What does the new government mean for US lending?

In January 2021, there will be a new US President. That change will have significant implications for lenders and their customers, as well as the world as a whole.

There is much that we don’t yet know about the new administration’s plans – and if 2020 taught us anything, it’s to be wary of making predictions for the future. This all said we’ve considered some cautious early forecasts for what we could expect for lending under a Biden presidency.

1) A more collaborative approach to addressing the pandemic

As of mid-December 2020, the COVID-19 pandemic has infected over 17 million Americans and killed more than 300,000 people. With a vaccine now successfully in production, the new administration will now need to address the vaccine’s roll out across the nation. Producing and delivering vaccines across the United States and beyond will take time.

Due to President-elect Biden’s long experience in Washington, there is a good chance that the new administration will be more effective in their approach to controlling the spread of and treatment for the virus. In early 2020, the Centers for Disease Control and Prevention (CDC) faced major challenges in receiving adequate administrative support; the new administration is less likely to withhold support from the CDC.

2) Prospects for economic recovery and stimulus

Throughout the fall of 2020, there have been repeated efforts to negotiate a new economic stimulus package in Washington DC. As of mid-December, these discussions have not yet concluded successfully. The new administration may be able to use its political capital to bring forward a new stimulus package, such as an increased Paycheck Protection Program (PPP), which had 5.2 million approved loans as of August 2020.

Lenders will be looking for details, such as whether there will be direct cash payments to individuals again. In addition, some business groups like the Business Roundtable, which includes lenders such as JP Morgan, have called for additional government stimulus.

A new stimulus package, in almost any form, would likely be beneficial to lenders – particularly in the sub-prime space, where consumers have already been hit hard by the crisis. If borrowers have the cash to pay their debts on time, lenders will not have to worry about credit losses on such a critical level.

3) Changes to financial industry regulation

Since 2017, the US government has somewhat reduced the extent of regulation on the financial sector. Under the new administration, banking regulation could change to more closely resemble how it operated under the Obama years. That means that federally-regulated lenders might have to change their strategy to accommodate a greater degree of enforcement.

Potential changes of note for the financial industry include:

  • Consumer Financial Protection Bureau (CFPB) – created under President Obama, this agency experienced difficulties under President Trump. The agency returned approximately $12 billion to consumers in the Obama years, according to CNBC. Under the new administration, the Bureau may receive greater support to pursue enforcement actions against financial institutions.
  • Reinstating the bank rules repealed by the Trump administration in 2018. For example, the measure changed the definition of „too big to fail“ to lenders with $250 billion in assets instead of $50 billion. The Biden administration may reinstate the previous definition, which could impact smaller lenders.

4) Changes to taxes, such as higher tax rates and IRS funding

Corporate tax levels are likely to change from the reduced levels of the past few years.

A CNBC article suggests that the new administration may increase tax rates on personal incomes over $400,000. In addition, the Social Security tax rate may be increased, and taxpayers earning over $1 million could face higher capital gains tax rates.

For lenders, these changes could have several consequences, and systems to evaluate borrower income levels may need to change. If the tax changes ultimately reduce economic output, there may be more intense competition for borrowers, especially at the higher income levels. Lenders will therefore need to find ways to compete for borrowers through offering faster and better customer experiences and services.

Aside from changes to tax rates, there is also speculation that the new administration may provide increased funding to the Internal Revenue Service (IRS). The tax gap, estimated at more than $381 billion, represents the difference between taxes owed and collected; a better-funded IRS may decide to pursue more individuals and companies‘ audits to close this gap.

5) Increased trade stability

During his term in office, Trump has developed a reputation for unpredictable policymaking and has aimed to change free trade negotiations with Canada and Mexico. For US companies with suppliers, customers, and connections abroad, increased trade uncertainty has caused concerns.

For example, within the automotive industry, automotive companies have supply chains that span Canada, US and Mexico. The Federal Reserve estimate that “only 31% of all light vehicles made in North America were assembled in the same country from which they received their engines and transmissions” – in other words, the majority of light vehicles receive critical components from another country in North America.

The Biden administration appears unlikely to wish to disrupt trade in North America. Previously, the outgoing administration sought to apply significant tariffs on the automotive industry by using an obscure section of the Trade Expansion Act of 1962. Such tariffs make business more difficult; however, early indications suggest that Biden is unlikely to impose any tariffs on the automotive industry.

6) Interest rate stability

The President influences interest rates and related decisions made by the Federal Reserve through appointments. The current Chair of the Federal Reserve was appointed in 2018 for a four-year term, and in due course, the new administration will have a chance to appoint a new Chair.

In the short term, the new administration appears unlikely to exert pressure on the Federal Reserve’s policy, meaning that low-interest rates are likely to continue for a prolonged period. According to a New York Times article, the Federal Reserve has signalled that it is unlikely to change these interest rates „until at least 2023.“

For the foreseeable future then, lenders may assume that interest rate changes are going to be a less significant aspect of new deals; instead, they might look to improve profitability through increased flexibility of service, better service options, and more efficient use of resources.

Looking forward

Increased political stability, low-interest rates and the possibility of stimulus are likely to benefit lenders in the coming months, though some forecast regulatory changes for the banking industry may cause a few difficulties for the largest lenders.

As these changes come down the pipeline, your company will need the ability to change and adapt quickly to policy changes, new legislation and rules brought in by the new administration.

With 2021 on the horizon and the world navigating a turbulent start to the new decade, it’s a critical time to prepare for the future and to make sure your business can remain seaworthy.

Get in touch with White Clarke Group to find out how we can help you to futureproof your business.

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