Financial Services Report

Our Take

While the adage about March is that it comes in like a lion and out like a lamb, for those covering financial services issues, it seems like the month came in like a hurricane and left like a man angry at an old rival.  In between, the Democratic Caucus frayed over the banking regulatory relief bill only to see the Senate-passed bill only run into potentially bill killing changes in the House.  A potential trade war started to simmer driving the markets into correction territory.   Congress passed a 1.3 trillion-dollar, 2200-page spending bill to keep the government open through the end of the fiscal year.  And depending on your perspective, either the greatest or the scariest, reality show in history keeps plugging along. 

Looking Ahead

Near Term

  • House and Senate are in Recess for the next two weeks.

Further Out

  • The game of chicken between the House and Senate and the final disposition of the bank regulatory relief bill will continue. 
  • Acting CFPB Director Mulvaney is expected to testify before the Senate on April 12th and likely before the House around the same time, as part of the CFPB’s semi-annual report to Congress. 
  • Fed Governor Randy Quarles, Vice Chairman for Supervision, will make his semi-annual appearance before the Senate Banking Committee on April 19th.

The Past Week

Legislative Branch
Financial Services Advances 8 Bills in Markup, Including Volcker Rule Reform
On Wednesday, the House Financial Services Committee held a markup despite the snowstorm that moved through Washington Wednesday morning. Partly with the storm in mind, Committee leadership skipped opening statements and moved into consideration of the eight bills on the docket, which were:

  • The Protecting Veterans Credit Act of 2017 (H.R. 2683), introduced by Representative John Delaney (D-MD), that would amend the Fair Credit Reporting Act (FCRA) to exclude from consumer report information: (1) Certain medical debt incurred by a veteran if the hospital care or medical services relating to the debt predates the credit report by less than one year; and (2) A fully paid or settled veteran's medical debt that had been characterized as delinquent, charged off, or in collection. The Committee favorably reported H.R. 2683, as amended, by a vote of 59-0.
  • A bill to require the appropriate Federal banking agencies to recognize the exposure-reducing nature of client margin for cleared derivatives (H.R. 4659), introduced by Representative Blaine Luetkemeyer (R-MO). The Committee favorably reported H.R. 4659 by a vote of 45-15.
  • The Volcker Rule Regulatory Harmonization Act (H.R. 4790), introduced by Representative French Hill (R-AR), and amended in the nature of a substitute by Representative Bill Foster (D-IL) that amends Section 619 of the Dodd-Frank Act (DFA) to streamline the regulatory authority over the Volcker Rule by granting the Federal Reserve the exclusive rulemaking authority as well as incorporated the small bank relief from the Senate bill.  The Committee favorably reported H.R. 4790, as amended, by a vote of 50-10.
  • The Ensuring Quality Unbiased Access to Loans (EQUAL) Act of 2017 (H.R. 4861), introduced by Representative Trey Hollingsworth (R-IN), which would repeal the Federal Deposit Insurance Corporation (FDIC) Guidance on Deposit Advance Products.  The bill was approved by a vote of 34-26. 
  • The Public Company Registration Act (H.R. 5051), introduced by Representative Sean Duffy (R-WI), that would raise the threshold for companies to register as a public reporting company with the Securities and Exchange Commission (SEC).  The bill passed on a straight party-line vote of 34-26.
  • The Small Bank Exam Cycle Improvement Act of 2018 (H.R. 5076), introduced by Representative Claudia Tenney (R-NY), would amend the Federal Deposit Insurance Act to increase the qualifying asset threshold for insured depository institutions eligible for 18-month on-site examination cycles from $1 billion to $3 billion. The Committee favorably reported H.R. 5076, as amended by Ranking Member Waters, by a vote of 60-0.
  • The Practice of Law Technical Clarification Act of 2018 (H.R. 5082), introduced by Representative Alex Mooney (R-WV), would amend the Fair Debt Collection Practices Act to exclude from the definition of "debt collector" any law firm or licensed attorney engaged in litigation activities in connection with a legal action in a court of law to collect a debt on behalf of a client.  This bill passed on a 35-25 vote.
  • The Derivatives Fairness Act (H.R. 5323), introduced by Representative Warren Davidson (R-OH), that would exempt from the Credit Valuation Adjustment (CVA) capital charge non-cleared derivatives with certain counterparties commonly described as “end-users.” The Committee favorably reported H.R. 5323 by a vote of 34-26.

