Financial Services Report

December 11, 2017

Our Take

While not known as a prescient sage, back in 2006 John Mayer may have seen the future when wrote
"And when you trust your television
What you get is what you got
Cause when they own the information, oh
They can bend it all they want"
Much has been written about the Balkanization of how people receive their news and we all know of the biases that various sources have that "bend" what we each of us receives.   From my cozy perch inside the bubble of Washington, it still surprised me that last week a Pew Research poll was released that showed that a majority of President Trump's supporters (62%) can't think of anything Trump has done that they're unhappy with.   Perhaps this may have as much to do with the sense of team as a sense of ignorant bliss.  But either way speaks to the new world of tribal politics we may be entering in.  Speaking of which, for many liberals their view that this descent into tribal politics will be complete on Tuesday if, as the latest polls are correct and Alabama elects Roy Moore to the Senate.  It would be bittersweet irony if, similar to the Presidential campaign, the polling this race was also way off.

Looking Ahead

Near Term

  • The House will take up a couple of financial services related bills this week, including H.R. 2396, the Privacy Notice Technical Corrections Act and H.R. 4015, the Corporate Governance Reform and Transparency Act as well as some sanctions measures against Iran.
  • The House Financial Services Committee has scheduled a mark-up for another series of bills on Tuesday.       
  • The Senate will continue to move through nominations next week.
  • The House and Senate Conference on Tax reform will hold its first open meeting on Wednesday.  While primarily expected to be the best example of Washington’s kabuki theater, it could shed some insight into where the potential landmines of the conference still exist.

Further Out

  • Funding for the Government now runs out on December 22nd.
  • The Debt Ceiling is expected to be breached in January.

The Past Week

Legislative Branch
House, Senate Approve Motion to Go to Conference; First Meeting Expected Dec. 13
Both chambers of Congress approved procedural motions to go to conference on the recently-passed tax reform bill last week, taking the legislation, another step forward in the legislative process. However, the move was not without some drama after House Freedom Caucus members initially withheld support for the vote due to Republican leadership’s plans to enact a two-week continuing resolution (CR) to keep the government open until Dec. 22. The conservative group backed down from those threats, clearing the way for the tax bill conference, which is reportedly set to have its first official meeting on Dec. 13.
Financial Services Panel Considers Five Regulatory Relief Bills Ahead of Markup Next Week
On Thursday, the House Financial Services Financial Institutions and Consumer Credit Subcommittee held a hearing on five legislative proposals aimed at creating a “more efficient federal financial regulatory regime.” The bills range in their focus from providing relief for the credit union industry, to forcing more frequent regulatory reviews, to ensuring that the Consumer Financial Protection Bureau (CFPB) respects Dodd-Frank language preventing it from regulating the insurance industry. Democratic members offered some skepticism on some of the bills, particularly on legislation (H.R. 3179) that would require American regulators to conduct a cost-benefit analysis in the case that an American regulatory regime is more onerous than the international regime for the same industry. The Committee is expected to hold a markup next week, but currently only H.R. 3179 is on the docket to be considered.
New Dem Coalition Urges Bipartisan Path on Tax Reform
On Wednesday, a group of young Democrats known as the New Democrat Coalition sent a letter to the Conference Committee asking them to “abandon their partisan approach” and pursue a more bipartisan effort on tax reform. The group proposed a set of six principles to guide a new tax reform plan, namely: (1) Put middle class families first; (2) Support workers and enable them to invest in themselves and their jobs; (3) Simplify the tax code to enable private sector growth and small business fairness; (4) Promote innovation, entrepreneurship, and new business formation; (5) Spur infrastructure investment and create good, well-paying jobs; and (6) Be fiscally responsible and built for long-lasting success by pursuing a bipartisan, transparent process. The conference process on the tax bill is expected to kick into gear this week.
Hensarling Outlines Plan for Housing Reform
On Wednesday, the Financial Services Housing and Insurance Subcommittee held another hearing on housing reform, this one titled, “Sustainable Housing Finance: Private Sector Perspectives on Housing Finance Reform, Part IV.”  According to the Committee hearing memo the purposes of this hearing was to explore the role of credit enhancements and credit risk transfers in the U.S. housing finance system.   The hearing also served as a platform for Chairman Hensarling to outline his revised views on the path for Housing reform, as he offered tacit support for the DeMarco Bright plan.   More importantly, the Chairman acknowledged that his vision of reform, previous espoused in the PATH Act would not become law, as he offered a willingness to negotiate with other stakeholders. 
HFSC Oversight Committee Takes Aim at Office of Financial Research
On Thursday, the Financial Services Oversight and Investigations Subcommittee held a hearing to examine the Office of Financial Research (OFR), as part of the Office’s annual testimony requirement.  During the hearing Republicans attacked the agency’s outgoing Director, Richard Brenner with questions about the effectiveness and necessity of the organization.  
Walberg and Blunt Rochester Introduce Annuity Safe Harbor Legislation
On Friday, Representatives Tim Walberg (R-MI) and Lisa Blunt Rochester (D-DE) jointly introduced H.R. 4604, the Increasing Access to a Secure Retirement Act.  The bill is a stand-alone annuity selection safe harbor similar to a provision from versions of the Retirement Enhancement and Savings Act. According to their joint press release, this legislation would encourage employers to offer annuities by clarifying existing rules in order to make it easier for retirement plan sponsors to provide guaranteed lifetime income products as part of their employee benefits.  Both Walberg and Blunt Rochester serve on the House Education and Workforce Committee whose jurisdiction includes this issue and Walberg currently serves as the Chairman of the Subcommittee on Employment, Labor and Pensions. 

