Winds of change are blowing in Washington, D.C. The election of Republican Donald J. Trump as president, combined with a Republican-controlled U.S. House and Senate has the potential to usher in widespread change, and much of it could affect the payments industry. As eventful as 2016 was, it might pale in comparison with 2017.
While Congressional Republicans have moved quickly to include amendments that would repeal portions of the Affordable Care Act through budget resolutions—making them filibuster-proof—there’s some uncertainty around how fast and how far all of Trump’s reforms will go. As John MacAllister, principal, Dorado Industries, noted a day after the presidential election, “Who knows if the next four years will be a case of ‘shock and awe’ or punctuated with the shrieking sound of President Trump putting the brakes on the hyperbolic promises of Candidate Trump.” However, with so many Republicans in Congress and one in the Oval Office, 2017 and beyond could be a good time for business—and the payments industry in particular—especially if it leads to regulatory relief.
Below is a list of some of the biggest regulatory and legislative issues to watch in 2017:
The Dodd-Frank Act. While repealing and eventually replacing the Affordable Care Act (ACA) is at the top of the list for Trump and Republican lawmakers (more on that act later), rolling back the Dodd-Frank Act and its numerous regulatory tentacles is a priority, too. Since the law was signed following the 2008 financial crisis, Republicans have been quite vocal about their disdain for the legislation, which many say imposes too many rules and costs on financial services companies, and results in reduced and/or more expensive services for consumers. Legislators also have complained that too many midsize banks are designated “too big to fail.” For example, Sen. Richard Shelby (R-Ala.), chairman of the Senate Banking Committee, floated a “discussion draft” in mid-2015 that would have changed the designation process and provided regulators with flexibility to exempt midsize banks from stricter capital and oversight requirements. In addition, the bill would have given lawmakers greater oversight of the Federal Reserve. Shortly after the release of his discussion draft, Shelby introduced the Financial Regulatory Improvement Act of 2015 (S 1484) to provide “sensible” relief to financial institutions. The bill didn’t get very far, but demonstrated the Republicans’ intent to go after various facets of the Dodd-Frank Act, including the Consumer Financial Protection Bureau (CFPB), which the act created. This might be the year that Republicans and the industry get what they want.
The CFPB. Some of the biggest potential changes following the November elections could be for the CFPB—in structure, leadership, funding, reach or all of the above—although you can be sure Senate Democrats like Elizabeth Warren (D-Mass.) will fight against them. Republican lawmakers have been eager to overhaul the bureau’s leadership structure and budget oversight. U.S. Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, introduced to the House in September the Financial CHOICE Act (HR 5983), which includes sweeping changes to the CFPB. Among those changes, the legislation would eliminate Directory Richard Cordray’s position, replacing it with a bipartisan, five-member commission charged with promoting consumer protections as well as competitive markets. Also, the agency would be subject to congressional oversight and appropriations. Currently, the CFPB is funded primarily from the Fed’s operating budget, with certain caps, and its budget is not subject to congressional approval. The bill also would require the commission to obtain permission before collecting personally identifiable information on consumers, repeal its authority to ban bank products or services it deems abusive, and annul its authority to prohibit arbitration (more on that last point below).
Under the Financial CHOICE Act, the CFPB’s name would be changed to the Consumer Financial Opportunity Commission. In addition, the bill would end “too big to fail” bailouts, and replace a section of the Dodd-Frank Act with a new chapter in the bankruptcy code designed to handle the failure of large, complex financial institutions. The bill was placed on the House’s Union Calendar—a separate calendar that schedules bills involving money issues—on Dec. 20. Though analysts didn’t expect Rep. Hensarling’s bill to go far in the 114th Congress, they said it could provide a catalyst to reform Dodd-Frank in the 115th Congress which commenced on Jan. 3.
