Financial Services Report

Our Take

Last week was one of the busiest for those whose work covers the financial services industry and Congress as the Senate began its debate on a regulatory relief package (a/k/a the Bank Lobbyist Act for those readers on the left).   It also may have been the unofficial start of the 2020 Democratic Presidential primary – as every potential candidate currently a Senator attempted to outdo each other’s rhetoric slamming the bill.   Perhaps it should come as little surprise as it seems both the right and the left bounces from issue to issue claiming the current one is ultimate sin.   However, in the case of the reg relief bill, this demagoguing reached a new level, as long simmering tensions among Senate Democrats reached a dangerous schism only previous seen in the self-purification tests of House Republicans.

Part of this issue comes from a lack of an ability to communicate with each other, or as one moderate Democratic Senator told me last week, “perhaps we shouldn’t think about why people vote in against their self-interests as it requires us to presuppose we know what their interests are.”     After reading many op-eds and critiques of the bill, it seems that there is much in it that both sides would concur is important, and a small number of provisions that are more deregulatory than Democrats would prefer.   If the adage of a good deal is that both sides come away feeling unhappy, then the banking bill may actually have achieved that goal.

Looking Ahead

Near Term

• The Senate Banking Committee continues consideration of its regulatory relief bill, with a cloture vote set for 5:30pm on Monday.  Assuming that an agreement between the two parties can be reached, there will be a series of amendments – likely 10 – that will be debated and then voted on.   Negotiations reportedly continue about a second substitute that will – potentially – include some of the nearly thirty provisions that House Financial Services Chairman Hensarling would like to see in the bill.  If all goes to plan, a vote on final passage should occur Thursday afternoon.
•   The House is slated to consider five bills in the financial services realm – all of which are supposedly in play for inclusion in the Senate bill. This includes a bill (H.R. 4601) that seeks to improve the transparency of the Financial Stability Oversight Council (FSOC) and improve the Systemically Important Financial Institution (SIFI) designation process.
• The House is also set to take up an omnibus spending bill this week, in order to leave enough time for negotiations to play out before the current spending bill runs out on March 23^rd.

Further Out

• Depending on how negotiations between the House and the Senate play out on the regulatory relief bill, and whether Chairman Hensarling feels like he got enough to satisfy himself, and or, the Republican conference, there could be continued negotiations on the shape and form of the final regulatory relief package.  
• Funding for the government runs out on March 23^rd.

The Past Week

Legislative Branch
House
House Passes Bill to Add CFPB to EGRPRA Process
Last week, the House continued its drumbeat of passing legislation with varying degrees of bipartisan support in order to justify the inclusion in the regulatory relief bill being considered by the Senate.   The latest chapter in this playbook took place on Tuesday, when a bill (H.R. 4607) sponsored by Rep. Barry Loudermilk (R-GA) that would subject the Consumer Financial Protection Bureau (CFPB) to the regulatory review process under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) passed on a 264-143 vote, with 38 Democrats voting in the affirmative. The bill stipulates that the CFPB must review all rules, regardless of whether or not the Bureau considers them “significant,” and also must tailor unnecessary rules as appropriate.
 
Financial Institutions Subcommittee Continues to Advance Conversation on Data Breach Legislation — Notifications, State Preemption Remain Key Issues to Resovle
On Thursday, the House Financial Services Financial Institutions and Consumer Credit Subcommittee held a hearing on a pair of legislative proposals that would aim to strengthen current regulations around data security and the response to breaches. The hearing largely focused on breach notification and state preemption issues, but Democrats did not denounce the bill and seemed open to eventual support. Panelists noted the difficulty of breach investigations and pushed back against the idea that the U.S. should adopt similar rules to those promulgated in the European Union. Concluding the hearing, Chair Blaine Luetkemeyer (R-MO) noted that he’s working to get everyone to yes, but warned the panelists that the legislation is “one major breach away from being fast-tracked,” as the need for a response would be undeniable.
 
Appropriations Subcommittee Discusses DOL Budget with Acosta
On Tuesday, the House Appropriations Labor-H Subcommittee held a hearing to discuss the FY19 budget proposal for the Department of Labor (DOL) with Labor Secretary Alexander Acosta.  While these hearings have tended to focus on the Department’s Fiduciary Rule, at this hearing the primary issue that Democrats pressed the Secretary on was the Department’s rule allowing employers to keep some share of the employees’ tips from a tip pool, which came as little surprise as the Department recently reversed a rule made under the Obama-era DOL in 2011.
 
