Financial Services Report

Looking Ahead

Near Term

• The Senate is in recess this week while the House will have an abbreviated week for the Columbus Day holiday.  The House will be in recess next week.
• The House Financial Services Committee will hold a marathon mark-up of 23 bills starting on Wednesday and likely concluding with votes on Friday. 
• A bipartisan group of members of the Ways and Means Committee are expected to meet with Canadian Prime Minister Trudeau on Wednesday.

Further Out

• The Senate may take up its version of the budget when Senators return the week of October 16^th
• Funding for the Federal Government and a slew of programs, including Flood Insurance expires on December 8th

The Past Week

Legislative Branch
House
House Approves Budget Resolution Setting Tax Reform in Motion
On Thursday, the House approved their version of a FY2018 budget resolution (H. Con. Res. 71) on a 219-206 vote.  This budget contains reconciliation instructions, making the passage the completion of the first legislative step for accomplishing (comprehensive?) tax reform.  The Senate still needs to pass its version of the budget and then a reconciled budget resolution needs to be approved by both chambers.  During the debate in the House, lawmakers rejected three alternative proposals from Democrats that would have increased spending on social safety net programs and one amendment put forward by the conservative Republican Study Committee that would have balanced the federal budget in five years.  The House budget envisions increases to defense spending by $72 billion and cuts nondefense spending by $5 billion.
 
Energy and Commerce Panel Takes Lead in Equifax Questioning
On Tuesday, the House Energy and Commerce Digital and Consumer Protection Subcommittee held a hearing about the Equifax data breach.  During the hearing, the from former Equifax Chairman and CEO Richard Smith, who stepped down due to the hack and the firm’s controversial decision to notify the public weeks later, testified and was subjected to condemnation from both parties.   For example, the Chairman of the full committee, Rep. Greg Walden (R-OR) accused the company of failing put consumers first and subcommittee Ranking Member Jan Schakowsky (D-IL) saying the company “deserves to be shamed.”
 
House Financial Services Committee Continues Grilling of Equifax
In the final set of the four hearing week with former Equifax CEO Richard Smith, the House Financial Services Committee took its turn on Thursday.   During the hearing, Chairman Jeb Hensarling (R-TX) outlined his calls to establish national standards for data security and breach disclosures, and Financial Institutions Subcommittee Chairman Blain Luetkemeyer (R-MO) indicated there would be hearings on a data breach bill in his committee shortly.  Democrats, meanwhile, maintained their intense criticism of the credit reporting agency, with Ranking Member Maxine Waters (D-CA) touting her bill to punish credit reporting agencies for credit errors. There were also questions about the relevance of Smith appearing for the committee, given that he resigned from Equifax, but he attempted to rebut those charges arguing that he remains an advisor to the company.
 
House Financial Services Committee Holds SEC Oversight Hearing
On Wednesday, the House Financial Services Committee held a hearing on oversight of the Securities and Exchange Commission (SEC) featuring testimony from SEC Chair Jay Clayton. The session featured many of the same themes as last week’s Senate Banking Committee hearing on the same subject. The session focused on the recent hack that may have allowed for the attackers to profit off of information stolen from the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. In response, Republicans urged for the SEC Chair to delay the implementation of the planned consolidated audit trail (CAT) that would increase and centralize the data collected by the agency. Other topics covered included the regulation of financial technology and initial coin offerings, the commitment from Chair Clayton to hire a Chief Risk Officer at the agency, and Clayton’s priorities for establishing a uniform fiduciary standard.
 
GOP House Members Write Op-Ed Urging Fiduciary Rule Repeal
On Thursday, House Education and Workforce Committee Chair Virginia Foxx (R-NC) and Rep. Phil Roe (R-TN) published an op-ed in the Washington Examiner urging the repeal of the Department of Labor’s fiduciary rule. Saying that the rule would harm small-dollar investors, the lawmakers continued a long-running sharp critique of the DOL’s rule. They also endorsed a repeal bill (H.R. 2823) advanced by the Education and Workforce Committee in July.
 
