Financial Services Report (7/1)

The House and Senate are in Recess for the July 4th holiday this week. When they return, the House is expected to take up the National Defense Authorization (NDAA) while the Senate will return to nominations. In addition, the House Financial Services Committee will hold a marathon mark-up, with as many as twenty-one bills on the docket that will start on Thursday and then continue the following Tuesday.

Last Week in the House

The Floor

 

After passing its second appropriations minibus on Tuesday, the House turned its attention to the standalone Financial Services and General Government Appropriations bill, which provides $24.55 billion in discretionary funding for the White House, the Treasury Department, and independent agencies including the Securities and Exchange Commission. The bill passed by a vote of 224 to 196, with five mostly moderate Democrats joining Republicans in opposition. Among other notable provisions, the bill would provide federal workers with a 3.1 percent raise.

 

Lawmakers also adopted roughly three dozen amendments to the underlying bill, including some that would: (1) prohibit SEC from implementing its Regulation Best Interest; (2) prohibit SEC from promulgating rules revising shareholder re-submission thresholds; (3) require the Treasury Department to print the $20 bill with Harriet Tubman's likeness; and (4) provide $1 million to support the Postal Service's offering of financial services. However, with a "gentleman's agreement" in the Senate to prevent riders in their appropriations bills, it is unclear how many of these policy statements will become law.

 

Hearings and Markups

 

Fintech Task Force (6/25): On Tuesday, the Financial Services Committee's Fintech Task Force convened its inaugural hearing. The Committee received testimony from officials representing federal and state financial regulators, each providing their perspective on the state of play for fintech policy, as well as offering solutions on what needs to be done to boost innovation and protect consumer interests. Lawmakers on both sides of the aisle agreed that there needs to be a “harmonious” approach to dealing with fintech regulations, stressing the need for stakeholder collaboration to achieve consistency within the regulatory framework. Key topics that were discussed at the hearing include the OCC’s special purpose charter, data privacy and security, open banking, and credit scores. 

 

Asset Manager Diversity (6/25): On Tuesday, the Financial Services Diversity and Inclusion Committee held a hearing discussing minority and women-owned (MWO) asset managers, who control only 1.1% of assets under industry management. Among other trends, members and witnesses attributed MWO underrepresentation to investor and consultant bias, as well as a lack of transparency and education in the investment industry. During the question and answer period, committee members from both parties expressed interest in policies to increase asset manager diversity – including diversifying the talent pool by encouraging females and minorities to explore STEM programs and introducing financial literature at early ages.

 

USMCA Labor Provisions (6/25): On Tuesday, the Ways and Means Subcommittee on Trade held a hearing examining Mexico’s labor reform and its role in the United States-Mexico-Canada Agreement (USMCA). During the hearing, the enforceability of USMCA’s labor standards continued to be a key concern of Committee Democrats, with Democrats present repeatedly voicing an interest in enhancing scrutiny of Mexico’s compliance with labor obligations. For their part, Committee Republicans continued to call on the House to swiftly pass the trade deal, which they argued offers substantially better labor protections than NAFTA. 

 

Democratic skepticism of USMCA’s labor provisions has consistently remained one of the top sticking points to the deal’s consideration and approval by Congress. Complying with labor commitments required under the agreement, the populist government of Mexican President Andres Manuel Lopez Obrador passed sweeping labor reforms this spring, prior to the Mexican Congress’s approval of USMCA earlier this month. 

 

Robocall Bill Markup (6/25): On Tuesday, the Energy and Commerce Communications Subcommittee held a markup (committee memo) where the subcommittee advanced the Stopping Bad Robocalls Act (text) bipartisan anti-robocall legislation that would: (1) instruct FCC to publish rules ensuring that robocalls only be made with consumers' consent, as well as rules preventing the "abuse" of provisions allowing companies such as financial services companies to make calls without consent; (2) require carriers to implement call authentication technology; (3) allow carriers to offer call blocking services at no additional charge; and (4) increase FCC enforcement authority against illegal calls. 

 

The Subcommittee agreed to advance the bill and four amendments by a voice vote. Additionally, Rep. Ana Eshoo (D-CA) withdrew a proposed amendment that would have eliminated the carveout of calls made in relation to federal debts from Telephone Consumers Protection Act protections. Rep. Eshoo indicated an interest in working with Committee Republicans to eliminate concerns around the amendment and reintroduce it during the full committee markup.

 

AI Task Force (6/26): On Wednesday, the Financial Services Committee’s Artificial Intelligence (AI) Task Force held its first hearing examining the use of AI in the financial services industry. During the hearing, members and witnesses broadly recognized the potential of AI to enable innovative underwriting models, improved supervision and compliance, and faster, more efficient decision-making. However, Members were also careful to scrutinize the potential unintended consequences of AI, most notably algorithmic bias. To this end, witnesses consistently stressed that the opacity of machine learning algorithms makes it difficult to identify unintended biases resulting from the interaction of thousands of seemingly innocuous variables. 