Another salvo fired at the CFPB was a decision by the U.S. Court of Appeals for the District of Columbia Circuit on Oct. 11, which determined, among other things, that the structure of the CFPB is unconstitutional because it’s led by a single director which can only be removed for cause, calling the bureau’s structure a “gross departure from settled historical practice” in which independent agencies are led by commissioners or board members, according to the court’s decision. Despite its unconstitutionality ruling, the court allowed the CFPB to continue operating. However, the court redlined, or struck through, the provision in the Dodd-Frank Act which provided that the agency’s director can only be removed for just-cause. Thus, if the ruling is unchanged following the disposition of the bureau’s request for rehearing en banc (by the full bench), Trump will be able to remove the director “at will.” The court also disagreed with the CFPB’s contention that because Dodd-Frank does not provide a statute of limitation, no statutes of limitations apply to any of the CFPB’s administrative enforcement actions. The court rejected this argument, finding that Dodd-Frank incorporates the statute of limitations of the underlying statute being enforced by the CFPB in its administrative proceedings. In addition, the court took issue with the CFPB’s reversal of a long-standing interpretation of law from a prior regulator. Specifically, in 2015, the CFPB determined that the Real Estate Settlement Procedures Act (RESPA) prohibits captive mortgage reinsurance arrangements. This interpretation was at odds with a long-standing prior interpretation from HUD. The CFPB then sought to apply this new interpretation to conduct PHH engaged in based on the prior HUD guidance. According to the court, because the CFPB’s 2015 interpretation conflicted with the prior interpretation of another regulator, the CFPB violated due process by seeking to retroactively apply its interpretation to PHH’s past conduct. The panel ruling stems from a $109 million enforcement action issued by the CFPB in 2015 against mortgage servicer PHH Corp., alleging kickbacks in exchange for real estate referrals, which is in violation of the Real Estate Settlement Procedures Act (RESPA). PHH also challenged the constitutionality of the bureau under the Separation of Powers Doctrine, arguing that the CFPB places legislative, executive and judicial power all in the same hands of a single person.
CFPB’s Final Rule on Prepaid Accounts. The industry waited more than four years for the CFPB to issue its final rule on prepaid accounts since the agency first released its Advanced Notice of Proposed Rulemaking in May 2012. The CFPB on Oct. 5 released its final rule on prepaid accounts, which closely mirrored what the CFPB initially had proposed in November of 2014. Unfortunately, this meant the rule contained a definition of “prepaid account” so wide-ranging that it includes many of the more than 15 different types of prepaid cards in the market, some of which likely will not withstand the increased costs of compliance, Brad Fauss, president and CEO of the NBPCA, said when the final rule was released. The rule applies to traditional GPR prepaid cards, nonreloadable general use prepaid cards (other than gift cards), mobile wallets, P2P payment products and other electronic accounts that can store funds. In addition, the rule covers payroll cards, student financial aid disbursement cards, tax refund cards and certain federal benefit cards.
What’s more, legal experts have pointed to outstanding compliance concerns, including whether existing card packaging materials will need to be pulled from inventory and retail shelves and replaced by Oct. 1, 2017, despite allowances in the final rule that would otherwise permit issuers to sell through existing card packaging materials produced in the normal course of business prior to the effective date; and how providers will limit liability for unregistered prepaid cards when providers often cannot determine the presence or absence of unauthorized use without knowing the identity of the accountholder.
Most of the provisions of the final rule are scheduled to take effect on Oct. 1, 2017; however, the right-leaning Congress and Trump administration might look favorably upon legislative proposals that would provide industry relief from the final rule. That said, there are no known plans for legislation that would affect the final prepaid accounts rule.
At a panel discussion on Jan. 13 on the prepaid account rule, held as part of the meeting of the American Bar Association Committee on Consumer Financial Services in Carlsbad, Calif., Kristine Andreassen, the team leader for the CFPB prepaid accounts rule, left the door open for changes to be made and said that the bureau wants to hear about problems or issues with the rule, according to a report in Ballard Spahr’s CFPB Monitor. The rules “are never set in stone,” said Andreassen, who advised that clarifications could come in the form of informal guidance or a formal modification to the rule. She also indicated that a small-entity compliance guide should be issued within the next two months, according to the report.
CFPB Proposed Rule to Restrict Arbitration Clauses. The CFPB released a proposed rule on May 5 that places restrictions on arbitration clauses in financial services contracts. If adopted in its current form, covered institutions will be restricted from including class action waivers in their arbitration agreements and arbitration clauses will be required to contain notices to that effect. Arbitration regulation is an area that has come under fire from House Republicans, already critical of the CFPB. Payments industry critics fear the rulemaking will spawn frivolous lawsuits that take longer to resolve disputes, lead to smaller rewards for consumers and cost more—costs which, they argue, could be passed on to consumers. In addition, if companies abandon the use of arbitration clauses, as well as the cost recovery mechanisms that are commonly offered to consumers, as the industry has predicted, consumers may be left with costly individual litigation as their sole option to attempt to recover small amounts in dispute, since the vast majority of consumer disputes do not manifest the commonality of interests required to be eligible for class action litigation. The CFPB is currently reviewing comments it received about the measure prior to the expiration of the comment period that ended Aug. 22. Critics have pointed out that the CFPB’s own arbitration research has shown that arbitration leads to more favorable outcomes for consumers. Of the 562 class action suits studied by the CFPB, the average cash settlement was less than $33 per consumer, and class action litigation took an average of at least two years. In comparison, the average amount received by consumers who won in arbitration was nearly $5,400, with an average arbitration time frame of two to seven months.
