Financial Services Report

Looking Ahead

Near Term

  • The Senate floor will be consumed by the immigration effort, and there are no hearings scheduled in the Banking Committee.
  • There are two major financial services bills coming up on the floor of the House.  First is the so-called “TRID” bill that will amend the CFPB’s rule for mortgage disclosure.  Second, is the “Madden Fix” or “Valid when Made” bill that would bring some level of certainty to credit markets roiled by the Midland v. Madden decision.   If this legislation, which will come up under a rule, is to have a chance for inclusion in the Senate reg relief bill its proponents will need to run up the Democratic votes on the floor.
  • Even though the budget deal from last week made the President’s budget more moot than in most years, this week marks the start of budget week with numerous officials coming to the Hill to talk about the Administration’s policy priorities. 
  • As part of this effort, Secretary Mnuchin will again pull double duty on the Hill testifying before the Senate Finance Committee on Wednesday and Thursday.
  • OMB Director Mulvaney also heads before the House Budget Committee on Tuesday where we suspect he might receive a question of two about his other role as Acting Director of the CFPB.
  • The House Financial Services Committee holds multiple hearings this week.  First the Financial Institutions Subcommittee holds a hearing Wednesday morning on data breach that could provide insight into the draft bill they are working on.  Then later that afternoon the Capital  Markets Subcommittee has a hearing on derivatives
  • On Thursday the FI subcommittee holds another hearing on de-risking, while the Terrorism Financing Subcommittee holds a hearing that afternoon.

Further Out

  • Newly minted Fed Chair Jerome Powell will testify before the House Financial Services Committee on February 28th.
  • Strong rumors circulate that the Senate will take up its reg relief bill after it completes (disposes?) of the immigration effort.  By some accounts that means the bill will be on the floor during the week of February 26th

