Financial Services Report
July 20, 2015
Our Take
Tuesday marks the 5th Anniversary of Dodd-Frank and it seems like little has changed, as Republicans continue to attack the law while Democrats defend it. With numerous event this week to commemorate the “wood anniversary” of financial reform it seemed appropriate to once again go into the time machine to dig up what we were writing about Dodd-Frank five year ago. The following is from the July 26, 2010 newsletter, and like so many analyses of the law’s impact, depending on which side of the aisle you sit on you may think it prescient or comical.
POST-DODD-FRANK: THE AFTERMATH
Now that the Dodd-Frank Wall Street Reform and Consumer Protection Act is the law of the land, companies from Wall Street to Main Street are attempting to comprehend the impact to their business. Interestingly, one of the unintended consequences of this legislation is that many small banks are expected to consolidate in order to survive the effects of financial regulatory reform. Although the new legislation is on the whole less burdensome on community banks than their larger counterparts, the new rules and tighter scrutiny are still expected to impose a substantial onus on small banks. Increased compliance costs for areas such as mortgage disclosures, combined with stricter capital and lending standards, is expected to have an almost immediate impact on bank profits. One industry expert called it “the end of community banking as we know it,” as these small banks are unable or unwilling to bear the brunt of added costs on their own. Another expert agreed with this assessment, but stated that it depends on how Dodd-Frank is implemented and how bank examiners and the consumer czar carry out their responsibilities.
Looking Ahead
Near Term
- Ton of events commemorating the 5th Anniversary of Dodd-Frank
- House Financial Services Committee has hearings on Federal Reserve Reform; Too Big to Fail and the Iran Deal’s impact on terrorism Financing.
- Senate Banking has hearings scheduled on FSOC and bank SIFIs, while the HELP Subcommittee on Employment and Workplace Safety will hold a hearing on the DOL’s Fiduciary Rule.
Further Out
- House Financial Services Committee may hold a mark-up before House leaves for the August Recess.
- Transportation Authorization expires on July 31st.
- At 1pm on August 5th, the will be hosting a forum on the “Know Before You Owe Initiative” on eClosing. The forum will feature remarks from Director Richard Cordray, and include a panel discussion with consumer groups, industry representatives, and members of the public.
- August 10-12 (and possibly through the 13th) the Department of Labor will hold a public forum to hear from various stakeholders about its Fiduciary Rule
- Federal Fiscal Year ends September 30th – Continuing Resolution seems ever more likely.
The Past Week
Legislative Branch
House
House Passes a Slew of Bills – Ranking Member Waters Forces Two to be Pulled
On Tuesday the House of Representatives passed a series of financial services related bills (see last week’s update for the full list) under the procedural method known as “Suspension of the Rules.” However two of the bills scheduled to be voted on were pulled from the calendar at the last moment, apparently in response to objections from Financial Services Committee Ranking Member Maxine Waters. The two bills were: H.R. 1675, which would raise the amount of stock options a company could give to its employees without making additional investor disclosures, and H.R. 2354 would require the Securities and Exchange Commission to revisit all its major rules to make sure they aren't outdated or ineffective. It is possible that House Leadership could bring the bills back to the floor under a rule.
House Passes Short Term Transportation Bill
On Wednesday the House passed, by a vote of 312-119 a short-term extension of the Transportation funding bill, potentially clearing the last remaining statutory deadline until the end of the fiscal year. The bill, which provides funding until December 18th still needs to pass the Senate, and it appears that Senators are looking at moving a very different bill – one that includes an extension of the Export-Import Bank and that also uses different pay-fors. This will set up a potential nail-biter of a process as both Houses need to resolve their differences before the August recess.
Oversight and Investigations Holds Monetary Hearing
On Tuesday, one day before Fed Chair Janet Yellen would testify before the full House Financial Services Committee, the Oversight and Investigations subcommittee held its own hearing to preview some of the messages Republicans intended to ask the Chair. During the hearing panelists on the Federal Reserve’s actions since the 2008 economic recession, particularly in relation to transparency, oversight, and its regulatory capacity. Specifically, Republicans questioned the Fed’s relationship with the international Financial Stability Board (FSB), the Treasury Department’s Financial Stability Oversight Council (FSOC), and its alleged lack of transparency in deciding monetary policy, such as when to raise interest rates.
Other topics of discussion included the publication of the Fed’s strategy in reaching its goals in monetary policy—thereby increasing predictability—and the viability of stress tests administered by the Fed on SIFIs. In general terms, both Republicans and panelists voiced concerns over the regulatory capacity of the Fed and a drift from its traditional mandate of implementing monetary policy, particularly if it’s done with little Congressional oversight.
