Financial Services Report

Our Take

Loyal readers may recognize that the following is looks eerily similar to the “our take” from last year’s Memorial Day week newsletter.  And they would be right.  However, it still seems just as relevant today. 
May 29th, would have been the 101st birthday of John Fitzgerald Kennedy.   As we think about the true meaning of Memorial Day, we should pause to think about the following – which I am assuming is true, because you know, it’s on the Internet.  According to historian Michael Beschloss, these were to be the final words of a speech that the President was to give in Austin Texas on November 22, 1963

"Neither the fanatics nor the faint hearted are needed.  And our duty as a Party is not to our Party alone, but to the nation, and indeed, all mankind.  Our duty is not merely the preservation of political power, but the preservation of peace and freedom.  So let us not be petty when our cause is great.  Let us not quarrel amongst ourselves when our Nation’s future is at stake.  Let us stand together with renewed confidence and cause – united in heritage of the past and our hopes for the future – and determined that this land we love shall lead all mankind into new frontiers of peace and abundance." 

On a weekend, and week where we reflect on those who gave their lives for our country it is always important to remind oneself about the values they were willing to die for.

Looking Ahead

Near Term

  • The House and Senate are in Recess this week.
  • The Fed, FDIC, OCC, SEC and CFTC are set to release a Notice of Proposed Rulemaking on Wednesday that sets forth revisions to the Volcker Rule.

Further Out

  • The Appropriations process continues to gear up with both the House and Senate versions of the Financial Services and General Government spending bill moving forward.  The full appropriations committee will consider its version of that legislation during the week of June 4th while the Senate Subcommittee is scheduled to mark-up its version the week of June 18th.  The House bill, which passed out of subcommittee last week (see more below) contains many of the provisions that Chairman Hensarling was trying to include in S. 2155.


The Past Week

Legislative Branch
House Passes, Trump Signs Financial Regulatory Relief Bill
On Tuesday, the House voted 258-159 to pass S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act (text), a bipartisan package of financial reforms primarily designed to provide regulatory relief to small and medium-sized banks, and which had previously passed the Senate in March on a 67-31 vote.   President Trump then signed the bill on Thursday, marking a significant achievement for Republicans and moderate Democrats seeking to tweak some elements of the regulatory regime under Dodd-Frank. However, despite a narrative in the press that the bill represented a major Dodd-Frank rollback, it is worth noting that the legislation leaves in place many cornerstones of the 2010 legislation, including the Consumer Financial Protection Bureau (CFPB) and its single-director structure, as well as requiring large financial institutions to go through the Resolution Authority — sometimes called a “living will” — process. Only Rep. Walter Jones (R-NC) defected from Republicans ranks by voting against the bill today, while 33 House Democrats bucked party leadership and joined Republicans by voting in favor, namely:  

  • Rep. Ami Bera (D-CA)
  • Rep. Sanford Bishop (D-GA)
  • Rep. Lisa Blunt Rochester (D-DE)
  • Rep. Andre Carson (D-IN)
  • Rep. Lou Correa (D-CA)
  • Rep. Jim Costa (D-CA)
  • Rep. Henry Cuellar (D-TX)
  • Rep. Danny Davis (D-IL)
  • Rep. John Delaney (D-MD)
  • Rep. Bill Foster (D-IL)
  • Rep. Vincente Gonzalez (D-TX)
  • Rep. Josh Gottheimer (D-NJ)
  • Rep. Alcee Hastings (D-FL)
  • Rep. Jim Himes (D-CT)
  • Rep. Ron Kind (D-WI)
  • Rep. Ann McLane Kuster (D-NH)
  • Rep. Rick Larsen (D-WA)
  • Rep. Al Lawson (D-FL)
  • Rep. Sean Patrick Maloney (D-NY)
  • Rep. Stephanie Murphy (D-FL)
  • Rep. Rick Nolan (D-MN)
  • Rep. Tom O’Halleran (D-AZ)
  • Rep. Scott Peters (D-CA)
  • Rep. Collin Peterson (D-MN)
  • Rep. Kathleen Rice (D-NY)
  • Rep. Brad Schneider (D-IL)
  • Rep. Kurt Schrader (D-OR)
  • Rep. David Scott (D-GA)
  • Rep. Teri Sewell (D-AL)
  • Rep. Kyrsten Sinema (D-AZ)
  • Rep. Thomas Suozzi (D-NY)
  • Rep. Marc Veasey (D-TX)
  • Rep. Filemon Vela (D-TX)


