Financial Services Report

Our Take

That sound you heard emanating from our nation’s capital last week was the collective scream of the city’s establishment trying to deal with the President’s firing of FBI Director Comey and then subsequent responses from the White House.   Without commenting on the specifics of the situation, the impact on the future of legislation remains unclear.  

One takeaway, is that the President, in the school of “old dogs and new tricks,” seems to want to run the country in the way he has run his business.   While this continuously frustrates the old guard of the establishment and so-called “elites,” and might poll terribly, he seems to have little interest in change.  While the President’s popularity with his base remains essentially unchanged, Congress continues to suffer from devastatingly low popularity.  While some argue that Democrats, especially in the Senate, will find it politically expedient to engage in protracted partisan fights, requiring 60 votes for almost every bill, others may see the benefit to striking deals where they are there to made. 
At the very least, hopefully it doesn’t come to this (though this is perhaps the best parody of political analysis in some time).
Looking Ahead

Near Term

  • The Senate will start the week by considering two sub-Cabinet level nominations — Jeffrey Rosen to be Deputy Secretary of Transportation and Rachel Bland to be Associate Attorney General.  With roll call votes on those nominations could come as early as Monday evening, it is unclear whether Democrats will attempt to tie Bland’s nomination the recent firing of Federal Bureau of Investigation Director James Comey. 
  • The House will return from a one week recess to take up to criminal justice measures to coincide with National Police Week. 

Further Out

  • The House is expected to take up the CHOICE Act during the week of May 22nd.   