Yellen Testifies for Humphrey-Hawkins Report
On Wednesday, Fed Chair Janet Yellen was the sole witness for a hearing entitled, “Monetary Policy and the State of the Economy.” Chair Yellen spent a considerable amount of time answering questions related to when the Fed will raise its target benchmark rate as well as what factors the Fed takes into account when making the decision. While Chairman Hensarling and Oversight and Investigations Subcommittee Chairman Duffy questioned the Chair about the Fed’s refusal to comply with a Congressional subpoena, the majority of the members of the Committee focused their questions on the Fed’s monetary policy. Other topics discussed included how the FSOC intends to dedesignate SIFIs, where the Fed stood on implementing the so-called “Collins Fix”, and how the Fed was negotiating capital standards for insurance companies. In addition many of the Democrats on the panel used their time to highlight the economic disparity among communities of color and to ask the Fed what tools they had to improve economic conditions.
Cummings Introduces Bill to Close Revolving Door for Financial Services Regulators
On Thursday, Rep. Elijah Cummings and Senator Tammy Baldwin (R-WI) introduced the “Financial Services Conflict of Interest Act,” a clear response to recent reports that SEC Chair White’s new Chief of Staff received a large bonus from his private sector employer before moving to the SEC. The bill would prohibit any private sector employees from receiving a bonus before moving to federal government employment. It also lengthens the “cooling off” period before a former federal employee could lobby his or her former office as well as expands the code of ethics for financial services regulators.
Bipartisan Bill to Expand Credit Worthiness Introduced
On Tuesday, Rep. Keith Ellison (D-MN) and Mike Fitzpatrick (R-PA) introduced H.R. 3035, the Credit Access and Inclusion Act. The legislation would expand the types of entities that can report to credit bureaus, including utility and telecom companies, in order to provide more data points for creditors to use in crafting more accurate credit scores. According to the Congressmen, if the legislation were enacted nearly 100 million Americans would be able to either establish a credit score, or raise their existing one.
Senate
Cordray Appears Before Banking to Discuss Semi-Annual Report
On Wednesday the Senate Banking Committee heard testimony from the Director of the Consumer Financial Protection Bureau (CFPB), Richard Cordray, in his semi-annual report to Congress. In his opening statement Cordray touted the achievements of the CFPB and highlighted recent action in the areas small dollar loans, anti-discriminatory measures directed against auto lenders, and of rural mortgage lending. However, in response to questions from Committee members, Cordray appeared to offer flexibility in determining regulations for mortgages under $100,000 and the designation of certain areas as rural.
Much of the hearing focused on what the CFPB was doing to protect the data it was collecting, not surprising in light of the recent OPM breach. While Cordray emphasized that the vast amount of data being collected by the CFPB does not include personal information, some Senators seemed dissatisfied and asked for follow-up consultations. Cordray also confirmed that the CFPB will initiate the rulemaking process on the issue, he avoided setting a timetable, instead saying that the CFPB will soon convene a “small business review panel in due course.” Other topics that came up during hearing included the CFPB’s regulation of auto lenders as an end-around the fact the Bureau is prohibited from regulating auto dealers; consumer protections for credit vs. debit cards; and small dollar lending.
Yellen Testifies Before Senate Banking
On Thursday, the day after appearing before the House Financial Services Committee, Fed Chair Yellen took her seat in front of the Senate Banking Committee and addressed many of the same issues. During the hearing some Republican members questioned Chair Yellen on the Fed’s participation in the FSB and its influence on domestic regulatory decisions. For example, in response to a question from Sen. Mike Rounds (R-SD), Yellen said that the US will make its own capital standards and contribute significantly to the international standards debate, ensuring that the standards “work for US firms.” Questions of SIFI designation and de-designation were also raised, with Chair Yellen agreeing that firms should be able to “de-certify” but that any so-called “off-ramp” can’t be a set of instructions that would lead to the FSOC “micromanaging” institutions, but rather a set of actions that would “significantly change their systemic footprint.” Finally, Chair Yellen offered some flexibility on the current $50 billion asset threshold for SIFI designation noting that she would be open to a “modest increase” to the threshold, but maintained that the increase must be matched with a discretionary authority for the Fed to stress test institutions it deems systemically important that would fall short of a higher asset threshold.
Brown Introduces Bill on “Zombie Debts”
On July 15th, Senator Sherrod Brown, Ranking Member of the Senate Banking Committee introduced a bill that would require banks and other creditors to notify the three credit reporting agencies when one of their consumer’s debts have been discharged via bankruptcy. According to the press release, the bill amends the Bankruptcy Code to “require creditors to ensure that a debt discharged in bankruptcy shows a zero balance on the consumer's credit report in an accurate and timely manner,” and also creates a private right of action for debtors who can prove that the creditor willfully violated this requirement.
Brown Warren and Waters Urge Administration to Reconsider FHA Proposal
On Tuesday, Senators Sherrod Brown and Elizabeth Warren along with Representative Waters sent a letter to the Directors of HUD and OMB urging them to reconsider a recent Administration proposal that Brown, Warren and Waters argue would allow lenders that have engaged in illegal activity to keep accessing taxpayer-backed mortgage insurance. Among other things, the proposed FHA change, which technically arises out of the Paperwork Reduction Act, would drop a requirement that FHA approved lenders need to certify that they are not, or have not recently been, subject to certain charges or penalties
Warren Requests Info on Results of Swaps Push Out Repeal
On Thursday, Senator Elizabeth Warren (D-MA) and Rep. Elijah Cummings (D-MD) sent a letter to CFTC Commission Massad, FDIC Chair Gruenberg and Comptroller of the Currency Curry requesting information on the potential impact on banks and taxpayers of last year’s partial repeal of the Dodd-Frank swaps push-out provision. According to the letter, Warren and Cummings were writing to regulators after they failed to receive the information from a group of banks they wrote to earlier in the year.
