In one of the last executive actions of the Trump administration, the Office of the Comptroller of the Currency published an important final “Fair Access to Financial Services” rule requiring that large banks and federal savings associations make lending decisions based upon “individualized, quantitative risk-based analysis and management of customer risk.” Translation: The lenders are not to make such decisions on the basis of the political unpopularity (among leftists) of certain businesses, obvious examples of which are producers of fossil fuels or firearms, operators of for-profit colleges or private prisons, and payday lenders, and perhaps others engaged in entirely legal business activities.
Under that finalized rule, such politicized lending criteria as “reputational risk”---a wholly circular construct devoid of analytic content---were to be excluded as determinants of the allocation of capital. This constraint would enhance the productivity of financial capital by both lenders and borrowers, by making economic value the central driver of lending decisions and the use of borrowed funds. The strengthened role of economic value would help to preserve the soundness of the banking/financial system, and more generally would engender a number of aggregate economic benefits flowing from the strengthening of economic factors and the weakening of political factors in the capital market.
As discussed below, the rule---ostensibly aimed at the lending decisions of the financial institutions---in reality is designed to constrain the behavior of bureaucrats and politicians pursuing politicized agendas. That is why no one can be surprised that the Biden administration has announcedthat “it has paused publication of its rule to ensure large banks provide all customers fair access to their services.” (The rule was to have taken effect on April 1.) Here is the explanation for the pause:
Pausing publication of the rule in the Federal Register will allow the next confirmed
Comptroller of the Currency to review the final rule and the public comments the OCC
received, as part of an orderly transition.
That is an explanation that explains little even as it is highly revealing, as the “orderly transition” rationale could be applied to any rule promulgated during the Trump administration but not yet published in final form. It is not difficult to conclude that many high-level members of the Biden administration prefer politicized lending, as a short journey down memory lane illustrates. Remember Operation Choke Point? That was the blatant effort by the Obama administration to exclude several legal industries from the banking system. This clearly was illegal and unconstitutional, having been based upon no law or any other kind of legal authority; it simply reflected the political biases of the senior Obama decisionmakers.
There is no evidence that then-Vice President Biden opposed it, and such arbitrary exercises of power are constrained by no obvious limiting principle. Any industry can become a target, and it is obvious that the discriminatory practices inexorably will expand over time as new bureaucrats and politicians come to occupy the various desks and offices, imposing their own views of what is good. The efficient allocation of capital? Who in the Beltway has an incentive to care about that?
The central value of the Trump rule was straightforward: Far from constraining the lenders, it imposed a short leash on the bureaucrats and politicians, in that new efforts to politicize lending could be challenged in court by the prospective borrowers disfavored by government officials. With or without a rule, the reality is that the banks and savings associations as a practical matter cannot take the public officials to court, as doing so would expose them to a vast array of punitive retaliations from the regulators. The lenders have to deal with the regulators on a daily basis on a vast array of their operations. It is no trick at all for the regulators to cause a given lender no end of legal and operational problems. Can anyone seriously deny this reality?
Accordingly, litigating politicized lending standards is vastly more problematic without the new rule than with it because such lending constraints inevitably are predominantly an informal system based upon letters and phone calls and hints and winks and sighs and frowns. Without the rule, the borrowers against whom the discrimination is directed would not have standing to sue, and the lenders would not do so for the reasons just delineated.
That is why Choke Point and similar gameplaying in the capital market is ideal for the political left: No formal rule is being violated, the banks are in no position to resist, and the borrowers have no recourse. Equality under the law is thrown out the window because the left fundamentally believes in nothing as much as its own political power, while the bureaucracy---much ignored in the reality that it is an important interest group---is left to enhance its own powers at the expense of market forces.
The 2010 Dodd-Frank financial regulation legislation may have created vast perversities for the U.S. financial system, but Title III charges the OCC with assuring fair access to financial services and fair treatment of customers by the institutions subject to its jurisdiction. In short, we have had for a decade a law supposedly constraining the ability of public officials to politicize lending, and they were happy to ignore it. The Trump fair access rule was wholly justified as a regulatory matter; and by constraining in a way enforceable in court the ability of public officials to impose their ideological preferences upon the lenders, it would have yielded a more efficient allocation of capital over time. That the Biden administration is in the process of discarding it does not bode well for a policy-driven strengthening of U.S. economic performance, in the capital market and many others.