Financial Services Report

February 20, 2018

Our Take

Dating back to 1862, and every year since 1886, the Senate has read President George Washington’s Farewell address.  It is worth reading and thinking about our first President’s writing – both for its sage advice, but also as a reminder that many of the political ills that cloud our government today date back to the founding.
That said, some of his letter seems especially prescient today.  For example, he states that,

“The unity of government which constitutes you one people is also now dear to you. It is justly so, for it is a main pillar in the edifice of your real independence, the support of your tranquility at home, your peace abroad; of your safety; of your prosperity; of that very liberty which you so highly prize. But as it is easy to foresee that, from different causes and from different quarters, much pains will be taken, many artifices employed to weaken in your minds the conviction of this truth; as this is the point in your political fortress against which the batteries of internal and external enemies will be most constantly and actively (though often covertly and insidiously) directed, it is of infinite moment that you should properly estimate the immense value of your national union to your collective and individual happiness; that you should cherish a cordial, habitual, and immovable attachment to it; accustoming yourselves to think and speak of it as of the palladium of your political safety and prosperity; watching for its preservation with jealous anxiety; discountenancing whatever may suggest even a suspicion that it can in any event be abandoned; and indignantly frowning upon the first dawning of every attempt to alienate any portion of our country from the rest, or to enfeeble the sacred ties which now link together the various parts.
For this you have every inducement of sympathy and interest. Citizens, by birth or choice, of a common country, that country has a right to concentrate your affections. The name of American, which belongs to you in your national capacity, must always exalt the just pride of patriotism more than any appellation derived from local discriminations. With slight shades of difference, you have the same religion, manners, habits, and political principles. You have in a common cause fought and triumphed together; the independence and liberty you possess are the work of joint counsels, and joint efforts of common dangers, sufferings, and successes.
But these considerations, however powerfully they address themselves to your sensibility, are greatly outweighed by those which apply more immediately to your interest. Here every portion of our country finds the most commanding motives for carefully guarding and preserving the union of the whole.”
While he goes on to talk about how regional political interests need to be subdued for the strength of the Union as he whole, he also notes that political parties need to be kept in check.  Writing,

“The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries which result gradually incline the minds of men to seek security and repose in the absolute power of an individual; and sooner or later the chief of some prevailing faction, more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation, on the ruins of public liberty.
Without looking forward to an extremity of this kind (which nevertheless ought not to be entirely out of sight), the common and continual mischiefs of the spirit of party are sufficient to make it the interest and duty of a wise people to discourage and restrain it.”
Last week the Special Counsel confirmed that a foreign government successfully interfered with our elections, using social media and other means to create confusion attempt to influence the elections.   In hindsight, this should not come as a great surprise, since traditional media has been hit with the double whammy of disruption via technology and a decrease in trust by the public.   Perhaps we would all benefit from Washington’s instructions for a vibrant democracy,
“It is substantially true that virtue or morality is a necessary spring of popular government. The rule, indeed, extends with more or less force to every species of free government. Who that is a sincere friend to it can look with indifference upon attempts to shake the foundation of the fabric?
Promote then, as an object of primary importance, institutions for the general diffusion of knowledge. In proportion as the structure of a government gives force to public opinion, it is essential that public opinion should be enlightened.”

Looking Ahead

Near Term

  • The House and Senate are in Recess this week.

Further Out

  • While strong and persistent rumors continue to swirl that the Senate will take up the reg relief bill on February 27th, right before the Senate left for the President Day’s recess, Leader McConnell teed up a series of judicial nominations for consideration.  While this is not indicative of another delay in the much-awaited floor debate on the Reg Relief bill, there has yet to be a firm indicator that the legislation will be on the floor next week.
  • Newly confirmed Fed Chair Jerome Powell is scheduled to testify for the annual Humphry-Hawkins hearings next week.