Select Highlights from the Administration
Treasury
Report on “Treasury Flash Rally” Released
On Monday, Treasury, along with the SEC, CFTC, Fed and Fed Board of Governors released a staff report on the rapid rally of Treasury notes on October 15th. Although report avoided identifying any overwhelming single cause, it mentioned flash traders, regulations and general market forces as possible culprits.
Request for Information on Online Market Lending Released
On Thursday, Treasury put on an RFI seeking more information about the burgeoning online market for credit for small businesses. According to the press release that accompanied the RFI, it appears that Treasury is interested in learning more about the business models and product offerings of online marketplace lenders; the potential for online marketplace lending to expand access to credit to historically underserved market segments; and how the financial regulatory framework should evolve to support the safe growth of this industry. They also made it clear that the RFI is the first step in this process, which will also include roundtables later this summer.
Federal Reserve Board (The Fed)
Fed to Delay Some Stress Test Requirements
On Friday, the Fed announced that that is was proposing changes to its capital planning and stress testing requirements, including a one-year for large banks to use the supplementary leverage ratio. According to press reports, this proposal would only apply to a handful of requirements that have not yet been integrated into the annual stress tests conducted by the Fed. For example, under the proposal banks that are subject to the supplementary leverage ratio would get an extra year before they had to incorporate that ratio into their stress testing. According the Fed, the one-year delay would allow banks to have “adequate time to develop the required systems necessary to project the supplementary leverage ratio.” Comments on the proposal are due September 24th.
CFPB
Deputy Director to Resign
On Thursday, the American Banker reported that CFPB Deputy Director Steve Antonakes had announced his resignation, apparently effective immediately. Antonakes had been with the CFPB since 2010 and had spent the last two years as Deputy Director. In a separate memo to staff, Director Cordray announced that information about Antonakes’ successor would be disclosed in the coming weeks.
Bureau to Release Monthly “Snap-shots” of Consumer Complaints
On Thursday, the CFPB announced that it had released the first, in what it intends to be a regular monthly series, of highlights of the consumer complaints. Each month, the report will spotlight a particular product and geographic location, with the initial report focusing on debt collection complaints as well as complaints from consumers in Milwaukee, Wisconsin.
Department of Labor
Labor Official Hints at Changes in Fiduciary Rule
On Thursday, while participating at a meeting of the SEC’s Investor Advisory Committee, Timothy Hauser, Deputy Secretary for the Department of Labor hinted that the Department could be open to making changes to the proposed rule before it finalized. Comments for the proposed rule are due on Tuesday July 21 and there will be a public hearing in early August.
Next Week’s Schedule
On Tuesday, July 21st at 11:00 am in Room 215 Dirksen the Senate Finance Committee will hold a mark-up of an original bill to extend certain expired tax provisions (the extenders).
On Tuesday, July 21st at 4:30pm the HELP Subcommittee on Employment and Workplace Safety will hold a hearing entitled, “Restricting Advice and Education: DOL’s Unworkable Investment Proposal for American Families and Retirees.”
On Wednesday, July 22nd at 10:00am in 2128 Rayburn the Monetary Policy and Trade Subcommittee will hold a hearing entitled, “ Examining Federal Reserve Reform Proposals.”
On Wednesday, July 22nd at 2:00pm in 2128 Rayburn, the Task Force to Investigate Terrorism Financing will hold a hearing entitled, “The Iran Nuclear Deal and Its Impact on Terrorism Financing.”
On Wednesday, July 22nd at 10:00am in Room 538 Dirksen, the Banking Subcommittee on Securities, Insurance and Investment will hold a hearing entitled, “Oversight of the Financial Stability Oversight Council Designation Process.”
On Wednesday, July 22nd at 10:00 am in in 428A Russell, the Small Business Committee will hold a hearing entitled, ““Targeted Tax Reform: Solutions to Relieve the Tax Compliance Burden(s) for America’s Small Businesses."
On Wednesday, July 22nd at 10:00 am in 2360 Rayburn the Small Business Committee will hold a hearing entitled, “"How Tax Compliance Obligations Hinder Small Business Growth”.
On Thursday, July 23rd at 9:30am in 538 Dirksen the Banking Committee will hold a hearing entitled, “Measuring the Systemic Importance of U.S. Bank Holding Companies.”
On Thursday, July 23rd at 10:00am in 2128 Rayburn the Financial Services Committee will hold a hearing entitled, “Ending Too Big to Fail: What is the Proper Role of Capital and Liquidty?”
On Friday, July 24th at 9:15am in 2128 Rayburn, the Financial Institutions Subcommittee will hold a hearing entitled, “National Credit Union Administration Operations and Budget.”