 

Ex-Im Pulled from HFSC Markup (6/26): On Wednesday, the Financial Services Committee held a markup where lawmakers approved by a voice vote a single piece of legislation requiring federally assisted housing to have carbon monoxide detectors. More notably however, Chairwoman Maxine Waters (D-CA) withdrew from the agenda the United States Export Finance Agency Act (HR 3407), her bipartisan compromise with Ranking Member Patrick McHenry (R-NC) which would reform, rename, and reauthorize the Export-Import Bank for seven years.

 

The withdrawal of Chairwoman Waters' Ex-Im bill was proceeded by pushback from Democrats of diverse ideological stripes—moderate Democrats questioned the bill's new disclosure requirements and restrictions on deals with Chinese state-owned enterprises (SOEs), while Committee progressives pushed for climate and environment requirements for Ex-Im-financed projects. Following the bill's withdrawal, Chairwoman Waters reiterated her desire to pass a long-term Ex-Im reauthorization, but the the bank faces a narrow road ahead of September 30. Ranking Member McHenry, for instance, indicated that HFSC Republicans would resist fundamental changes to the bill, particularly with regards Chinese SOE's.

 

Bills Introduced

 

Students and Young Consumers Empowerment Act (Bonamici and Porter): Reestablishes and expands the authorities of the CFPB Office for Students and Young Consumers, which was closed by former CFPB acting Director Mick Mulvaney.

 

Transform Student Debt to Home Equity Act (Kaptur): Creates a HUD and FHFA pilot program connecting creditworthy federal student debt holders with federally-held foreclosed properties and providing them with the opportunity to restructure their student debt into the opportunity to purchase foreclosed properties.

 

Rural Jobs Act (Sewell and Smith): Increases by $500 million the allocation for the New Markets Tax Credit—which provides a 39 percent tax credit for investments in designated high-poverty census tracts. Senate companion legislation was introduced by Sens. Mark Warner (D-VA), Roger Wicker (R-MS), Shelley Moore Capito (R-WV), and Ben Cardin (D-MD).

 

PTIN Rescindment (Estes and Sewell): Creates a process for the IRS to rescind Preparer Tax Identification Numbers (PTIN) in cases of negligence, fraud, or abuse, allowing the removal of bad actors from the tax system.

 

Protecting Homeowners from Disaster Act (Brownley): Restores the tax deduction for property and casualty losses that was eliminated under the Tax Cuts and Jobs Act.

 

Other Activity

 

Inter-Affiliate Transaction Requirement Letter: On Wednesday, 17 House Democrats including Reps. Josh Gottheimer (D-NJ) and Bill Foster (D-IL) sent a letter to Federal Reserve Chairman Jerome Powell, Federal Deposit Insurance Corporation Chairman Jelena McWilliams, and Comptroller of the Currency Joseph Otting, urging them to roll back initial margin requirements for inter-affiliate transactions in order to release a “large and increasing amount of unusable, locked-up collateral.” In the letter, the legislators request that the agencies provide regulatory parity by aligning the initial margin requirements for inter-affiliate transactions with those of the Commodity Futures Trading Commission (CFTC) and international regulators.'

 

Last Week in the Senate

 

The Floor



On Thursday, the Senate passed the 2020 National Defense Authorization Act (NDAA) (S. 1790) by a vote of 86-8. The vote came after Senators spent most of the week working through amendments to the bill, a process complicated by Senate Democrats' amendment that would restrict the use of military force against Iran, as well as a hold up by Sen. Rand Paul (R-KY). Of note to followers of the Banking Committee, the legislation includes the Fentanyl Sanctions Act, which would impose targeted sanctions on Chinese and other international manufacturers who knowingly provide synthetic opioids to traffickers.

 

Hearings and Markups

 

Fannie and Freddie (6/25): On Tuesday, the Banking Committee held a hearing examining if Fannie Mae and Freddie Mac should be designated as systemically important financial institutions. During the hearing, Committee Chairman Mike Crapo (R-ID) noted that the GSEs have larger balance sheets than any financial institution in the United States and have less capital and are far more leveraged than any current SIFI, despite their lack of formal designation. For his part, Ranking Member Sherrod Brown (D-OH) used the hearing to double down on his priorities for housing finance reform, including the preservation of the 30-year fixed rate mortgage and GSE affordable housing goals.

 

Hearing on Ex-Im Reauthorization (6/27): On Thursday, the Banking Committee held a hearing examining the reauthorization of the Export-Import Bank, which is currently set to lapse after September 30. In his opening statement, Chairman Mike Crapo (R-ID) expressed interest in improving the bank's meeting of its 20 percent small business lending mandate, as well as improving the competitiveness of US businesses against state-supported competitors. Ranking Member Sherrod Brown (D-OH) called for an Ex-Im reauthorization of more than seven years and criticized Senate conservatives who hobbled the bank's board of directors.

 

Bills Introduced

 

DASHBOARD Act (Warner and Hawley): Requires certain firms that collect consumer data to disclose what data are harvested and how they are monetized. Gives consumers the ability to delete all or some of the data collected on them.

 

Small Business Lending Fairness Act (Brown and Rubio): Bans confessions of judgement in business loans.

 

Corporate Transparency Act (Rubio, Wyden, and Whitehouse): Requires certain firms to disclose their owners to Treasury at the time of formation. Also requires such firms to file annual reports detailing ownership changes and current ownership.

