Financial Services Report (2/19)

Looking Ahead

The Past Week

On Thursday, the Senate by a vote of 83-16 and then the House on a 300-128 vote passed a spending package averting a second partial government shutdown.  Included in the package was $1.375 billion in funding for border security, however people want to define it.  While the President signed the spending package on Friday, he also declared a state of emergency allowing him to reallocate $8.1 billion in funds from other programs towards a border wall. The action will generate legislative pushback from Congressional Democrats, potentially divide Republicans and is certain to face a legal challenge. 
 
In addition to the Homeland Security appropriations bill, the appropriations bill also funds the other six outstanding spending bills through the end of the fiscal year—among them the Financial Services-General Government bill, which funds the Treasury Department, numerous financial regulators, and the Executive Office of the President. Among one of the provisions in the measure was legislation sponsored by Emanuel Cleaver and Sean Duffy and Emanuel Cleaver to establish a housing choice voucher mobility demonstration to encourage families receiving voucher assistance to move to lower-poverty areas.

 

HOUSE OF REPRESENTATIVES 
Financial Services Committee
Despite two hearings being rescheduled for the funerals of former Reps. John Dingell and Walter Jones, the Financial Services Committee’s hearing agenda began to heat up this week.
 
Committee Activity

From the Desk of Chairwoman Waters

 Elsewhere in Committee

Bills Introduced

Other Items of Notes

Ways and Means Hearing on Middle Class Families
On Wednesday the House Ways and Means Tax Subcommittee Hearing on Middle Class Families, largely focused on last Congress’s Tax Cuts and Jobs Act (TCJA).  During the hearing Committee Republicans continued to emphasize positive economic indicators—including last month’s strong job numbers—as evidence tax reform and other GOP economic policies are working. Democrats, however, argued that growing consumer debt and other indicators show that the benefits of the tax law have not reached the middle class. Additionally, Subcommittee Chairman Mike Thompson (D-CA) called the Treasury Department’s 2018 withholding tables “withholding manipulation” intended to exaggerate the effects of tax reform and several Democrats continued to criticize TCJA’s cap on the state and local tax deduction (SALT).
 
Democrats Write IRS Over Inaccurate Withholding Tables
On Tuesday, House Ways and Means Oversight Subcommittee Chairman John Lewis (D-GA) and Rep. Judy Chu (D-CA) sent a letter to Treasury Secretary Steven Mnuchin  and IRS Commissioner Charles Rettig expressing concern that “millions of taxpayers” are receiving less-than-expected tax refunds due to inaccurate 2018 withholding tables. The letter notes that the 2018 tables did not fully factor in tax reform’s removal of numerous deductions and exemptions and requests that IRS lower the underpayment threshold to 80 percent (from the current level of 85) and provide information on how it will update 2019 withholding tables.
 
Scott Seeks Information on Cybersecurity of Retirement Plans
On Tuesday, House Education and Labor Committee Chair Bobby Scott (D-VA) and Senate Health, Education, Labor, and Pensions (HELP) Committee Ranking Member Patty Murray (D-WA) sent a letter to Comptroller General Gene Dodaro requesting a GAO study on retirement plan cybersecurity. The letter describes cybersecurity liability for plan sponsors and participants as “ill-defined” and expresses interest in better protecting retirement accounts and defining responsibilities for plan fiduciaries.
 
SENATE

Banking Committee
The Banking Committee's week peaked with FHFA nominee Mike Calabria's appearance before the Committee on Thursday.

Committee Activity

Elsewhere in the Committee:

Bills Introduced

Other Items of Note 

Rubio Floats Legislation to Stem Recent Tide of Stock Buybacks
On Wednesday, Sen. Marco Rubio (R-FL) indicated that the recent criticism against the proliferation of stock buybacks was not a partisan issue by saying that he planned to introduce legislation that would tax stock buybacks the same as dividends. Under current law, dividend payments are taxed as ordinary income, while sales of stock during a share buyback are taxed at the lower capital gains rate.  Rubio’s plan was immediately criticized by his colleagues, including Senator Rick Scott (R-Fl). 
 
Democrats Blast CFPB Payday Proposal
On Wednesday, every Senate Democrat signed on to a letter opposing the Consumer Financial Protection Bureau’s proposed changes to the Payday Lending Rule. Additionally, the letter calls CFPB’s proposed changes to the rule—which would eliminating certain underwriting requirements, including the requirement that lenders verify a borrower’s ability to repay a loan—a “green light” to the payday lending industry and criticizes the process underlying the rule’s revision.
 