FHFA's Watt urges Congress to speed overhaul of Fannie, Freddie
In a hearing last week, Federal Housing Finance Agency Director Mel Watt urged members of the House Financial Services Committee to pick up the pace on creating a new framework for Fannie and Freddie, which holds $5 trillion in mortgages. "The role of Congress is to make the tough decisions,” said Watt. “It is important that these decisions get made expeditiously … the conservatorships are unsustainable.” Lawmakers generally agreed with Watt's assessment that the government-sponsored enterprises need lawmakers to move forward quickly on legislation. Efforts to produce a bipartisan bill have stalled on Capitol Hill in the nine years following 2008 financial crisis.
 
Waters Introduces Bill to Break Up Large Banks
On Wednesday, House Financial Services Committee Ranking Member Maxine Waters (D-CA) introduced a bill dubbed the “Megabank Accountability and Consequences Act” that would force any bank considered to be “systemically important” to the global financial system to break up in the event of repeated consumer violations. The bill comes in response to the Wells Fargo fake accounts scandal, which has received significant congressional attention since being revealed last year. In a separate provision, the bill would also encourage more accountability on the part of bank executives by requiring them to sign annual certifications that the bank has completed due diligence to comply with federal consumer protection laws.
 
Senate
Senate Approves Quarles as Fed Governor, Vice-Chair
Last week, the Senate approved the nomination of Randal Quarles to become a member of the Federal Reserve’s Board of Governors and become the central bank’s Vice-Chair of Supervision. Most Democrats objected to the nomination in the 65-32 vote, with all Republicans voting in favor. The former investment banker and Bush Administration Treasury official will now take over for Daniel Tarullo as the Fed’s primary regulator and contribute to the bank’s monetary policy decisions. Even with the Quarles confirmation, however, the Fed has three additional openings on its seven-member board.
 
Senate Budget Committee Backs Budget With Tax Reform Instructions
On Thursday, the Senate Budget Committee advanced its budget resolution along strict party lines, 12-11, that includes reconciliation instructions for a comprehensive tax reform package. The resolution keeps overall spending levels steady from 2017, unlike its counterpart in the House, which cuts nondefense spending by $5 billion and increases defense spending by $72 billion. Assuming the full Senate approves the resolution — which only requires a simple majority — the two chambers will then reconcile their respective versions in conference. If Republicans are to meet their ambitious goal of getting tax reform legislation to the president’s desk before the end of the year, the approval by the Senate and subsequent conferencing would need to be done at a breakneck pace – unless the House was to simply acquiesce to the Senate passed bill.
 
Wells Fargo CEO Sloan Defends Bank’s Progress in Senate Banking Committee Hearing
In a hearing of the Senate Banking Committee on Tuesday, Wells Fargo CEO Timothy Sloan testified that the embattled bank is on a positive track forward as lawmakers criticized the bank for fraudulent sales practices involving up to 3.5 million unauthorized accounts. Lawmakers from both parties criticized Sloan on Tuesday for the various scandals that had gone on allegedly without his knowledge, but it was the minority party that delivered the harshest criticism to the embattled bank. Democratic lawmakers went after Sloan for talking up the bank’s aggressive growth strategy to investors while leaders pressured lower-level employees with excessive sales goals. They also slammed the bank for pursuing arbitrated settlements with defrauded consumers as Democrats hone in on the controversial practice.
 
Senate Finance Committee Discusses Complexities of International Tax Reform
Last Tuesday, the Senate Finance Committee held a hearing on International Tax Reform. Fresh off of the release of their new tax reform framework, Republicans stressed that the need to reform an “outdated” tax code is urgent and bipartisan. Democrats criticized Republicans using a recent analysis by the Tax Policy Center that showed upper middle-income professionals and business people seeing an increase in taxes due to the loss of deductions. In turn, Republicans criticized the Tax Policy Center analysis as a “blank filling exercise” in an attempt to push back on the unfavorable numbers shown in the report.
 
