HEROES Act Mostly Grows Government, But Has Redeeming Cannabis Banking Provision

On May 15, the House passed the Economic Recovery Omnibus Emergency Solutions (HEROES) Act (H.R. 6800), by a vote of 208 to 199. The 1,800-page bill, which was unveiled by House Democrats earlier this month, calls for trillions of dollars in new deficit spending and includes a number of longstanding progressive pet projects unrelated to the COVID-19 pandemic. Yet, to paraphrase Ronald Reagan, there is a free-market pony in the middle of this pile of big-government initiatives that should be passed in a compromise bill: Affirming the legality of banking services to marijuana-related firms in states that have declared the substance legal.

On the financial services front, the HEROES Act would further constrain the debt collection and credit reporting industries, to the detriment of consumers.

On the matter of debt collection, the legislation would place additional restrictions on the ability of debt collectors to service accounts, essentially placing a temporary moratorium on debt collection. More specifically, the HEROES act broadens the emergency restrictions under the Fair Debt Collection Practices Act (FDCPA) to prevent collectors from repossessing or foreclosing on any personal property or from garnishing wages or other income. Violations of these emergency restrictions would result in a fine 10 times normal FDCPA fines. And while these restrictions would only come into play during the “covered period”—from the date of enactment of the bill to a date 120 days after the COVID-19 pandemic ends—there is always the chance that Congress chooses to make the restrictions permanent.

While the restrictions under FDCPA have historically applied to third-party debt collectors, the HEROES Act would change that to also cover creditors—the banks, credit unions, and finance companies that originate loans. This would effectively bar lenders themselves from collecting on what they are owed.

Together, these proposed restrictions on debt collection would inevitably make credit more expensive. As George Mason University law professor Todd Zywicki notes in a 2015 paper, reducing the effectiveness of debt collection will “increase losses and lead to higher prices and less access to credit for consumers, especially low-income and high-risk consumers.” That is exactly what we don’t need during a global pandemic and economic crisis.

Similar to the restrictions it would place on debt collectors, the bill would suspend negative credit reporting from the date of enactment to 120 days after the COVID-19 pandemic ends. The HEROES Act would also prohibit credit scoring agencies from introducing new credit models that would negatively impact a consumer’s credit score and prevent lenders from furnishing adverse information.

Because a credit score is a risk indicator that helps a lender determine a borrower’s ability to repay, lenders will not be able to accurately gauge risk—likely causing them to lend less, especially to those who need credit the most. And just like the HEROEs Act’s restrictions on debt collection, the restrictions on credit reporting would make credit more expensive.

While the HEROES Act would punish the debt collection and credit reporting industries, the legislation rewards Fannie Mae and Freddie Mac—the two government-sponsored enterprises (GSEs) at the core of the 2008 housing crisis. Specifically, the legislation would strike the sunset clause on the GSE patch under the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage rule, effectively delaying sunset of the agencies to at least June 2022. The GSE patch allows Fannie and Freddie to circumvent lending rules and back mortgages from risky borrowers who have a debt-to-income ratio higher than 43 percent

By trying to delay sunset of the GSE patch, House Democrats are going against the better judgement of CFPB Director Kathy Kraninger and Federal Housing Finance Agency (FHFA) Director Mark Calabria, who both support getting rid of this cronyist carveout. Beyond that, an extension of the GSE patch is especially concerning when considering the potential economic impact of COVID-19 on the housing market, especially at a time when the mortgage market is more dependent than ever on government-backed loans.

However, there is one financial services provision in the HEROES Act that is worthy of praise. Section 110606 includes language from the Secure and Fair Enforcement (SAFE) Banking Act that would give safe harbor protections to banks and credit unions doing business with legal marijuana shops that operate in accordance with state laws. This is important given the incongruity between state and federal law over the legality of marijuana, which has led many banks to forgo offering any services to marijuana-related businesses out of fear of federal punishment.

The SAFE Banking Act has bipartisan support in both chambers of Congress—it passed the House last year 321 to 103, gaining the support of about half of House Republicans—and has 33 cosponsors in the Senate. Thirty-eight state attorneys general also back the bill, and President Trump, Attorney General Barr, and Treasury Secretary Mnuchin have all expressed support for liberalizing marijuana banking.

Senate Majority Leader Mitch McConnell (R-KY) has declared the HEROES Act “dead on arrival” in the Senate. We suggest that he proceed with his plans to kill the vast majority of bad provisions of this bill, but put the SAFE Banking Act on life support to be passed as part of any future compromise bill.

Instead of growing government and crippling industries that keep credit flowing, lawmakers should work toward getting rid of #NeverNeeded regulations that hinder getting the nation’s economy back on track. Kudos to House Democrats for recognizing the need to get rid of #NeverNeeded barriers to marijuana banking, and may they and all members of Congress extend this logic to all sectors of the economy.

CEI Senior Fellow John Berlau contributed to this post.