House Overwhelmingly Passes Bill to Exempt Non-Banks from Stress Tests
On Tuesday, House lawmakers passed (395-19) a bill (H.R. 4566) that would exempt non-banks from stress tests designed to evaluate whether major financial institutions can withstand economic shocks. The bill primarily benefits asset management firms, who had been subject to the regulators’ tests per the provisions of the Dodd-Frank financial reform law.
GOP Writes Letter on NAFTA ISDS; Lighthizer Pushes Back in Ways and Means Hearing
Last week, Republican lawmakers sent a letter to Lighthizer backing the inclusion of investor-state dispute settlement (ISDS) provisions in a renegotiated NAFTA after Lighthizer had defended oppositional views on ISDS to the House Ways and Means Committee in a hearing on Wednesday. Ways and Means Committee Chair Kevin Brady (R-TX) pressed Lighthizer on the issue saying that American property would be left “unprotected against discrimination, foreign seizure, regulatory abuses and other forms of unfair action,” without adequate ISDS language. Lighthizer responded that the “strongest argument” in favor of ISDS was Chair Brady’s support, and the Chair told reporters afterward that he believes “we can get to a good outcome.”
Ross Teases Tariff Exemptions in Ways and Means Hearing
On Thursday, Commerce Secretary Wilbur Ross testified to the House Ways and Means Committee on the Administration’s recent tariff announcement, and alluded to exemptions for the tariffs that were formalized by the White House this week. Committee Chair Kevin Brady (R-TX) was critical of the Administration’s tariff proposal and urged the Commerce Department to allow “consolidation of petitions” and more flexible policies for individual waivers to the tariffs.
Congress Passes Omnibus, Averting Government Shutdown
Despite some hiccups in Congress and the White House, lawmakers successfully passed the omnibus last week and President Trump signed it into law Friday afternoon. The $1.3 trillion package includes school safety measures, boosted opioid funding, and a significant infrastructure investment, but notably lacks any action on the deferred action for childhood arrivals (DACA) program or health insurance market stabilization. With the midterm elections approaching, there was an appetite from party leaders to swiftly reach an agreement on the spending bill so that they could turn their attention to the intensifying battles for control of the House and Senate in November.
Among the financial services priorities in the omnibus was a decoupling of flood insurance from other spending fights as the National Flood Insurance Program (NFIP) is now reauthorized through July 31 rather than the end of the fiscal year on Sep. 30. Funding levels for key financial services agencies include (1) $1.6 billion for the Securities and Exchange Commission (SEC) and an additional $244 million to relocate their current headquarters; (2) $248 million for the Commodity Futures Trading Commission; (3) $11.4 billion for the Internal Revenue Service (IRS), including $320 to implement the recent tax reform package; and, (4) $25 million for the Treasury’s Community Development Financial Institutions (CDFI) Fund.
Senate Approves FSOC, Mint Nominees Under Unanimous Consent
On Thursday, the Senate approved two significant financial services nominees — Thomas Workman to be the Financial Stability Oversight Council’s insurance expert and David Ryder to be Director of the U.S. Mint — under unanimous consent. Workman will replace Roy Woodall, who had been serving under temporary authority from Congress after his initial term expired in Sep. 2017. Among the key issues that Workman is expected to work on is considering whether to relieve Prudential Financial of its systemically important financial institution (SIFI) tag that imposes additional regulatory scrutiny from the Federal Reserve.
HUD Oversight Hearing Focuses on Carson Furniture Controversy
On Thursday, Housing and Urban Development Secretary Ben Carson faced a grilling from Democrats on the Senate Banking Committee over the former presidential candidate’s purchase of a $31,000 dining set for his personal office. The Secretary took responsibility in the hearing, although he asserted that he was being treated unfairly in the court of public opinion. On policy matters, Secretary Carson continued to defend the President’s FY19 proposal for his Department, which would see HUD take a $6 billion funding cut.
Select Highlights from the Administration
The White House
Trump Indicates New Penalties on Chinese Imports
On Thursday, President Trump announced that he would be signing a new round of penalties on Chinese imports, totaling about $50 billon, in response to China’s alleged theft of American intellectual property. The presidential memorandum follows a Sec. 301 investigation conducted by the Treasury Department, which found that the copying of American intellectual property in China was leading to billions of lost dollars in the American economy. The move comes on top of the already-announced tariffs against steel and aluminum that would also largely affect Chinese imports, with the Administration citing national security authority to impose them.  
Federal Reserve
Fed Bumps Rates in Powell’s First FOMC Meeting; Fed Chair Talks Bank Relief Bill
On Wednesday, new Federal Reserve Chair Jerome Powell announced that the Federal Open Markets Committee had, as expected, decided to raise the federal funds interest rate by a quarter point. A heating up economy and good unemployment numbers led the Fed to continue its gradual pace of raising rates, although some Fed officials are considering an additional hike in 2018. In his press conference, Chair Powell said that the Fed has yet to finalize plans for how to apply the Senate’s bipartisan banking regulatory relief bill should it go through the House and become law. Repeating a statement he made in a congressional hearing last month, the Fed Chair said that the Fed wouldn’t hesitate to keep tough oversight of some banks below the proposed $250 billion threshold if they believed it was necessary.
Securities and Exchange Commission (SEC)
SEC Fiduciary Approach ‘Not Affected’ by Court Ruling
Speaking at a conference in Florida, SEC Chair Jay Clayton said last week that the 5th Circuit Court of Appeals’ rejection of the Labor Department’s fiduciary rule would not impact his own agency’s approach to the issue. Chair Clayton remained coy about the timeline when the SEC may issue its own proposal on conflict of interest among broker-dealers, although outside analysts expect an announcement from the SEC this summer.