Financial Services Report

Welcome to the Columbus Day edition of Thorn Run Partners' financial services report, where we provide you the insight and analysis that is ahead of the curve and driving the narrative in Washington, DC.    

While Washington and the nation were gripped by the Kavanaugh nomination last week, there was also numerous events and activities taking place last week of note for the financial services industry. In case you missed any of it, we hope this newsletter is helpful in catching you up.

Looking Ahead

Near Term

  • The House remains in Recess.
  • The Senate is taking up the Water Infrastructure bill in an effort, perhaps futile, to regain some internal comity, following the bruising partisan nature of the Kavanaugh hearing. 
  • On Thursday, the Senate Banking Committee will dip it’s proverbial toe into the blockchain and cypto ecosystem, while a day earlier the Senate Commerce Committee will hold its second hearing on privacy in as many weeks, this time focusing on California and Europe’s standards.

Further Out

  • Senators and Staff are anxious to leave, but the Senate could be in session until October 19th.
  • The mid-term election is November 6th.
  • The House returns on November 13th
  • Funding for the handful of measures under the current CR expires on December 5th.

The Past Week
Legislative Branch
Waters Calls for CFPB Student Loan Investigation
On Monday, House Financial Services Committee Ranking Member Maxine Waters (D-CA) along with  twelve other House Democrats sent a letter to Chairman Jeb Hensarling (R-TX) calling for an investigation into the Consumer Financial Protection Bureau’s (CFPB) enforcement actions against student loan companies.  The letter follows on the August resignation of CFPB Student Loan Ombudsman Seth Frotman, who alleged numerous deficiencies in the Bureau’s handling of student loan issues, including the supposed suppression of a staff report on banks charging student dubious account fees and blocking efforts to call attention to “predatory for-profit schools.” The letter repeats Mr. Frotman’s concerns and said that, if true, his allegations indicate that CFPB has “inappropriately prioritize[d] the protection of the agency’s regulated entities over the safeguarding of the protection of consumers from financial misdeeds.”
Waters Releases Legislation to Undo CFPB Changes
On Tuesday, House Financial Services Committee Ranking Member Maxine Waters (D-CA) introduced the Consumers First Act (H.R 6972) which would reverse a number of initiatives taken by Consumer Financial Protection Bureau (CFPB) Acting Director Mick Mulvaney. The bill’s numerous provisions include: (1) limiting the number of political appointees at the Bureau and requiring adequate staffing; (2) outlining the duties of particular offices; (3) codifying CFPB’s name; (4) restoring the enforcement powers of the fair lending office; (5) reestablishing a dedicated student loan office; (6) reactivating numerous prior agreements; (7) requiring document sharing with Congress related to an allegedly suppressed student lending report; (8) mandating that the consumer complaint database remain “transparent and publicly accessible;” and (9) reinstating terminated Consumer Advisory Board members. The legislation is highly unlikely to gain traction this Congress but singals an issue that Ranking Member Waters may make a priority should she become Chair of the Committee next Congress.
Banking Committee Holds Hearing on Regulatory Relief Bill Enforcement
On Tuesday, the Senate Committee on Banking, House, and Urban Affairs held a hearing on the implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) featuring federal regulators from the Federal Reserve, Office of the Comptroller of the Currency (OCC), National Credit Union Administration (NCUA), and Federal Deposit Insurance Corporation (FDIC). The regulators discussed their agencies’ efforts thus far to implement S. 2155, which became law in May, and outlined expected next steps for implementation. During the hearing, Chairman Mike Crapo (R-UT) and Republican Members urged regulators to expedite the implementation of S. 2155 and various additional regulatory relief measures such as recalibrating the Global Systemically Important Bank (G-SIB) surcharge and simplifying the Volcker Rule. Despite several Committee Democrats having voted in favor of the bill, Ranking Member Sherrod Brown (D-OH) reiterated his assertion that it loosens oversight of the nation’s biggest banks and destabilizes the financial system, while several other Democrats expressed concern over proposed changes to OCC’s enforcement of the Community Reinvestment Act (CRA).
Judiciary Antitrust Subcommittee Hears from Regulators
On Wednesday, the Senate Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights held an oversight hearing on the enforcement of antitrust laws featuring Federal Trade Commission (FTC) Chairman Joseph Simons and Department of Justice (DOJ) antitrust division head Makan Delrahim. During the hearing, Members and witnesses discussed a variety of antitrust issues including technology companies, performance rights organization (PRO) consent decrees, and standard-essential patents. Significant partisan differences emerged on the issue of standards of proof in antitrust cases. While Subcommittee Chairman Mike Lee (R-UT) raised concerns that unjustified fears of over-consolidation are being used to justify the introduction of subjective elements to antitrust enforcement, Ranking Member Amy Klobuchar (D-MN) argued that U.S. industry is undergoing a “wave of consolidation” and promoted legislation that would substantially lower the competition threshold required for antitrust enforcement.
