Financial Services Report (4/15)

Last Week in the House
The Floor
On Tuesday, Democratic leadership was forced to pull its proposal to increase spending caps by $17 billion for defense spending and $34 billion for non-defense spending following an intense intra-party disagreement, as members of the Congressional Progressive Caucus indicated that they would not support the bill without an additional $33 billion in non-defense spending. Despite the inability to vote on the either spending caps deal or a budget resolution, a procedural maneuver earlier in the week set the top line spending number for the Appropriators to develop FY20 spending bills with an overall limit of $1.3 trillion for defense and non-defense funding.

Hearings and Markups
Treasury Budget (4/9): On Tuesday, Treasury Secretary Steven Mnuchin appeared before the Appropriations Subcommittee on Financial Services and General Government to discuss Treasury’s FY20 budget proposal. While much of the hearing dealt with House Democrats' ongoing legal battle to obtain President Trump's tax returns, other issues discussed included: (1) Democrats criticizing a 94% cut to the Community Development Financial Institutions Fund; (2) Treasury Secretary Mnuchin attributing the uncertainty facing state-legal marijuana businesses to statutory inconsistency that is not solvable via Treasury regulations alone; and (3) continued Member focus on Opportunity Zones and cyber security.
Community Reinvestment Act (4/9): On Tuesday, the Financial Services Subcommittee on Consumer Protection held a hearing entitled: "the Community Reinvestment Act: Assessing the Law’s Impact on Discrimination and Redlining." In his opening statement, Chairman Gregory Meeks (D-NY) said that lawmakers "must to better" in their efforts to combat redlining and expressed interest in examining the role of fintech, banking deserts, and non-bank lenders, as well as ensuring that evolving business models do not enable further discrimination. Ranking Member Blaine Luetkemeyer (R-MO) expressed concern that CRA is outdated, overly burdensome, and does not properly account for developments in modern financial markets.
International Financial System (4/9): On Tuesday, Treasury Secretary Steven Mnuchin delivered his semiannual testimony on the international financial system to the Financial Services Committee. The contentious hearing saw Democrats press Secretary Mnuchin on a multitude of issues pertaining to President Trump’s tax returns, the Administration’s financial ties to Russian oligarchs, and his personal finances. Conversely, Republicans were eager to tout the Administration’s deregulatory and taxation accomplishments. Aside from the partisan rancor, exacerbated by the late start of the hearing, several votes and a prior commitment by the Secretary, lawmakers questioned the Secretary on issues pertaining to insurance, the Export-Import Bank, trade, beneficial ownership, and the current expected credit losses (CECL) model.
Bank CEOs (4/10): On Wednesday, the Financial Services Committee held a hearing featuring the CEOs of seven of the eight US Globally Systemically Important Banks (G-SIBs). Throughout the hearing, the bank CEOs consistently emphasized that their firms are less complex and better capitalized since the financial crisis, while also highlighting their diversity initiatives and community involvement.
With few exceptions, Committee Democrats directed scrutiny towards bank scandals, compensation, and diversity practices, with Chairwoman Maxine Waters (D-CA) and others accusing big banks of treating fines as "the cost of doing business." Ranking Member Patrick McHenry (R-NC) and other Committee Republicans, in contrast, called the hearing an inappropriate politicization of big banks and emphasized the important role of large financial institutions as employers and financiers. Specific topics receiving substantial attention included fintech, shadow banking, overdraft fees, and Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance. In addition, all of the CEOs noted that cyber security was an area that could have a significant impact on the economy.
Bills Introduced
Return to Prudent Banking Act (Kaptur): Reinstates and expands Glass-Steagall restrictions on affiliation between commercial and investment banks repealed under the 1999 Gramm-Leach-Bliley Act. Among other provisions, he bill would prohibit any insured depository institution from being an affiliate of any broker or dealer, investment adviser, investment company, or any other person or entity dealing mainly in securities.
