Chris Willis and his guests delve into the anticipated regulatory landscape and legal needs for financial services companies under the upcoming Trump administration.
In this episode of The Consumer Finance Podcast, host Chris Willis, co-leader of Troutman Pepper's Consumer Financial Services Regulatory practice, is joined by colleagues Mark Furletti, Stephen Piepgrass, Jesse Silverman, and James Stevens. Together, they delve into the anticipated regulatory landscape and legal needs for financial services companies under the upcoming Trump administration. The discussion covers the potential resurgence of new financial products, the impact on M&A activity, the role of state attorneys general, and the future of bank-fintech partnerships. Tune in to gain insights on how to strategically navigate the evolving regulatory environment and leverage opportunities in the financial sector.
The Consumer Finance Podcast: What Financial Companies Need to Know in a Second Trump Administration
Host: Chris Willis
Guests: Mark Furletti, Stephen Piepgrass, Jesse Silverman, and James Stevens
Date Aired: December 12, 2024
Chris Willis:
Welcome to The Consumer Finance Podcast. I'm Chris Willis, the co-leader of Troutman Pepper's Consumer Financial Services Regulatory Practice. Today, we're going to be talking about what financial services companies will need during the upcoming Trump administration.
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Now, as I said, we're going to be talking about what will be important to the financial services industry in terms of their legal needs during the upcoming Trump administration. To talk about that with me, I have four of my colleagues. From our Consumer Financial Services group, I've got my colleagues, Mark Furletti and Jesse Silverman, but we also have two special guests. From our corporate group, we have James Stevens. James is a corporate lawyer, but he specializes in financial institution corporate work. We're very glad to have him here. Then finally, but certainly not least, we have our partner from our Regulatory Investigation Strategy and Enforcement Group, also called RISE, Stephen Piepgrass. He's the practice group leader of that group, and that's the group that contains our very preeminent state attorney general practice. Gentlemen, thank you all for being here to talk to the audience about this very important topic today.
James Stevens:
Thanks for having us.
Mark Furletti:
Thanks, Chris.
Chris Willis:
Let me just set the stage here, because all of us lived through a Trump administration from 2017 to 2021. My memory of that and the demands of the financial services industry during that time was the following. First of all, we saw less aggressive federal enforcement and less aggressive positions being taken in supervision by the federal regulators, but it was still meaningful in terms of the regulatory pressure on the industry. It didn't go to zero, but by any means. But because of the perceived, more friendly environment, we had a lot of clients become interested in launching new products. We had clients interested in entering into new partnerships, especially with fintech companies. Fintech companies themselves were in a very rapid growth and founding mode.
At the same time on the regulatory front, we had states, and in particular, a number of states, promising to fill what they perceived was a gap in terms of enforcement and rulemaking in terms of consumer protection. Our practice as a law firm has to obviously be adaptable to that. What I'm going to do is I'm going to go through each of those areas and ask our guests today to talk about what they anticipate the industry will need in the coming four years and just, let's take it from there.
As I said, one of the things that there was a lot of interest in during the last Trump administration was the creation of new financial services products. Mark, would you mind talking to the audience about your experience about that during the last administration?
Mark Furletti:
Sure. Thanks, Chris. I guess, I view that period, Chris, as a bit of a renaissance in terms of fintech. We saw just an explosion, I think, in new products being launched. These products were across the whole credit spectrum. Now, I guess, I want to note, though, that during that period, Chris, 2017 to 2020, the prime rate was very low. Of course, it was in the threes to start the Trump term. It went up to the mid fives. Then due to COVID, it came down back into the threes. Relatively speaking, the rate environment was really favorable for, particularly for people who have to borrow money in order to lend it out to small businesses or to consumers.
Currently, the prime rate as you know is in the high sevens. Some of this favorable activity, I think, may have been encouraged by, or aided significantly by the low rate, in addition to the favorable regulatory environment. I think there's an expectation, if you look at the yield curve, it looks like the rates are likely to come down, or investors expect them to come down in the somewhat near future. Hopefully, we'll have another confluence of events like we had previously.
In terms of the products, we were involved in a number of installment loan products and point of sale, and in a number of niche areas, folks who had a specialized knowledge, or ability to offer financing as to very specialized products, because they understood how those products were sold and how people use those. I'm sorry, this is like purchasing products, or services, or things. We just saw an explosion of different kinds of products that were designed to finance particular goods, or services. Buy now, pay later, of course, was chief among those, but we saw a number of other niches. We saw rent to own products enter the market. We helped people launch credit card programs and charge card programs. These were all across both consumer and small businesses. We saw an explosion in bank model programs, 50 states throughout the US.