 

Fair Housing Improvement Act (Kaine): Prohibits housing discrimination based on income source or veteran status.

 

Save Affordable Housing Act (Young and Wyden): Removes the ability of certain properties financed by the Low-Income Housing Tax Credit to convert to market-rate properties after 15 years instead of 30. This bill is companion legislation to a bill introduced in the House by Reps. Joe Neguse, Don Beyer, and Jackie Walorski.

 

Small Business Investment Improvement Act (Young and Risch): Establishes defined application processing timelines for Small Business Investment Company (SBIC) loans. Also requires FBI background checks for all SBIC loan applicants.

 

Other Activity

 

Paul Watkins Letter: On Tuesday, Sen. Elizabeth Warren (D-MA) and Reps. Ayanna Pressley (D-MA) and Katie Porter (D-CA) sent a letter to CFPB Director Kathleen Kraninger urging the CFPB to reconsider its continued employment of Assistant Director of the Office of Innovation Paul Watkins in light of his previous employment by the Alliance Defending Freedom, which has been designated a hate group by the Southern Poverty Law Center. In the letter, the legislators expressed concern that his previous commitment to a “homophobic hate group” could indicate that Watkins could use his role at the CFPB to “scrap crucial protections for the LGBTQ consumers.”

 

Student Loan Servicer Consolidation Letter: On Thursday, Sens. Elizabeth Warren (D-MA) and Cory Booker (D-NJ) and Rep. David Cicilline (D-RI) sent a letter to the he U.S. Department of Justice (DOJ) Antitrust Division and Federal Trade Commission (FTC) urging them to scrutinize the merger between two of the four largest student loan servicers, Nelnet Inc. and Great Lakes Educational Loan Services, which the DOJ reviewed and approved in 2018 despite concerns over potential effects the merger could have on market competition. The letter also notes a recent report from the Education Department's Office of the Inspector General, which found that the department's Office of Federal Student Aid failed to use its available resources to hold loan servicers accountable or to competitively incentivize quality service for borrowers.

 

Mandatory Arbitration Letter: On Friday, Sen. Elizabeth Warren (D-MA) and Rep. Jesús "Chuy" García (D-IL) sent a letter to JP Morgan Chase CEO Jamie Dimon expressing concern at Chase's decision to reintroduce forced arbitration clauses into its credit card contracts. The letter argues that the clauses, which Chase removed in 2010 as part of a legal settlement, “allows banks and other companies to get away with scamming large numbers of customers out of relatively small amounts of money.” 

 

Last Week in the Administration

 

Housing EO Targets Local Regulations

On Tuesday, President Trump signed an executive order establishing the White House Council on Eliminating Regulatory Barriers to Affordable Housing. Chaired by HUD Secretary Ben Carson, the council will include representatives of eight federal agencies and will be tasked with identifying costs and barriers that impede the development of affordable housing. Most notably, the Council is expected to work to identify and overcome barriers to affordable housing development at the municipal level, where the White House has argued burdensome and outdated regulations have impeded investment in the nation's housing stock.

 

Commenting on the action, Secretary Carson said: “Increasing the supply of housing by removing overly burdensome rules and regulations will reduce housing costs, boost economic growth, and provide more Americans with opportunities for economic mobility.” The action has drawn support from industry stakeholders including the National Association of Realtors, National Association of Home Builders, and Mortgage Bankers Association.

 

White House Mulling Capital Gains Cut

On Thursday, Bloomberg reported the the White House is developing a proposal to index capital gains to inflation, a move that would significantly reduce the effective tax rate on capital gains. Per the report, Administration officials are split on whether or not to move forward with the change and have not yet consulted the Department of Justice on the legality of pursuing it through existing regulatory authority rather than going through Congress. If implemented, the change would likely prompt pushback , and legal action, from Congressional Democrats and liberal stakeholders who have long argued that any effective decrease in the capital gains tax would primarily benefit the rich.

 

Treasury IG Opens $20 Bill Investigation

On Monday, Treasury Department acting Inspector General Richard Delmar sent a letter to Sen. Chuck Schumer indicating that the Treasury OIG would investigate the Treasury Department's delayed redesign of the $20 bill, including any White House involvement in the delay. The letter is a response to Sen. Schumer's letter from earlier this month calling for scrutiny of the Department's decision to delay the redesign of the $20 bill to feature Harriet Tubman.

 

Credit Suisse Avoids Objection but Faces Restrictions Following Stress Testing

On Thursday, the Federal Reserve released the results of its annual Comprehensive Capital Analysis and Review (CCAR), finding that the nation's largest banks have strong capital levels and that all but one of the 18 banks examined has sufficient capital planning. While the Fed did not formally object to any capital plans—which would prevent firms from taking capital actions without Fed authorization—it did require Credit Suisse to address identified weaknesses in its capital adequacy process and reduce capital distributions to last year's levels. Commenting on the results, Fed Vice Chair for Supervision Randal Quarles commented "The stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices."

 

This Week's Schedule

 

Both chambers of Congress are in recess for the Fourth of July.