The Past Week

Legislative Branch
House Passes Madden Fix and Mortgage Disclosure Bills
On Wednesday, the House passed a bill (H.R. 3299) on a 245-171 vote that would codify the “valid when made” doctrine that stipulates a loan’s terms are valid even after the loan is sold to a third-party in a jurisdiction with more stringent banking laws. The measure — which was passed out of the House Financial Services Committee on a 42-17 vote — aims to address a controversial 2015 court decision in Madden v. Midland Funding that held that state usury laws are not preempted once the loan has been transferred to another party.  With only 16 Democratic votes for the bill, this legislation faces a steep uphill climb to pass the Senate or to be included in that chamber’s Reg Relief package.
Also last week, the House also passed a bill (H.R. 3978) that would modify mortgage disclosure requirements by requiring the CFPB to incorporate discounts on title insurance into mortgage disclosure rules. It also includes a handful of other changes, including prohibiting the SEC from forcing traders to reveal their source code to regulators without a subpoena.  This effort garnered substantially more Democratic support – with 43 Dems voting aye – and thus may have a smoother path to enactment into law.
Mnuchin Talks Of President’s Support for Internet Sales Taxes and NAFTA at Ways and Means
On Thursday, Treasury Secretary Steven Mnuchin appeared before the House Ways and Means Committee for a hearing on the Treasury Department’s budget request for the 2019 fiscal year. Aside from explaining the Treasury’s priorities for the year, the Secretary made headlines by suggesting that President Trump “feels strongly” that Congress should allow for the collection of state and local sales taxes on purchases on the Internet, regardless of where the retailer is based. Mnuchin also noted that renegotiation of the North American Free Trade Agreement (NAFTA) was a top priority and that he was “cautiously hopeful” that the three parties will be able to reach an agreement on a revised version of the landmark trade deal.
Mulvaney Faces Questions on FY19 Budget in Budget Committee Hearing
On Tuesday, Office of Management and Budget (OMB) Director Mick Mulvaney appeared before the House Budget Committee to defend the President’s proposed budget for the 2019 fiscal year. While the Director took heat for some of the specific proposals included in the budget — namely a program to replace food stamps with food deliveries and the President’s possible military parade in Washington — he focused on the topline figures in the budget as well as the passage of tax reform at the end of last year. Director Mulvaney also seemed to suggest that he would vote against the President’s budget if he were still a Member of Congress, but OMB later clarified that he had actually been referring to the budget caps deal advanced by the chamber earlier this month.
HFSC Panel Talks Breach Notification, State Preemption in Data Breach Hearing
On Wednesday, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing on data breach issues and the possible introduction of legislation to address the issue. Data breach policy has become a key topic in Congress after high-profile hacks at Equifax, Sony, and various agencies within the federal government. During the hearing lawmakers discussed whether there was a need for the introduction of a federal standard, with a particularly great degree of debate on the issues of state preemption and a deadline for consumer notification. Then, a few days following the hearing Subcommittee Chair Blaine Luetkemeyer (R-MO) released bill, see more below. 
Luetkemeyer Introduces Data Breach Bill
Following a hearing on the issue earlier in the week, House Financial Services Financial Institutions Subcommittee Chair Blaine Luetkemeyer (R-MO) released a draft bill that would establish new federal rules for handling data breaches. The measure, cosponsored by fellow Subcommittee member Rep. Carolyn Maloney (D-NY), would set requirements for private companies to notify law enforcement and customers following a cyberattack, as well as setting standards on the precautions that businesses should take to prevent such attacks. Consumers would need to be notified immediately, unless law enforcement officials deem a delay is necessary, and it would not change standards for firms that already comply with the standards set by the Gramm-Leach-Bliley Act.  
House Science Subcommittees Hold Blockchain Hearing as Witnesses Suggest Congressional Commission
In a joint hearing of two House Science, Space, and Technology Subcommittees on Wednesday, lawmakers discussed the broader applications of blockchain technology, particularly those that could be used by the federal government itself. The witnesses — including cybersecurity analysts and industry experts — recommended that Congress set up a loose legal framework that would support innovation in the public sphere and create a “blockchain advisory group” that could provide additional information to policymakers.
HFSC Subcommittee Discusses Derivatives Legislation
On Wednesday, the House Financial Services Capital Markets Subcommittee held a hearing on a set of 11 legislative proposals regarding the regulation of derivative financial products. The largely technical bills would make changes to the regime set up by both Dodd-Frank and the Commodity Exchange Act to govern the complex derivative markets. Witnesses included Kenneth Bentsen of the Securities Industry and Financial Markets Association (SIFMA) and a pair of experts from industry organizations dedicated to the issue. It remains to be seen whether any of the proposals will be considered when the Senate’s regulatory reform bill (S. 2155) is eventually sent over to the House.
Financial Institutions Subcommittee Holds hearing on “De-risking”
On Thursday, the Financial Institutions Subcommittee held a hearing entitled, Examining De-risking and its Effect on Access to Financial Services.  According to the committee memo,  “De-risking” refers to the practice of financial institutions to terminate relationships and close the accounts of clients and merchants deemed as “high risk,” unprofitable, or complex, in order to avoid legal liability and greater regulatory scrutiny.  While much of the hearing focused on the derivative impacts of Operation Chokepoint, the hearing should be viewed as a sign of the continued interest of Congress to examine, and potentially amend, anti-money laundering (“AML”) laws.
House Small Business Committee Discusses Goldman Sachs Research on Access to Capital, Job Creation