I would say that I don't think this is a license to do whatever you want in terms of the regulatory environment, Chris. I think as we – just as the environment can become favorable, it can in the future become unfavorable again. I think folks have to be cognizant of maybe this is a good time to test things, to innovate, to try new things. But in terms of looking at it as an opportunity to do exceptionally aggressive things and hope that there won't be any consequences, maybe there's fewer short-term consequences. I think the longer term could be problematic. I view it as a good time to both launch and test products and to innovate, as opposed to take exceptionally aggressive legal positions and hope they don't come back at you in the future, because unfortunately they could if there's a change in administration.
We were able, of course, our expertise is providing the consumer facing disclosures and agreements and looking at the commenting on the application flows and servicing flows for consumers. So, we were able to during this “Renaissance” help folks stand up all of these new programs and launch them, and a number of those were highly successful, which is great. We're expecting to see something like that again.
Chris Willis:
Thanks. I'm glad you mentioned that it's not a license to do whatever you want. I think that points up the need that although it's a great time to launch new products and businesses ought to take advantage of the opportunity to do that, it still requires careful consideration of compliance issues, not just for the future but also for the present, because the regulatory environment didn't evaporate, and we'll talk about that more later. It may have become slightly less aggressive, but that doesn't mean, as you said, that it's a license to do whatever.
Jesse, do you have a perspective on this? I think during those years, you were probably in house in the financial services industry. What's your perspective on this?
Jesse Silverman:
I was. And I do, I want to follow up on what Mark said, and say investigations are very trailing indicators. What you're doing now is going to actually be investigated by the future CFPB. We do not know who that future CFPB is going to be. I would absolutely consider going forward with all the due care that you went forward with in the past. I absolutely agree, like Mark called it a golden age of partnerships, and I think that's largely true. I would expect there to be a golden age again. There are still some challenging headwinds, especially in BaaS, but I think that ultimately, what's going to come out is going to be better for the industry, but I also think about the CFPB in a tiered approach.
We've talked about this before, but I expect there to be major changes in the types of regulations and rules that they put forward. I expect many of the current regulations to be challenged, and some of them probably won't be defended, or they won't be defended well by the new admin. But then you get down to enforcement and under Trump, there was robust enforcement under Kraninger and Mulvaney. I would say, the focus was different. They were focused more so on the traditional mortgage lenders. Anything that touched service members was very, very, like the enforcement was stronger there.
I think that there are probably lots of people thinking about enforcement and maybe not thinking about it in the right way. Some of those companies that are on the edges where this current CFPB is pushing the boundaries of their supervisory and enforcement authority, I think they're probably going to be safer in the future. But guess what? In a zero-sum game where you've got limited resources, the CFPB is going to be redeploying those resources towards the more traditionally supervised. They may see more action themselves. If you're in those traditional spots, I wouldn't expect nothing.
Then there's examinations, where examinations are the least to change administration by administration. I would absolutely expect that to continue. Frankly, that's what we saw under the last Trump admin. I'm sure we're going to talk about this here too, but as the federal enforcement dies down, there are a number of state AGs who are ready, willing, and able to take up that cause, too. We seem to find a relatively steady state of enforcement action. The subject changes, the players change. The overall enforcement activity stays relatively harmonious, much to the chagrin of the industry.
Chris Willis:
Yeah. Thanks for mentioning that, Jesse. Especially with respect to those products that are positioned not to be credit, but which the current CFPB has been very active and recharacterizing as such, we may see less of that at the federal level. But that certainly is a state issue that's waiting to happen. In fact, has played out a lot in the states. We'll be talking to Stephen about that later.
Another thing I've been reading a lot in the news is that there's an expectation that M&A activity is going to pick up in the near future, because of perhaps, economic or other conditions. James, that's one of your areas of specialty. Would you mind talking about what you think the outlook is for M&A in the near future?
