Insights

Financial Services Report (5/13)

May 13, 2019
If you were watching your stock portfolios this past week there was a lot of movement – most of it downward – due to concerns about the impact of a potential escalation in the ongoing trade war between the US and China. Given the eccentric management style of this President it is hard to predict how this trade war will get resolved. However, there is another event on the horizon – the need to increase the debt ceiling – that could pose even more of a risk to financial health of this country. At this point, unless a breakthrough occurs this summer, it looks like the extension of the debt ceiling is likely to be part of the same legislative vehicle that will be used to fund the government. Conflating these two, independently politically controversial measures, into one single bill could be a brilliant tactical maneuver, albeit one with a tremendous "risk-reward" ratio. Especially if the White House really doesn't want a real funding bill in September.

Looking Ahead

Another busy week in store ahead, including two separate days where the Financial Regulators will be before the House and Senate Banking Committees. Other notable hearings include a House Judiciary Committee will hold a hearing on arbitration that should be a redux of a hearing in the Senate Judiciary Committee earlier this year; a hearing with the five FCC Commissioners before a House E&C subcommittee, and a Capital Markets Subcommittee hearing on protecting workers rights.
 
In addition, the Senate Finance Committee is holding a hearing on retirement security, which could serve as an incentive for the Senate to move its Retirement Enhancement and Savings Act (RESA), while the House version (known as SECURE) is expected to be on the floor before Memorial Day.
 
Finally, the House is scheduled to take up the following bills this week – all under the Suspension Calendar reserved for non-controversial legislation.
  • H.R. 2578 – National Flood Insurance Program Extension Act of 2019
  • H.R. 389 – Kleptocracy Asset Recovery Rewards Act
  • H.R. 1060 – BUILD Act 
  • H.R. 1037 – Banking Transparency for Sanctioned Persons Act of 2019
 
Last Week in the House
The Floor
 
On Friday, the House voted 257-150 to pass a disaster relief package (HR 2157) providing $17.2 billion in support recovery efforts from recent hurricanes, wildfires, and other natural disasters. 34 Republicans joined Democrats in passing the measure, which would also extend the National Flood Insurance Program (NFIP) through September 30.
 
The vote marks the House's latest offer in a disaster relief debate that has dragged on due to disagreement over relief funding for Puerto Rico. Complicating matters, tension has also recently emerged between the White House and Senate Republicans over the Administration's attempt to tie disaster relief funding to border security.
 
Hearings and Markups
 
Minority Home Ownership (5/8): On Wednesday, the Financial Services Housing Subcommittee held a hearing examining minority homeownership. During the hearing, Members debated four draft legislative proposals (Committee Memorandum) that would: (1) discount FHA mortgage insurance premiums for first-time homebuyers who complete HUD-approved counseling programs; (2) ensure that DACA recipients are eligible for federally-backed housing loans; (3) establish standards for rent-to-own contracts; and (4) limit FHA premiums to only being charged until outstanding principal reaches 78 percent of original home value.
 
FTC and Data Privacy (5/8): On Wednesday, all five Federal Trade Commission Commissioners appeared before the Energy and Commerce Consumer Protection Subcommittee to discuss data privacy. From the witness stand, the five Commissioners urged lawmakers to provide FTC with greater resources to protect consumer privacy, including additional staffing, APA rulemaking authority, the ability to issue fines for first offenses, and jurisdiction over non-profits and common carriers.
 
Several senior Committee Democrats—including Chairs Pallone and Schakowsky—raised concerns about FTC privacy staffing and spoke favorably of imposing guardrails on data usage—in their terms "a reasonable” use limitation on collection. On the Republican side of the dais, Members stressed the need for a federal data privacy standard to preempt state laws, target specific bad acts, and avoid delegating overly broad rulemaking authority to FTC.
 
HFSC Markup (5/9): On Wednesday and Thursday, the Financial Services Committee held a markup where the Committee advanced five bills, all on either unanimous roll calls or by a voice vote. The only bump came when Rep. Carolyn Maloney (D-NY) had to pull her Corporate Transparency Act, legislation to require the disclosure of the beneficial owners of corporations, from the mark-up. However, the Committee indicated that it would be taken back up at the June mark-up. Additionally, the Committee approved the creation of two FinTech task forces and announced a Vice-Chair for the Majority.
 
