Financial Services Report

November 20, 2017

Our Take

It is interesting to view the recent votes on Tax Reform through the historical prism of the last time we had comprehensive tax reform in 1986.   While a review of all the roll call votes show some party line votes, it seems like most of the votes were more strong bipartisan totals.   While we have shared our thoughts about the wisdom of using a “once in a generation opportunity” to pass temporary changes to the code privately with many of you, it seems telling that this tax effort is a reflection of the ideological “silo-ing” that continues to advance in our country.  

The following chart, which is part of a recent Pew Poll, shows how both people are tending to coalesce around hardened partisan beliefs.   While there appears to be a correlation between the weaponization of politics in the early 1990’s along with a media medium that figured how to monetize these new politics, we are not here to assign blame.  Rather, as our readers, and others make their commutes to wherever they are going to spend the Thanksgiving holiday, we encourage people to try to refrain from “winning” their Thanksgiving arguments with their relatives and instead try to listen to family on the other side of the political spectrum.   As the proverb goes, every journey starts with a single step, and while listening to your own relatives will not immediately reverse the trends described in the Pew Poll, it might be the first step our country needs.
Have a great Thanksgiving holiday!
Looking Ahead

Near Term

  • House and Senate are in Recess for the Thanksgiving Recess, as staff and members pause to catch their collective breaths.

Further Out

  • The full Senate is expected to take up tax reform when it returns on November 27th.
  • The President’s nominee to become Chairman of the Fed, Jerome Powell, gets his nomination hearing before the Senate Banking Committee on November 28th.
  • The Senate Banking Committee will mark up its regulatory relief package on December 5th.
  • Funding for the Federal Government expires on December 8th.
  • The Alabama Senate Race will be decided on December 12th.