Banking Committee Republicans Repeat Call for Volcker Simplification
On Monday, four Republican members of the Senate Banking Committee—Chairman Mike Crapo (R-ID) and Sens. Pat Toomey (R-PA), Tim Scott (R-SC), and Tom Cotton (R-AR)—sent a letter to Federal regulators expressing support for efforts to revise the Volcker Rule and urging the regulators to further clarify the rule. Specifically, the letter notes that proposed changes released in May included few changes to the Rule’s “overly-broad” definition of covered funds and encourages the agencies to consider broadening it, so to exclude additional investments addressing the rule’s application to venture capital, other long-term investments, and loan creation.
Sanders Introduces “Too Big to Fail” Legislation
On Wednesday, Senator Bernie Sanders (I-VT), a vocal critic of the U.S. financial industry, introduced legislation (text; summary) that would require the break-up of financial institutions with total exposure greater than three percent of U.S. gross domestic product (currently $584.5 billion). This definition would include the nation’s six largest banks, all of which have over $10 trillion in assets. Under the bill, affected institutions would be given two years to restructure subject to Fed supervision and would be prohibited from Federal Reserve discount facilities and from using insured deposits for speculative activities. In a statement introducing the bill, which is highly unlikely to become law, Sen. Sanders said “We must end, once and for all, the scheme that is nothing more than a free insurance policy for Wall Street: the policy of ‘too big to fail.’” Rep. Brad Sherman (D-CA), who joined Sen. Sanders for the announcement, is expected to introduce companion legislation in the House.
Former Regulators Urge Senate Amendments to JOBS Act 3.0 Package.
On Wednesday, members of the Systemic Risk Council—including more than two dozen former financial regulators—sent a letter to leaders of the Senate Banking Committee urging them to reevaluate two provisions the JOBS Act 3.0 capital formation package that passed the House this summer. First, the letter raises concerns that Title XII of the bill—which would cap at every two years the frequency at which bank holding companies are required to submit resolution plans—does not accommodate special circumstances or changes requiring resolution plans to be revisited. The letter recommends that this provision be either dropped or amended to allow off-cycle resolution planning if warranted by changes in the firm, market, or legal environment. Second, it notes that Title XV—which exempts companies not overseen by banking regulators or the Federal Housing Finance Agency (FHFA) from company-run stress testing—would include certain broker-dealers, investment advisers, and non-bank swap dealers with more than $250 billion in assets. Consequently, the letter urges the Senate to strip the provision or amend it to ensure that the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) maintain stress testing oversight. Despite being passed nearly unanimously in the House, JOBS 3.0’s path forward in the Senate is unclear and Banking Committee Ranking Member Sherrod Brown (D-OH) has expressed interest in revising the bill.
Banking Democrats Call for Wells Fargo Hearing
On Thursday, Ranking Member Sherrod Brown (D-OH) and Democratic members of the Senate Banking Committee sent a letter to Chairman Mike Crapo (R-ID) requesting a hearing with Wells Fargo CEO Tim Sloan and Chair of the Board Elizabeth Duke to examine what the letter describes as “rampant consumer abuses and other compliance breakdowns” at the bank. The letter cites more than a dozen instances of alleged misconduct by Wells Fargo in the past year, including inappropriately charging 570,000 consumers for unneeded auto insurance that resulted in the repossession of 25,000 cars. In addition to wanting to hear from Wells Fargo themselves, the letter also calls for the Committee to conduct oversight over various regulatory efforts over the bank, including; the Federal Reserve’s February cease and desist order; and the Office of the Comptroller of the Currency (OCC) and Consumer Financial Protection Bureau (CFPB) consent orders with the bank. 
Cornyn Calls USMCA an “Uphill Fight” in Congress
On Wednesday, Senate Majority Whip John Cornyn (R-TX) said that the tentatively-named United States-Mexico-Canada Trade Agreement (text) will be an “uphill fight” in Congress and that he does not expect a vote on the deal this year. However, other Republicans have called for a quick vote on the agreement, with Sen. Chuck Grassley (R-IA) saying that the House will most likely hold a vote during the lame duck session if Democrats take control of the lower chamber. With Mexican President-Elect Andres Manuel Lopez Obrador having said that he will not reopen the negotiation after taking office, the timing of the approval is in flux and Mexico’s December 1 presidential transition becomes considerably less concrete of a signing deadline. Late last Sunday, U.S. and Canadian negotiators reached a last-minute agreement for Canada to join the NAFTA-replacement framework that was agreed to by the United States and Mexico at the end of August. A fact sheet on the numerous changes to the agreement can be found here. Subject to Trade Promotion Authority (TPA), ratification of the agreement will require an up or down vote by Congress. 
Select Highlights from the Administration
The White House
New York Times Alleges Trump Tax Dodge – White House Calls story “boring”