Senators Introduce Legislation to Spur Graduate Students to Save for Retirement
Last week, Senators Ron Wyden, Elizabeth Warren, Mike Lee, and Tim Scott introduced the  Graduate Student Savings Act .   This legislation would allow graduate students to save for retirement by allowing graduate student stipends to be deposited into IRAs. Currently, Federal and state governments generally tax fellowship or stipend funding as income, which does not qualify as "compensation" and therefore cannot be saved in an IRA. This is the third consecutive Congress in which this legislation has been introduced.
 
Warner, Thune Introduce Bill to Incentivize Employers to Help Student Loan Crisis
A group of twenty bipartisan Senators introduced the Employer Participation in Repayment Act to expand the existing tax exclusion for education assistance from income tax liability calculation to include student loan debt assistance.  If enacted, the bill would allow employers to contribute up to $5,250 tax free annually to their employees’ student loan payments. A companion bill was previously introduced in the House and is endorsed by stakeholder groups including the National Education Association.
 
Senate Finance Democrats Want to Clarify Tax Code
The entire Democratic side of the Senate Finance Committee introduced the Equal Dignity for Married Taxpayers Act, which would remove gender-specific references to marriage in the tax code. By replacing terms such as “husband and wife” with “married couple,” the bill’s sponsors argue that the legislation would combat “inequality and discrimination” in the tax code and avoid tax complications for same-sex filers.
 
Bicameral Legislation to Remove SALT Caps Introduced
Last week, two New Jersey Congressmen – Senator Bob Menendez and Representative Bill Pascrell – both members of their Chambers Tax writing committees, introduced the Stop Attacks on Local Taxpayers Act to remove the Tax Cuts and Jobs Act’s $10,000 cap on the state and local tax (SALT) deduction, as well as restoring the top individual tax rate of 39.6%. The SALT cap has been a subject of significant criticism from lawmakers from high tax states—notably New York, New Jersey, and California—since tax reform was enact and numerous lawmakers from those states have signed on as cosponsors, including Chris Smith, New Jersey’s only Republican lawmaker following the 2018 mid-term elections.
 
SELECT HIGHLIGHTS FROM THE ADMINISTRATION
White House
Cuomo, Trump Talk SALT
On Tuesday, New York Governor Andrew Curomo met with President Trump at the White House. Among other topics, the Governor urged President Trump to consider supporting the repeal of the Tax Cuts and Jobs Act’s $10,000 cap on the state and local tax (SALT) deduction—a significant complain of politicians in high-tax states such as New York that it most effects. After the meeting, Governor Cuomo said that Trump was “open to discussing the SALT issue” and would raise the point with National Economic Council Director Larry Kudlow.
 
With Mnuchin and Lighthizer in Beijing, Trump Warms to China Deadline Extension
On Friday, United States Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin concluded two days of talks in Beijing where they met with Chinese officials—including President Xi Jinping—to discuss the ongoing US-China trade dispute. Speaking from the White House, President Trump told reporters that the talks went “extremely well” and acknowledged the possibility of delaying the escalation of tariffs on $200 billion in Chinese goods—currently scheduled for March 2—as the sides seek a long-term trade solution. The White House indicated that trade talks are set to continue in Washington this week, with Presidents Trump and Xi meeting “at some point after that.”
 
Federal Reserve
New York Fed Flags Auto Lending Delinquency
On Tuesday, the Federal Reserve Bank of New York published its Q4 Household Debt and Credit Report, in which it found that a record 7 million Americans are at least 90 days behind on their car payment—more than one million more who were in such distress at the height of the Great Recession. The finding has been identified as a notable indicator of economic distress given that car payments are among most consumers’ first financial priorities, with Fed economists noting: "The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong labor market.”
 
Agencies Approve Long Awaited Biggert-Waters Rule to Boost Private Flood Insurance
On Friday, five federal banking regulators issued a joint final rule requiring regulated institutions to accept certain private flood insurance policies. Implementing several provisions contained in the 2012 Biggert-Waters Flood Insurance Reform Act, the final rule: (1) requires lenders to accept flood insurance policies that satisfy criteria set-forth in the act; (2) allows institutions to accept insurers written assurance that such requirements are met; (3) clarifies circumstance under which institutions may accept policies that do not meet this criteria; and (4) allows institutions accept certain flood coverage plans provided by mutual aid societies.
 