James Stevens:
Certainly. We agree. We think there's going to be a big uptick in the M&A space. I think that a baseline understanding that I have of the financial services industry though is that the natural state is an insatiable desire to consolidate. Anybody, whether you're a bank, or you're a non-bank financial service provider, the desire to partner through an acquisition, or merger with someone else to diversify your products, your services, your geographic markets, that is something that is always on the people in the space's minds. When you add on top of that, the need to get scale, so you can get more efficient with the extraordinary costs we have in the regulatory and the technological spend that it's expected of financial service providers, that's the way I look at it is it's not like the natural state is slow and then we have periods of uptick. The natural state in my mind is a ramped-up M&A environment. What we've experienced over the last several years has been a down cycle.
A lot of that was not political. It was the environment we were in. The interest rate environment, the credit concerns about the credit cycle, concerns about whether we were going to go into some recession as the rate, interest rate environment was an inflation was addressed and things of that nature. There's certainly a political element to it as well. I think I think part of that is, frankly, the regulatory matters that Mark was just talking about, is that the financial services industry has been receiving a lot of regulatory scrutiny under the current administration. I think that nobody wants to buy another person's problem.
I think that in this new environment that we're hopeful for and what we saw in the previous Trump administration with, I agree with Jesse, I mean, that certainly, this is not a – there's always going to be regulatory enforcement and investigations and certainly, examination. I think that we all agree that there's going to be less scrutiny in general. Maybe the costs will go down and the concern, the unpredictable concerns that regulatory scrutiny provides is going to be less. That sets the stage on top of some of those other more economic macro factors for a lot more robust environment.
I think the last one is just generally, the market. As soon as the election results were announced, the bank stocks went up 10%. I'm sure you've seen a similar – we've seen a similar uptick across the entire financial services industry. I think that having a currency that's worth more and having a robust market and economic environment is another thing that encourages M&A. We expect a lot of M&A in the coming years.
Chris Willis:
Yeah. Of course, James leads a team of our lawyers that are specialists in exactly that kind of M&A. There's another thing that's one of your specialties, James, that I also wanted to ask you about, and that's bank charters. It seems like, there might be the possibility under a Trump 2 administration for more people to be able to apply for and get bank charters, and maybe for the possibility of some special purpose charters. Would you mind commenting on that?
Jesse Silverman:
Yeah, Chris. I think you're right. I think we did see that in the prior administration. A lot of the fintech companies, there was only a couple, so when I say a lot, I mean, the handful of fintech and other non-bank financial service providers that were able to obtain a bank charter, be it a regular state or national bank charter, a Utah, ILC, or something else, a lot of those happened in the prior Trump administration, or all of the live work associated with them happened during the Trump administration.
We've seen virtually no new bank formation in those areas over the past several years. There's a big moat around the banking industry for those that are not currently in it. I think that we need as a country, we need to have new bank formation. I think we should somehow recognize that we want people to be in the system, not out of the system, and encourage people to get into a regulated bank charter. I think that we'll see a lot more of that during this current administration. That goes to not only the federally regulated national banks, state banks, but I think, also, you'll continue to see interest in special purpose state charters. I do think that the biggest hindrance to those banks is not necessarily the proposed operators, but generally, what those banks can do.
For example, in Georgia, where I am, we have a merchant acquiring limited purpose bank charter. The regulators are excited to talk to organizers of those banks. But that bank charter is only as valuable, is only valuable if the card networks will allow the people to get that charter to become members. Very similar to the Wyoming charter and others around the country that really are not useful, unless you can get access to the Fed’s master account.
Chris Willis:
Got it. Thanks very much, James. We talked earlier about bank fintech partnerships and the idea that it's likely that there'll be a resurgence in those during the upcoming Trump administration. Jesse, I'd like to start with you on this. Those partnerships involve obviously product design and consumer protection issues, which we already talked a little bit about earlier. But they also involve transactional aspects. Would you mind addressing what the industry needs when there's a lot of that partnership activity from a transactional standpoint?
Jesse Silverman:
From a transactional standpoint, I'm not sure that there's a big difference between the Trump admin, the Biden admin, at least from a transactional standpoint. It's more a function of what are people comfortable doing. I think there, there's just a greater comfort in being able to try out the new partnerships. Part of the challenge right now, frankly, is just there has been a lack of clear guidance on how to engage in those relationships. We've seen lots of problems, obviously. We have seen a host of issues, obviously, with synapse and the BaaS space.