Congress Passes Two-Week CR, Setting Up Major Fight Before Christmas
On Thursday, the Senate followed the House in approving a two-week continuing resolution (CR) funding the government until Dec. 22. The House approved the bill by a vote of 235-193, and the Senate by a 81-14 margin (to be posted here), giving President Trump enough time to sign it into law and avoid a government shutdown. The next fight on government funding is expected to be more difficult as Democrats will be seeking policy concessions in exchange for their votes, most notably on the deferred action for childhood arrivals (DACA) program. Conservatives have also threatened to sink a possible package over the continued use of CRs and what they see as excessive government spending.
Banking Committee Advances Powell Nomination
On Tuesday, the Senate Banking Committee approved the nomination of Jerome Powell to be the next chair of the Federal Reserve on a nearly unanimous 22-1 vote. Only Sen. Elizabeth Warren (D-MA) voted against the nomination, saying that she was unconvinced by Powell’s answers on the need for significant regulatory scrutiny for major financial institutions. The nomination now goes to the Senate floor, and is expected to be approved before Janet Yellen’s term as Fed Chair ends in February.
Banking Committee Approves Bipartisan Reg Reform Bill
Shortly after the Powell vote, the Banking Committee approved a bill (S. 2155) on a 16-7 vote designed to provide regulatory relief to small financial institutions and boost economic growth through a series of small reforms. The most notable of those reforms is raising the asset threshold — from $50 billion to $250 billion — at which banks automatically qualify as systemically important financial institutions (SIFI) and become subject to an additional round of scrutiny from the Federal Reserve. Other notable provisions in the package include language allowing consumers to freeze their files with credit reporting companies, requiring federal regulators to pursue more transparency in international negotiations on insurance regulation, and exempting institutions with less than $10 billion in assets from Dodd-Frank’s Volcker Rule on speculative trading. The bill is the product of a months-long negotiation between Chair Mike Crapo (R-ID) and moderate Democrats, and is a bipartisan response to the House’s highly contentious Financial CHOICE Act that passed the House earlier this year.
While votes were held on dozens of amendments, only the managers’ amendment passed — which included a series of regulatory additions based on previously submitted bills — as the Democrats who are backing the package agreed to vote down their compatriots’ amendments with the aim of building a consensus around the underlying legislation. Chair Crapo promised that there would be “continued dialogue” on the package to “build and expand the area of consensus” on what may be included in the bill that will ultimately be considered on the Senate floor. In the final Committee approval, Democrat Sens. Jon Tester (D-MT), Joe Donnelly (D-IN), Heidi Heitkamp (D-ND), and Mark Warner (D-VA) joined all Republicans in voting in favor of the bill.
Select Highlights from the Administration
Consumer Financial Protection Bureau (CFPB)
Mulvaney Makes First Major Move as CFPB Head by Curbing Data Collection
On Monday, newly minted Acting Director of the CFPB Mick Mulvaney announced he had frozen the agency’s collection of personally identifiable information (PII) over cybersecurity concerns. The financial services industry has long criticized the data collection polices as threats to consumer privacy and information security. Defenders of the practice have claimed that the data is essential to helping the agency identify discrimination and other misconduct, and is anonymized to prevent serious harm from a possible data breach. In announcing the decision, Mulvaney said “We should find ways to have as rigorous a data-security program as possible here before we start expecting that from people who we oversee out in the industry.”