Internal Revenue Service
IRS Filing Data Indicates Lower Refunds
On Thursday, the IRS released refund data indicating that refund checks on average shrunk over the first 12 days of this year’s tax filing season. The average refund check through February 5 was $1,949, an 8.7 percent decrease over the $2,135 average during the same period last year. As the first post-tax reform return season underway, policymakers and the media have been monitoring return data to examine any impact of the tax law on returns. For its part, the Treasury Department acknowledged that returns are likely to be slightly lower this season, but attributed this to more accurate withholdings—and more money being left in paychecks—throughout the year.
 
Shutdowns, IT Among Challenges Facing IRS
On Tuesday, National Taxpayer Advocate Nina Olson released her 2018 Annual Report to Congress. The report identifies numerous challenges facing the IRS, including: (1) the partial government shutdown; (2) antiquated IT infrastructure;  and (3) finding legal answers to questions emerging from the Tax Cuts and Jobs Act. Accompanying the report, Ms. Olson also released the second edition of the National Taxpayer Advocate’s 2019 “Purple Book” outlining 58 legislative recommendations to improve taxpayer rights and tax administration—its number one recommendation is that Congress provide “significantly more funding” to modernize IRS’s IT systems.
 
Office of the Comptroller of the Currency
Watchdog Says OCC Didn’t Endorse Ethics Rule for 15 Years
On Thursday, the US Office of Special Counsel—which deals with whistleblower reports against government agencies—issued a report claiming that the Office of the Comptroller of the Currency (OCC) did not enforce an employee conflict of interest rule for nearly 15 years. Under Office of Government Ethics rules, OCC employees are prohibited from engaging in policymaking affecting industries in which employees have a financial stake. OSC found, however, that OCC did not enforce these rules between 1996 and 2011, an oversight which the report calls a “serious ethical lapse.” OCC fixed the issue after it was flagged by an employee in 2011.
 
Securities and Exchange Commission
Exchanges Sue SEC Over Transaction Fee Pilot Program
On Thursday, the New York Stock Exchange, Nasdaq, and Cboe Global Markets filed separate lawsuits in federal district court challenging the SEC’s transaction fee pilot program regulation. All of the filings criticize the pilot program, with NYSE calling it “arbitrary and capricious and otherwise not in accordance with the law.” Adopted in December, the SEC’s fee pilot would examine replacing exchanges’ “maker-taker” payment model—whereby exchanges offer fees and rebates to encourage trading—with various fee caps or banning feeds all together—a move that would cut into exchange revenues.
 
Government Accountability Office
GAO Urges Congressional Action on Data Privacy
On Wednesday, GAO released a report urging Congress to consider comprehensive legislation dealing with internet data privacy. The report recommends that legislation address: (1) which agency has jurisdiction over data privacy; (2) what authorities that agency should have; and (3) the challenge of protecting privacy while fostering innovation. The same day, the US Chamber of Commerce released draft privacy legislation incorporating the feedback of over 200 member companies based around principals of transparency, opt-out consent, and FTC rulemaking.   The Senate Commerce Committee is scheduled to hold a hearing about this issue on February 26^th. 
 
Office of Financial Research
OFR Adopts Repo Data Collection Final Rule
On Tuesday, OFR adopted a final rule establishing a repurchase agreement (repo) data collection and requiring central counterparties with average daily total open repo commitments of at least $50 billion to submit information to the collection. The collection will aim to identify and monitor potential risks to U.S. financial stability and support the calculation of certain non-LIBOR reference rates. In a press release accompanying the final rule, OFR said that all substantive comments on its July proposed rule supported the establishment of a repo data collection.
 
IN THE STATES
Conference of State Bank Regulators

State Banking Regulators Endorse Fintech Recommendations
On Thursday, the Conference of State Bank Regulators released the findings of its Fintech Industry Advisory Panel, with regulators agreeing to implement 14 recommendations from the panel. Among the recommendations that CSBS embraced include: (1) developing a 50-state model law to license money services; (2) creating a standardized call report for consumer finance businesses; (3) building an online database of state licensing and fintech guidance, while encouraging a common standard; (4) developing a State Examination System to simplify examinations of nonbanks operating in more than one state; and (5) expanding the use of the Nationwide Multistate Licensing System among all state regulators and to all nonbank industries supervised at the state level.

 

 Next Week’s Schedule
 
The House and Senate are In Recess Next Week.