Financial Services Report (11/19)

Our Take

The first week immediately after the election of a lame duck Congress is a unique experience, a diptych, framing the juxtaposition between those arriving and those leaving.   Newly-elected members, sometimes with their spouses, sometimes with their staff can be found wandering around the Capitol complex, their faces full of expressions of awe and exhilaration as the gravity and the reality of their new jobs set in.   At the same time those who have lost or decided not to seek re-election can be seen cleaning out their offices and sometimes interacting with their soon to be former colleagues as if a great weight has been lifted off their chests. And is often the case, the week is filled with whispers and wonderings of palace intrigue, with questions swirling amongst the Democrats as to who would be their leaders come January.  

 While the caucus elections, at least for the top three positions, have only a modicum of uncertainty, the possibility, albeit also miniscule, that Nancy Pelosi will not regain the Speaker’s Gavel was the question du jour for many this past week.   There are 37 days between the secret ballot in the Democratic Caucus and the public vote in the House of Representatives, and it is certainly possible that things could change during that time – but as of right now, with no challenger to Pelosi to have officially announced, the prognosticators and pundits were left facing an incredibly unusual circumstance, as two completely diametrically opposite statements appear to be true.  I am speaking of course of the fact that there currently are not 218 votes for Nancy Pelosi to be Speaker and yet, come January, Nancy Pelosi will get 218 votes to become Speaker. 

Looking Ahead

Near Term

• The House and Senate are in Recess for the Thanksgiving Break

Further Out

• On November 28^th the H&I Subcommittee will hold a hearing on the FHA.
• The HFSC may hold a hearing on December 6^th to consider the Housing Finance Reform discussion draft introduced by Chairman Hensarling.
• Funding for a handful of spending bills, including the Financial Services spending measure, as well as the Homeland Security spending bill will expire on December 8^th.
• The Federal Debt limit expires on March 2, 2019

The Past Week

Legislative Branch
House
Fed Vice Chair for Supervision Quarles Heads to Hill
On Wednesday, Federal Reserve Vice Chair for Supervision Randal Quarles delivered his Semiannual Testimony on the Federal Reserve’s Supervision of Regulation of the Financial System to the House Financial Services Committee (HFSC).   In his testimony, Vice Chair Quarles outlined the Fed’s ongoing efforts to tailor bank regulations and identified stress testing transparency and a community bank leverage ratio as topics of upcoming rulemaking. Despite HFSC Chairman Jeb Hensarling’s (R-TX) push for the Fed to go further in reassessing Dodd-Frank regulations, other HFSC members—including several Republicans who are likely to be Ranking Members of various subcommittees next year, were generally supportive of the Fed’s rulemaking efforts.   HFSC Ranking Member Maxine Waters (D-CA), and other Democrats were critical of proposed changes to capital requirements and stress test transparency. Several Democrats also criticized the Office of the Comptroller of the Currency’s (OCC) proposed changes to the Community Reinvestment Act (CRA) and questioned Vice Chair Quarles on the Fed’s involvement in OCC’s proposal.
 
Waters Eyes HFSC Restructure
Next year the House Financial Services Committee could look very different, as Maxine Waters (D-CA) appears to be is weighing several changes to the Committee’s structure.  Among the reported changes include; (1) renaming the Capital Markets, Securities and Investment subcommittee the Investor Protection, Entrepreneurship and Capital Markets subcommittee (which would move the jurisdiction of Insurance and Annuities into this new subcommittee; (2) broadening the Financial Institutions and Consumer Credit subcommittee and recasting it as the Consumer Protection, Financial Institutions and Monetary Policy subcommittee; (3) expanding the Terrorism and Illicit Finance subcommittee as the Terrorism, Illicit Finance and International Financial Institutions subcommittee; (4) restructuring the Housing and Insurance subcommittee into the Housing and Community Development subcommittee; and (5) creating a new “Diversity and Inclusion” subcommittee as well as a possible technology and innovation task force.
 