The Past Week

Legislative Branch
House Passes Tax Cuts and Jobs Act 227-205
On Thursday, the House took another significant step forward in the effort to overhaul the nation’s tax code by passing H.R. 1 – the Tax Cuts and Jobs Act (TCJA) (text; section-by-section) by a vote of 227 to 205. As expected, the bill was passed on the strength of the Republican majority, with 13 Republicans joining all voting Democrats in opposing the measure. Most Republican defections stem from differences on the elimination of the state and local tax (SALT) deduction, which would hit high-tax states such as California, New York, and New Jersey disproportionately compared to the rest of the country.   
The next day the Senate Finance Committee also passed out its version of tax reform on a partyl line vote (see more on this below0.  Should the full Senate be able to pass a bill, it seems the plan is a for quick conference.   Current thinking has the Senate aiming to pass its bill during the week of Nov. 27, setting up a conference for the week of Dec. 4 and a vote in both Chambers on final passage as soon as the conference is complete.  Many view the Alabama Senate race, which will conclude on December 12th, as the artificial deadline. 
House Passes Flood Insurance Reauthorization on Partisan Vote
On Tuesday, the House approved a bill (H.R. 2874) to reauthorize the National Flood Insurance Program (NFIP) on a 237-189 vote with 15 Democrats voting in favor and 14 Republicans voting against. The bill would reauthorize the NFIP for five years and make a significant number of changes designed to make the program more sustainable over the long-term. Those changes were largely opposed by Democrats and coastal Republicans, who argued that they would make insurance unaffordable for many homeowners and small businesses. The White House said it supported the package in a statement of administration policy issued Monday. However, the Senate is currently working on a competing version of legislation to reauthorize the NFIP, and it is expected to differ from the House version significantly.
Financial Services Committee Approves 23 Bills in Markup, Including ‘Madden’ Fix
On Tuesday, the House Financial Services Committee advanced a set of 23 bills to the House floor, some for the second or third time.   These ranged from highly partisan measures that would roll back elements of the Dodd-Frank Act to bipartisan fixes for extending the submission cycle for bank resolution plans. In the former category is a bill that would aim to prevent federal regulators from cutting off banking services to certain industries, such as debt collection, to prevent enforcement actions such as the Justice Department’s “Operation Choke Point” that has been highly criticized by Republican lawmakers. Another contentious bill was the Protecting Consumers’ Access to Credit Act (H.R. 3299), that would legislate a solution to the Madden v. Midland decision that upended the “valid when made” doctrine governing how loans are regulated when they cross state lines. The bill, which was approved with some Democratic support in a 42-17 vote, though it is noteworthy that the provision wasn’t included in the deal between Chairman Crapo and moderate Democratic Senators (see more on this deal below).   Critics of the Madden Fix legislation have charged that it protects “rent-a-bank” arrangements that allow for payday lenders to partner with banks in order to avoid some states’ more scrupulous financial regulatory laws.
Acosta Talks Apprenticeships, Dodges Fiduciary Rule Questions at House Hearing
On Tuesday, the House Education and the Workforce Committee held its first oversight hearing for the Department of Labor (DOL) since the Trump Administration’s pick, Secretary of Labor Alexander Acosta, took the helm at the agency. In a brief and relatively uncontentious hearing, Members and Secretary Acosta highlighted the importance of apprenticeship programs and discussed the future of the Jobs Corps. On a more partisan note, Secretary Acosta offered no new details for the Department’s plan on the fiduciary rule, only reiterating his commitment to working with the Securities and Exchange Commission (SEC) on a best interest standard and noting that a proposed delay for the rule is currently being considered by the White House Office of Management and Budget (OMB).
Senate Finance Committee Approves Tax Bill After Bruising Markup
Late Thursday night, the Senate Finance Committee approved the Senate GOP’s version of the Tax Cuts and Jobs Act (chairman’s mark) on a party-line vote, setting up a highly anticipated debate on the Senate floor over the GOP’s push to reform the nation’s tax code. The Committee made a slew of changes to the bill during the contentious four-day markup, most notably by including a full repeal of the Affordable Care Act’s (ACA) individual mandate. The full Senate is expected to consider the bill — which still has to be turned into final legislative text —during the week of Nov 27. Should the Senate pass their bill, it would likely set up a conference committee for the week of Dec. 4, with a vote in the House on the final bill shortly thereafter.   
Tax Reform Retirement Provisions – Senate vs. House Comparison
Given that tax reform is officially in the final stretch of the legislative process, we wanted to provide a summary of this helpful explainer of the differences in retirement policy between the House and Senate versions of a tax overhaul via The Wall Street Journal.
What’s in there:
Elimination of Roth recharacterizations
Both the Senate and House bills would do away with so-called Roth recharacterizations. With a recharacterization, investors who convert a traditional individual retirement account to a Roth IRA can “undo” the conversion, nullifying the tax bill they would otherwise have to pay. The recharacterization strategy—which must be carried out by Oct. 15 of the year following a conversion—is frequently used by people who convert a traditional IRA to a Roth only to see the account balance fall. By recharacterizing, they can get out of paying taxes on profits that no longer exist.
More time for departing employees to repay 401(k) loans
Both Senate and House bills include a provision that would allow people who leave a company with a 401(k) loan outstanding to repay the loan by the day they file their federal tax returns. Currently, such employees are required to repay 401(k) loans within 60 days of their departure. Those who fail to do so must pay income tax on the loan’s balance. Borrowers younger than 59½ also owe a 10% penalty.  For many 401(k) borrowers, the new rule will provide extra time in which to get the money back into a 401(k) account or roll it over to an IRA, where it can grow tax-deferred.
Changes to 403(b) and 457 contribution rules
The Senate bill would eliminate the ability of individuals to save in both a 401(k) plan—or a 403(b) plan—and the 457 plans that are frequently used by governments. Currently, employees with access to both 457s and either a 401(k) or a 403(b) can “double dip” by contributing up to $18,000 a year to each plan, says Alison Borland, executive vice president of defined-contribution solutions at 401(k) record-keeper Alight Solutions LLC. The bill would also eliminate several other special situations in which participants in 403(b) and 457 plans are currently allowed to contribute more than participants in 401(k) plans.
A simplified tax form for older Americans
The Senate bill directs the Internal Revenue Service to publish “a simplified income tax return”—to be called a Form 1040SR—for people age 65 or older for use starting Jan. 1, 2019. “The form is to be as similar as possible to the Form 1040EZ,” the bill says.
What’s Out:
Mandatory Roth 401(k) catch-up contributions
