Financial Services Report

Looking Ahead

Near Term

• The House will take up the Federal Aviation Administration (FAA) reauthorization bill this week.  While the bill has little to do with day to day financial services policy it is a “must-pass” bill and therefor has been on the short list of bills that could serve as a vehicle for Chairman Hensarling’s alternative package if the House is forced to vote on S. 2155 without amendment.  However, because it is a “must pass” with a tax provision there are reports that it may be subject to a filibuster in the Senate to prevent additional tax policy from being enacted this year.
• The Senate will return to the mundanity of judicial nominations, after the excitement of last week’s CRA.  
• There are two hearings in the House Financial Services Committee this week, one on HUDs rental assistance and the other an oversight hearing of the SEC.
• Speaking of the SEC, Chairman Jay Clayton will appear before the FSGG subcommittee where he will likely receive a lot of questions about the SEC’s fiduciary rule proposal that was released last week.
• The House Energy and Commerce Committee is getting in on the CFIUS action with a hearing on Thursday.

The Past Week

Legislative Branch
House
Quarles Backs Volcker Changes, Reg Tailoring in First Hearing for Fed Vice-Chair
On Tuesday, the House Financial Services Committee held a hearing for the Federal Reserve’s semi-annual report to Congress on the supervision and regulation of the financial system. It marked the first hearing where an actual Fed Vice-Chair for Supervision testified rather than past years when the Fed Chair was required to attend since the Vice-Chair position had remained vacant during the Obama Administration. In this instance, Quarles, delivered balanced written testimony that encouraged some regulatory reform efforts ongoing in both the House and Senate. The hearing touched on a wide number of topics as Members from both sides sought information on their regulatory priorities for the central bank. On the Volcker Rule, Quarles largely agreed with Republicans in saying that changes were necessary, but separately, he broke from the majority party in asserting that the Fed would need to retain some limited capacity to intervene at company board meetings if necessary. During the hearing, he was also questioned about the proper role for regulators of insurance in negotiating international agreements.  In response he noted he backed the state-based system, but defended involvement in international forums for Federal participants.    
 
Duffy, Perlmutter Introduce Bipartisan Bill on CFPB Transparency
On Wednesday, the bipartisan pair of House Financial Services Committee members Reps. Sean Duffy (R-WI) and Ed Perlmutter (D-CO) introduced the Give Useful Information to Define Effective Compliance (GUIDE) Act that would mandate the Consumer Financial Protection Bureau (CFPB) to issue guidance to help facilitate compliance. Specifically, the bill requires the Bureau to publish criteria, definitions, and process for each type of guidance the Bureau shall provide within one year of enactment of a law. The bill would also require the Bureau to create a process for amending or revoking guidance.
 
House Science Committee Presses FDIC on Response to Data Breaches
On Thursday, House Science Committee Chair Lamar Smith (R-TX) led a letter to the Federal Deposit Insurance Corporation’s General Counsel Charles Yi for information on the agency’s response to a recent data breach, specifically asking if any officials were disciplined for their failure to notify Congress. The letter follows a report from the agency’s Office of the Inspector General (OIG) saying that high-level employees had significant “shortcomings” over the course of seven data breaches at the FDIC in 2015 and 2016. The letter from Congress also asks the FDIC for an update on action implementing IG recommendations.
 
Mulvaney Asks House Approps Sub to Put CFPB Under Appropriations Process
Following his appearances in front of Congress as Acting Director of the CFPB earlier this month, Mick Mulvaney again urged Congress to put the Bureau under the congressional appropriations process during a budget hearing for his other role as Director of the Office of Management and Budget (OMB). He told the House Appropriations Financial Services and General Government Subcommittee that he struggles to “understand why you would voluntarily give up that control.” Democrats at the hearing countered that Mulvaney has not adequately fulfilled his role as a consumer watchdog since taking over at the Bureau.
 