McCarthy Elected Minority Leader; Pelosi Challenger Emerges
On Wednesday, House Majority Leader Kevin McCarthy (R-CA) easily dispatched Rep. Jim Jordan (R-OH) by a vote of 159 to 43 to be elected Republican Leader next Congress. Despite year-long rumors that Majority Whip Steve Scalise (R-LA) would make a run for the top leadership position, Republican’s loss of the House meant that McCarthy needed only a simple majority of Republicans to be elected Minority Leader rather than the 218 votes on the House floor he may have struggled to obtain for Speaker. This dynamic set the stage for a relatively smooth transition of power, with Rep. Scalise elected Minority Whip, Reps. Liz Cheney (R-WY) and Mark Walker (R-NC) elected Conference Chair and Vice Conference Chair respectively, Rep. Tom Emmer (R-MN) elected to head the National Republican Campaign Committee, Rep. Jason Smith (R-MO) being reelected as Conference Secretary, and Rep. Gary Palmer (R-AL) elected as Republican Policy Committee Chair. Although Democrats have delayed their leadership elections until after Thanksgiving, opposition to Minority Leader Nancy Pelosi’s bid to reclaim the Speaker’s gavel heated up last week after more than a dozen Democrats reportedly signed onto a still yet to-be-released letter opposing her candidacy. Rep. Marcia Fudge (D-OH), considered a potential anti-Pelosi candidate, has refused to rule out a run.
 
New Dems Push Back on OCC CRA Proposal
On Thursday, Greg Meeks, along with 10 other members of the New Democratic Coalition that serve on the House Financial Services Committee (HFSC) sent a letter urging the Office of the Comptroller of the Currency (OCC) to reconsider its August advance notice of proposed rulemaking (ANPR) intended to modernize regulations relating to the Community Reinvestment Act (CRA). While outlining principals to be incorporated into any CRA modernization effort, the letter calls for several specific changes to OCC’s proposal, including: (1) maintaining qualitative assessment components that OCC’s ANPR would remove; (2) increasing incentives for banks to go beyond the bare minimum of CRA compliance; (3) improving rating consistency across different regulators; (4) increasing flexibility for banks with new business models; and (5) including both the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) in any future rulemaking.
 
Senate
Quarles Provides Semi-annual Testimony to Senate Banking
On Thursday, following his appearance before the House Financial Services Committee, Federal Reserve Vice Chairman Quarles trekked across the Capitol to provide his semi-annual report to the Senate Banking Committee.  Vice Chair Quarles outlined the Fed's efforts to improve its stewardship of the financial system through two avenues—increasing transparency and improving regulatory efficiency—and said that rulemaking on the stress testing regime and a community bank leverage ratio should be expected soon. While Committee Chair Mike Crapo (R-ID) spoke favorably of Fed efforts to tailor financial regulations, Committee Democrats raised concerns that the regulatory changes, as well as supervisory lapses related to leveraged lending and foreclosures, could undermine financial stability.
 
Both Parties Hold Senate Leadership Elections
On Wednesday, Senators from both parties elected their leadership for the 116^th Congress. On the Republican side, Majority Leader Mitch McConnell (R-KY) was reelected as Leader, while Sen. John Thune (R-SD) was chosen to replace term-limited Majority Whip John Cornyn (R-TX) in a long expected move. Lower down the leadership ladder, Sens. John Barrasso (R-WY) and Roy Blunt (R-MO) each ascended one spot to Conference Chair and Policy Committee Chair, respectively, while Sen. Joni Ernst (R-IA) beat out Sen. Deb Fischer (R-NE) to serve as Vice-Conference Chair. In the Democratic Leadership elections, Minority Leader Chuck Schumer (D-NY) was reelected without opposition. Soon thereafter, Sen. Schumer announced his intention to largely keep in place his extensive leadership team, including Sen. Dick Durbin (D-IL) as Whip and Sen. Patty Murray (D-WA) as Assistant Leader. The lone change to Democratic leadership will be the departure of Sen. Chris Van Hollen (D-MD) as Democratic Senatorial Campaign Committee (DSCC) Chair, with Sen. Catherine Cortez Masto (D-NV) taking over those responsibilities.
 
Senate Confirms Bowman to Fed Board Spot
On Thursday, the Senate voted 64-34 to confirm Michelle Bowman to a seat on the Federal Reserve Board of Governors for the remainder of a term expiring in 2020. Fourteen Democrats joined every Republican except Sen. Rand Paul (R-KY) to approve Ms. Bowman’s nomination, which marks President Trump’s third appointment to the Board since taking office. A former community banker and Kansas State Bank Commissioner, Ms. Bowman takes a seat on the Board reserved for a Governor with community banking expertise. To this end, her confirmation is particularly significant given the ongoing efforts to tailor regulations for smaller banks, which she is generally expected to support. Pending Senate consideration of the nominations of Marvin Goodfriend and Nellie Liang to the two Board positions that remain open, President Trump is likely to have appointed five of the Board’s seven members by the end of the year, in addition to elevating Jerome Powell to its chairmanship.
 
