John Heasley

John Heasley
TBA General Counsel

Economic and regulatory issues in the coming months

There was no acknowledgement of the almost 40 years of compliance by FDIC-insured institutions with the Fair Housing Act, the Community Reinvestment Act and the Equal Credit Opportunity Act.

With the rollout of vaccines, there seems to be some light at the end of the tunnel for the COVID-19 pandemic. Some restrictions on businesses are being lifted and, if you can believe the stock market, the economic outlook for the period of six to 12 months from now is good.

The new administration and the new congressional majorities are committed to a new spending bill. It is likely that they can pass a $1.9 trillion package, or a fraction thereof, in the budget reconciliation process where only 51 votes are needed.

The national debt has now exceeded the GDP for the first time since WWII. Some economists have raised fiscal and inflationary concerns, but the newly empowered believe that further massive spending is a much-needed Keynesian jolt to the economy.

Janet Yellin proved her fiscal bona fides when she was at the Fed and, as the new Treasury Secretary, she is a strong supporter of the Biden stimulus.

President Biden, federal agencies and Congressional allies will propose a number of challenges to Texas banking. Early executive actions have lived up to his commitments to climate activists. The Keystone pipeline has been cancelled despite the concerns of Canada and trade unions. Fracking has been banned on federal lands and offshore leases.

With little federal land in our state, the economic impact is more limited but the opposition to natural gas as a cleaner energy source, actively encouraged in the Obama era, will create problems as regulators focus on fracking activities and methane release.

In the long run, despite the harm to jobs in other states and foreign policy problems, the limitation on hydrocarbons from other sources combined with an improved economy will probably increase the demand and the prices for Texas oil and gas.

Sanctions from Washington are not the only threats to the oil and gas industry. Climate activists have been pressuring shareholders in publicly traded banks. Only one out of the big four is still actively engaged in energy lending.

Last year, the OCC issued a regulation that would have allowed for lending to all legal businesses. This was an effort to combat regulatory pressure not to lend to certain companies in the disfavored fields such as gun manufacturing and oil and gas. It was called “Operation Choke Point” in the Obama years. The new administration has withdrawn the reg.

The more immediate challenges for Texas community banks are on the regulatory front. The CFPB will have a new and activist director. The agency will access the more than $600 million it can annually get from the Fed and has already started to lawyer-up.

In January, the acting director of the CFPB sent a memo to bureau employees indicating high priority issues. Among them was an allegation that banks prioritizing existing customers for PPP had a disproportionate impact on minority-owned businesses. The most likely next step would be fair lending exams on PPP portfolios.

Even more concerning is the CFPB’s desire to “take bold and swift action on racial equity.” (Along with climate change, racial equity policy proposals will be part of the agenda for all federal agencies.) The CFPB memo goes on to state that “as we all know, practices and policies of the financial services industry have both caused and exacerbated racial inequality.”

There was no acknowledgement of the almost 40 years of compliance by FDIC-insured institutions with the Fair Housing Act, the Community Reinvestment Act and the Equal Credit Opportunity Act.

The enhanced focus on fair lending will probably include an expansion of the “disparate impact” approach in examining lending practices. The CFPB’s approaching rollout of small business fair lending regs, Sec. 1071 of Dodd-Frank, will also contain strong racial equity provisions.

Narrow Congressional majorities will not allow the progressive left to fulfill its desires legislatively. Expect federal agencies to push the envelope on examinations and rulemaking. Their actions will also be challenged in the courts.