On Tuesday, the New York Times published an article alleging that President Donald Trump participated in “dubious tax schemes”—including sham corporations, padded invoices, improper tax deductions, and undervaluation of properties—allowing him to minimize tax payments on more than $413 million in payments from his father. Responding to the news, White House Press Secretary Sarah Huckabee Sanders described the article as “boring” and a “misleading attack against the Trump family.” Among Congressional Democrats, the allegations have renewed interests in obtaining President Trump’s tax returns—which Ranking Democrats on both the House Ways and Means and Senate Finance Committees have said they would subpoena if Democrats retake either chamber. Senate Finance Committee Ranking Member Ron Wyden (D-OR) also sent a letter to recently-confirmed Internal Revenue Service (IRS) Commissioner Charles Rettig calling on the IRS to probe “serious and credible allegations of potentially illegal tax fraud." New York City officials are reportedly investigating the matter.
Department of the Treasury
Regulators Release Interagency Statement on BSA/AML Resource Sharing
On Wednesday, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and four regulators overseeing depository institutions issued an interagency statement addressing instances in which banks and credit unions share resources to manage Bank Secrecy Act (BSA) and anti-money laundering (AML) obligations. The statement recognizes the value of collaborative BSA/AML arrangements, reaffirms that individual banks are responsible for ensuring their own compliance with BSA/AML requirements, and offers a non-exhaustive list of collaboration examples across the several components of BSA/AML compliance. For instance, it notes that banks can pool their training and internal controls resources and that personnel at one bank can be used to conduct independent testing of a collaborating bank’s BSA/AML compliance program. Banks and credit unions are encouraged to contact their primary federal regulators with questions relating to specific arrangements.
Federal Reserve
Fed Considering Real-Time Payments Proposal
On Wednesday, the Federal Reserve published a notice in the Federal Register seeking public comments on proposals to develop a real-time banking system. In the notice, the Fed outlines two strategies for fostering faster payment systems: (1) developing a service for real time settlement of faster payments 24 hours a day, seven days a week, 365 days a year; and (2) creating a liquidity management tool that would enable transfers between Federal Reserve accounts to support real-time interbank settlement of faster payments. The project is expected to involve significant private sector participation. The Fed-supervised U.S. payment system—which closes outside of business hours and on weekends and federal holidays—is seen as falling behind real time systems available in other countries, as well as private sector payment products, a problem that burdens consumers with billions of dollars in overdraft fees every year.
Consumer Financial Protection Bureau
Mulvaney Stands By CFPB Official In Blogging Controversy
On Tuesday, Consumer Financial Protection Bureau (CFPB) Acting Director Mick Mulvaney sent an email to employees informing them that Eric Blankenstein will remain director of CFPB’s supervision division despite controversy over racially charged blog posts that Mr. Blankenstein admitted to making in 2004.  The decision comes amid significant pressure for his removal. Earlier on Tuesday, the National Treasury Employees Union, which represents employees at the union, sent a letter to Director Mulvaney saying that the blog posts “indicate that [Mr. Blankstein] is unfit for any leadership position in the federal government” and calling into question Mr. Blankenstein’s oversight of the restructuring of CFPB’s restructuring of the office of fair lending, which is responsible for investigating discrimination complaints. Additionally, on Wednesday, 13 Senate Democrats sent a letter to Director Mulvaney asking about the vetting process around Mr. Blankenstein’s hiring.
Internal Revenue Service
IRS Releases Guidance on Meals/Entertainment Deduction Changes
On Wednesday, the Internal Revenue Service issued guidance on the business expense deduction for meals and entertainment reflecting changes passed in the Tax Cuts and Jobs Act (TCJA). Under the guidance, taxpayers will generally be able to continue deducting 50% of business related food and beverage expenses, despite TCJA’s changes to the meal and entertainment expense deduction. While TCJA eliminates the deduction for entertainment, amusement, and recreation, the guidance indicates that the law does not address the deductibility of business meals, clarifying significant confusion over how food and beverages may count as entertainment. Wednesday’s guidance also outlines the specific situations in which business meals are deductible and requires food expenses to be stated separately from entertainment expenses. IRS is requesting comment on the guidance by December 2.
Bureau of Labor Statistics
Unemployment Rate Declines to 3.7% in September
On Friday, the Bureau of Labor Statistics issued its September Labor Situation Report in which it reported that the economy added 134,000 jobs in September. Despite the unemployment rate falling to 3.7 percent, a fifty-year low, the number falls well short of the 185,000 jobs predicted in a survey of economists conducted by Bloomberg. Despite happening in the middle of the reporting period, Hurricane Florence is unlikely to have significantly suppressed the job numbers, given that it did not have a major impact on large population centers. Responding the news, President Donald Trump tweeted “Just out: 3.7% Unemployment is the lowest number since 1969!”
Next Week’s Schedule
Mon. (10/8)

