6 banking questions for the next Democratic debate

August 11, 2019 9:00 PM

WASHINGTON — The first two rounds of debates with the roughly 20 Democrats running for president contained hardly a mention of financial services policy. Issues like health care and immigration demanded most of the focus.

But if moderators at the next debate in Texas next month wanted to throw banking issues into the mix, they would have no shortage of possible questions to ask.

The fate of Fannie Mae and Freddie Mac could be determined in the next presidential term. Recent data breaches have put hundreds of millions of consumers’ personal financial data at risk. The future of payments with the emergence of digital currencies and development of real-time payments systems is at an inflection point. Those are just a few possibilities.

Here are six potential debate questions on financial policy.

A new home stands under construction at a Lennar Corp. development in Montgomery, Illinois, U.S., on Wednesday, May 15, 2019. A stronger-than-expected increase in housing starts at the beginning of the second quarter bodes well for residential investment to make a contribution to GDP growth after five quarters of declines. Photographer: Daniel Acker/Bloomberg

Daniel Acker/Bloomberg

How would you chart a future course for the U.S. housing finance system?

To the average American homeowner, the housing finance system dominated by Fannie Mae and Freddie Mac appears to be relatively functional.

But 11 years after the colossal mortgage companies were bailed out, they are still wards of the government. Whoever inhabits the Oval Office in early 2021 would be positioned to end the federal conservatorships and determine the long-term future of the housing finance system.

How consumers own a piece of the American Dream has not been discussed much on the presidential trail related to other pocketbook issues like healthcare, even though the housing market contributes between 15% and 18% to GDP, according to the National Association of Home Builders.

If elected, the Democratic nominee and his or her administration could face decisions about the level of government involvement in the housing finance system, whether to privatize Fannie and Freddie, and whether to enable other private-sector competitors, among other matters.

Lawmakers have for years tried to craft a comprehensive reform plan for the government-sponsored enterprises, to no avail. More recently, the Federal Housing Finance Agency in the Trump administration has shown willingness to make administrative reforms without Congress.

Yet even though the Treasury Department is developing a GSE reform blueprint, many have speculated that the administration may wait until after the election to advance reforms to avoid any political fallout from disrupting the housing market.

Attendees stand in the demonstration room during the F8 Developers Conference in San Jose, California, U.S., on Tuesday, April 30, 2019. Facebook Inc. unveiled a redesign that focuses on the Groups feature of its main social network, doubling down on a successful but controversial part of its namesake app and another sign that Facebook is moving toward more private, intimate communication. Photographer: David Paul Morris/Bloomberg

David Paul Morris/Bloomberg

What do you think of Facebook’s plan to get more involved in financial services by offering a digital currency?

Facebook has already been heavily criticized for privacy failures just as some policymakers call for a breakup of the big tech firms. On the campaign trail, Sen. Elizabeth Warren, D-Mass., has been the most vocal in calling for reforms of Silicon Valley.

The Libra project puts Facebook’s privacy protocols further under the microscope. The social media giant has been targeted in particular over the Cambridge Analytica scandal and dissemination of fake news items leading up to the 2016 election. Yet Facebook’s interest in having a direct hand in consumer finances through the payments arena has drawn little focus from the Democratic candidates.

And Facebook is not the only large company trying to develop its own digital currency. Walmart recently filed an application for a stablecoin that could allow customers to buy retail goods without using a bank account.

Capital One signage is displayed outside a bank branch in New York.

Capital One Financial Corp. signage is displayed outside a bank branch in New York, U.S., on Saturday, July 13, 2019. Capital One Financial Corp. is scheduled to release earnings figures on July 18. Photographer: Mark Abramson/Bloomberg

Mark Abramson/Bloomberg

The data breach at Capital One compromised the data of over 100 million credit applicants. How worried should Americans be about of the safety of their financial data?

Cybersecurity should be another issue that hits close to home for the American voter.

Following the massive breaches hitting companies such as Equifax and Capital One, it is common for consumers to discover a fraudulent credit card in their name or some other type of suspicious activity in their credit file.

Despite the hundreds of millions of Americans whose information has been compromised, policy responses to issues such as how companies notify consumers of breaches have been lacking, let alone stronger cybersecurity requirements.

The U.S. lags far behind other countries in developing a real-time payments system. The Fed has proposed its own solution, while large banks say the private sector should lead the way. Who’s right?

Another financial services issues with broad implications for both American businesses and consumers is the future of the U.S. payments system.

Despite the rapid movement of nonbank payment technologies (such as Facebook’s proposed Libra project) and mainstream real-time payments systems taking hold in other countries, adoption of a faster payments model for the U.S. banking system has been slow.

Recently, the Federal Reserve announced a plan to develop its own real-time payments framework, called FedNow, by 2024. The Fed’s new system would compete alongside an RTP system that was launched by The Clearing House — which is owned by the largest banks — in 2017. The megabanks have criticized the Fed’s effort, but smaller institutions have praised the involvement of the central bank out of fear that they will lose out in an industry-led system.

Of the leading presidential candidates, only Warren has weighed in specifically on this topic. Before the Fed’s decision, she called for the central bank to act and welcomed it after it was announced. It remains to be seen whether the other candidates are even aware of the debate.

Over 30 million U.S. households either have no ties to the banking system or are considered “underbanked,” according to the FDIC. Is this a problem, and if so, should the government be involved in the solution?

The plight of the unbanked and underbanked has not been on the radar in economic policy debates, but several officials including Federal Deposit Insurance Corp. Chairman Jelena McWilliams have focused on the difficulty of many Americans to access the banking system.

Without access to financial services, consumers may find it hard to qualify for loans, build savings and accrue wealth. Proposals for expanding financial inclusion include reforms to the Community Reinvestment Act, establishing branches in rural communities and other areas with higher populations of unbanked and underbanked, enabling nonbanks to better serve consumers through digital technology, having banks offer small-dollar loans, and even equipping the U.S. Postal Service to offer financial services.

Financial institutions are increasingly using artificial intelligence to underwrite loans. Should American consumers be concerned about potential discrimination that can result from lending algorithms?

Algorithmic lending and alternative credit data are being touted as a means for expanding loans to more consumers.

While algorithmic lending generally results in fewer borrowers being rejected, skeptics note that building AI models can still incorporate bias. They cite studies suggesting minorities pay higher interest rates for loans involving such algorithms. Recently, Warren and Sen. Doug Jones, D-Ala., sent a letter to federal financial regulators asking whether the agencies had the tools to deal with algorithmic lending discrimination.

Policymakers are still scratching the surface on the use of AI in lending. It isn’t clear yet who bears the responsibility when algorithms result in discriminatory lending practices that run afoul of fair-lending laws.