Financial Services Report

June 13, 2017

Our Take

Questions continue to swirl around how Congress will be able to address the ever-advancing deadline to raise the debt ceiling.  Will they pass a clean extension as Secretary Mnuchin as indicated is his preference?  Or, will Freedom Caucus members and OMB Director Mulvaney be able to successfully extract concessions in the negotiations to prevent the full faith and credit of the United States government from being questioned?   And, speaking of concessions, what will the Democrats ask for in exchange for their vote – revenue neutral tax reform, dropping efforts to repeal Obamacare, or something else?   With all of this uncertainty yet again surrounding the passage of legislation to extend the government’s borrowing authority, perhaps the time is ripe for a grand bargain on the issue.   Democrats, whose history under the Gephardt Rule shows they never wanted to make this a public issue, and who are tired of having to supply the votes and the campaign fodder for Republicans, have almost no incentive to bail out the GOP majority.  Republicans, in control of all three branches of Government for the first time during one of these crises, know that they can’t escape the blame for any repercussions to the Market for failing to raise the debt limit.  While few are publicly talking about it, the stars may be aligning so that this next extension is the final time Congress deals with this issue.  

Looking Ahead

Near Term

  • The House is expected to take up a series of bills next week related to veterans affairs and health care, including bills to require social security numbers be provided as a condition to receiving a health insurance tax credit (H.R. 2581) and another bill that would modify the legal procedures governing health care lawsuits where coverage was provided or subsidized by the federal government (H.R. 1215).
  • The Financial Services Committee is set to mark-up a handful of bills that will be the foundation of the flood insurance reform Congress needs to pass before the end of the fiscal year.
  • Secretary Mnuchin is scheduled to be up twice next week, once on Monday and once on Wednesday to testify before a pair of House Appropriations Subcommittees. 
  • The Senate is expected to move a series of nominations as well as possibly take up an Iran sanctions bill that Senators may seek to add on Russian sanctions language to.
  • The Senate Banking Committee continues down its own path for reg relief with another hearing.
  • The Federal Reserve will hold its two-day meeting of the open markets committee, which is widely anticipated to conclude with Chair Yellen announcing

 Further Out

  • Debt Ceiling extraordinary measures end TBD (September?)
  • FAA reauthorization expires September 30th, 2017
  • CHIP authorization expires September 30th, 2017
  • National Flood Insurance Program expires September 30th, 2017
  • PDUFA/MDUFA and Medicare / Other Health Extenders Expires September 30th, 2017
  • Section 702 of FISA – Internet Surveillance authority expires December 31st, 2017