Currently, employees under age 50 can save up to $18,000 a year in a 401(k)-type plan before taxes, while those 50 or older can set aside up to $24,000. Under an amendment introduced recently by Sen. Orrin Hatch (R., Utah), anyone eligible to put in an amount above $18,000 would have to do so in a Roth account, which unlike a 401(k) offers no upfront tax deduction but instead allows the money to be withdrawn tax-free. This amendment wasn’t included in a list of modifications to the bill backed by the Senate Finance Committee chairman on Wednesday.
Elimination of 401(k) catch-up contributions for high earners
As originally proposed, the Senate bill would have done away with the extra $6,000 workers age 50 and older can contribute each year to 401(k)-type plans—but only for those with salaries of $500,000 or more. Lawmakers have removed the provision.
Elimination of nonqualified deferred compensation
Originally, the Senate bill would have required employees who use deferred-compensation plans to pay income tax on the money they contribute in the year in which they earn it—effectively killing these plans. Currently, employees who use these plans—typically high-earners—can wait to pay income tax until they withdraw the money. The original bill would also have accelerated tax payments due on nonqualified stock options to the time when such options vest. Current law allows workers to delay paying tax until they exercise their options—by buying stock at a discounted price and immediately selling it. These provisions are now out of the Senate bill. Lawmakers in the House yanked a similar provision before they proposed their bill.
A 10% penalty on early withdrawals from 457 plans
People who withdraw money from most 401(k)-style plans before age 59½ must pay income tax plus a 10% early withdrawal penalty on the money. Thanks to a quirk in the law, the 10% early withdrawal penalty doesn’t apply to 457 plans. While the original Senate bill would have imposed the 10% penalty on 457 plans, the Senate Finance Committee chairman removed that measure from the bill Wednesday.
Senators Reach Bipartisan Regulatory Relief Deal
Last week, Banking Committee Chair Mike Crapo (R-ID) reached a deal (text) with nine Democrat senators on the outlines of a bill that would roll back some Dodd-Frank regulations in an aim to provide relief for smaller banking institutions and boost economic growth. The long-negotiated bill would center around raising the automatic asset threshold triggering a systemically important financial institution (SIFI) from $50 billion to $250 billion and immediately exempting all banks with less than $100 billion in assets that are currently subjected to enhanced federal oversight. The package also includes Sen. Susan Collins’ (R-ME) Senior$afe Act that would provide liability immunity to financial services professionals who disclose the suspected exploitation of a senior citizen to law enforcement or regulatory authorities.
Not all Democrats were on board with the proposal, with prominent liberal Sen. Elizabeth Warren (D-MA) saying the deal "shows once again how Washington values short-term profits for big banks ahead of the interests of consumers or the safety of the financial system." Interestingly, Ranking Member Sherrod Brown (D-OH), who had originally been involved in separate negotiations with the Chairman that ultimately concluded without a deal, announced his disagreement, though not an explicit opposition to Crapo’s deal with moderate Democratic Senators, with Brown noting that it rolls back too much of Dodd-Frank without doing enough to protect working families.
Senate Confirms Otting to Comptroller Post; Noreika Resigns
On Thursday, the Senate confirmed former OneWest Bank executive Joseph Otting to be Comptroller of the Currency. Otting will replace Acting Comptroller Keith Noreika, who has been criticized by some Democrats for being too active in his temporary role as head of a major financial regulator. Two Democrats, Sens. Joe Manchin (D-WV) and Heidi Heitkamp (D-ND), joined Republicans in the 54-43 confirmation vote. After the confirmation, Noreika announced his resignation from the post and his intention to return to the private sector despite some rumors that he was under consideration to revise that role as a temporary Director to fill the recent vacancy at the CFPB.
Leahy Introduces Bill for Data Protection, Responses to Breaches
On Wednesday, former Senate Judiciary Committee Chair Sen. Patrick Leahy (D-VT) introduced a bill aimed at preventing data breaches and providing procedures for consumers in the aftermath of a hack. The bill comes as a response to the recent high-profile cybersecurity incident at Equifax, which may have led to the release of personal information for hundreds of millions of individuals across the country. The bill would attempt to address the problem by requiring companies to take preventative action in the cybersecurity space, as well as requiring disclosures of breaches to consumers.
Senate HELP Hearing on Labor, Ed Nominees
On Wednesday, the Senate Health, Education, Labor, and Pensions (HELP) Committee held a hearing for a set of four nominees for the Departments of Labor and Education, notably including the nomination of Preston Rutledge to be Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA). During the hearing, Ranking Member Sen. Patty Murray (D-WA) pressed Rutledge on his views on the Department of Labor’s fiduciary rule, which broadly falls under the EBSA’s jurisdiction. Rutledge dodged, saying that he would not commit to a position for the Department, but resisted the charge that he had “discomfort” regarding the fiduciary rule. An executive session to vote on the nominations has yet to be set.
Select Highlights from the Administration
Consumer Financial Protection Bureau (CFPB)
Cordray Announces Resignation at the End of November
Consumer Financial Protection Bureau (CFPB) Director Richard Cordray told CFPB staff that he intends to resign at the end of the month. Cordray has led the agency since its inception, and his tenure has become a point of partisan contention given the watchdog’s numerous rulemaking and enforcement actions targeting the financial services industry in recent years. The announcement has been expected for weeks given increasing pressure on President Trump to dismiss him, and Cordray’s own rumored ambition to run for governor of Ohio in 2018.
OMB Director Mulvaney Rumored to be Named Interim CFPB Director
After the announcement that Richard Cordray would be resigning from his post as head of the CFPB, reports quickly emerged that the leading candidate to take over the consumer watchdog on an interim basis is current Office of Management and Budget Director Mick Mulvaney. Mulvaney, a former congressman, has previously called the CFPB “one of the most offensive concepts” in the U.S. government and a “sad, sick joke.” This appointment, which would allow Mulvaney to continue to run OMB, is possible under the Vacancies Act, which allow for a previously Senate-confirmed individual is able to fill this type of vacancy.  Despite press reports making this seem as fait acompli, and certain to happen last Friday, like so many rumors circulated during this past year of Cordray’s tenure, the day came and went with no news.
Department of the Treasury
Treasury Recommends SIFI Designation Overhaul
Last week, Treasury Department officials released a report recommending a series of changes to the process for the Financial Stability Oversight Council (FSOC) to give banks the “systemically important financial institution” (SIFI) tag. The proposal focuses primarily on shifting the regulatory focus away from the size of firms and towards an activities-based approach, which has long been advocated for by industry stakeholders. The report also calls SIFI designation a “blunt instrument” and suggests that firms be given a clear path to de-designation.