The full list of bills passed include:

  • The Protect Affordable Mortgages for Veterans Act grandfathers certain VA loans from Section 309 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which prevents refinanced VA loans that do not meet certain requirements from being pooled into Ginnie Mae securities.

  • The Expanding Access for Capital for Rural Job Creators Act requires the SEC Advocate for Small Business Capital Formation to identify unique challenges facing rural-area small businesses.

  • The Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform (COUNTER) Act would modernize the Bank Secrecy Act and Anti-Money Launder (BSA/AML) regime through a variety of measures including: (1) codifying information sharing programs; (2) providing regulatory relief to smaller banks; and (3) closing loopholes.

  • HR 2515 would extend Dodd-Frank whistle-blower protections to employees to report misconduct directly to their employer, rather than to the SEC.

  • The Insider Trading Prohibition Act would codify the definition of insider trading and repeal a 2014 court decision that imposed onerous burdens on prosecutors to demonstrate insider trading. During the mark-up a manager's amendment was agreed to that addressed several concerns raised by industry, including clarifying that the bill does not establish strict liability or prohibit 10(b)(5) plans.

Bills Introduced
 
Cash Buyer Discrimination Act (Cicilline): Prohibits retail businesses from refusing cash payments.
 
Flood Insurance Extension (Waters and McHenry): Extends authorization of the National Flood Insurance Program until September 30. NFIP is currently set to expire on May 31 and an extension through September 30 is also included in the House's disaster relief package. **Note that this bill will be on the suspension calendar this week.
 
Gold Standard (Mooney): Defines the dollar as a fixed weight of gold. Additional legislation by Rep. Mooney would provide for an audit of US gold stores.
 
FinCEN and Emerging Technologies (Anthony Gonzalez and Emmer): Requires the Financial Crimes Enforcement Network (FinCEN) to undertake a study on its use of emerging technologies.
 
Foster Care and Public Housing (Turner): Provides priority for federally assisted housing to youths aging out of foster care.
 
Other Activity
 
Fintech and AI Task Forces: Although it was a bumpier road then originally anticipated, on Thursday, Financial Services Committee formally created two FinTech Task Forces. One, the Financial Technology Task Force will be chaired by Rep. Stephen Lynch (D-MA) and examine Fintech regulation, Fintech lending, and their impact on consumers. The other, will be known as the Artificial Intelligence Task Force, and it will be chaired by Rep. Bill Foster (D-IL) and will examine the the applications of machine learning to financial services and regulation, as well as the risks of algorithms and big data.
 
BB&T/SunTrust Letter: On Wednesday, Financial Services Committee Chairwoman Maxine Waters sent a letter to the Fed and FDIC urging them to delay approval of the proposed merger between BB&T and SunTrust banks. Noting that the proposed merger would create the largest institution to be primarily regulated by FDIC, the letter raises concerns about the merger's potential impact on consumers and employees. It urges the regulators to hold additional public hearings rather than "rubber stamp" consolidation.
 
HFSC Vice Chair: On Wednesday, Financial Services Committee Democrats elected Rep. Michael San Nicolas (D-GU) to serve as the Committee's Vice Chair. The freshman from Guam becomes the first HFSC Vice Chair to be a Delegate from a US Territory.
 
Last Week in the Senate
The Floor

On Wednesday, after months of impasse the Senate confirmed three new directors to the board of the Export-Import Bank giving the board and operational quorum which will allow it approve financing for projects in excess of $10 million dollars—something it has been unable to do since 2015 amid skepticism of its mission from several conservative Republicans.
 
Despite the longstanding Republican opposition to the Ex-Im Bank, all of the nominations were approved overwhelming. Kimberly Reed was confirmed to be the bank's new President by a vote of 79-18 and former House Members Spencer Bachus (R-AL) (72-22) and Judith DelZoppo Pryor (77-19) were also confirmed by wide bipartisan margins. The upper chambers spent the balance of its week confirming a variety of other judicial and executive nominees.
 
Hearings and Markups
 
Bank Data Privacy (5/7): On Tuesday, the Banking Committee held a hearing examining the impact of data privacy legislation on the financial services industry. Members discussed both consumer data privacy in general and specific financial services topics during the hearing. On data privacy in general, Members on both sides of the aisle (although only two Republicans were present) criticized privacy policy transparency and called for additional guardrails on data usage and the enumeration of particular consumer rights. With regards to financial services, Committee Democrats directed scrutiny towards credit bureau data breaches, as well as the potential for machine learning to enable discrimination.
 