McConnell Invokes Cloture on Kraninger to be CFPB Nominee
On Thursday, Majority Leader Mitch McConnell (R-KY) invoked cloture on the nomination of Kathleen Kraninger to be Director of the Consumer Financial Protection Bureau (CFPB). With the Senate out this week for Thanksgiving, the motion means that Ms. Kraninger’s nomination could receive a floor vote when Senators return to Washington the week of November 26. After the Banking Committee advanced her nomination in a party-line vote in August, Ms. Kraninger—currently serving in a leadership position at the Office of Management and Budget (OMB)—is likely to continue to face substantial Democratic opposition on the Senate floor over a variety of criticisms, including CFPB policies under Acting Director Mick Mulvaney, an alleged lack of expertise in consumer finance, and involvement in the Trump administration’s migrant family separation policy. This week, it was widely reported OMB chief and Acting CFPB Director Mulvaney—who is also considered a possible candidate for White House Chief of Staff—is eyeing the position of Secretary of Commerce with Secretary Wilbur Ross potentially departing that position as soon as this year.
 
Judiciary Committee Holds Bank Bankruptcy Hearing
On Tuesday, the Senate Judiciary Committee held a hearing entitled “Big Bank Bankruptcy: 10 Years After Lehman Brothers.” In his opening statement, outgoing Chairman Chuck Grassley (R-IA) attributed the damage from the failure of Lehman Brothers to shortcomings in U.S. bankruptcy law, which he said is inadequate for handling the bankruptcy of massive institutions. After the hearing, Committee members Sens. John Cornyn (R-TX) and Chris Coons (D-DE) announced their intention to pursue legislation that would establish a new section of the bankruptcy code for big banks, a proposal that has passed the House numerous times but has not advanced in the Senate. While details are still forthcoming, Sen. Coons expected such an addition to the bankruptcy code to serve as a complement to liquidation under Dodd-Frank’s orderly liquidation authority (OLA), rather than as a replacement for OLA. Additionally, he indicated that it would build on earlier legislative offerings by clarifying the relationship between the bankruptcy provision and OLA, reducing liability protections for senior officers, and increasing regulator involvement.
 
Six Senators Introduce Proxy Advisory Firm Bill
On Wednesday, a bipartisan group of six Senators announced their intention to introduce the Corporate Governance Fairness Act (announcement) intended to increase oversight of proxy advisory firms. Among other provisions, the bill would require major proxy advisory firms to register as investment advisors under the Investment Advisors Act and direct the Securities and Exchange Commission (SEC) to conduct periodic examinations of such firms, including their conflict of interest policy and potential false statements to clients.  Because the legislation would allow, but not require, smaller proxy firms to register as investment advisors, it seems be specifically targeting one company that is not currently registered as an investment advisory. In announcing the introduction of their legislation, the bill’s sponsors acknowledged the importance of proxy advisors, but cited concerns from stakeholders including the New York Stock Exchange that such firms wield oversized influence in shareholder decision making and are prone to conflicts of interest, echoing similar concerns made an SEC roundtable on this issue earlier in the week. 
 
Rubio and Kennedy Introduce Small Business Data Breach Notification Bill
On Thursday, Sens. Marco Rubio (R-FL) and John Kennedy (R-LA) introduced the Small Business Credit Protection Act (text; summary) intended to protect small businesses against credit bureau data breaches. Under the bill, credit bureaus would be required to notify small businesses of a data breach within 30 days and be prohibited from charging small businesses for a credit report for 180 days following a breach. The bill’s sponsors noted that despite recent enhancements to consumer protections against credit bureau data breaches, business credit is excluded from the stator definition of “consumer” information and thus currently excluded from newer protections.
 