Mnuchin Appears Before Appropriations Subcommittee on Treasury FY19 Budget
On Tuesday, the House Appropriations Financial Services Subcommittee held a hearing to discuss the FY19 budget proposal for the Department of the Treasury with Treasury Secretary Steven Mnuchin. The hearing focused on the White House’s soon-to-come tariff announcement (see more below), with Secretary Mnuchin first suggesting that the tariffs would exclude Canada and Mexico. Secretary Mnuchin also said that new sanctions on Russia were “coming soon.”
 
Senate
Bank Reg Relief Bill Faces Second Week on Senate Floor After Substitute Amendment Introduced
The bipartisan banking regulatory relief bill (S. 2155) is making its way through the Senate after cloture was invoked on the motion to proceed on Tuesday on a 67-32 vote. The bill’s consideration will extend into a second week as lawmakers continue to negotiate what may be included in the final package, as well as what (and how many) amendments may be offered.  Last week Senate Majority Leader Mitch McConnell (R-KY) has filed cloture for the bill’s substitute amendment — which was introduced Wednesday detailing changes aimed at gaining the support of House Republicans — and a vote is expected at 5:30 p.m. on Monday.  Negotiations between Senate Democrats and Republicans were reported to last through the weekend, though it is unclear whether Chairman Hensarling was involved in any negotiations as well.   Assuming an agreement for consent to dispense an agreed upon group of amendments, the bill will likely see a final up-or-down vote on Thursday.
 
While the substitute that was filed earlier in the week included specific changes to the bill including: (1) a provision that would make clear that only custody banks are able to receive the lighter scrutiny under the supplementary leverage ratio (SLR); (2) requiring credit bureaus such as Equifax to provide free credit monitoring for consumers after a breach; (3) clarifying that foreign banks with more than $100 billion in assets will remain subject to Federal Reserve regulatory scrutiny; (4) student loan provisions that would allow financial institutions to offer rehabilitation programs for private student loans; and (5) limiting regulators’ authority over commercial real estate lending by allowing them only to implement capital requirements under certain conditions.
 
Based on a request from earlier in the week, it is anticipated that the Senate may consider 10 other amendments (five per side) – though all are expected to fail.  In addition, Chairman Hensarling made it clear that he would like to see twenty-nine bills that the House has passed included in the bill.   Due to procedural concerns, the determination on the scope of a second substitute amendment will be finalized around 5pm on Monday.   In addition to including these measures in the Reg Relief bill there are rumors that many of these bill may be included in the omnibus that the House is expected to take up later this week. 
 
Hatch, Wyden Reintroduce RESA
Sens. Orrin Hatch (R-UT) and Ron Wyden (D-OR) have reintroduced the Retirement Enhancement and Savings Act (RESA) in the Senate ahead of Congress’s consideration of an omnibus spending bill. The bill would: (1) facilitate expanded multi-employer pensions (MEP); (2) provide a small employer start-up credit; (3) facilitate auto-enrollment enhancements and lifetime income disclosures; (4) clarify the current annuity selection safe harbor; and (5) provide lifetime income portability. The bill’s introduction follows Majority Leader Mitch McConnell’s (R-KY) announcement that Hatch will co-chair a bipartisan, bicameral Joint Select Committee on the Solvency of Multiemployer Pension Plans and comes among a frenzied effort to get the measure into the end of year spending package.
 
Warren Introduces Bill to Create FINRA Fund for Unpaid Arbitration
On Tuesday, Sen. Elizabeth Warren (D-MA) introduced a bill that would require the Financial Industry Regulatory Authority (FINRA) to create a new fund that would cover unpaid arbitration awards. The measure is intended to allow for consumers to garner awards from firms even if they go out of business or otherwise unable to pay following a decision in arbitration. FINRA has said they already addressing the issue, with spokeswoman Michelle Ong saying that the self-regulator has “taken many steps in recent steps in recent years to use the tools within its power to help customers recover the awards they are owed.”
 
Finance Committee Hearing Focuses on Blocking Counterfeits in E-Commerce
On Tuesday, the Senate Finance Committee held a hearing on the enforcement of trade laws regarding counterfeit goods, with a particular emphasis on the policies of U.S. Customs and Border Patrol (CBP). Leadership from both parties called counterfeit goods a “danger” in terms of both economic growth and public safety and urged CBP to improve their efforts in the digital era. A representative from CBP said the agency likely would need more statutory authority, with enhanced penalties and information sharing cited as two likely goals. Other panelists pointed to the need for online platforms to do more to prevent counterfeit goods from being sold in the first place, and that the private sector could do more to identify counterfeit producers. After some pressuring from Ranking Member Ron Wyden (D-OR), CBP said it would be putting forward its response for necessary statutory authority within 60 days. 
 