House Financial Services Committee Chair Jeb Hensarling (R-TX) had been working to push the House to pass an amended version of this legislation that would have included other provisions which he had guided through the House, but earlier this month, he agreed to allow the bill to come up unamended after receiving assurances from House and Senate leaders that a second bill — primarily composed of measures focused on the capital markets — would be voted on this summer. However, those assurances did not include any guarantees from the group of moderate Democrats that were critical in helping S. 2155 clear the sixty-vote threshold in the Senate.  Regardless, the commitment from Republican leadership means that the issue of financial deregulation is likely to continue to stay in the headlines throughout the summer and possibly through the midterm elections this fall.
Financial Services Committee Approves Capital Markets, CFIUS Bills in Markup
On Tuesday, the House Financial Services Committee approved another three bills to be reported to the House floor. Two passed unanimously, while a third — creating a housing demonstration program to set aside section 8 housing vouchers for opioid recovery projects — was passed on a 39-19 vote. The passage of the three bills brings the total number of measures to be reported out of the Committee in the 115th Congress to 102. Specifically, the bills approved Tuesday were:

  • H.R. 5735 – The Transitional Housing for Recovery in Viable Environments Demonstration Program Act, which would amend the United States Housing Act of 1937 to establish a demonstration program to set aside section 8 housing vouchers for supportive and transitional housing for individuals recovering from opioid use disorders or other substance use disorders.
  • H.R. 5793 – The Housing Choice Voucher Mobility Demonstration Act, which would authorize the Secretary of Housing and Urban Development to carry out a housing choice voucher mobility demonstration to encourage families receiving such voucher assistance to move to lower-poverty areas and expand access to opportunity areas.
  • H.R. 5841 – The Foreign Investment Risk Review Modernization Act (FIRRMA), which would aim to modernize and strengthen the Committee on Foreign Investment in the United States (CFIUS) to more effectively guard against the risk to the national security of the United States posed by certain types of foreign investment.