Grassley to Chair Finance Committee
On Friday, Sen. Chuck Grassley (R-IA) announced his intention to replace retiring Chairman Orrin Hatch (R-UT) at the head of the Senate Finance Committee.  Under Republican Conference rules, Sen. Grassley has two years remaining to Chair the Finance Committee, which he previously led from 2003 to 2007. Sen. Grassley’s move means that that Senator Lindsey Graham (R-SC) will assume the top spot on the Judiciary Committee and that Senator Mike Crapo (R-ID) will remain Chairman of the Banking Committee.
 
Select Highlights from the Administration
White House
Automobile Tariffs Reportedly On Hold
On Tuesday,  President Donald Trump opted to postpone further consideration of potential Section 232 national security tariffs on automobile imports after reviewing a draft report on the matter. In May, the Department of Commerce initiated a probe examining the national security impact of automobile and auto part imports, on which President Trump has repeatedly threatened to impose tariffs of up to 25%.  A decision on imposing tariffs is likely to wait until publication of the Department’s final report, which is due in February.
 
Trump Says Tariffs Up In Air After China Releases Negotiating Document
On Friday, President Trump dialed back threats to impose tariffs on an additional $267 billion in Chinese exports, telling reporters that “we may not have to do that.” During the exchange, President Trump commented on a list that Chinese officials submitted to their US counterparts earlier in the week that categorizes 142 potential concessions into three categories—issues the Chinese are willing to negotiate further, issues they are already working on, and issues they consider off limits—and indicated that he expects the United States to achieve the inclusion of “four or five things left off” the initial list. Regardless, officials and experts have generally been pessimistic that the document foreshadows a breakthrough in trade tensions when President Trump and Chinese President Xi Jinping meet in Buenos Aires, Argentina later this month.
 
Federal Reserve
Fed to Reassess Monetary Policy Approach
On Thursday, the Federal reserve announced that it will spend 2019 reviewing the strategies, tools, and communication practices it utilizes to fulfill its dual mandate of maximizing employment and ensuring price stability. As part of the review, the Fed will host public events around the country—including a research conference in Chicago in June 2019—and issue a report outlining its findings. Announcing the initiative, Fed Chair Jerome Powell commented: "With labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy."
 
Federal Deposit Insurance Corporation
FDIC Seeks Stakeholder Comments on Small Dollar Loans
On Wednesday, the Federal Deposit Insurance Corporation (FDIC) published a Request for Information (RFI) seeking public comment on issues related to small-dollar lending by supervised institutions. The RFI marks the latest development in a regulatory push to ensure access to small-dollar credit, with the Office of the Comptroller of the Currency (OCC) publishing a bulletin in May encouraging banks to provide small dollar loans. In an accompanying announcement, FDIC Chair Jelena McWilliams indicated a belief in the importance of small-dollar lending, saying “I encourage the public to use the RFI process to tell us how to ensure that consumers can obtain small dollar credit from banking institutions in a responsible manner." Comments on the RFI will be accepted for 60 days.
 
FDIC to Vote on CBLR Proposal that McWilliams Expects to Apply to 80 Percent of Community Banks
On Friday, Federal Deposit Insurance Corporation (FDIC) Chair Jelena McWilliams delivered a speech at the Federal Reserve Bank of Chicago’s Community Bankers Symposium in which she said that more than 80 percent of banks will be eligible for streamlined capital requirements under a soon to be approved Community Bank Leverage Ratio (CBLR) rule. Also in the speech, Chair McWiliams said that the ratio would be “easy to calculate” and that FDIC would also revisit capital requirements for community banks that do not adopt the ratio. Established under the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), CBLR allows qualifying banks with less than $10 billion in assets to substitute risk-based capital requirements by meeting a simple tangible equity to total assets ratio. FDIC’s board is expected to vote to approve the proposal on Tuesday.
 
Internal Revenue Service
IRS Advisory Council Releases 2018 Annual Report  
On Thursday, the Internal Revenue Service Advisory Council (IRSAC) released its 2018 annual report including several recommended changes to IRS administration. Among other issues, the 2018 report addresses: (1) IRS budget; (2) electronic third-party authentication; (3) transfer pricing documentation; (4) Tax Pro accounting; and (5) and updates to Circular 230. Highlights include harsh criticisms of IRS’s 16 percent budget cut since 2011 as “indefensible” and a recommendation that the agency reassess and clarify its treatment to cryptocurrency, including potentially accepting tax payments made in virtual currency.

Next Week’s Schedule

The House and Senate are in Recess next week