SEC/CFTC Appropriations (5/8): On Wednesday, the Appropriations Subcommittee on Financial Services and General Government held a hearing examining the budgets of the Securities and Exchange Commission and Commodity Futures Trading Commission. The hearing was sparsely attended. However, Chair Clayton did receive questions on the impact of the Current Expected Credit Loss standard on securities markets and whether the SEC intended to initiate a rule-making to prohibit mandatory arbitration in consumer agreements. In addition, he was questioned about the forthcoming Best Interest rule, and how he views the rule as a way to harmonize the regulatory environment for investors.
 
Bills Introduced
 
Loan Shark Prevention Act (Sanders): Institutes a 15-percent federal usury rate on credit cards and other consumer loans while allowing states to set lower usury rates. The legislation would also call for the US postal services to provide certain affordable financial services to consumers, including ATMs, check cashing, and checking accounts. Sen. Sanders announced the legislation in a Facebook live-stream with Rep. Alexandria Ocasio Cortez (D-NY), who is introduced companion legislation in the House.
 
Data Prevention and Compensation Act (Warren and Warner): Imposes mandatory penalties for credit reporting agency data breaches and expands FTC supervision of CRA data security. Sens. Warren and Warner previously introduced the bill last Congress and House companion legislation is sponsored by Reps. Elijah Cummings (D-MD) and Raja Krishnamoorthi (D-IL).
 
Repeal CFPB Act (Cruz): Eliminates the Consumer Financial Protection Bureau. Sen. Cruz has introduced legislation to eliminate the CFPB in each of the last three Congresses.
 
Opportunity Zones Reporting (Booker, Hassan, Scott): Requires the Treasury Department to collect and report data on the Opportunity Zone program. House companion legislation was introduced by Reps. Ron Kind (D-WI) and Mike Kelly (R-PA).
 
Student Borrower Bankruptcy Relief Act (Durbin and Warren): Eliminates provisions in bankruptcy code making student debt non-dischargable, allowing student borrows to achieve relief through bankruptcy.
 
Student Loan Borrower Bill of Rights Act (Durbin, Warren, and Reed): Institutes a number of protections for student loan borrowers, including: (1) improving certain disclosures; (2) limiting late fees and other adverse actions; (3) prohibiting mandatory arbitration clauses; and (4) requiring higher education institutions to verify the exhaustion of federal loan eligibility prior to students taking out private loans.
 
Other Activity
 
Warren Equifax Letter: On Tuesday, Sens. Elizabeth Warren (D-MA), Mark Warner (D-VA), and Brian Schatz (D-HI) and Rep. Raja Krishnamoorthi (D-IL) sent two letters calling for FTC and CFPB to "hold Equifax accountable" for its 2017 data breach. The letters accompany the reintroduction of legislation (see above) that would increase supervision of credit reporting agency cybersecurity practices, as well as a report on the 2017 Equifax data breach. .
 
Roberts/Crapo Derivatives Letter: On Wednesday, Agriculture Committee Chairman Pat Roberts (R-KS) and Banking Committee Chairman Mike Crapo (R-ID) sent a letter to the Fed, OCC, and FDIC urging them to to exempt derivatives contracts between affiliates of the same company from rules that require them to set aside collateral for those swaps. As the letter notes, doing so would harmonize banking regulators' approach with that of CFTC, allowing US banks to "compete on a more level playing field with their non-bank and non-U.S. competitors."
 
Banking Committee Facebook Letter: On Thursday, Banking Committee Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) sent a letter to Facebook CEO Mark Zuckerberg requesting information on Facebook's use of financial information and the impact of its data practices on the financial lives of Facebook's users. Among other topics, the letter asks about Facebook's reported plans for a proprietary based payment system, data sharing between Facebook and financial institutions, and handling of information linked to creditworthiness.
 
Manufactured Housing Finance Letter: On Thursday, Sen. Catherine Cortez Masto (D-NV) led a group of eight Senate Democrats in a letter calling for the Consumer Financial Protection Bureau to improve manufactured home financing transparency. In the letter, the Senators urge CFPB to work with consumer advocates to design disclosure forms detailing the differences between real and personal property relating to titling, cost, repossession, and other factors, and to offer local housing counseling resources.
 