  • No events scheduled.

Tues. (10/9)

  • Online Lending Policy Summit 8:00 AM – The Online Lending Policy Institute will host a daylong summit on growth, innovation, and regulation of online lending. Details here.

Wed. (10/10)

  • Hearing: Senate Commerce Committee on Consumer Data Privacy – 10:00 AM – The Senate Committee on Commerce, Science, and Transportation will hold a hearing entitled "Consumer Data Privacy: Examining Lessons From the European Union's General Data Protection Regulation and the California Consumer Privacy Act." Details here.
  • Brookings Event on the Economy 2:00 PM – The Brookings Institution will host an event entitled "The forgotten Americans: An economic agenda for a divided nation," featuring a conversation with Govs. John Kasich (R-OH) and John Hickenlooper (D-CO). Details here.

Thurs. (10/11)

  • BPC Event on Reference Rate Reform 9:30 AM – The Bipartisan Policy Center (BPC) will host an event entitled "Reference Rate Reform: Impact on the Economy and Consumers" featuring SEC Chairman Jay Clayton. Details here.
  • Hearing: Senate Banking Committee on Cryptocurrency and Blockchain – 10:00 AM – The Senate Committee on Banking, Housing, and Urban Affairs will hold a hearing entitled "Exploring the Cryptocurrency and Blockchain Ecosystem." Details here.

Fri. (10/12)

  • Brookings Event on the Digital Economy 10:30 AM – The Brookings Institution will host an event entitled "Governing the emerging digital economy," featuring a conversation with NTIA Administrator David Redl. Details here.