Partisan Financial Deregulation Provisions Included in Appropriations Bill
The House Appropriations Subcommittee for Financial Services and General Government marked up their FY 2019 proposal this week, approving a $23.4 billion bill that would include several financial deregulatory measures opposed by Democrats. The measures deregulatory provisions largely reflect bills pushed through the House Financial Services Committee by Chair Jeb Hensarling (R-TX), including contentious moves such as bringing the Consumer Financial Protection Bureau (CFPB) under the congressional appropriations process. However, many bipartisan efforts are also included, such as consolidating Volcker Rule rulemaking at the Federal Reserve and reforming the Financial Stability Oversight Council’s (FSOC) nonbank designation process. A full committee markup of the bill is expected early next month.
Iancu Talks Intellectual Property, Patent Eligibility in USPTO Oversight Hearing
On Tuesday, the House Judiciary Committee held an oversight hearing of the U.S. Patent and Trademark Office (USPTO).  After visiting the Senate last month, USPTO Director Andrei Iancu testified before the House Judiciary panel for the first time in his new role, fielding questions from members on: (1) address concerns from intellectual property stakeholders about Section 101; (2) streamlining the processes in the USPTO’s Patent and Trial Appeal Board (PTAB); (3) the fallout of recent Supreme Court decisions that have impacted patent eligibility law; (4) the new claims construction process rule. Members on the committee agreed that more clarity for patent eligibility is crucial and that the USPTO needs to provide more precedential opinions when issuing patents.
House Subcommittee Considers Eleven Capital Markets Proposals
On Wednesday, the House Financial Services Subcommittee on Capital Markets, Securities, and Investments held a hearing to discuss eleven proposals aimed at boosting access to capital. The hearing featured witnesses from a variety of interest groups and businesses, including the Securities Industry and Financial Markets Association (SIFMA), the Biotechnology Innovation Organization (BIO), and the U.S. Chamber of Commerce. Capital markets will reportedly be the focus of a follow-up bill to the passage of an initial financial regulatory reform package last week. The eleven bills can be found here.
Senate Confirms McWilliams as FDIC Chair
On Thursday, the Senate confirmed Jelena McWilliams on a 69-24 vote to be the next Chair of the Federal Deposit Insurance Corporation Board of Directors, replacing Obama Administration holdover Martin Gruenberg, though Gruenberg can remain on the Board through the end of the year. McWilliams had previously been an executive officer at Fifth Third Bank and comes to the FDIC as the regulator prepares to implement changes enacted into law by S. 2155 last week. She is also likely to speed the regulators’ work at unwinding other rules, including an overhaul of the Volcker Rule, and she is widely expected to embrace the chartering of new institutions, including ILCs. 
Banking Committee Approves CFIUS Bill – Provision then added to Defense Bill
On Tuesday, the Senate Banking Committee approved a bill to overhaul the Committee on Foreign Investment in the United States (CFIUS) on a unanimous vote, including an amendment that would block President Trump from easing sanctions on Chinese telecom company ZTE without first certifying to Congress that the company is complying with U.S. law. The underlying bill — introduced by Sens. John Cornyn (R-TX) and Dianne Feinstein (D-CA) — would broaden CFIUS’ ability to review foreign acquisitions of American companies that could prove to be threats to national security, primarily reflecting an increasing perceived threat from China. Among the specific changes incorporated into the bill is creating an interagency process for identifying technologies and intellectual property that may be vulnerable to falling under foreign control. Following Tuesday’s markup, Sen. Tim Scott (R-SC) — who sits on both the Banking and Armed Services Committees — added the bill to the Senate’s version of the fiscal 2019 National Defense Authorization Act (NDAA), a move approved by Banking Chair Mike Crapo (R-ID), and one that could ensure the measure becomes law as the NDAA is one of the few pieces of legislation enacted every year.
Watt Says FHFA Working on New Fannie, Freddie Capital Rule
Federal Housing Finance Agency Director Mel Watt said in a Senate Banking Committee hearing on Tuesday that his agency aims to release a new risk-based capital rule to govern Fannie Mae and Freddie Mac. The hearing focused on the issue of government conservatorship of the two troubled housing giants, with Watt explaining that the new capital rule would be suspended until Fannie and Freddie return to normal operations. Watt also argued that the recent reinstatement of $3 billion capital reserve buffers for both institutions should ensure that they will not need to draw on Treasury funds again, despite losses in the fourth quarter of 2017.
Banking Committee Cybersecurity Hearing Focuses on Information Sharing, Workforce Issues
On Thursday, Senate Banking Committee held a brief hearing on cybersecurity issues in the financial services industry, picking up on a conversation that the Committee previously had after the wave of data breaches in 2014. With a vote series pending before the Memorial Day recess, the hearing was lightly attended, with Democrats outnumbering Republicans 6 to 2. Two issues emerged as priorities from the hearing, namely (1) ensuring that businesses are building cybersecurity capabilities into their existing workflows and relatedly (2) the shortage of cybersecurity professionals to fill that need. Panelists highlighted the successes of information sharing in identifying threats, and recommended an emphasis on diversity in helping address the jobs gap.
Select Highlights from the Administration
The White House