Select Highlights from the Administration
The White House
White House Pushes Forward on Steel, Aluminum Tariffs; Excludes Mexico, Canada
On Thursday, the White House announced that it will implement tariffs of 25 percent on imported steel and 10 percent on imported aluminum, though subsequently it indicated that it would be excluding the nations of Canada and Mexico. The tariffs — which can unilaterally be implemented by the President under national security authority — are designed to protect American materials manufacturers from foreign competition, primarily coming from China. Free trade advocates fear that the move could trigger a global trade war as nations move to enact their own penalties on American exports, such as agricultural products, automobiles, and intellectual property. The President suggested that the tariffs will begin being collected within the next month.
 
A number of congressional Republicans have urged President Trump to reconsider, with House Ways and Means Chair Kevin Brady (R-TX) leading 107 House Republicans in a letter suggesting that President Trump reverse course and avoid the “unintended negative consequences” of the tariffs. Despite the opposition, President Trump pressed forward in keeping with a campaign promise to be “tougher” on competition from free trade, although the flexibility and exemptions for allies mark a significant softening of the policy since it was first publicly suggested by the White House. Meanwhile, the exemptions for Mexico and Canada are largely seen as a nod to the ongoing negotiations for a modernization of the North American Free Trade Agreement (NAFTA). Progress in tripartite talks that would revise the landmark trade deal have been slow, and President Trump has suggested that the tariffs could be instituted on the U.S.’s North American neighbors if the discussions ultimately fail.
 
Cohn Steps Down as NEC Director
In the latest of a string of Trump Administration officials leaving their positions, Gary Cohn, the Director of the White House’s National Economic Council (NEC), announced last Tuesday that he planned to resign in the coming weeks.   Widely reported as a response to the President’s decision to implement tariffs on imported steel and aluminum. Cohn, a registered Democrat and former COO of Goldman Sachs, was considered one of the key “establishment” voices in the White House and has opposed some of the ‘economic nationalism’ policies pushed by other White House economic officials, such as Commerce Secretary Wilbur Ross and National Trade Council Director Peter Navarro. The President tweeted that he would be making a decision on who would replace Cohn “soon.”
 
Consumer Financial Protection Bureau (CFPB)
CFPB Issues New RFI on Rulemaking Process
On Wednesday, the CPB continued its string of requests for information (RFIs) with a new order seeking comments on the “the overall efficiency and effectiveness of its rulemaking processes.” The RFI marks the seventh request since Acting Director Mick Mulvaney took over for Richard Cordray and pledged to reorient the consumer watchdog. The Bureau suggested that more RFIs are in the pipeline, with the next due next week to address the Bureau’s adopted rules.
 
CFPB Issues Final Rule To Help Mortgage Servicers Communicate With Certain Borrowers Facing Bankruptcy
Last Thursday, The Consumer Financial Protection Bureau (CFPB) issued a final rule to help mortgage servicers communicate with certain borrowers facing bankruptcy. The rule gives mortgage servicers more latitude in providing periodic statements to consumers entering or exiting bankruptcy, as required by the Bureau’s 2016 mortgage servicing rule. The rule also provides a clear single-statement exemption for servicers to make the transition, superseding the single-billing-cycle exemption included in the 2016 rule. The effective date for the rule is April 19, 2018.
 
Department of the Treasury
Treasury to Indicates Timing of Report on Fintech Regulation
Last week, Craig Phillips, Counselor to Treasury Secretary Steven Mnuchin, said the Treasury will be releasing a report on the regulation of nonbanks, with a particular focus on whether fintech companies should be subject to some of the same scrutiny as conventional banks. Phillips suggested that both traditional nonbanks, such as small-dollar lenders, as well as the crop of technology-based marketplace lenders will be addressed in the report. He added that the report will likely consider the “regulatory asymmetries” between those companies and regulated banks, with the goal of allowing for innovation without creating an uneven playing field in the market. Phillips also briefly touched on the idea of a federal charter from the Office of the Comptroller of the Currency, saying that the Treasury is hoping to help determine “where banking begins and ends.”