Many in the industry feel the agency’s goal is to eliminate arbitration, leaving class action or expensive individual lawsuits as consumers’ primary method of recompense. Rumors sprang up that the CFPB would publish a final rule on arbitration before President-elect Trump takes the oath of office on Jan. 20 to make the rule harder to undo, but that seems less likely with each passing day. “It is beginning to look like the CFPB will not finalize the arbitration rule before the inauguration,” Alan S. Kaplinsky, partner, Ballard Spahr LLP, tells Paybefore. “We’re getting close to Jan. 20 and nothing has happened. And, why would Director Cordray want to pick a fight right now? He wants to hold onto his job. If he were to do something right now, it would be like waving a red cape in front of a bull,” Kaplinsky adds. Cape or not, it may be difficult for Cordray to stay at the helm of the CFPB.
Interchange. Retailers are concerned that the Durbin Amendment, and the debit interchange caps and network routing rules that were put in place as a result could be in jeopardy amid the fervor to roll back Dodd-Frank. While Rep. Hensarling’s bill doesn’t mention interchange specifically, more than 600 retailers sent a letter Nov. 15 to House Speaker Paul Ryan (R-Wis.) and Minority Leader Nancy Pelosi (D-Calif.) urging them not to introduce legislation that would repeal financial reforms, including interchange caps, they say, are “critical” to U.S. businesses and customers. That could be a pre-emptive strike against reviving a House bill (HR 5465) that Rep. Randy Neugebauer (R-Texas) introduced in June 2016. Neugebauer, now retired and a candidate to replace Cordray at the helm of the CFPB, noted that as a result of the Durbin Amendment, some banks reduced their free checking account offerings, increased account fees and instituted higher minimum balance requirements. The bill would have to be re-introduced in the new congressional session to be considered for passage.
Affordable Care Act. As much as Republicans hate the CFPB in its current form, they might actually hold more contempt for the ACA, which they’ve promised to repeal since its passage in 2010. Now, in 2017, they’re saying the sweeping health care reform hasn’t delivered on its promises. “When Obamacare’s supporters forced their partisan law on our country, they promised … lower premiums and out-of-pocket health care costs, [a system] that would foster choice and allow families to keep the plans and doctors they liked,” Senate Majority Leader Mitch McConnell (R-Ky.) said Jan. 11. “But it didn’t take long for the American people to discover the truth about Obamacare. Too many have been personally hurt by this law,” he added. Lawmakers are wasting no time in setting the wheels into motion to repeal ACA. The Senate has already voted 51-48 to approve a budget resolution Republicans will use to dismantle the act. The House of Representatives quickly followed, voting 227-198 on Jan. 13 to instruct committees to draft legislation by a target date of Jan. 27 that would repeal the 2010 Affordable Health Care Act. Although the repeal and what comes next will have more far-reaching effects on other industries—insurance, medical care providers, pharmaceutical companies—they could be beneficial to those in the health payments business. “Looking forward, the early signals from the incoming administration and the new Congress suggest that we will see further reforms that will strengthen and broaden the market for consumer-directed health accounts, where cards are the preferred method of payment for consumers,” Chris Byrd, WEX Health executive vice president, tells Paybefore.
It’s clear the atmosphere is right for a plethora of possible changes coming out of Washington in 2017 and beyond, with many affecting the payments industry. Whether it’s the Dodd-Frank Act, the CFPB and its rulemaking, the battle over interchange or the ACA, there’s a lot to watch. A business-friendly Republican Congress and a businessman President-elect suggests that positive changes for the payments industry are ahead, and a period of optimism is likely to replace one of anxious hand-wringing.
- Industry Views: What Trump’s Win Means for Payments
- President Obama Signs Health Care Law, Opens Doors for Standalone HRAs
- CFPB Fights Court’s Ruling that Its Structure Is Unconstitutional