Senate Judiciary Panel Joins in on Equifax Criticism
In the third of four hearings on the Equifax breach, the Senate Judiciary Subcommittee on Privacy, Technology and the Law featured not only former Equifax CEO Richard Smith, but an additional panel of cybersecurity experts. In that vein, the hearing took a slightly different tone than the others, focusing on next steps in cybersecurity rather than solely criticizing Equifax’s recent practices. The expert panel consisted of Jamie Winteron, the Director of Strategic Research Initiatives at Arizona State University’s Global Security Initiative, and Tyler Moore, an assistant professor of cybersecurity and information assurance at the University of Tulsa’s Tandy School of Computer Science.
 
Senate Banking Committee on Equifax Data Breach Provides Bipartisan Skewering of Company
The Senate Banking Committee took its turn in holding the credit reporting agency Equifax accountable on Wednesday, with another bipartisan condemnation of former CEO Richard Smith. The hearing saw a rare united front among Republicans and Democrats on the committee, with Ranking Member Sherrod Brown (D-OH) criticizing the credit reporting firm for creating a “goldmine for hackers,” and Chair Mike Crapo (R-ID) adding that the breach was “shocking and concerning.” Banking Committee members also engaged with Smith’s proposal to allow consumers to lock and unlock their credit data at any time.   
 
Select Highlights from the Administration
Department of Labor (DOL)
Economy lost 33,000 jobs in September
The Labor Department reported Friday morning that the economy lost 33,000 jobs, down from 169,000 jobs added in August. Prior to the jobs report, the Bureau of Labor Statistics said Hurricane Harvey in Texas and Hurricane Irma in Florida could have “direct and indirect effects on employment, hours, and earnings.” September unemployment fell to its lowest level since February 2001, dropping to 4.2 percent. Additionally, average hourly private-sector earnings rose 2.9 percent in September over the previous year, the largest increase since December 2016.
 
Consumer Financial Protection Bureau (CFPB)
CFPB Announces Final Small Dollar Rule – Spares Traditional Installment Lenders
On Thursday, the Consumer Financial Protection Bureau (CFPB) released its final rule to address payday lending “debt traps” that analysts say will lead to less use of the product. The new rules would require small-dollar lenders to determine whether borrowers accessing more than $500 can afford to pay their loans and maintain basic living expenses within 30 days. Republicans have criticized the CFPB’s actions against the industry, and the rule will be eligible for disapproval per the Congressional Review Act. Industry representatives split on the content of the rule, with the American Banking Association (ABA) and Credit Union National Association (CUNA) saying that the rule appears to avoid adverse impacts, while the Financial Service Centers of America – the Payday Lenders trade group called it “fundamentally flawed and politically motivated.”
 
CFPB Issues Interim Final Rule To Help Mortgage Servicers Communicate With Certain Borrowers At Risk Of Foreclosure
Last Wednesday, the Consumer Financial Protection Bureau (CFPB) issued an interim final rule and a proposed rule to provide mortgage servicers more flexibility and certainty around requirements to communicate with certain borrowers under the Bureau’s 2016 mortgage servicing amendments. The interim final rule seeks to give servicers more flexibility regarding when to communicate about foreclosure prevention options with borrowers who have requested a cease in communication under federal debt collection law. The proposed rule would aim to provide more certainty for mortgage servicers about when to provide periodic statements to consumers in connection with their bankruptcy case. The comment period on both the interim final rule and the proposed rule will close 30 days after publication in the Federal Register.
 
Department of Treasury
Treasury Reg Reform Report for Capital Markets
On Friday, the Treasury Department released its second report on streamlining federal financial regulations, with this release focused on capital markets. Among the recommendations were streamlining disclosure requirements, re-examining JOBS Act provisions, and increasing the amount that can be raised from crowdfunding from $1 million to $5 million. The report outlines 91 changes in total, with only nine that would require a contribution from Congress. The report is a part of the executive order President Trump issued in February for a complete financial regulatory review, with two additional reports anticipated in the future.