Insights

Financial Services Report

November 23, 2015

Our Take
Last week a bipartisan bill, H.R. 1737, which had been reported out of the Financial Services Committee with a majority of Democrats in support, passed the House by a vote of 332-96. (more on this bill below)
 
By all accounts, this bill should be hailed as an example of how Congress should work.  Initially drafted as an overly broad attack on the CFPB, a group of moderate Democrats worked with their Republican colleagues to reach a limited solution to specific issue with the CFPB.  Instead of praising their efforts, the debate surrounding this bill (both in private and public) exposed serious fissures in the Democratic Party, with the far left effectively calling out by name the supporters of the bill.

Much has been made this year about conservative Republicans and partisan purity tests.  Less has been said about similar efforts on the left, however the combination is narrow middle.  In some ways, the cannibalization of the middle is the logical result of the combination of ever increasing partisan redistricting, the business community’s preference for any Congressional Republican over a Democrat, and balkanized media echo chamber that only seems to be augmented by social media. 
 
When Congress returns from the Thanksgiving Recess it will face two major legislative deadlines in successive weeks – the Highway Bill and then funding the government.  With the bases on the left and the right having already staked out positions on what will be acceptable in the final packages, it will require shrewd negotiations and Representatives and Senators willing to work together to find that ever elusive middle – or else they might just end up having to punt everything into next year.
 
Looking Ahead

Near Term

Further Out

  • Congress returns on November 30th and faces a series of fast approaching deadlines::

    • December 4th – The Transportation Authorization runs out.  There is currently a conference committee working to reconcile the two versions each body has passed.  Included in these bills are provisions that would renew the Ex-Im bank charter, and the House passed version also includes series of regulatory relief measures for various financial institutions.
    • December 11th – Funding for the Federal government expires.   Despite private insinuations that negotiations continue on the various riders that are looking to ride on the omnibus, publicly Democrats continue to assert that they are opposing all riders.
    • The Second Session of the 114th Congress is slated to start on January 11th.     

The Past Week

Legislative Branch

House
House Overwhelmingly Passes Legislation calling on CFPB to Fix its Guidance For Auto Lenders
On Wednesday, by a 332-96 vote, the House overwhelming passed H.R. 1737, a bill to require the CFPB to rescind and revise its guidance for indirect auto lending.  The veto-proof majority vote came over White House opposition (though not a veto threat), and a contentious floor debate.  The measure now goes to the Senate, where Senator Warren and other liberal Senators are expected to mount a strong opposition. 
 
House Passes Series of Financial Services Related Bills
Last week the House of Representatives passed a series of bills related to the Financial Services Industry, including:

  • H.R. 3032, the Securities and Exchange Commission Reporting Modernization Act, passed by voice vote;
  • H.R. 1478, the Policyholder Protection Act, sponsored by Rep. Bill Posey (R-FL), passed the House by a voice vote;
  • H.R. 1317, which would broaden exemptions from swap rules for affiliates of nonfinancial entities, also passed by voice vote;
  • The House also passed S. 2036 by a voice vote, sending the Warren-Vitter bill to cap the CEO Pay of Fannie and Freddie CEOs at $600,000 dollars.  The bill is now at the President’s desk and he is expected to sign it;
  • H.R. 1210, the Portfolio Lending and Mortgage Access Act, passed the House by a 255-174 vote.  The bill, which would ease CFPB regulations on qualified mortgages (QM) as well as increase liability protections for lenders, received a veto threat from the White House and supporters failed to garner a veto proof majority in the House; and
  • H.R. 3189, the Fed Oversight Reform and Modernization (FORM) Act, was also passed over a Presidential veto, 241-185. 

Chair White Defends SEC Before Financial Services Committee
On Tuesday, the Financial Services Committee held a hearing where SEC Chair Mary Jo White offered testimony on the SEC activities and priorities for the FY 2017 fiscal year. There was a bipartisan recognition of the SEC’s recent work in finalizing crowdfunding rules, but partisan division on issues such as systemically important financial institution (SIFI) designation and a uniform fiduciary standard during a marathon defined the three-hour session.   
With regard to the fiduciary issue a wide array of Members, including Chairman Hensarling, Rep. David Scott (D-GA), Rep. Keith Ellison (D-MN), and Rep. Ann Wagner (R-MO), questioned the SEC Chair on her plans to institute a fiduciary rule, particularly in relation to the Department of Labor’s efforts. Republicans, and Rep. Scott urged the SEC Chair to take the lead on crafting a rule, but White remained steadfast in her opinion that there was a “different statutory authority” for the two regulators. She committed to releasing “most of the details” of the proposal in the “short-term,” but also said that it would be longer than two months.  Other topics of discussion included the amount of liquidity in the corporate bond market, the recently issued pay-ratio rule, and notably, Chair White’s tacit dismissal of a rule on political contributions.