Senate
Senate Approves Auto Lending CRA in Narrow Vote
On Wednesday, in a narrowly bipartisan vote, the Senate voted 51-47 in favor of a Congressional Review Act (CRA) resolution (S.J. Res. 57) that would repeal the CFPB’s 2013 guidance on indirect auto lending.  While the CRA has traditionally been applicable only to agency rulemakings, a GAO decision had determined that the CFPB’s efforts, though limited in nomenclature to guidance, had effectively served as a rule.  That decision set off the shot clock for expedited consideration in the Senate, necessitating only a simple majority for passage, even though the guidance itself had been publicized in 2013.   Since then Republicans, and some Democrats had expressed their concerns that the CFPB effort was based upon faulty analysis and inaccurate assumptions of discrimination during the “dealer markup” phase of an auto loan. While previous legislative efforts had generated substantial bipartisan support, on Wednesday only Sen. Joe Manchin (D-WV) joined Republicans in voting in favor of the resolution.  The bill now heads to the House, where it is expected to pass easily and then will be signed into law by President Trump.
 
Quarles Defends eSLR, Volcker Reforms in Senate Banking Hearing
On Thursday, the Senate Banking Committee held a hearing for the Federal Reserve’s semi-annual report to Congress on its regulation and supervision duties. Fed Vice-Chair Randal Quarles — who testified to the House Financial Services Committee on Tuesday — delivered the same written testimony to the Senate Committee and once again focused his remarks on “tailoring” financial regulations. Republicans on the Committee called for Quarles to be confirmed to his full term, while Democrats noted that President Obama’s nominees were also slow-walked in the Senate. On policy, the Vice-Chair backed the Senate’s recently-passed regulatory relief bill (S. 2155) and supported federal regulators’ recent move to alter the enhanced supplemental leverage ratio (eSLR) – which was criticized heavily by Democrats. Quarles also made headlines when he said that guarantee for the 30-year fixed-rate mortgage is "probably not" necessary, in an exchange in which Senator Heidi Heitkamp (D-N.D.) defended government policy of backing such mortgages.  Other topics of focus include Quarles’ approach to insurance regulations — including backing the ongoing effort at the Financial Stability Oversight Council (FSOC) to change its designation process for nonbanks — and possible changes to the Volcker Rule, which the Vice-Chair also indicated he would support.
 
Senate Commerce Committee Discusses TCPA, Enforcement Actions in Robocalls Hearing
On Wednesday, the Senate Commerce Committee held a hearing on the prevalence of abusive robocalls and ongoing efforts by the Federal Communications Commission (FCC) and Federal Trade Commission (FTC), among others, to stop them. The session included a tiny bit of drama, as the first witness, Adrian Abramovich, who is subject to legal proceeding for violating the TCA, appeared only after he was subpoenaed to testify on an alleged robocalls fraud.  Not surprisingly, Abramovich largely refused to answer the Committee’s questions, frequently invoking his 5^th Amendment right avoid self-incrimination. The hearing also examined the legal framework put forward by the Telephone Consumer Protection Act (TCPA) and the Fair Debt Collection Practices Act (FDCPA), as a witness from the U.S. Chamber spoke on the significant litigation that has occurred under the former statute. Primarily, however, Members wanted to know what steps to take to stop fraudulent calls and whether regulators had the tools they needed to pursue bad actors. Panelists largely said that they did, although a representative from the National Consumer Law Center argued that not enough was being done to protect landline customers. A separate robocalls hearing in a House Energy and Commerce Subcommittee that had been scheduled for Thursday was rescheduled as the House unexpectedly gave the day away. 
 
Senator Tim Scott Introduces Bill to Exempt Insurance from CFPB Authority
On Thursday, Sen. Tim Scott (R-SC) led a bipartisan group in introducing a bill that would ensure the Consumer Financial Protection Bureau (CFPB) does not regulate the business of insurance. The bill also further codifies the primacy of the state-based insurance regulation system. Companion legislation was approved by the House Financial Services Committee by a 37-18 vote earlier this year. The other cosponsors of the Senate legislation include Sens. Tammy Baldwin (D-WI), Joe Manchin (D-WV), and Mike Rounds (R-SD).
  