Last Week in the Administration
 
China Tariffs Escalated Following Commitment Reversal
On Friday, the United States officially raised tariffs on $200 billion worth of Chinese exports from 10% to 25% after Chinese negotiators reportedly offered draft agreement text backtracking on key commitments relating to intellectual property, competition policy, and currency manipulation. Following the tariffs coming into effect, Chinese Vice Premier Liu He prematurely broke off the latest round of talks in Washington. Despite the development's apparently negative outlook for resolving the ongoing trade dispute between the world's two largest economies, President Trump remained optimistic about the talks on Twitter, commenting: "“Talks with China continue in a very congenial manner — there is absolutely no need to rush."
 
Debt Collection Rule Rewrite Includes Bright-Line Limits on Calls
On Tuesday, the Consumer Financial Protection Bureau issued a notice of proposed rulemaking updating the Bureau's Debt Collection Rule. The new rules would: (1) limit debt collectors to no more than seven attempted telephone calls per week and require them to wait at least a week to call again after making contact;(2) require collectors to provide disclosures containing information about the debt in question and consumer protections; (3) allow consumers to opt out of receiving electronic messages; and (4) prohibit collectors from threatening to sue a consumer to collect a debt if the debt collector knows or should know that the statute of limitations has expired.
 
Intended to modernize and clarify debt collection rules amid the proliferation of new telecommunications technologies, the proposal was not well received by House Financial Services Committee Chairwoman Maxine Waters, who called it, "another example of an anti-consumer action at the Consumer Bureau."
 
Fed Publishes Regulation, Stability Reports
On Friday, the Federal Reserve published its second ever Supervision and Regulation Report, which indicated that bank capital ratios have declined slightly since 2018 despite overall "strong capital positions." The report identifies a spike in stock buybucks, as well as increased levels of total assets by banks as two potential factors contributing to slightly depressed capital. Earlier in the week, the central bank also issued its May 2019 Financial Stability Report, which noted increased levels of leveraged lending despite limited exposure to the banking system.
 
FinCEN Issues Money Transmitter Guidance for Crypto-Stakeholders
On Thursday, the Financial Crimes Enforcement Network published guidance clarifying when individuals and organizations dealing in cryptocurrencies may be treated at money transmitters under the Bank Secrecy Act. While the new guidance does not establish any new regulatory expectations, it does consolidate current FinCEN regulations, administrative rulings, and guidance issued over the last decade.
 
SEC Exempts Small Companies From Auditor Attestation
On Thursday, the Securities and Exchange Commission proposed amendments exempting smaller companies from Sarbanes-Oxley auditor attestation requirements. Under the proposed changes, companies with less than $100 million in revenue would not be required to have an external auditor attest to their internal financial reporting controls—a measure intended to reduce fraud in the wake of the Enron and WorldCom scandals that has also been questioned for posing a disproportionate burden on smaller companies. The Commission voted 3-1 to advance the proposal, with dissenting Commissioner Robert Jackson raising concerns that the measure would weaken internal controls.
 
FHA Changes Aim to Increase Bank Participation
On Thursday, the Federal Housing Administration proposed several revisions to its lender certification requirements aimed at increasing certainty for participating lenders and servicers in how to satisfy compliance requirements. Most notably, FHA is proposing changes intended to increase the precision and clarity of certifications and to revise its "defect taxonomy" to clarify the various loan defect categories. The changes are intended to increase competition in the FHA-insured mortgage market—particularly among traditional banks, many of which have exited the market since the housing crisis.
 
FHA Rolls Out Opportunity Zone Incentives
On Thursday, the Federal Housing Administration announced new incentives for property owners to invest in Opportunity Zones. Under the changes, applicants to certain FHA multifamily mortgage insurance programs will see their application fee cut by two-thirds for transactions classified as "broadly affordable" and located in qualified Opportunity Zones —resulting in average cost savings of $28,000. Applicants will see a one-third fee reduction for transactions in Opportunity Zones classified as "market rate" or "affordable." In addition, FHA also announced that it would designate senior underwriters to process applications located in Opportunity Zones "to ensure expert and expedient review."
 
