Financial Services Report (6/8)

The protests for justice in the aftermath of the George Floyd killing have upended a congressional schedule, that was already upended by COVID-19, and may likely result in the House of Representatives coming back to DC to vote on a package of civil justice legislation before the end of the month.

In the near term, next week will be dominated by hearings, with multiple hearings on the impact the economic job loss has had on the housing market – both purchase and rental. In addition, Secretary Mnuchin and the SBA Administrator will be in front of the Senate Small Business Committee.
Last Week in the House
The Floor

The House was out of session last week for Floor Votes but was scheduled for virtual committee work.

Hearings and Markups

Inclusive Lending (6/3): On Wednesday, the Financial Institutions Subcommittee hearing focused on the implementation of the paycheck protection program (PPP) in Minority Depository Institutions (MDI) and Community Development Financial Institutions (CDFI). Members on both sides of the aisle called for simplifying the PPP’s loan forgiveness application process, particularly for smaller borrowers, and Full Committee Chairwoman Maxine Waters (D-CA) called for using a “substantial compliance” standard for evaluating the applications. Some Democratic members also called for making equity investments in CDFIs and MDIs.

Two GOP members expressed interest with assisting MDIs and CDFIs go digital, with Full Committee Ranking Member Patrick McHenry (R-NC) suggesting that more fully digital banking experiences could help drive financial inclusion. Democrats, notably Reps. Nydia Velazquez (D-NC) and Katie Porter (D-CA), called for greater transparency in PPP funding flows.

Bills Introduced

Emergency Housing Voucher Act (Waters): Provides $10 billion towards tenant-based emergency housing assistance.

Reopening America by Supporting Workers and Businesses Act (Brady): Establishes a $1200 “return to work bonus” for employees returning to their jobs.

Encouraging Public Offerings Act (Trahan, McKinley, Rose, and Simpson): Expands “testing the waters” and confidential registration to all issuers. The legislation passed the House unanimously in 2017 and was part of the JOBS 3.0 package last Congress.

Hong Kong Autonomy Act (Sherman and Yoho): Requires escalating primary and secondary sanctions against individuals and entities involved in China’s erosion of the autonomy of Hong Kong. The bill is the House companion to Senate legislation spearheaded by Sens. Toomey and Van Hollen.

Other Activity

House Appropriations Schedule Released. In a Thursday “Dear Colleague” letter to Members on the House Appropriations Committee , Chairwoman Nita Lowey (D-NY) provided an overview of the Committee’s plan of attack for addressing fiscal year (FY) 2021 spending bills next month. According to that letter, Appropriators will hold subcommittee and full committee markups on funding bills during the weeks of Jul. 6 and Jul. 13, with floor consideration likely occurring the weeks of Jul. 20 and Jul. 27. She also plans to offer additional details on the schedule — as well as the specific order in which the bills will be considered — later this month.
Last Week in the Senate
The Floor

On Tuesday, the Senate confirmed Brian Miller to be Special Inspector General for Pandemic Recovery in a 51-40 vote. Sen. Doug Jones (D-AL) was the only Democrat to vote for the White House lawyer to serve as watchdog over $500 billion in COVID-relief funding. Democrats and other critics have opposed Mr. Miller’s nomination over concerns of his independence given his background in the White House Counsel’s office.

On Wednesday evening, by unanimous consent, the Senate passed the House’s PPP modification legislation, that among other things sought to ease loan forgiveness provisions while providing more time and flexibility for how recipients use these funds. Specifically, the bill includes the following changes: 

Loan Forgiveness. The bill extends the covered period during which a recipient can use their loan towards forgivable expenses from eight to 24 weeks after origination. It also includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce: (1) if the recipient is unable to rehire former or similarly qualified employees; and (2) if the recipient is unable to return to the same level of business activity due to the COVID-19 public health emergency. 

Use of Funds. The measure allows a greater portion of loan forgiveness to come from non-payroll costs. Borrowers will now be allowed to have up to 40 percent of their forgiveness come from non-payroll costs, up from an initial 25 percent. 

