Financial Services Report

Our Take

This week, during his Committee’s semi-annual hearing of the CFPB, House Financial Services Chairman Jeb Hensarling shared his belief that Congress had abdicated too much of its Article I authority in delegating powers to the Administration.  While he specifically was referencing CFPB Director Cordray, who he referred to as “a dictator, and not a benevolent one,” his comment about Congress giving up too much of its power was very similar to those of Congressional Democrats circa 2004-2006.  Though those were in reference to then President George W. Bush and what they viewed as the profligate usurpation of congressional legislative prerogative,– or in that case — the ability to declare war.  While neither side of the aisle is likely to agree that the either was correct in their respective frustrations with the acquiescence of Congressional authority to the Administrative branch, it isn’t surprising that similar sentiment exists.  And it many ways it is this disconnect that is a driving force in the gridlock that has ensnared Washington.   Ironically, it is a Trump presidency that may be the one thing that can truly unclog the resolute partisanship in Congress, as the institution will need to put aside petty difference to face the challenge of President Trump in order to reassert itself as the primary governing force in America.  If so, then that may just be the one way a Trump Presidency makes America great again. 

Looking Ahead

Near Term

• The Senate is out for a two week recess.
• The House is expected to take up H.R. 2745, a bill that would limit the FTC’s authority to challenge mergers and acquisitions through administrative litigation.  The House will also consider a series of less controversial measures on the suspension calendar.
• Treasury Secretary Jack Lew will come before the House Financial Services to talk about the state of the international finance though he is likely to field questions on more domestic matters, like the FSOC’s pending efforts on asset managers and what the Agency intends to do about the rise of the so-called marketplace lenders.

Further Out

• The Senate Banking Committee has a full schedule of hearings and Executive Sessions scheduled for when it returns from recess including, an April 5th hearing on “Assessing the Effects of Consumer Finance Regulations.” 538 Dirksen and then hearing from Director Cordray on April 7^th.   The Committee has scheduled an executive session prior to Cordray’s testimony to consider a series of nominations.    Later in the month there will be a joint subcommittee hearing on Fixed Income markets.

 
The Past Week

Legislative Branch

House
Cordray Before House Financial Services
On Wednesday, CFPB Director Richard Cordray appeared before the House Financial Services Committee as part of his semi-annual testimony before Congress.  During the hearing Direct Cordray received questions about a series of CFPB initiatives including: enforcement actions against indirect automotive finance lenders; payday and small dollar loans; arbitration; marketplace lending; mortgage lending and whether small banks and credit unions should be exempted from CFPB rules.   As has been the case historically, Republicans attacked the CFPB while Democrats generally defended the Bureau. 
 
Perez On the Hill
This past week was an exceptionally busy one for Department Labor Secretary, and rumored Vice Presidential nominee, Tom Perez as he testified before three different Congressional committees.  First on Tuesday, he was before the House Appropriations Labor, Health and Human Services Subcommittee, then before the full House Education and Workforce Committee before filling out his Thursday morning before the Senate Appropriations Labor, Health and Human Services Subcommittee.  At all three hearings the Secretary discussed a variety of issues including the forthcoming federal overtime rule, new worker safety standards and the advisor conflict of interest (a/k/a “fiduciary") rule. At no time during any of these three appearances did he offer any indication of a specific release date for the fiduciary rule except to say it could be expected in the “very near future.” 
 
Lew Testifies Before Appropriations Subcommittee
On March 16, the House Appropriations Committee's Subcommittee on Financial Services and General Government held a hearing to discuss the Fiscal Year 2017 (FY2017) budget request for the Department of the Treasury.  During the hearing, Treasury Secretary Jack Lew talked about a variety of topics including the FSOC Designation Process and the Administration’s plan for resolving the Puerto Rico fiscal crisis.  During the hearing Ranking Member Serrano noted and commended Treasury’s FY17 request included substantially more money for Community Development Financial Institutions (CDFI) Fund, while Rep. Herrera Beutler (R-WA) questioned what Treasury was doing to resolve the disparate treatment for financial services companies in the data localization provisions of the TPP. 
 