Partially, it's going to be the market clearing itself out, and what's coming out the other side is going to be better, stronger than what was going in. It's really just a function of there needs to be clearer guidance that's something more than just risk based. I know that there is a demand. It's one of these demands that I think crosses party lines. I think there's a willingness to provide more guidance on how to engage in those partnerships better. Then, of course, there's one of the items that we haven't talked about at all yet, which I think is going to be seismic. Frankly, I'm not entirely sure how, but that's crypto, right?
There is a massive, massive untapped demand. Everyone who's read the newspapers has seen that they have spent a lot of money to make sure that they get access to the political process. I expect that access to present itself in wider variety of crypto products. Now, how that integrates with the traditional financial services and the banks and KYC, AML, that really is still TBD to me, but I know it's going to be very, very different.
Chris Willis:
Yeah, makes sense. James, this is another area where you practice a lot in terms of assisting parties in negotiating and entering into these transactions. What's your perspective on that in the coming years?
James Stevens:
Well, I do think there's a political element to it. I agree with what Jesse said. I think that the prior administration was more open, seemingly more open to certainly crypto space, but the bank fintech partnership space, a lot of the huge amount of growth that we experienced in those partnerships occurred coming out of that administration. Then the pandemic led to a lot of those partnerships as well. I will say though, I'm not tying the future of these partnerships to the current administration. I think that these partnerships are the future and the future is not going to be denied. I really think that we're already on the downside of the slope here.
There were a lot of partnerships that were put in place, just a tremendous amount of volume. There were a lot of participants that were getting into that space. To be quite honest with you, I don't know that I blame it on guidance as much as I blame it as lack of guidance as I blame it on just the poor operators. I think that what you've seen is regulators, maybe we saw this in the prepaid space 20 years ago, the regulators are going to come in as they learn about a new industry or a space, they're going to come in, they're going to criticize it. There's going to be a spike in enforcement actions, especially on smaller, smaller banks. I think that we've seen that.
I think, if you just look at the trend over the last three or four months, that trend is going down dramatically. I think that there are certainly still bad partnerships out there that will be identified, or bad operators that will be identified. I think that we are already moving into an environment where there's going to be less scrutiny of these bank partnerships. The regulators are accepting the reality that this is the way that banking is going to be put together in the future.
Chris Willis:
All right. Thanks. We've left one relatively large enchilada for the very end of our discussion, and that's the states. Let me just give a little preface to this, Stephen, before I launch you to discuss it.
Stephen Piepgrass:
Sure.
Chris Willis:
First of all, so many of the issues that we've been talking about throughout the podcast thus far are areas of special state interest. Like, for example, partnerships where states have been active in making true lender arguments, or re-characterization of non-credit products as credit. There are a number of states who've really taken the lead in doing that, with California being a great example of it. On top of that already existing state interest on a lot of issues that the industry will be interested in during the next four years, there is, of course, the high likelihood that if the states perceive lax federal enforcement of consumer protection laws, they will promise to fill the gap. That's where, of course, our state AG practice comes in.
Troutman Pepper has what I believe is the preeminent practice in that area in the country. It was one of my primary motivations for us to come to Troutman almost three years ago now. I'm very fortunate, and I feel like our clients are very fortunate to have someone like Stephen and his team to be incredibly informed about what's going on with the states and assist with issues that will arise with regulatory investigations and other issues with the states. Stephen, do you mind telling the audience about your perspective on what the action will be like with the states in the coming four years?
Stephen Piepgrass:
Sure. Thanks for teeing that up, Chris. I think this entire conversation has really led to this point, which is the role of the states in stepping in as gap fillers. We saw that in the last Trump administration, and I think we are poised to see that again as the second Trump administration begins. This isn't even a matter of having to dust off a playbook. They've been running this playbook for as long as I've been practicing really for a couple decades. The AGs have already been active and are active in investigating partnerships in looking into, or we've seen them look into rent to own, buy now, pay later, all of the different areas that we've been talking about. Earn wage access is a huge focus right now.
The Democratic AGs in particular see themselves and see their role as being one of stepping in, stepping up when federal regulators pull back in the case of a Republican administration. They will perceive any change, or any change in the level of scrutiny being applied at the federal level by the agencies as being something that they really need to step in and fill the gap on. I think we will see that happening. They've already got the playbook, they know how to run the plays, we will see them running them as soon as we start to see any pullback on the regulatory side at the federal level.