Borrower Benefits. The bill lengthens the PPP loan term from two to five years and allows program participants to take advantage of the CARES Act’s payroll tax deferral.

Timelines. The legislation pushes the PPP program’s expiration from Jun. 30. to Dec. 31. 

Prior to Senate passage of H.R. 7010, Sens. Ron Johnson (R-WI) and Mike Lee (R-UT) — who had expressed concerns and opposition to the House-passed bill — secured a letter from key Small Business Committee members in both chambers clarifying that the intent of the legislation is not to reauthorize the program through the end of the year without additional reforms.

Small Business Committee Chairman Marco Rubio (R-FL) and Sen. Susan Collins (R-ME) have also indicated they are working on a technical change to the legislation that would ensure business can have their loans forgiven in some form regardless of whether they reach the 60 percent threshold. Additionally, there has been a bipartisan push in Congress to expand PPP eligibility to 501(c)6 organizations and other currently ineligible nonprofits in the next round of COVID-19 relief legislation. 

Hearings and Markups

CARES Title IV: (6/2): On Tuesday, the Banking Committee held a hearing examining the implementation of Title IV of the CARES Act. Members and witnesses at the hearing were broadly supportive of the assortment of 13(3) lending facilities that have been established by the Federal Reserve and backed by funding provided under the CARES Act, which participants on several occasions argued has averted a potential COVID-19 meltdown of the financial sector. 

Discussion of specific lending facilities largely revolved around the Main Street Lending Program for midsized businesses as the Municipal Liquidity Facility (MLF). On the Main Street Program, members and witnesses offered several suggestions to improve the program’s flexibility, including increasing the government’s willingness to take losses on participating loans and decreasing the minimum loan floor. Participants called for improving MLF by making more municipalities eligible to participate directly and increasing the loan term, with several calling for the establishment of grants as a more generous form of fiscal relief than the loans provided under the program. 

Hong Kong (6/4): On Thursday, the Banking Committee held a hearing examining US policy tools for responding to Chinese encroachments against the autonomy of Hong Kong. Members and witnesses most notably focused their discussion of the use of sanctions and the elimination of differential treatment between China and Hong Kong. Sens. Pat Toomey (R-PA) and Chris Van Hollen (D-MD) promoted their Hong Kong Autonomy Act, which would impose mandatory sanctions on individuals and entities infringing Hong Kong’s independence and financial institutions doing business with them. The legislation received qualified support from the witness panel. 

On differential treatment, members from both sides of the aisle generally agreed that the United States cannot continue to treat Hong Kong differently from China when China itself refuses to treat it as such, while cautioning that any actions should be wary of pushing Hong Kong further towards the mainland. Democrats were critical of what they described as President Trump’s vague and overly broad announcement of retaliatory actions against Beijing, as well as his general leadership in addressing Hong Kong autonomy.

Other Activity

Brown Letter on Reg BI: On Monday, Banking Committee Ranking Member Sherrod Brown (D-OH) sent a letter to SEC Chairman Jay Clayton reiterating his criticism of the commission’s Regulation Best Interest, which is set to come into effect on June 30. While alleging that the standard fails “to require that broker-dealers put investor interests first,” the letter nonetheless calls for the Commission to pursue “tough compliance examinations and enforcement” of the regulation in order to protect investors to the extent possible. The letter additionally calls on the commission to collect several data regarding Regulation BI’s implementation in order for Congress and stakeholders to better understand its efficacy.