Token Taxonomy Act (Davidson and Soto): Clarifies definitions of digital assets as they relate to regulated securities, specifically excluding digital tokens from that definition. Reps. Davidson and Soto first introduced the bill last year. A separate piece of legislation introduced by the duo would also provide $25 million in funding to prevent cryptocurrency deceptive practices.
Expansion of Private Employee Ownership Act (Kind and Smith): Extends to S-corporations tax deferral benefits on the gain from the sale of employer stock to an employee stock ownership plan (ESOPs). The bill, which would also provide assistance to companies transitioning to an employee-ownership model, is intended to "encourage the formation of employee-owned businesses and promote retirement savings" by incentivizing employers to sell stock to employees. Senate companion legislation to the perennially introduced bill is sponsored by Sens. Ben Cardin (D-MD) and Pat Roberts (R-KS).
Housing Financial Literacy Act (Beatty and Stivers): Gives first-time homebuyers who complete a Department of Housing and Urban Development (HUD)-certified housing counseling course a 25 basis point discount on their Federal Housing Administration (FHA) mortgage insurance premium.
Shutdown Guidance (Wexton): Requires federal financial regulators to issue guidance encouraging financial institutions to work with consumers and businesses affected by a Federal Government shutdown.
Public Pension Bailouts (Babin): Prohibits Treasury or the Fed from providing bailouts or other financial assistance to state or municipal pension plans.
Other Activity
Dem Retreat: On Wednesday, House Democrats kicked off their 2019 retreat as Members attempted to regroup following last week's failed budget caps push. During the event, Fed Chairman Jerome Powell held a closed door session where he fielded questions and reportedly reasserted the Fed's independence in the face of continued tension with President Trump.
Hensarling Headed to UBS: On Thursday, news broke that former House Financial Services Committee Chairman Jeb Hensarling (R-TX) is joining UBS as Executive Vice Chairman of the Americas. He will be based out of Dallas.
Last Week in the Senate
The Floor
On Thursday, the Senate passed a resolution (S. Res. 168) sponsored by Sen. Jack Reed (D-RI) designating April as Financial Literacy Month. The upper chamber did not otherwise consider any financial services legislation last week.
Hearings and Markups
Robocalls (4/11): On Thursday, the Senate Commerce Subcommitte on Communications, Technology, Innovation, and the Internet held a hearing entitled “Illegal Robocalls: Calling All To Stop The Scourge.” During the hearing, broad bipartisan consternation at illegal robocalling continued, as did support for the TRACED Act (S. 151) anti-robocall legislation advanced that advanced through Committee earlier this month. In addition to bipartisan support for the TRACED Act, Members and witnesses showed particular interest in criminal penalties for illegal robocalls and the STIR/SHAKEN authentication standard.
Bills Introduced
Gold Star Spouses and Spouses of Injured Servicemembers Leasing Relief Expansion Act (Tillis, Warren, Portman, Reed, and Sinema): Allows spouses of military servicemembers who die in service to terminate vehicle leases. Furthermore, the legislation allows spouses of servicemembers who suffer catostrophic injury to terminate both residential and vehicle leases. Companion legislation in the House was introduced by Reps. Cheri Bustos (D-IL) and Brad Wenstrup (R-OH).
Algorithmic Accountability Act (Wyden and Booker): Requires companies to their use of automated decision systems for impacts on discrimination, privacy, and security and to correct any issues uncovered. Rep. Yvette Clarke (D-NY) simultaneously introduced companion legislation in the House.
Credit Applicant Demographics (Gillibrand, Klobuchar, Wyden, and Blumenthal): Requires creditors to request demographic information from applicants for certain types of credit in order to prevent discriminatory lending practices.
Small Business Reorganization Act (Grassley, Whitehouse, Tillis, Klobuchar, Ernst, and Blumenthal): Streamlines small business bankruptcy procedures through provisions intended to increase debtors' ability to negotiate a successful reorganization and retain control of the business and reduce unnecessary procedural burdens and costs.
