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3 Areas to Expect Major Regulatory Changes Under Biden’s Administration


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Businesses face constant uncertainty, from market to financial risks. A new administration coupled with a senate that’s shifting control pose additional regulatory and policy risks. Reciprocally, these changes also open up new opportunities and foster resilience against a constantly evolving political landscape.

This article describes some areas that might impact your business strategies under the Biden administration. Primarily, we focus on legislation that will impact new disclosures, home ownership, and climate change.

The Biden administration will be driving regulatory changes on the financial sector in the coming years. So far, the president’s executive orders have focused on Covid relief and reversals of Trump-era policies. With respect to financial regulation, he has signed a single directive to the OMB director to develop recommendations to modernize regulatory review and to undo Trump’s regulatory approval process. (CNN.com)

While details of this directive are a work in progress, Biden’s position leans towards tighter regulation and more disclosures. There are three areas where firms should anticipate policy changes that may impact business strategies and daily operations.

  • Anti-Money-Laundering (AML) – Entity Disclosure Compliance

  • Real Estate and Access to Home Ownership

  • Climate Risk Reporting for the Financial Sector

These changes will impact how organizations address

  • Reporting and disclosures

  • Investment opportunities

  • Tax incentives

  • Risk assessments

 Anti-Money-Laundering (AML) – Entity Disclosure Compliance


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The Biden administration is driving a transparency and anti-money-laundering initiative early in the presidency. At the start of the year, congress “enacted significant AML reforms in the Mac Thornberry National Defense Authorization Act (2021 NDAA).” (Pillsbury Law). Pillsbury adds that “we have not seen the level of changes to the U.S Bank Secrecy Act since the USA Patriot Act passed in the wake of 9/11.” The aim of the reform is to eliminate the anonymity of privately controlled companies, by creating a federal registry of all entities such as LLCs and corporations.

The Corporate Transparency Act (CTA), which is part of the 2021 NDAA will require anyone with substantial ownership (25 percent or more) to provide disclosure to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCen). This requirement effectively reduces the anonymity offered by LLCs, and other entity structures, and increases the amount of ownership information (including personal information) that companies will be obligated to report.

There are broad exclusions from the reporting requirements for public companies, some larger private companies, and certain other entities that either have existing disclosure obligations or otherwise are seen as being at lower risk of being used for money laundering purposes.

The registry will be non-public, but can be only be accessed by requests from law enforcement as well as financial institutions for the purpose of KYC due diligence.

The specifics such as exact reporting requirements and non-compliance penalties are forthcoming. Businesses should be prepared to amend their data requirements for additional compliance reporting.

 

Real Estate and Access to Home Ownership

The Real Estate space will be particularly interested in the details and interpretations of the language set forth by the Corporate Transparency Act (CTA). Developers and investors will want to know how the regulations apply to entities other than but similar to LLCs and corporations such as certain partnerships and trusts.


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Biden is pushing housing reforms. First, the president is appointing the commissioner of The Federal Trade Commission (FTC), Rohit Chopra, to head the Consumer Finance Protection Bureau (CFPB). Additionally, Biden is keeping Mark Calabria as head of the Federal Housing Finance Agency (FHFA).

  • The change at the top of the CFPB reflects Biden’s intent to 1) reform credit reporting and 2) increase access to home mortgages in general. Biden has noted problems with credit reporting. “They often contain errors, they leave many ‘credit invisible’ due to the sources used to generate a credit score, and they contribute to racial disparities,” (Fortune) Biden has also proposed a $640 billion investment in housing over the next 10 years, including “a down payment tax credit of up to $15,000 for first time homebuyers.” (Maxwell).

  • Keeping Mark Calabria as head of the FHFA signals a continuation of the federal effort to end conservatorship of GSEs Fannie Mae and Freddie Mac, albeit not likely a top priority. A major hurdle currently facing this transition is the capital requirement of $283 billion for Fannie and Freddie set forth in 2020. At the start of 2021, Fannie is at $25 billion while Freddie is at $20 billion. To assist this capitalization effort, the FHFA and US Treasury announced restructuring of the Preferred Stock Purchase Agreements (PSPAs) dividends, which will allow the GSEs “to continue to retain earnings until they satisfy the requirements.” (DSNews).

  • An overarching theme of Biden’s campaign has been social equity. He has expressed a desire to reinstate a rule that allows the Housing and Urban Development (HUD) to “share the risk of mortgages written for multifamily housing projects and state and local housing finance agencies (HFAs)”. He is also seeking to foster investment in underserved communities through expansion of the Community Reinvestment Act. (Maxwell)

  • There has also been focus in amending or eliminating the 1031 exchange tax incentive. The 1031 exchange allows investors to defer capital gains from selling a property when he or she purchases another “like-kind” property within a limited period.  For now, Biden has not put forth anything official, but real estate investors are already bracing for potential changes to the 1031 exchange. (1031exchange.com)

  • The Biden administration has also vowed to support but reform opportunity zone investments. One of his directives is “Introducing transparency by requiring recipients of the Opportunity Zone tax break to provide detailed reporting and public disclosure on their Opportunity Zone investments and the impact on local residents, including poverty status, housing affordability, and job creation.” (joebiden.com)

Government investment may boost lending opportunities in certain zones like underserved communities and for certain demographic groups such as first-time homebuyers. Additionally, the push for transparency in various fronts will lead to additional reporting requirements on the horizon.

 

Climate Risk Reporting in the Financial Sector


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Biden’s administration will drive the nation towards more environmental regulations and policies. This will require significant work and learning from the private sector with respect to measuring and addressing climate change risk.

Banks have rolled out initiatives to include climate change risks in their models since 2018, developing methodologies that the Federal government will want to leverage when it aims to developing a climate risk assessment framework for the financial sector. (marketwatch.com)

Fed Governor Brainard has called out the lack of federal preparedness to even start analyzing climate risk models. In a speech in December 2020, she noted “Two-thirds of respondents to a recent survey of members of the Basel Committee on Banking Supervision’s Task Force on Climate-Related Financial Risks (TFCR) indicated that they lack sufficiently granular or reliable data necessary to run climate risk assessment models.” (Federal Reserve)

She further explained that “To date, measurement efforts have been hampered by data gaps and methodological hurdles, many of which are unique to climate change and contribute to elevated uncertainty in estimates of climate-related risks.”

There is an ongoing effort to develop something similar to a stress test that banks are required to demonstrate resilience against. However, climate risk stress tests will be more complex as suggested by Brainard. Biden has also signed several executive orders to tackle climate change. The direction of this administration suggests the following:

  • Federal agencies will be focused on developing a framework to obtain reliable climate data

  • Once data quality issues are addressed, banks will be required to demonstrate resilience to climate change in their risk models.  

Preparation for the administration’s climate change initiatives boils down to data – the ability to obtain it, the processes to validate, organize, store, and make use of this data. The data architecture to produce risk models and regulatory reports from this data will also be key.

About BaseCap Analytics

BaseCap Analytics has been helping large banks and investment firms stay compliant in the continually evolving landscape of federal regulations. We have helped banks implement Basel capital calculations, redesign data pipelines, improve efficiencies etc., in their regulatory reporting process.

BaseCap’s Data Quality Manager automates data quality controls – providing businesses data quality reports, insights on root-cause analysis, and guidance for data remediation, all without requiring data science or coding knowledge, and without the need of additional staff to implement and maintain.

With the pairing of data expertise and a powerful data quality management engine, BaseCap can help you navigate new reporting requirements on the horizon. Contact us to see how the Data Quality Manager can help you ensure clean reliable data across any use cases, including regulatory reporting.

 

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