Trump Apparently Overrules Mulvaney on Wells Fargo Penalties
On Friday, Reuters reported that the CFPB, under the new leadership of Office of Management and Budget (OMB) Director Mick Mulvaney, would be freezing its penalties against Wells Fargo for its fake accounts scandal. Per the provisions of an agreement struck between the bank and the consumer watchdog earlier this year, Wells Fargo would refund homebuyers who were wrongly charged fees in exchange for low rates, but the appointment of Mulvaney brought that agreement into question. President Trump quickly pushed back against that narrative tweeting that the penalties would “not be dropped” and “if anything, [they will be] substantially increased.”
GAO Finds that CFPB’s Auto Guidance Is Subject to the Congressional Review Act
On Tuesday, the Government Accountability Office (GAO) issued an opinion stating that the CFPB’s March 2013 guidance on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act (Bulletin 2013-02) was a general statement of policy and therefore actually a rule for the purposes of the Congressional Review Act (CRA). The decision came in response to a March 2017 letter from Senator Pat Toomey (R-PA) requesting a review of the guidance.  This is the second time that the GAO has determined that an agencies guidance qualified as a rule for the purposes of the CRA in response to letters from Senator Toomey. 
Now that the GAO has made this determination, the CFPB has a few options.  He could rescind the bulletin or policy, leaving the door open for future directors to pursue it again. Alternatively, Acting Director Mulvany could submit the rule to Congress for review. Like any other rule, Congress would then have 60 legislative days after receipt to pass its resolution of disapproval by a simple majority vote. At this point the CFPB has not indicated what it intends to do.
Securities and Exchange Commission (SEC)
SEC Chair Clayton Suggests Close Monitoring of Soaring Bitcoin
Last week, SEC Chair Jay Clayton offered his views on the use of bitcoin, which has gained significant attention after its value soared by hundreds of percent over the past few weeks. Clayton offered a tempered view of the cryptocurrency, saying that it was roughly equivalent to “handing people a piece of paper that says ‘stock.’” From a more granular perspective, Clayton said that the Commission would continue to act against fraud in initial coin offerings and in any instance “they ignore securities laws.” The SEC Chair went on to assert that know your customer rules would also apply in the use of large amounts of currency, while the Commission’s chief accountant Wesley Bricker said that Commission staff will continue to monitor bitcoin “very closely.”
Federal Reserve
GAO Scolds Fed for Not Doing Enough to Defend Against ‘Regulatory Capture’
On Thursday, the GAO issued a report suggesting that the Federal Reserve has not done enough to prevent so-called ‘regulatory capture’ in its supervision of the nation’s banking system. Regulatory capture refers to when a federal agency often seeks to benefit the regulated industry rather than consumers, particularly when the agency’s staff used to work in the industry. The GAO’s report did not cite individual instances of regulatory capture, but said that it was a “potential cause” in the “weakness in federal supervision of large banks. The report was delivered to House Financial Services Committee members Reps. Al Green (D-TX) and Maxine Waters (D-CA), who had requested the GAO look into the issue.