HUD Inspection Process and Enforcement Reform Act (Rubio): Permits the removal or pay reduction of HUD employees for misconduct and expands authority of HUD to enforce safety and sanitation standards in federal housing programs. Reps. Doug Collins (R-GA) and David Cicilline (D-RI) are expected to introduce companion legislation in the House.
Respect the Caps Act (Tillis and Warren): Prohibits Fannie Mae and Freddie Mac from transferring CEO duties to another position. The bill come in response to an FHFA inspector general report which found that both GSE's had transferred CEO responsibilities to other executives in order to circumvent the Congressionally mandated $600,000 cap on CEO pay.
No Red and Blue Banks Act (Kennedy and Cramer): Bans banks that "discriminate against lawful businesses through social policy considerations" from receiving federal contracts. In particular, the bill would target banks, including Citi and Bank of America, that have limited their dealings with certain firearms businesses.
HALOS Act (Murphy and Toomey): revises Regulation D to exempt presentations at events such as demo days from the definition of a general solicitation, removing barriers to pitching angel investors at these events. The HALOS Act was included in last year's JOBS 3.0 capital formation package and companion legislation has also been reintroduced in the House by Reps. Steve Chabot (R-OH) and Brad Schneider (D-IL).
SAFE Banking Act (Merkley and Gardner): Creates a legal safe harbor for financial institutions doing business with state-legal marijuana businesses. The bill is the Senate companion to Rep. Ed Perlmutter's (D-CO) perennially introduced legislation that passed the Financial Services Committee last month.
Other Activity
Senators Continue to press Wells Fargo: On Tuesday, Banking Committee Ranking Member Brown (D-OH) and Sen. Elizabeth Warren (D-MA) released letters from three federal regulators showing continued dissatisfaction at Wells Fargos compliance with regulatory consent orders following a number of high profile scandals. Notably, Consumer Financial Protection Bureau Director Kathleen Kraninger commented that she is "not satisfied with the banks actions to date" and said that CFPB is considering "all appropriate actions." The letters are a response to inquiries from the Senators in March to leadership at CFPB, the Fed, and the Office of the Comptroller of the Currency.
Bank Misconduct Report: On Wednesday, Banking Committee Ranking Member Sherrod Brown (D-OH) released a report entitled "Misconduct by the Numbers" outlining alleged misconduct by Bank of America, Citi, JP Morgan, and Wells Fargo since 2005. On the heels of the House Financial Service Committee's hearing with G-SIB CEOs, Ranking Member Brown also called on the Banking Committee to hold its own hearing with bank executives.
Brown Leveraged Lending Letter: On Thursday, Banking Committee Ranking Member Sherrod Brown (D-OH) sent a letter to Treasury Secretary Steven Mnuchin calling for heightened regulatory scrutiny of the leveraged finance market. Raising concerns of increased levels of leverage and deteriorating underwriting, the letter accuses the Financial Stability Oversight Council (FSOC) of taking "only a wait and see approach to the issue" and focusing on "deregulating the financial services industry rather than performing its mission of identifying risks." It requests that Secretary Mnuchin as FSOC Chair provide evidence of any of FSOC attention to leveraged lending by April 23.
Cain's Fed Hopes Dwindle: On Thursday, Sen. Kevin Cramer told CNN that he would vote against Herman Cain's nomination to the Federal Reserve Board. Sen. Cramer joined Sens. Cory Gardner (R-CO), Lisa Murkowski (R-AK), and Mitt Romney (R-UT), as well as Joe Manchin (D-WV), in opposing the former pizza executive and 2012 Presidential candidate's nomination—likely killing the controversial nomination in a Senate divided 53-47. ABC News has reported that Mr. Cain is expected to withdraw from consideration for the position.
Corporate Profits Tax: On Thursday, Sen. Elizabeth Warren published a blog post proposing a 7% tax on profits of U.S. companies with profits greater than $100 million per year. The tax would be assessed on top of tax liability under current rules and apply to global profits in order to reduce tax avoidance strategies. The Presidential candidate's latest ambitious proposal is projected to raise revenues by $1 trillion over the next decade.