We often think of our strategies when it comes to dealing with state AGs in two ways, an offensive and a defensive strategy. I think this is something that really fits into some of the opportunities that James in particular was talking about, where we're going to see, I think, a real explosion in new products, in products that are really cutting edge in partnerships. What that will mean is that the companies that are engaging in those need to really think about how they are interacting with the regulators who are going to be most active in this new coming administration. That's where the offensive strategy plays in. Companies need to think about how to engage with the AGs and explain to those regulators who are going to be the ones who are really at the forefront of regulation in this area, why the products they have and are offering are compliant with the law, why they don't create consumer concerns, and why their products are really the gold standard.
That's something that we work with the different AG associations all the time and helping have those conversations, really educating the attorneys general about some of these products that the AGs are really just beginning to hear about or think about, think through whether the old frame, whether they fit into any of their older frameworks. Having an offensive strategy to really engage, whether that's at the Republican AG Association, Democratic AG Association, Attorney General Alliance, or the National Association of Attorneys General, lots of different venues to have those conversations. I think that's going to be really important for the businesses that are thinking about what innovative things can we bring to market today. That's the offensive strategy.
Then, of course, you've got to have a defensive strategy as well, which is dealing with the investigations when they come, as we know they do, and as we know, they will. As you know, we're working on multiple AG investigations right now for clients in the fintech and financial services space, as I am with many others on your team, Chris. I agree, I think the partnership that we've been able to build with you coming into Troutman and really working so closely, hand in hand with us and the state AG team, has allowed us to bring your subject matter expertise and our venue expertise, put those together into something that I think is really powerful for our clients.
Chris Willis:
Yeah. Thanks, Stephen. It's a wonderful partnership and it's one that I love telling clients about. Thank you for doing that. The other thing that I'd want to point out to our audience about states is that those same states that tend to have very active AGs also have shown themselves very willing and very able to pass legislation affecting the financial services industry. There are certain states, like California, New York, Illinois, places like that, that have been steadily legislating on areas involving our industry, either directly for things like credit reporting, or consumer credit protection, or debt collection, or things like that, or indirectly in more general statutes that will also affect our industry, like privacy statutes, for example, or Colorado being the first one to enact an AI statute, which of course will be impactful to the financial services industry.
I think the financial services industry also needs during the coming four years to be aware of those state legislative activities to have an active government relations presence and awareness, so that they don't get blindsided by state legislation that might disrupt one of their business models, for example. That's probably the last thing that I'd want to mention about the states.
Jesse Silverman:
I'd add one more. We haven't spent a lot of time talking about the state banking regulators.
Chris Willis:
Sure. Go ahead, Jesse.
Jesse Silverman:
There are several of them who we know will also fill in that same void that we were just talking about the AGs filling. There are several state banking regulators that are taking certainly more aggressive approaches when it comes to true lender. Certainly, more aggressive approaches when it comes to EWA. I think that we can expect, there will be a hand in glove between the state AGs and the state banking regulators as well. The wave will continue to crash. Like I said, I just think there will be different subjects. There will be different players. You still have to be prepared for it to come.
Chris Willis:
Yeah. I would even add to that, Jesse. I mean, there's one particular state banking regulator that I'm aware of that has had a very high emphasis on fair lending in its examinations, even over the last four years, even when the federal government was very active in that area. We wouldn't expect that to die down.
Jesse Silverman:
The one thing that's been fascinating, having been a state regulator myself, a federal regulator in the House, outside council, it's always fascinating that so much of state regulation, state banking regulation is literally driven by one or two people who just have a passion for a particular issue, and they can bring a number of states along. You mentioned a state with fair lending. A few years ago, there were a couple of states that were really on lead gen. If you go look at it, there's just a couple of people and they're still there. I don't know what their issues du jour are, but they are still there and they still have the power of the state behind them. It's always a fascinating – the issues change. Some of our clients are going to – they're going to welcome this change. Other of our clients, they're going to find more scrutiny. It's one of these things where you have to be careful what you wish for.
Chris Willis:
Yeah, exactly. Well, this has been a fascinating discussion. I thank all of you for joining me on the podcast today. Of course, thanks to our audience for listening in today as well. Don't forget to visit and subscribe to our blogs, TroutmanPepperFinancialServices.com and ConsumerFinancialServicesLawMonitor.com. While you're at it, why not visit us on the web at troutman.com and add yourself to our Consumer Financial Services email list. That way, we can send you copies of the alerts and advisories we send out, as well as invitations to our industry-only webinars that we hold from time to time.
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