Trump Signs Resolution Overturning CFPB Auto Lending Guidance
On Monday, President Trump signed S.J. Res. 57 into law, officially overturning the Consumer Financial Protection Bureau’s (CFPB) guidance to prevent discrimination in auto lending. The resolution was passed under the provisions of the Congressional Review Act (CRA), which allows Congress to repeal regulations passed in the last 60 legislative days of the previous Administration and does not require a 60-vote majority in the Senate. This specific guidance was targeted by Republicans due to their concerns that it was based upon faulty analysis and inaccurate assumptions of discrimination during the “dealer markup” phase of an auto loan. Only a handful of Democrats approved of the measure in either chamber.
Office of the Comptroller of the Currency
New OCC Policy Allows Banks to Offer Short-Term Loans
On Wednesday, the Office of the Comptroller of the Currency (OCC) announced a new policy that would encourage banks to offer short-term loans to customers with problematic credit histories. The OCC policy advises banks to require short-term loans to be paid within a specific timeframe and be transparent to the customer with the requirements of the loan. This plan reverses Obama Administration policy that told banks to avoid these loans to customers with unreliable records in paying back their debt. Democrats and critics of the new proposal argue that short-term loans trap customers with high interest rates and sustained debt. Banks that implement the new OCC policy may also have to comply with the Consumer Financial Protection Bureau’s (CFPB) small dollar (i.e., payday) lending rule, although Acting Director Mick Mulvaney has indicated that he intends to reconsider that rule. 
Otting Says New Fintech Charter Guidance On Track for July Release
Last week, Comptroller of the Currency Joseph Otting said that his agency aims to release new guidance for financial technology companies seeking special purpose charters in July. That timeline represents a slight delay from the regulator’s previous statements, with Otting saying that its meetings with fintech companies has typically resulted in diminished interest in the charters. Otting also discussed the practice of bank partnerships with fintech companies, saying that the agency wants to ensure that banks will not “effectively lend their charter to a vendor.”
OCC Report Suggests Increased Deposit Costs Possible
On Thursday, the Office of Comptroller of the Currency released its latest semiannual risk report highlighting elevated operational risk stemming from cyber threats, compliance risk as banks manage money laundering risks, and the possibility of increased deposit costs as market interest rates continue to rise. The last point was one of emphasis for the banking regulator given that interest rates have stayed at near record-lows for the past decade. OCC officials also pointed to increased competition on deposits from financial technology companies, saying that it represents a trend that banks have not been forced to grapple with in the past.
Federal Reserve
Fed to Consider Volcker Rule Changes May 30
The Federal Reserve, along with the other regulators responsible for implementing the Volcker Rule will consider a proposal to modify the Rule at an open meeting of its Board of Governors on May 30. The interagency rule broadly bans proprietary trading by banks, restricting them from making profit-seeking trades financed by protected deposit insurance – although certain institutions with less than $10 billion in assets are now exempted from the requirement thanks to the enactment of S.2155 this week. Reportedly, among the changes in the Fed’s proposal are removing the requirement that banks must prove that their trading is permitted, eliminating the rule’s presumption that trades held for less than 60 days are automatically covered by the rule, and tweaking the definitions of both “proprietary trading” and covered funds.”
Consumer Financial Protection Bureau (CFPB)
CFPB Statement on Repeal of Auto Lending Guidance Hints Toward Future Action
Last week, CFPB Acting Director Mick Mulvaney issued a statement following President Trump’s signing into law of a resolution (S.J. Res. 57) repealing the consumer watchdog’s guidance on auto lending that thanked the President and Congress for “reaffirming that the Bureau lacks the power to act outside of federal statutes.” Calling the resolution “a solution in search of a problem,” Mulvaney argued that the repeal of the guidance represented a rightful correction of “Bureau overreach.” The repeal was significant not only because of its undoing of a contentious regulatory action, but because it marked the first time that Congress had repealed guidance from an executive agency, as opposed to a formal rule. The CFPB’s statement makes clear that more action could be on the horizon, saying that “a number of Bureau guidance documents may be considered rules for purposes of the CRA [Congressional Review Act], and therefore the Bureau must submit them for review by Congress.”
The Judicial Branch
Supreme Court
Court Issues 5-4 Ruling on Arbitration Provisions in Employee Contracts on 5-4 Ruling
On Monday, the Supreme Court ruled on a 5-4 decision that employers may use arbitration clauses in employment contacts to prohibit workers from starting class-action litigation. The case, Epic Systems Corp. v. Lewis, saw the Court’s five conservatives and four liberals split over whether the Obama Administration’s National Labor Relations Board (NLRB) was right in barring such clauses, although the Trump Administration NLRB had switched over to argue in favor of the employers. Associate Judge Neil Gorsuch wrote the majority’s opinion, saying that the New Deal-era National Labor Relations Act “says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.” In the minority’s dissent, Judge Ruth Bader Ginsburg said that the decision would violate a 1937 SCOTUS decision that employees have a “fundamental right” to join together to advance their common interests.