 
HFSC Subcommittee hears about FDIC and Refund Anticipation Loans
On Wednesday, the House Oversight and Investigations Subcommittee heard from the acting inspector general of the Federal Deposit Insurance Corporation (FDIC) who shared his report that examined how FDIC personnel had encouraged certain banks to cease offering refund anticipation loans (RALs).  According to the report, the basis of the decision to cause the banks to exit RALs “was not fully transparent because the FDIC chose not to issue formal guidance on RALs, applying more generic guidance applicable to broader areas of supervisory concern.”  The review of FDIC practices was part of a larger study conducted in response to the FDIC’s role in Operation Choke Point.
 
Hensarling Hints at Dodd-Frank Repeal Law
While speaking to the American Bankers Association, Financial Services Chairman indicated that he was working on, and would soon release a bill to “rip out [Dodd-Frank] by its roots”.  While he didn’t offer concrete specifics, it is expected that the bill would contain incentives for banks to hold “fotress capital” as well as many of the modifications to the Federal Reserve contained in H.R. 3189, the Fed Oversight Reform and Modernization Act.  That bill passed the House last year but appears unlikely to get to the President’s desk anytime soon. 
 
McHenry Outlines FinTech Agenda
Speaking at a FIN Coalition event on Thursday, Representative Patrick McHenry (R-NC) announced that the he and Majority Leader Kevin McCarthy were working on a “Innovation Initiative” that would include provisions related to the burgeoning FinTech industry.  While he refrained from offering specifics, reports speculate that this legislation could include a new national regulatory regime for “marketplace” lenders as well as new proposals to ease crowdfunding.  In addition, it appeared as if McHenry was planning to take aim at disparate impact, as he noted that he feared that the marketplace lending industry would be the next target for the CFPB’s use of the theory to police racial discrimination in lending. 
 
Senate
Banking Committee Holds Hearing on SEC Nominations
On Tuesday the Senate Banking Committee held a hearing to vet three nominees for positions in the Administration:  Matt Jeppson to be Director of the US Mint, and Lisa Fairfax and Hester Pierce to serve as Commissioners at the SEC.  As expected, Mr. Jeppson received scant attention as Senators focused primarily on the two SEC nominees with both sides asking hard questions – though primarily focusing on the opposite party’s nominee.  Despite the clear concerns that each side had for the other’s nominee, the pairing of the two means that both will ultimately receive confirmation.  In terms of other pending nominations, Chairman Shelby made it clear in his opening statement that he did not intend to consider nominees for vacancies on the Federal Reserve's Board of Governors until the White House nominates a vice chairman for supervision of financial institutions. 
 
Democrats Press CFTC to Complete Position Limits Rule
On Friday, Sherrod Brown (D-OH), the top Democrat on the Senate Banking Committee, along with three of his Democratic colleagues sent a letter to CFTC Chairman Massad urging him to complete the positions limit rule “immediately.”  In 2012, a federal court rejected the agency’s first set of rules on position limits.  The CFTC proposed new rules in 2013. 
 
Legislation Introduced to Stop “Activits Hedge Funds”
On Thursday, Senators Tammy Baldwin (D-WI) and Jeff Merkley (D-OR) introduced the Brokaw Act, legislation to increase transparency and strengthen oversight of activist hedge funds.  The legislation would make reforms to Securities law, including the definition of 'person or group' in order to prevent so-called wolf packs from skirting the intent of the disclosure rules and would work to eliminate what many Democrats (and some Republicans) view as the most destructive elements of “quarterly capitalism.”
 
Top Democrats on Banking Committees Call for GAO Investigation into Financial Services Diversity
On Tuesday, Senator Sherrod Brown, along with House Financial Services Committee Ranking Member Maxine Waters, requested that the Government Accountability Office (GAO), the non-partisan audit arm of Congress, update its 2013 study on diversity in the financial services industry and agencies. That study had found that management-level representation of minorities and women in the financial services industry and among federal financial agencies had not changed substantially in the years following the financial crisis.
 