The Past Week

Legislative Branch
Financial Services Committee Primes 5-Year Flood Insurance Bill
Reports on the provisions of a five-year flood insurance reauthorization bill emerged last week as House Financial Services Committee Chairman Jeb Hensarling (R-TX) preps the panel to introduce the bill. The draft plan to reauthorize the National Flood Insurance Program (NFIP) would reduce coverage for certain structures and for excessive claims, meeting Republican demands to further privatize the flood insurance industry. The draft bill is also expected to lower the cap on individual policyholders’ annual rate increases and ease the insurance requirements of government-backed mortgages. Chairman Hensarling has said he hopes to consider the reauthorization bill in Committee soon.  Without Congressional action, the NFIP will expire at the end of the fiscal year on Sep. 30.
Watt Testifies Before the Committee – Takes Heat from Both Sides
On Thursday, Federal Housing Finance Agency Director Mel Watt testified before the Senate Banking Committee as part of the Chairman’s interest in finding a solution to Fannie and Freddie.   During the hearing, Chairman Crapo warned Director Watt from against suspending Fannie and Freddie dividend payments to Treasury.  Watt had indicated his concern that without such a suspension, the GSEs could build larger capital supplies, something that others see as the first step toward re-privatizing the entities.  Later in the hearing Watt found himself on the receiving end of critiscm by Senator Elizabeth Warrant (D-MA) that he hadn’t done enough to help homeowners whose homes had lost considerable value due to the mortgage crisis.  While Watt attempted to defend himself, his claims appeared fail to persuade Senator Warren.
Dem Senators Express Concern with Noreika Appointment to Head OCC
On Thursday, seven Democrats on the Senate Banking Committee wrote to Treasury Secretary Steven Mnuchin over concerns that newly named acting Comptroller of the Currency Keith Noreika is unqualified for the post and has “obvious conflicts of interest.” Noreika was a banking attorney at Simpson Thacher &Bartlett before being tapped by Trump to run the agency. The Democratic senators chastised the Administration for choosing an “unvetted” interim head of the agency and demanded answers to questions on Noreika’s independence and the process for circumventing the Senate in naming an interim Comptroller. In response, the Treasury Department said that Noreika will “be recused from any specific matters involving his clients” and that he went through a “careful ethics screening” before being installed as Comptroller.
Select Highlights from the Administration
The White House
U.S. Reaches Trade Deal with China on Agriculture, Financial Services
The White House announced on Thursday that it had reached a deal with China to narrow the trade deficit between the two countries through a ten-point plan targeting certain industries. Among the most notable changes are improving market access for American electronic payments providers and beef producers in China, which have long-sought an easier process to reach Chinese consumers. Specifically, the deal would allow U.S. electronic payment firms to seek licenses from the Chinese government giving them “full and prompt access” to the Chinese market, and end a dispute that has also been subject to a case before the World Trade Organization.
Department of the Treasury
WH Review of Dodd-Frank to Be Delayed, Will Occur in ‘Stages’
Last week, Reuters reported that the Treasury Department’s planned review of executive regulations tied to the Dodd-Frank financial reform law will be completed in stages and that the entire review will not be completed by June as originally anticipated. President Trump issued an executive order in February directing the Treasury Department to conduct a review within 20 days, and the Department is reportedly prioritizing a review of banking regulations as part of that review. According to the sources cited in the report, a full review may take “several months.” President Trump has spoken out on his desire to do a “big number” to the Dodd-Frank law and legislation advanced by the house Financial Services Committee last week would significantly rewrite key elements of the law.
WH Names Kautter for Tax Post at Treasury
On Thursday, President Trump nominated David Kautter, a partner at the consulting firm RSM US LLP, to be the Treasury Department’s Assistant Secretary for Tax Policy. Kautter has also worked at consulting firm Ernst and Young, and been a professor at American University. Assuming Kautter is confirmed by the Senate, he will likely work to accelerate the White House’s tax reform effort, which Republicans hope to push through Congress before the end of the year.
Consumer Financial Protection Bureau (CFPB)
CFPB Announces Inquiry into Small Business Lending Practices
On Wednesday  at a field hearing in Lost Angeles the (CFPB) held a field hearing to announce its inquiry into small business lending under Section 1071 of the Dodd Frank Act.  This is the first step in a process that may ultimately result in a rulemaking.   During the event, the California regulator, Commissioner Owen spoke directly to financial technology (fintech) companies and their growing presence in providing credit to businesses. She said compliance, transparency, sound financial transactions, and the fair treatment of consumers as key areas for the principles that should govern fintech lending.
Noting that there were “perceive[d] large gaps” in the understanding of the way that entrepreneurs’ financing and credit needs are served, Director Cordray note the request for information released by the Bureau on Wednesday was the  “first step” toward crafting a Section 1071 rule on collecting and reporting small business lending data. In terms of the content of the inquiry and suggestions for the future regulatory efforts, Cordray said the Bureau will be “sensitive” to the fact that many financial institutions are not currently collecting the lending data and that changes imposed by the rule will “create implementation and operational challenges.” Specific requests for information include: (1) how to determine a definition for “small business” for the rule; (2) where small businesses seek financing and the kinds of loan products currently available; (3) the categories of data on small business lending currently used and maintained by financial institutions; and (4) privacy implications that may arise from disclosure of small business lending data. He reiterated that the CFPB takes feedback “seriously” will integrate suggestions into the Bureau’s “thinking and approach” as it moves forward with the rulemaking.
Office of the Comptroller of the Currency (OCC)
Curry’s Deputy, Nash, to Follow Curry Out of OCC
Paul Nash, the Senior Deputy Comptroller and Chief of Staff at the OCC, announced last week that he would be leaving the agency on May 26, following Tom Curry’s removal as Comptroller of the Currency last week. OCC special counsel Jonathan Fink and deputy chief of staff William Rowe have said that they will split Nash’s duties once he steps down. Keith Noreika is acting Comptroller and President Trump has yet to name his nominee to fill the post permanently.
Federal Reserve
Federal Open Markets Committee Announces 2018 Schedule
The Federal Reserve announced its tentative 2018 schedule last week, with sessions on the following days:

  • Jan. 30-31
  • March 20-21
  • May 1-2
  • June 12-13
  • July 31-Aug. 1
  • Sept. 25-26
  • Nov. 7-8
  • Dec. 18-19
  • Jan. 29-30, 2019

Current Fed Chair Janet Yellen’s term as head of the institution is set to expire at the beginning of February 2018.
Federal Deposit Insurance Corporation (FDIC)
Vice-Chair Hoenig Says U.S. Banking System Too Consolidated
On Friday, FDIC Vice-Chair Tom Hoenig said in a speech to a conference at Chapman University that proposed structural changes to banks are necessary due to the consolidation of the lending market into massive institutions. Hoenig has put forward a plan to require banks to partition certain elements of their business and to require them to be separately managed and capitalized. Hoenig pointed to the 2008 financial crisis and increased product complexity and risk as factors contributing to the consolidation trend, arguing that the banking system should “allow for failure and reduce reliance on intrusive regulations.”