Select Highlights from the Administration
Securities and Exchange Commission
SEC Proposes Revised Best Interest Standard Designed to Replace DOL Fiduciary Rule
On Wednesday, on a 4-1 vote, the Securities and Exchange Commission issued its own proposal for a rule dealing with conflict-of-interest issues for broker-dealers, which in some ways was different than the contentious fiduciary rule advanced under the Obama-era Department of Labor (DOL), and yet in some ways was very similar.  Specifically, the SEC proposal requires that brokers disclose all “key facts” about potential conflicts and mandates that they have a “reasonable basis” to conclude investment products are in their clients’ best interest. Additionally, it wouldn’t ban any single conflict of interest, but instead attempts to promote disclosures of conflicts and to lessen their impact, including a proposed four-page sample disclosure.  The proposal would also prevent brokers from calling themselves investment advisors or advisers, reserving that term for those registered under the Investment Advisers Act of 1940, unless the broker dealer happened to work at a firm that was also registered under that law.  Industry representatives largely praised the proposal, while consumer advocates and the major labor union AFL-CIO criticized as an insufficient step. Democrat Commissioner Kara Stein was the lone no vote on the proposal, which will now be open to public comment for 90 days.
 
Federal Reserve
Brainard Pushes Back on Capital Rules Change, Backs Volcker Changes
In a speech to the Global Finance Forum last week, Federal Reserve Governor Lael Brainard said that she believes that regulators should wait until capital and liquidity levels are tested before tailoring them for financial institutions. Explaining her dissenting vote at the Fed last week on a move to ease the leverage ratio for financial institutions, Brainard said, “Prudence would argue for waiting until we have tested how the new framework performs through a full cycle before we make judgments about its performance.” However, she added that she was broadly in favor of efforts to make regulations less burdensome, pointing to her support for revising the Volcker Rule in order to provide more clarity on what counts as “market making.”
 
Office of the Comptroller of the Currency
OCC, CFPB Fine Wells Fargo $1 Billion
On Friday, Wells Fargo officially agreed to pay a fine totaling $1 billion, split as $500 million to the Office of the Comptroller of the Currency (OCC) and $500 million to the Consumer Financial Protection Bureau (CFPB). The fine stems from Wells Fargo offenses related to its auto insurance and mortgage business, with the OCC charging that the hefty fine was due to “the severity of the deficiencies and violations of law, the financial harm to consumers, and the bank's failure to correct the deficiencies and violations in a timely manner.” The CFPB participation is notable given the leadership of Acting Director Mick Mulvaney, who has been accused by some consumer advocates as failing in his role as a watchdog. While Wells Fargo has been battling scandal for months, this may not end their legal troubles as the fine does not cover the bank’s wealth management business, which is under investigation for similar improprieties.
 
The White House
Trump to Tap Clarida, Bowman to Fed Board
On Monday, the Wall Street Journal reported that President Trump aims to name two nominees to the Federal Reserve Board, namely Columbia University economist Richard Clarida and Kansas bank commissioner Michelle Bowman. Clarida would become the central bank’s Vice-Chair, while Bowman would fill a spot reserved for a community banker or regulator of community banks. Both nominees will join Marvin Goodfriend in awaiting Senate confirmation to the Board.
 
Trump Flirts with Rejoining TPP, Then Decides Against …. For Now
Differing statements from President Trump last week led to some speculation that the U.S. may look to re-enter negotiations for the Trans-Pacific Partnership (TPP) that it withdrew from last year. New White House economic advisor Larry Kudlow had said there were some “discussions and considerations” about rejoining the 11 nation pact, but nothing was “concrete.” The President’s latest statement on the issue, saying that he “doesn’t like the deal for the United States,” came as TPP proponent and Japanese Prime Minister Shinzo Abe was visiting the United States.
 
The Judicial Branch
Supreme Court
SCOTUS Hears Internet Sales Tax Case; Justices Appear Split
On Tuesday, the Supreme Court heard oral arguments today in the case of South Dakota v. Wayfair about whether states can require out-of-state online retailers to collect their sales taxes. The closely-watched case will see the Supreme Court review a 1992 decision in Quill Corp. v. North Dakota that says retailers can be forced to collect sales taxes only if they have a physical presence in a state, such as a warehouse or store. Justices appeared split on whether they were willing to overturn that precedent, with the unusual group of Justices Anthony Kennedy, Neil Gorsuch, Clarence Thomas, and Ruth Bader Ginsburg seemingly open to reversing course. Congressional inaction over the past three decades is also seen as a key element in the debate, as some justices wondered if the lack of legislation on the issue raised the bar for whether courts can weigh-in on the issue. The case has also gained attention from Congress and the White House, with President Trump arguing frequently that online retailers such as Amazon do not pay sufficient local taxes.