The Past Week

Legislative Branch
House Passes Financial CHOICE Act, Senate Action Unlikely
The House passed Republican-backed legislation, known as the Financial CHOICE Act, to re-write the Dodd-Frank financial reform law on a vote of 233-186.  The White House supports the measure, but called it only “an important step in moving financial reform legislation through Congress” in its Statement of Administration Policy, alluding to the expected alternative version to be produced by the Senate. One Republican, Rep. Walter Jones (R-NC), joined all voting Democrats in opposing the measure. While House Republicans demonstrated unity on the measure, it is considered “dead on arrival” in the Senate, because many of the messaging provisions in the bill are too controversial to generate sixty votes.   However, elements of the CHOICE Act may survive as the Senate considers a narrower approach towards passing a regulatory relief bill (see more below).
House E&C Holds Hearing on Fintech Future
On Thursday, the House Energy and Commerce Subcommittee on Digital Commerce and Consumer Protection held their latest hearing as a part of its “Disrupter Series” entitled “Improving Consumer’s Financial Options with Fintech.” The hearing focused largely on consumer financial services.  The panel – consisting of various fintech industry professionals – offered their perspectives on the current issues within the realms of current fintech advancements, the current regulatory framework, and the consumer experience as these technologies continue to expand their footprints. Although outside of the subcommittee’s jurisdiction, the hearing also included commentary on the possibility of a special purpose banking charter for fintech companies, with members from both sides asking for information on the process.
Roe, Roskam Introduce Bill to Kill Fiduciary Rule
Last week, Reps. Phil Roe (R-TN) and Peter Roskam (R-IL) introduced an updated version of their bill to kill the Labor Department’s fiduciary rule and replace it with an alternative best interest standard. The rule went into effect on Friday after Labor Secretary Alexander Acosta said that there was no legal basis for additional delays to its implementation. The bill’s alternative standard would expand the exceptions made for those selling retirement products or educating about retirement, among a litany of changes designed to make the standard more workable for industry.
Acosta Discusses DOL Budget, Fiduciary Rule Review, H2B in Approps Subcommittee Hearing
On Wednesday, the House Appropriations Labor-Health and Human Services (Labor-H) Subcommittee held a hearing on the Department of Labor’s (DOL) budget proposal with Secretary of Labor Alexander Acosta. The hearing also provided an opportunity for lawmakers from both parties to discuss their priorities, with Republicans emphasizing the Department’s review of the fiduciary rule finalized last year by the Obama Administration. Other issues of concern raised by lawmakers included the Department’s approach to the H2B visa program, use of arbitration clauses in federal contractor contracts, and the retention of Obama-era protections in federal contractor employment practices.
House Freedom Caucus Talks Tax Reform in Heritage Event
On Friday, four members of the conservative House Freedom Caucus – namely Chairman Mark Meadows (R-NC), Rep. Jim Jordan (R-OH), Rep. Dave Brat (R-VA) and Rep. Warren Davidson (R-OH) – discussed the importance of comprehensive tax reform during an event at The Heritage Foundation. Chairman Meadows urged Congress to move on from the border-adjustment tax (BAT) – a tax policy that penalizes companies importing products from abroad and benefiting those that keep production in the United States. The Freedom Caucus has not taken a formal position on the BAT, but its membership’s divisions on the proposal were on full display at the event. Rep. Jordan doubled down on his criticism of a revenue neutral tax proposal, noting that “revenue neutral's a fancy way of saying the tax burden stays the same.” While GOP leadership has been pushing for a revenue neutral plan, Rep. Jordan stressed the need to focus on a deficit neutral plan instead, placing him at odds with Speaker Paul Ryan (R-WI) and House Ways and Means Chairman Kevin Brady (R-TX).
Senate Starts Reg Reform Effort with Community Banking Hearing
On Thursday, the Senate Banking Committee held a hearing entitled, “Fostering Economic Growth: The Role of Financial Institutions in Local Communities,” focused on regulatory reform for community banking institutions. Concurrently, released the results of its public request for proposals to boost economic growth, which may be included in the Committee’s nascent legislative effort on regulatory reform. The 130 submissions, which can be found here, came from a range of trade groups, think tanks, and businesses.   The hearing took place on the same day that the House passed its sweeping rewrite of the Dodd-Frank financial reform law, and could be viewed as a first step towards a reg relief bill that is expected to be far narrower in scope.  Chairman Crapo pointed to relief from Basel II capital requirements and exemptions from Home Mortgage Disclosure Act reporting as two areas of possible bipartisan compromise. Meanwhile, moderate Democrats – including Sens. Heidi Heitkamp (D-ND), Jon Tester (D-MT), and Joe Donnelly (D-IN) – offered mild support for regulatory relief from the Consumer Financial Protection Bureau (CFPB) and seemed open to compromise.
Isakson Introduces Bill to Kill DOL Fiduciary Rule
On Thursday, Sen. Johnny Isakson (R-GA) introduced legislation to kill the Department of Labor’s (DOL) existing fiduciary rule and use a different best interest standard. The move comes in the same week Republican lawmakers in the House introduced their own legislation to block the rule, which went into effect on Friday. The bill’s alternative standard would expand the exceptions made for those selling retirement products or educating about retirement, among a litany of changes designed to make the standard more workable for industry. The bill has five other Republican cosponsors, namely Sens. Lamar Alexander (R-TN), Mike Enzi (R-WY), Pat Roberts (R-KS), Tim Scott (R-SC), and Todd Young (R-IN).
Select Highlights from the Administration
The White House
Trump Taps Mnuchin Associate Otting for OCC Comptroller
On Monday, President Trump announced he will be nominating Joseph Otting to be the next Comptroller of the Currency following the expiration of Thomas Curry’s term in that office in April. Otting was CEO of OneWest Bank, an institution that has attracted some opposition over its foreclosure practices during the economic recession and also employed Treasury Secretary Steven Mnuchin. Both of those facts are likely to lead Senate Democrats to attack Trump’s pick for one of the top bank regulators in his eventual confirmation hearing.
NYT Report: Trump to Name Quarles, Goodfriend to Fed Board
On Monday, The New York Times reported that President Trump has selected Randal Quarles and Marvin Goodfriend to fill two of the three vacant seats on the Federal Board of Governors. Quarles was a Treasury Department official in the George W. Bush administration, while Goodfriend is a former Fed official and currently a professor at Carnegies Mellon University. Both potential nominees are expected to express conservative viewpoints on monetary policy as they have spoken against the maintenance of ultra-low interest rates since the 2008 financial crisis. Neither nomination has been formally announced by the White House.  
Consumer Financial Protection Bureau (CFPB)
CFPB Offers Further Insight into Deferred Interest Products, Small Business Lending RFI
On Friday, the Consumer Financial Protection Bureau (CFPB) held the summer meeting of its Consumer Advisory Board (CAB).  Among the topics covered was deferred interest products, as well as a request for information (RFI) on Section 1071 of the Dodd-Frank Act pertaining to small business lending. The meeting featured remarks from Director Richard Cordray, who noted that the Bureau sent letters to top retail credit card companies encouraging them to consider adopting more transparent promotional card practices. Director Cordray also touched on the ongoing study on the availability of credit to small businesses, noting that the Bureau is seeking feedback on how to improve access to credit in a “careful, thoughtful, and cost-effective way.”   The Bureau noted that while the purpose of the RFI is to gather the insight and data needed to formulate a final rule on small business lending, it’s too early to tell when a rule may be issued, and went on to note that it was extended the comment period so that it will close in mid-September. 
CFPB Fines Fay Servicing $1.15m Over Mortgage Servicing Practices
The CFPB announced its latest enforcement action last week, fining mortgage servicer Fay Servicing $1.15 million for failing to provide borrowers with adequate protections from foreclosure. The Bureau alleged that Fay would intentionally keep customers uninformed about the process for filing for foreclosure relief in order to speed the foreclosure process.
Federal Reserve
Fed Gives Three Banks More Time to Comply on Volcker Rule
On Thursday, the Federal Reserve announced it would provide three banks – SVB Financial Group, Deutsche Bank, and UBS – an additional five years to bring their illiquid funds into compliance with Dodd-Frank’s Volcker Rule. The rule is designed to prohibit banking institutions from engaging in proprietary trading and having direct partnerships with hedge funds.
Labor Department
Labor Department Publishes RFI on Fiduciary Rule
As announced by Secretary Acosta in his hearing on Wednesday, the Labor Department sent a request for information (RFI) on the Department’s fiduciary rule to the Office of Management and Budget (OMB) last week. In the hearing on Wednesday, Acosta said the RFI was necessary to provide “data” that would allow the DOL to complete its review of the rule as mandated by an executive order from President Trump.