Last Week in the Administration
US, China Reach Trade Enforcement Mechanism Consensus
On Wednesday, Treasury Secretary Steven Mnuchin said that the United States and China "have pretty much agreed on an enforcement mechanism" for a potential trade agreement resolving the ongoing dispute between the two countries. In an interview with CNBC, Secretary Mnuchin said that both countries would establish "enforcement offices" but declined to go into details. He additionally pushed back on setting an "arbitrary deadline" to resolve outstanding issues including the future of $250 billion of tariffs on Chinese goods and Chinese intellectual property protections.
Fed Loosens Living Will Requirements
On Monday, the Federal Reserve Board issued a notice of proposed rulemaking reducing the frequency of resolution planning for large banks pursuant to last year's Economic Growth, Regulatory Relief, and Consumer Protection Act. The proposal would allow Global Systemically Important Banks (G-SIBs) to file full living wills every four years—with a scaled back "targeted" plan filed in between— rather than filing a full plan every year. Non-G-SIBs with more than $250 billion in assets would alternate between a full and targeted plan every three years, while most banks with less than $250 billion in assets would not have to file at all. The proposed rule passed 4-1, with Governor Lael Brainard the sole dissenting vote.
Fed Issues Foreign Bank Tailoring Proposal
On Monday, the Federal Reserve Board of Governors issued a proposed framework tailoring rules for foreign banks. Under the proposed framework, foreign banks with $100 billion or more in U.S. assets would be sorted into categories of increasingly stringent requirements based on factors such as complexity, size, risk, cross-jurisdictional activity, and off-balance sheet exposure. While the Fed described the framework as "substantially the same" as last year's tailoring for large domestic banks, the central bank noted that the resulting impacts could be different given the unique operational complexities of foreign banks. The Fed Board approved the measure in a 4-1 vote, with Governor Lael Brainard criticizing a failure to address concerns about the liquidity of US branches of foreign banks.
SEC Nominee Lee to Recuse from PCAOB Oversight
On Friday, Politico published an ethics disclosure from Democratic Securities and Exchange Commission nominee Allison Lee indicating that she would recuse herself from matters regarding the agency's oversight of the Public Company Accounting Oversight Board. Ms. Lee—who is married to PCAOB member J. Robert Brown Jr.—left the door open to obtaining an ethics waiver for participation in some matters relating to the accounting industry watchdog.
Hood Designated as NCUA Chair
On Monday, President Trump named recently confirmed board member Rodney Hood as Chairman of the National Credit Union Administration. Mr. Hood replaces outgoing Chairman Mark McWatters who will remain on the NCUA board for the time being. Mr. McWatters' term runs until August, after which he is allowed to continue serving on the board until a replacement is named. While the Administration did not provide a reason for the change, Mr. McWatters has received several negative press reports relating to expenses, management practices, and ethics over the past year.
OMB Memo Increases Guidance Scrutiny
On Thursday, the Office of Management and Budget released a document expanding review of agency guidance's. The 15-page memo instructs federal agencies to submit non-binding guidance documents to the Office of Information and Regulatory Affairs, which could then designate them as "major" actions, opening the door for repeal the rule under the Congressional Review Act. Congressional Republicans including Sen. Pat Toomey (R-PA) have previously criticized "backdoor regulation" through the use of guidance, which Thursday's memo would appear to curtail. While the memo extends to independent agencies including the SEC and Fed, OMB does not have the ability to compel independent agencies to submit guidance in this way.
OMB Floats Scaleback of Economic Data Delay Rule
On Thursday, the Office of Management and Budget released a notice seeking comment on loosening a 1985 rule restricting US officials from commenting on key economic data until one hour after their release. In the notice, OMB acknowledged concerns that the delay—intended to preserve the integrity of government-published data—could be scaled back or eliminated given the rise of instant online communications.
This Week's Schedule
Both chambers of Congress have left Washington for a two-week recess. Lawmakers will resume legislative business on Monday, April 29.