The Past Week

Legislative Branch

Despite Brief Shut Down Congress Passes Six Week Funding Measure
On Friday morning, the President signed a sweeping bipartisan budget deal into law, ending a brief government shutdown, caused primarily by one Republican Senator’s refusal to expedite passage of the vote.  Ultimately, Congress voted early Friday morning, with the Senate passing the measure by a 71-28 vote around 2am and then the House passing it by a vote of 240-186 around 5:30am, before sending it to the President’s desk. 
The budget deal will keep the government funded through March 23rd, and should pave the way for Congress to consider an omnibus spending bill then.  Included in the package was a suspension of the debit ceiling through March 2019, ensuring that this political hot potato will be off the table until after the next election.   Also included in the bill was a provision that cuts the Federal Reserve's operating surplus by $2.5 billion, as well as an extension of the Federal flood insurance program to March 23rd as well.  The massive deal also included, billions in funding for health care, disaster relief, infrastructure, child care, and education, while also including many of the “tax extenders” that were set to expire at the end of 2017.   Among the tax provisions in the bill there were a few related to hardship distributions from retirement plans. 
House Passes Mortgage Choice Act
On Thursday, by a vote of 280-131 the House passed H.R. 1153, the Mortgage Choice Act.  This bill amends the Truth in Lending Act to specify that neither escrow charges for insurance nor affiliated title charges shall be considered "points and fees" for purposes of determining whether a mortgage is a "high-cost mortgage."  Currently, the CFPB imposes a cap on fees of 3 percent of the loan amount and lenders that meet that cap receive legal protections from the CFPB’s ability to pay / QM rule.   This marks the third time the bill has passed the House. 
House Passes Small Bank Holding Company Relief Act
Also on Thursday, the House passed on a 280-139 vote, H.R. 4771, the Small Bank Holding Company Relief Act.  This bill would require the Federal Reserve to raise the threshold for its rules governing debt levels at small bank holding companies from the current $1 billion-dollar level to a $3 billion-dollar level.  Opponents of the measure argued that the legislation would change could impair credit availability by promoting consolidation of community banks while also encouraging small banks to hold dangerously high amounts of debt.
House Financial Services Committee Receives FSOC Report
On Tuesday, the House Financial Services Committee held a hearing to provide the Secretary of the Treasury an opportunity to present and respond to questions about the Financial Stability Oversight Council (FSOC) Annual Report to Congress.  For the second time in as many weeks, Treasury Secretary Steven Mnuchin presented the findings of the annual report to Congress while also touting the recently passed tax reform bill, deregulation policies, and broader economic agenda for 2018.  At the hearing Chairman Hensarling used his time to question Mnuchin on what powers the FHFA Director has with regard to Fannie and Freddie in an effort to encourage Democrats to support efforts to reform the GSEs.  At the same time Ranking Member Waters used her time to talk about Russian sanctions, perhaps an indicator of how far about the two sides are the very issue everyone initially anticipated them finding common ground on.  
Also during the hearing, Secretary  Mnuchin was pressed for details by Committee Republicans on FSOC’s efforts to revise its nonbank designation process. In response, Mnuchin indicated that the FSOC will issue a proposal on criteria for designating firms before enforcing a new methodology.  He noted that the Treasury Department will be working with Congress on suggestions for criteria regarding SIFI designations with a focus on more transparency in the designation process.
Cleaver Questions Role of Bitcoin in Funding Hate Groups
On Thursday, Congressman Cleaver (D-MO) sent letters to the Bitcoin Foundation and the Chamber of Digital Commerce asking both organization to explain what they are doing to prevent the use of cryptocurrencies like bitcoin to fund the activities of white supremacist groups.  
Senate Democrats Query CFPB on Equifax Investigation
On Wednesday, a group of 37 Democratic Senators, lead by Brian Schatz (D-HI), sent a letter to the CFPB, questioning whether the Bureau has halted its investigation into the Equifax breach, and if so, who ordered the move.  The letter also sought information as to whether the agency plans to carry out on-site inspections of Equifax and other credit bureau agencies, if the CFPB was interviewing Equifax employees and whether the Bureau was coordinating with the FTC and other authorities in investigating the company.  The letter, which was addressed to both Acting Director English and Director Mulvaney, requested a response by February 19th.
Banking Holds Hearing on Crypto Currency – Warren and Clayton Spar on Fiduciary
On Tuesday, the Senate Banking Committee held a hearing entitled, Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission, where SEC Chairman Clayton and CFTC Chairman Giancarlo testified.  Both Chairmen noted that there were gaps in their respective authorities to regulate virtual currencies like bitcoin and hinted that they may seek additional regulatory powers from Congress.   In an exchange unrelated to bitcoin, Senator Warren (D-MA) askes the SEC Chairman to explain how the SEC intended to engage in the so-called fiduciary rule.  In response Clayton indicated that he wants to bring clarity to the rule, leading Warren to question exactly what that meant, though it appears he may have ultimately assuaged her concerns by indicating that the SEC’s final rule could strengthen elements of the DOL’s fiduciary standard.
Banking Committee Approves Three Nominees but Goodfriend Faces Difficult Road Ahead
On Tuesday the Senate Banking Committee cleared three of the President’s nominees for floor action.  Jelena McWilliams for FDIC Chair and Thomas Workman to serve on the FSOC as the Insurance expert both passed out of the Committee with broad bipartisan support.  However, Marvin Goodfriend, nominated to be a Federal Reserve board member faced stiff Democratic opposition and only won approval on a straight party-line vote.  Compounding problems for Goodfriend was the announcement by Republican Senator Rand Paul that he would vote against Goodfriend on the Senate floor.   Assuming that the party-line vote out of Committee is an indicator that no Democrats would vote for Goodfriend, the combination of Senator McCain’s absence and Paul’s announcement adds up to a defeat for Goodfriend on the floor.
Jones Introduces First Bill
On Thursday, newly elected Democratic Alabama Senator Doug Jones introduced his first piece of legislation.  The bill, which would ease capital requirements for certain commercial real estate loans, was cosponsored by Arkansas Senator Tom Cotton.  It is a companion measure to H.R. 2148, introduced by Representatives Pittinger (R-NC) and Scott (D-GA) in the House, which passed the House by voice vote back in November.  Jones, who despite a lack of public comment, is widely anticipated to support the Reg Relief bill in the Senate, and the introduction of this bill could be a sign of its eventual inclusion in that legislation.
Select Highlights from the Administration
Office of Financial Research Braces for Widespread Layoffs
On Thursday, the American Banker reported that an internal memo went out this week notifying employees that they need to attend a two-hour session to discuss the process for how the Office of Financial Research (OFR) would engage in reduction in force.   The memo should not come as a surprise as the President’s budget in May had called for the reduction of up to 84 full time employees and cuts to the budget totaling 25%.   Supporters of OFR claim that its mission — researching possible systemic threats – is still necessary, while others believe that these capabilities can be wrapped into Treasury. 
White House to Nominate IRS Commissioner
On Thursday, President Trump announced his intentions to nominate Charles Rettig, a tax attorney to serve as the next commissioner of the Internal Revenue Service. Rettig, who has backed Trump's decision not to release his tax returns, previously led the IRS advisory council.
Federal Reserve
Federal Reserve Announces Relaxation of Collateral Requirements for Swap Contracts
Last week, the Federal Reserve, along with the FDIC, OCC, FHFA and the Farm Credit Administration announced that they would likely not be imposing a new collateral requirement on the largest U.S. banks for amending legacy uncleared swap contracts, if those contracts are only being changed to conform to a new Federal Reserve rule.  Under a 2015 rule that establishes margin requirements for uncleared swaps, banks only have to post margin on swaps after the regulation's compliance date, unless those swaps are amended.  That rule’s margin requirements started on March 1, 2017 with the full requirements for margin slated to take effect in 2020.  
Consumer Financial Protection Bureau (CFPB)
CFPB Issues RFI on Enforcement Process
On Wednesday, the CFPB issued its third request for information (RFI) in as many weeks, with this one focused the Bureau’s enforcement processes. According to the press release, this RFI is intended to provide the Bureau with information to help assess the overall efficiency and effectiveness of its processes related to the enforcement of federal consumer financial law. It is expected that next week the CFPB will release another RFI focused on the Bureau’s supervisory processes.