This Week's Schedule
Mon. (5/13)
  • BPC Event with former SBA Administrator Karen Mills – 5:30 PM – The Bipartisan Policy Center will hold an event with former Small Business Administration Administrator Karen Mills entitled “A Conversation with Karen Mills: Fintech, Small Business, and the American Dream.” Details here.
Tues. (5/14)
  • Hearing: Senate Judiciary Committee on 5G – 10:00 AM – The Senate Judiciary Committee will hold a hearing entitled "5G: National Security Concerns, Intellectual Property Issues, and the Impact on Competition and Innovation." Details here.
  • Hearing: Senate Finance Committee on Retirement –10:15 AM – The Senate Finance Committee will hold a hearing entitled "Challenges in the Retirement System." Details here.
  • Hearing: Senate Budget Committee on the Budget and Spending Process – 2:30 PM – The Senate Budget Committee will hold a hearing entitled "Fixing a Broken Budget and Spending Process: Perspectives of Two Former Chairmen." Details here.
Wed. (5/15)
  • Hearing: Senate Banking Committee on Oversight of Financial Regulators – 9:30 AM – The Senate Committee on Banking, Housing, and Urban Affairs will hold an oversight hearing with the heads of the FDIC, OCC, NCUA, as well as Federal Reserve Vice Chair Randal Quarles. Details here.
  • Hearing: House Budget Committee on Retirement Security – 10:00 AM – The House Budget Committee will hold a hearing entitled "Keeping Our Promise to America’s Seniors: Retirement Security in the 21st Century." Details here.
  • Executive Session: Senate Commerce Committee – 10:00 AM – The Senate Commerce Committee will hold an executive six legislative measures. Details here.
  • Hearing: House Energy and Commerce Sub. on FCC Oversight – 10:00 AM – The House Energy and Commerce Subcommittee on Communications & Technology will hold a hearing entitled "Accountability and Oversight of the Federal Communications Commission." Details here.
  • Hearing: House Financial Services Sub. on Worker Rights and Protection – 10:00 AM – The House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets will hold a hearing entitled "Promoting Economic Growth: A Review of Proposals to Strengthen the Rights and Protections for Workers." Details here.
  • Hearing: House Education and Labor Sub. on the Older Americans Act – 10:15 AM – The House Education and Labor Subcommittee on Civil Rights and Human Services will hold a hearing entitled "Examining the Older Americans Act: Promoting Independence and Dignity for Older Americans." Details here.
  • Hearing: House Small Business Committee Member Day – 11:30 AM – The House Small Business Committee will convene its Member Day hearing for the 116th Congress. Details here.
  • Hearing: House Financial Services Sub. on Economic Sanctions – 2:00 PM – The House Financial Services Subcommittee on National Security, International Development, and Monetary Policy will hold a hearing entitled "Assessing the Use of Sanctions in Addressing National Security and Foreign Policy Challenges." Details here.
  • Hearing: Senate Small Business Committee on SBA’s Innovation Programs – 2:30 PM – The Senate Committee on Small Business & Entrepreneurship will hold a hearing on reauthorization of the Small Business Administration’s (SBA) Innovation Programs. Details here.
Thurs. (5/16)
  • Hearing: House Financial Services Committee on Oversight of Prudential Regulators – 10:00 AM – The House Financial Services Committee will hold a hearing entitled "Oversight of Prudential Regulators: Ensuring the Safety, Soundness and Accountability of Megabanks and other Depository Institutions." Details here.
  • Hearing: House Judiciary Sub. on Arbitration – 10:00 AM – The House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law will hold a hearing entitled "Justice Denied: Forced Arbitration and the Erosion of our Legal System." Details here.
  • Hearing: House Oversight and Reform Committee on the CFPB Payday Lending Rule – 2:00 PM – The House Committee on Oversight and Reform will hold a hearing entitled “CFPB’s Role in Empowering Predatory Lenders: Examining the Proposed Repeal of the Payday Lending Rule.” Details here.
Fri. (5/17)
  • No events scheduled.
Further Out
  • Hearing: House Financial Services Committee on Oversight of HUD – May 21 – The House Financial Services Committee will hold a hearing entitled "Housing in America: Oversight of the U.S. Department of Housing and Urban Development." Details here.