CECL Letter. On Thursday, Sens. Doug Jones (D-AL), Thom Tillis (R-NC), Jon Tester (D-MT), and Kevin Cramer (R-ND) published a letter calling for the Financial Stability Oversight Council (FSOC) to conduct a study on the economic drawbacks of the Current Expected Credit Loss (CECL) accounting standard. Noting that large bank reserves have increased nearly 60 percent since the standard came into effect this year, the letter raises concerns that its implementation could have pro-cyclical effects impeding lending during the COVID-driven economic downturn.
Last Week in the Administration
Better than Expected Jobs Report Marred by Confusion.
On Friday, the Bureau of Labor Statistics reported that the economy added 2.5 million jobs in May, and initially reporting that unemployment had dropped to to 13.3 percent, before issuing a correction that the actual unemployment rate was around 16%. While the President touted the numbers – they are primarily fueled by furloughed workers returning to reopening businesses last month and do not necessarily foreshadow an easy recovery. Looking beyond the return-to-work-driven job additions, 295,000 workers reported losing their jobs permanently last month.

Fed Expands Municipal Facility
On Wednesday, the Federal Reserve announced an expansion of its Municipal Liquidity Facility (MLF), allowing more municipal governments to take advantage of the program intended to ensure that state and local governments have access to credit to cover revenue shortfalls. The program’s updated term sheet will allow governors to designate two cities or counties as eligible for the program regardless of their population, as well as two entities involved in government activities, such as airports or utility companies. Previously, the program was only open to states, cities with at least 250,000 residents, counties with at least 500,000 residents, and certain multi-state entities.

Also Wednesday, Illinois became the first entity to borrow money through MLF, issuing $1.2 billion in debt to be repaid within one year.

Comptroller of The Currency Warns of Shutdowns’ Impact on Banks
On Monday, Acting Comptroller of the Currency Brian Brooks sent a letter to the US Conference of Mayors warning of the impacts of prolonged COVID lockdowns on the country’s banking sector. “Apart from damage to the physical collateral, extended lockdown orders obviously impair the ability of businesses, particularly small businesses, to generate the revenue needed to pay their loan obligations,” the letter reads. “Banks lend to customers based in part on their assessment of customers’ current and expected future income, which largely determine their ability to repay the debt. Indeed, federal law expressly authorizes national banks to make loan determinations based on banks’ assessment of current and expected income and current and expected cash flows.”

The Acting OCC head’s letter prompted immediate pushback from Chair Waters, who said, “With this inappropriate letter pressuring city and state officials to end important public safety measures put in place to combat the spread of the novel coronavirus, the new Acting Comptroller is transparently pandering to President Trump, who has made clear that he would prefer that we all pretend that there is no pandemic, that more than a hundred thousand Americans have not lost their lives already, and that many more are not at risk.”

DOL Opens Door For 401(k)s to Invest in Private Equity
On Wednesday, the Department of Labor (DOL) released a letter that will allow 401(k) funds to participate in private equity investments. While not a blanket approval for immediate investment in all Private Equity funds, the letter allows for “ … private equity investments offered as part of a professionally managed multi-asset class vehicle structured as a target date, target risk, or balanced fund.” The announcement was praised by SEC Chairman Clayton, which is not surprising as the

SEC Commissioner Pierce Renominated to SEC
On Tuesday, the White House announced the nomination of SEC Commissioner Hester Pierce to serve a full five-year term as a member of the commission. First appointed to the commission in 2018, Pierce is particularly known as a “crypto mom” supporting the development of crypto currency markets. Her renomination is additionally notable insofar as President Trump has thus far failed to nominate a candidate to fill the vacant Democratic seat on the commission, furthering concerns of a concerted effort to eliminate the traditional bipartisan equilibrium for filling vacancies.

Pompeo Warns of Chinese Listings
Secretary of State Mike Pompeo issued a statement on Thursday praising a recent move by NASDAQ to restrict access to the exchange to Chinese companies that do not comply with US auditing requirements. “American investors should not be subjected to hidden and undue risks associated with companies that do not abide by the same rules as U.S. firms. Nasdaq’s action should serve as a model for other exchanges in the United States, and around the world,” the statement reads. Secretary Pompeo’s statement comes amid increasing US-China tensions and a week after President Trump included scrutiny of Chinese firms listed on US exchanges in a speech detailing his retaliatory strategy against China.