Three Ways to Help get the SAFER Act Back on the Right Path

With the markup coming this week, some modest ideas on how to improve Section 10 so it can better accomplish its goal

Last week, after reading the new version of the SAFE Act, the SAFER Act, I outlined my analysis.

In both bills, Section 10 seeks to protect bank customers from bank regulators suggesting or requiring that banks cut ties with the customers without a legitimate reason. Unfortunately, in my opinion, the revised SAFER Act Section 10 doesn’t make customers safer, and in fact risks making regulators more powerful and less accountable than the status quo.

In the SAFE Act, Section 10 addressed the risk that bank regulators would abuse the concept of reputation risk or other nebulous justifications to target legal businesses that were unpopular with the regulators or constituencies that have sway over the regulators.  The SAFER Act risks making it harder to limit regulators discretion and abuse of power, and it’s not hard to imagine legal businesses that could be targeted from either side of the political spectrum.

This problem is real and important, and not easy to solve.  Policymakers working in good faith to find a solution and protect customers must balance competing concerns and build consensus, I respect their efforts on this issue as they head into a mark-up.  If I were a Senator on Banking Committee, I would propose the following amendments to protect bank customers from regulators.

Proposal 1 – Define “Unsafe or Unsound”: Protecting the safety and soundness of banking is the universal solvent of bank regulation. It is one of the great, vague wellsprings from which regulatory authority (real or perceived) gushes forth. And yet, it is not well defined. This has led to disputes between courts and the regulators as to just what constitutes the type of unsafe or unsound practice that regulators can force banks to abandon.

Congress should make clear that for something to be an unsafe or unsound business practice it must pose a threat to the financial viability of the bank and do so in a concrete and obvious way. Congress should expressly disclaim the idea that any excess risk would qualify, or that speculative or theoretical risks conceived of by the regulators are sufficient.

To be clear, this wouldn’t affect the ability of regulators to police things like anti-money laundering or anti-discrimination laws, which have their own statutory authority. Rather it would simply place some clear and at least somewhat objective barriers around regulators’ general authority.

Proposal 2 – Limit “Valid Reasons” to actually valid reasons: One of the changes between the SAFE Act and the SAFER Act is that the SAFER Act introduces a list of valid reasons that the regulator must be motivated by before they suggest or require that a bank cut ties with a customer. The only problem is that the list of “Valid Reasons” is effectively unlimited.

In addition to the usual suspects, such as an unsafe/unsound action, or violation or law or regulation there are copious other justifications. These include things like formal or informal written guidance. This is problematic because guidance does not have the force of law and failure to follow it is not supposed to give risk to legal consequences. And yet, under the SAFER Act it would. Likewise, various formal and informal supervisory determinations can also serve as a valid reason, even though supervisory determinations are opaque and usually not subject to meaningful external review. If that isn’t bad enough, the current draft also allows regulators to create their own valid reasons.

The only real limit is that reputation risk cannot be the “dispositive” factor, but that is not well defined, and regulators would certainly be smart enough to work around it. 

Instead, the list of valid reasons should be pared back to only those clearly traceable to legal restrictions or requirements. This would include bona fide safety and soundness issues (ideally as defined above) as well as other specific legal requirements. It would also include requirements created by regulation, provided the regulation in question is properly grounded in statute. Likewise, supervisory determinations would need to be clearly and legitimately based on statutory grants of authority to qualify.

Regulators steering or forcing banks to shed customers is a major use of government power. It must be used only when the regulator is acting in concert with its limited, statutorily granted, authority. Limiting the definition of “Valid Reason” to those clearly approved by Congress is vital to prevent, or at least minimize the risk of abuse.

Proposal 3 – Provide meaningful notice to customers: Providing notice to customers targeted by regulators is essential to holding regulators accountable. Banks have extremely strong incentives to not resist or sue their regulators. As such, the customer being aware of what is happening and potentially challenging the action in court is critical to making sure regulators are remaining within the limits of the law and constitution. The SAFE Act contained a mandatory customer notice provision for this reason.

Unfortunately, the SAFER Act largely guts the SAFE Act’s customer notification provision. The SAFE Act generally required that banks who were pressured or required by regulators to cut off a customer let the customer know, with exceptions for law enforcement or national security. The SAFER Act flips this on its head. It would be a rare occurrence for banks to be able to notify customers since they are prohibited in almost any case, including when the regulator relies on “valid reasons” like informal written guidance. This is wildly inadequate.

While there may be legitimate circumstances where notifying a customer that they were debanked because a regulator suggested or required it would be inappropriate, those circumstances are limited. Prohibiting disclosure in cases where such disclosure would interfere with a criminal investigation or national security (properly defined) matter probably strikes the right balance. Conversely, prohibiting disclosure over matters as dubious as informal written guidance or confidential examination information invites regulators to game the system to avoid accountability. The SAFE Act’s model should be restored.

This isn’t an exhaustive list of ways to reform banking, but it is a list of some ways Section 10 can be improved to actually accomplish its important mission. Hopefully changes along these lines are made, otherwise it would be a significant missed opportunity.