Select Highlights from the Administration

Federal Reserve Board (Fed)
FOMC Upgrades Economic Assessment While Lowering Outlook for Interest Rate Increases
On Wednesday, following two days of Federal Open Market Committee (FOMC) meetings, the Fed announced that it was upgrading its assessment of the US economic position when compared with January, though it also made note of global economic and financial developments that could continue to pose risks to our economy.  In addition, it now seems that the Fed is expected to raise rates at a slower pace than originally projected, with the federal-funds rate expected to creep up to 0.875% by the end of 2016.  This would mean two interest-rate increases this year, compared with four projected increases when officials last met in December, and implies the Fed is looking toward its next rate increase in June.
 
Federal Deposit Insurance Corporation (FDIC)
FDIC Finalizes New DIF Ratios
On Monday, in accordance with the requirements of Dodd-Frank, the FDIC approved a final rule to increase the Deposit Insurance Fund (DIF) to the statutorily required minimum level of 1.35 percent up from the current 1.15 percent. As approved, this rule will impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments.
 
Securities and Exchange Commission (SEC)
White Outlines Agenda for 2016 and Beyond
On Wednesday, while speaking at the Chamber of Commerce’s tenth annual Capital Markets Summit, SEC Chair Mary Jo White indicated that the SEC will continue to work on its remaining mandatory Dodd-Frank rulemakings, including those in Title VII, while also turning attention to some non-mandatory obligations.  White stressed that SEC would focus on three areas; disclosures, rules on asset managers, and finally optimizing equity markets.  In addition she indicated it was her personal belief that the SEC should work to establish a uniform fiduciary rule.   
 
SEC Needs More Time to Review IEX Application
On Friday, the SEC announced that it was extending the IEX group’s application to become a fully operational stock exchange and would be opening a 21 day comment period to hear more about the company’s application.  IEX was a key character in Michael Lewis’ book about High Frequency Trading, but their efforts to reign in high frequency traders is at the root of the SEC’s delay.  Critics of the company argue that the exchange’s “speed bump” designed to slow down high-speed traders will result in stale quotes that could make it hard for investors to know they are getting the best price, as well as potentially put the exchange in violation of SEC regulations. 
 
Office of the Comptroller of the Currency (OCC)
OCC Encourages Banks to Open More Branches
On Friday, while speaking at National Community Reinvestment Coalition event, Comptroller of the Currency Thomas J. Curry called on banks to open more branches in underserved communities, saying that online access can’t serve as a substitute for physical presence and that the lack of options results in consumers having to rely on payday lenders and check cashers for basic financial services.  Curry also said that the OCC is preparing to publish a white paper examining how banks’ use of innovative or flexible practices addresses the credit needs of low- or moderate-income individuals or areas, and that the report should be released “very soon.” 
 
Next Week’s Schedule

Tues. (3/22)

• Hearing: House Homeland Security Committee hearing on Cybersecurity – 10:00am – The House Homeland Security Committee will hold a hearing entitled, “The Role of Cyber Insurance in Risk Management.”  The hearing will take place in 311 Cannon.
• Hearing: House Appropriations Subcommittee on SEC Budget – 11:00 AM – The House Appropriations Subcommittee on Financial Services and General Government will hold a budget hearing on the Securities Exchange Commission featuring Chair Mary Jo White. Details here.
• Hearing: Ways and Means Tax Policy Subcommittee Hearing – 2;30pm – The House Ways and Means Tax Policy Subcommittee will hold a hearing on Member proposals relating to fundamental reform of the income tax system.  The Hearing will take place in 1100 Longowth sat 2:30pm.  Details here. 
• Hearing: House Financial Services on State of International Financial System – Mar. 22 at 10:00 AM – The House Financial Services Committee will hold a hearing on the state of the international financial system featuring Secretary of Treasury Jack Lew.    Details here.
• Hearing: House Financial Services Subcommittee on Housing – 2:00 PM – The House Financial Services Subcommittee on Housing and Insurance will hold a hearing entitled, “The Future of Housing in America: Government Regulations and the High Cost of Housing.”