HFSC Oversight Committee Examines FSOC
On Thursday, the O&I subcommittee held a hearing entitled, “Oversight of the Financial Stability Oversight Council: Due Process and Transparency in Non-Bank SIFI Designations.”  The hearing took on a largely partisan tone, with Republicans targeting the FSOC’s practices and motivations, and Democrats labeling the hearing the “Met Life hearing” and offering evidence to support the FSOC’s designation of the company.  Interestingly, the panelists provided insight into academia’s perspective on the regulation of non-bank entities through the FSOC process, and calling for more expertise, increased transparency, and additional consideration of the broader economy in the FSOC’s work, but none dismissed the purpose of the FSOC entirely.
 
Senate
Brown Urges Regulators to Stay Strong on Swaps Rules
On Friday, Senator Sherrod Brown, the ranking member of the Senate Banking Committee sent a letter to the Fed, OCC and FDIC urging for the regulators to stay refrain from watering down the rules that require the largest financial institutions to hold more capital and that limit the types of risk-taking the Senator indicated “contributed to the 2008 financial crisis.”
 
Menendez Questions FHFA on Failure to Meet Low Income Lending Goals
On Wednesday, Senator Bob Menendez sent a letter to FHFA Director Mel Watt questioning why the preliminary findings from the FHFA’s annual housing report showed that Freddie Mac failed to meet two goals for lending to low-income homebuyers last year and what the Director intends to do to correct for this.
 
Senators Ask FHFA to Revise Credit Scoring Standards
On Wednesday, four liberal Democratic Senators sent a letter to FHFA Director Mel Watt urging the FHFA to give less weight to medical debt when analyzing standards for credit scoring.  The letter, signed by Senators Merkley, Brown, Warrant and Franken, indicated that the change would be more reflective of the credit worthiness of the consumer. 
 
Senator Markey Leads Bicameral Push against FCC on TCPA Rules
On Tuesday, a letter lead by Senator Markey and Representative Eshoo, and joined by 39 of their colleagues, was sent to the FCC, CFPB and Department of Education urging those regulators to tread carefully as they implement section 301 of the recently passed Budget Act, which revised the application of the Telephone Consumer Protection Act (TCPA) for debts owed to, or backed by the Federal government.    Interestingly, the day after this letter was sent, FCC Commissioner Rosenworcel in response to a question about TCPA said that one problem was “that the agency is trying to figure out how to manage with a statute that didn't contemplate the digital world we live in today.”
 
Warren and Grassley Team Up on Whistleblower Issue
On Monday, Senator Elizabeth Warren and Chuck Grassley sent a letter to SEC Chair White seeking information about the Commission’s Office of the Whistleblower (OWB).  Among other things, the letter sought information about the implementation of SEC IG recommendations, and requested updated information on the volume of whistleblower tips, complaints and referrals, how the OWB responded, and how quickly.
 
Select Highlights from the Administration

Treasury
New Rules to Limit Inversions Released
On Thursday, Treasury and the Internal Revenue Service released a new proposal intended to curb corporate tax inversions by: (1) Limiting the ability of U.S. companies to combine with foreign entities using a new foreign parent located in a ‘third country,’; (2)  Limiting the ability of U.S. companies to inflate the new foreign parent corporation’s size and therefore avoid the 80-percent ownership rule; and (3) Requiring the new foreign parent to be a tax resident of the country where the foreign parent is created or organized.”  These rules were applicable to deals closed on Thursday or going forward.   Furthermore, the notice also was intended to limit an inverted companies’ ability to transfer foreign operations to the new foreign parent after an inversion without paying U.S. tax, for any deal completed on or after Sept. 22, 2014.
 
Consumer Financial Protection Bureau (CFPB)
Updated 2015 Agenda Released
On Friday, the CFPB released an updated rulemaking agenda, where it offered a timeline for some of the rulemaking initiatives pending with the Commission.  Among the updates, the CFPB noted that it expects to release its small dollar loan rulemaking proposal in the first quarter of 2016, and to finalize its prepaid card rule in spring of next year.  The also provided an outline of proposals for its forthcoming rule on arbitration clauses in credit cards, deposit accounts, payday loans and various other consumer financial products or services, though it refrained from indicating when such a rule would be proposed.
 
Bureau Announces Action Against Online Lender
On Wednesday, the CFPB announced that it was intiating an action against online lender Integrity Advance LLC and its CEO.  As part of the notice of charges, similar to a complaint filed in court, the CFPB alleged that the company hid the total cost of loans from customers, violated federal law through its pre-authorized fund transfers; and continued to debit borrowers accounts even after the consumer canceled the authorization to do so.  The case will now go before an Administrative Law Judge (ALJ) with the CFPB’s Office of Administrative Adjudication, an independent adjudicatory office within the Bureau.
 
Securities and Exchange Commission (SEC)
Aguilar Announces End Date
On Monday, it was reported that Luis Aguilar, the longest-serving member of the U.S. Securities and Exchange Commission, had informed the President that he intended to leave the Commission by the end of December, or earlier if a replacement is confirmed.  Although the President has nominated Lisa Fairfax to replace Aguilar, as well as Hester Peirce to replace former Commissioner Dan Gallagher, neither have yet to receive a nomination hearing, and so it seems likely that the SEC will be down to three Commissioners for at least some of 2016. 
 
Next Week’s Schedule
The House and Senate Are in Recess Next Week for the Thanksgiving Holiday