2018 Regulatory Changes Your Bank Should Be Watching

At the turn of 2017, the U.S. environment was best described as unsettled and uncertain. With the unexpected election results, President Trump entered Washington with a stance that “excessive rulemaking strangles economic growth” and a promise of change from the political norm.[1] Change is difficult. Many of the plans have been executed more slowly or differently than expected, sustaining the underlying climate of uncertainty. As we approach the close of the year, however, the pace of change seems to be picking up.

November seems to have set the stage for change in 2018. Tax reforms loom, Obama-era policies are expiring, and new faces are filling key positions. In the final weeks of 2017, Washington will have to accomplish a tremendous number of expensive and risky policy shifts to accomplish their goals. Some have a more direct impact on community banks than others, but—as is so often the norm—bills, laws, and policies are a figurative string of pearls where one decision impacts every other. Partisan politics being what they are, the outcome of one vote (e.g., the repeal of the Affordable Care Act, which some Republicans perceive as risky because it mixes taxes and health care) can stand in the way of or open the door to others.

As we so often do at the turn of a calendar year, we’re taking a look at some of the regulatory changes that stand to have the biggest impact on the economy in general and community banks in particular in 2018.

The Promise and Effort of Friendlier Tax Legislation

President Trump has promised big tax cuts for everyone by the end of 2017, and Republican lawmakers are scrambling. If they can get the legislation passed, top corporate tax rates would go as low as 20%, and small business rates would hover around 25%.

In addition, the Trump administration has pushed to eliminate SALT (State and Local Tax) deductions to get "the federal government out of the business of subsidizing the states."[2] The legislation passed in November, but powerful leaders from states most impacted by the removal of SALT are battling the decision. Rep. Kevin Brady, R-Texas, chairman of the powerful Ways and Means Committee, has acknowledged that these protesters will “need this problem solved before they vote 'yes' on tax reform."[3]

Congress is working so fast on these and related proposed tax legislation changes that their impact is unclear. The Congressional Budget Office (CBO) has warned that they have not had the time to analyze the likely impact on economic growth or employment, but that they foresee the bill could increase the federal budget deficit over a decade. The Joint Committee on Taxation added their assessment that the tax cuts wouldn’t generate sufficient economic growth to pay for themselves and may reduce federal revenue over a decade by roughly $1.4 trillion.

A Leadership Change Timeline

One thing we do know is that leadership changes mark the early Trump presidency—and many of those replacements will have an impact on banks and their customers. In particular, the new chair of the Federal Reserve (Fed), Office of the Comptroller of the Currency (OCC) and the new head of the Consumer Federal Protection Bureau (CFPB) will be important to monitor closely.

• On November 2, President Trump selected Jerome Powell to replace Janet Yellen at the end of her term in February 2018. Powell is a ‘safe’ choice, liked by Wall Street, and an experienced member of the Fed. He will face important tasks like building the consensus about whether to continue to raise interest rates in a steady-growth, low-inflation environment.[4]
• On November 16, Senate confirmed the President’s pick for the Office of the Comptroller of the Currency. Former OneWest Bank chief executive Joseph Otting is taking over for interim agency leader Keith Noreika. Otting is expected to be much friendlier to the banking industry than Obama appointee Thomas J. Curry, who instituted strict measures that bolstered the agency’s regulatory power. The move could impact everything from Dodd-Frank to the Community Reinvestment Act, to payday-lending practices, to bank executive payouts – and more – as the agency returns to its pre-Obama profile and takes a role as a vital player in the Trump administration’s work to roll back regulations.[5]
• Between November 24 and 25, the CFPB became the center of a legal battle that will no doubt get in the way of progress going into the new year. On November 24, standing director Richard Cordray resigned and named the agency’s chief of staff, Leandra English, as deputy director. Before she could take her role as his successor, President Trump appointed Mick Mulvaney, director of the Office of Management and Budget, to the position. He started his role on Monday, November 27—alongside English. As of early December, Mulvaney is acting as director and questions have arisen about whether the CFPB might actually be more effective as a commission. The legal battle that is heating up will pit the 1998 Federal Vacancies Reform Act and the 2010 Dodd-Frank Act against one another. [6] The resulting appointment will have a major impact and change in direction for financial regulations moving forward.[7]

Softer Regulatory Scrutiny

Senate Banking Committee Chairman Mike Crapo introduced a plan to ease regulatory burdens on banks. It’s being called “one of the best chances in years for lawmakers to make major changes to rules passed in the wake of the 2008 financial crisis.” The bill provides relief for small and regional lenders, and increases the limit for increased scrutiny as a result of Dodd-Frank from $50 billion to $250 billion. While the impact on community banks is yet to be seen, the move is another step toward right-sizing regulation—which is vital to supporting the growth and health of smaller financial institutions and community banks.[8]

As 2017 comes to a close, there are multiple scenarios that could play out in Washington surrounding tax legislation, leadership changes and policy modification, all of which will result in changes in the banking industry over the next year. We will continue to monitor the developments, keeping you informed on how potential changes might affect your institution, and you.

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[1] https://www.washingtonpost.com/news/business/wp/2017/11/15/richard-cordray-is-stepping-down-as-head-of-consumer-financial-protection-bureau/?utm_term=.e1920d59054d

[2] Treasury Secretary Steven Mnuchin on NBC's Meet The Press

[3] https://www.npr.org/2017/10/28/560413409/salt-reduction-becomes-major-sticking-point-in-tax-overhaul-so-what-is-salt

[4] http://www.businessinsider.com/fed-chair-jerome-powell-trump-pick-for-yellen-replacement-2017-11

[5] https://www.nytimes.com/2017/11/15/business/bank-regulation.html

[6] https://www.politico.com/story/2017/11/25/white-house-cfpb-mulvaney-english-trump-190527

[7] https://www.americanbanker.com/news/radical-changes-ahead-for-cfpb-after-cordray-departure?brief=00000159-ad9c-deb8-a3fb-fffd80dc0000

[8] https://www.bloomberg.com/news/articles/2017-11-13/senate-s-crapo-reaches-deal-with-democrats-on-easing-bank-rules