On Wednesday, the House Small Business Committee held a hearing to discuss a report compiled by investment firm Goldman Sachs on small businesses’ access to capital and the effect that the issue can have for the expansion of businesses. Witnesses included Goldman’s Head of Global Investment Research Steven Strongin, as well as a pair of companies that were studied as part of the research effort.
Mnuchin Testifies Before the Senate Finance Committee on Trump’s FY19 Budget
Last Wednesday, Treasury Secretary Steven Mnuchin appeared before the Senate Finance Committee to discuss President Trump’s FY 2019 Budget proposal. Republicans on the Committee were eager to champion the effects of the Tax Cuts and Jobs Act, with Secretary Mnuchin noting that approximately 90 percent of Americans will see the new tax withholding in their upcoming paychecks and that the entire 90 percent should see the changes take effect by the end of the month. Democrats on the Committee remained skeptical of the new tax law, as well as the President’s proposed budget as a whole. In the retirement realm, Sen. Mike Crapo (R-ID) asked Secretary Mnuchin what his opinion is on the assessment that capital (stocks, bonds, and securities) are increasingly owned by the middle class via pension funds, retirement plans, or individual accounts. Secretary Mnuchin said that he felt that it was a positive that millions of middle class Americans own stock, and that the Administration aims to do whatever they can to encourage more people to participate in the stock market.
Commerce Committee Probes FTC Nominees on Data Security, Antitrust
On Wednesday, the Senate Committee on Commerce, Science, and Transportation held a confirmation hearing for four nominees to the Federal Trade Commission (FTC). Joseph Simons (Republican chair), Rohit Chopra (Democrat), Noah Joshua Phillips (Republican), and Christine S. Wilson (Republican) each gave an overview of their background to the panel while underscoring the need to rigorously enforce consumer protection and antitrust laws. Sen. Richard Blumenthal (D-CT) urged all of the nominees to continue to push the appeal of a court decision that a business owned by a common carrier would share that common carrier's exemption from FTC oversight, creating an enforcement gap over online privacy. Simons said he fully expected the Ninth Circuit to overturn that ruling and said it would be a "great idea" to get rid of the common carrier exemption altogether. Currently, the FTC has been operating with two of its five commission seats filled since President Trump took office last year. The President will need to nominate one more Democrat to complete a full commission, who is rumored to be a staffer from Leader Schumer’s office.
Maryland Dems, Brown Write Mulvaney to Protect CFPB Anti-Discrimination Office
On Wednesday, Democrat Sens. Ben Cardin (D-MD) and Chris Van Hollen (D-MD) wrote to CFPB Acting Director Mick Mulvaney urging him to maintain the consumer watchdog’s Office of Fair Lending and Equal Opportunity (OFLEO) enforcement power after it was reported that Mulvaney was gutting the office earlier this month. While the enforcement duties are proposed to move to the Office of the Director, the senators offered concerns that the agency will now fail to enforce financial regulation that guard against racial discrimination. A separate letter led by Banking Committee Ranking Member Sherrod Brown (D-OH) offered similar concerns and urged Mulvaney to protect the office.
Brown Urges CFPB to Protect Consumers
On Monday, Senate Banking Committee Ranking Member Sherrod Brown (D-OH) strongly criticized Consumer Financial Protection Bureau (CFPB) Interim Director Mick Mulvaney for altering the Bureau’s mission and “further deterring the agency from pursuing its mission of protecting consumers.” In a statement, Sen. Brown encouraged Interim Director Mulvaney to prioritize the needs of working families and consumers, rather than cater to the needs of banks and payday lenders. “This Administration should swiftly nominate someone who will have full bipartisan support in the Senate and will protect consumers instead of special interests,” said Sen. Brown. “In the meantime, Mr. Mulvaney must take steps to ensure that consumer laws are enforced.”
Warren Questions Wells Fargo Customer-Repayment Efforts
In a Feb. 13 letter to Timothy Sloan — Wells Fargo’s chief executive — Sen. Elizabeth Warren (D-MA) posed a slew of questions about the bank’s troubled customer-remediation programs, asking Sloan to answer the questions by Feb. 28.  Sen. Warren stressed that the Sloan make good on his pledge to take care of the bank’s customers in the wake of widespread abuses. The letter asks Sloan to explain why Wells Fargo is making customers opt in to receive refunds of improper mortgage rate-lock fees, and also questions the bank’s efforts in repaying customers it forced to buy unneeded auto insurance. Sen. Warren went on to criticize Wells Fargo’s efforts to compensate its customers as “utterly inept,” noting that the bank “has caused thousands of people to spend valuable time and money trying to deal with a problem Wells Fargo created.”
Democrats on Joint Economic Committee Release Retirement Security Report
Last week Democrats on the Joint Economic Committee released a report highlighting challenges to retirement security and offers suggestions for increasing retirement savings. Among the host of different challenges for long-term retirement security cited, include: (1) insolvency issues related to multi-employer pension plans; (2) decreases in defined benefit pension plans in the workplace; (3) absence of lifetime income solutions; and (4) the cost of college and student loan debt. The report went on to suggest some potential policy solutions to address these issues, including better incentives for small businesses to create a plan in their workplace, allowing businesses to pool their defined contribution plans (i.e., “Open MEPs”), and employer match of student loan contributions into a workplace retirement plan.
Select Highlights from the Administration
The White House
President Releases FY19 Budget with High Deficits, Cuts to Most Financial Regulators
On Monday, the White House unveiled their fiscal year (FY) 2019 budget request, entitled the “Efficient, Effective, Accountable: An American Budget,” and calling for $4.4 trillion in topline spending.  While traditionally the President’s budget is dead on arrival when it arrives at Capitol Hill, this year’s proposal was especially dead as the budget deal that Congress passed only a few days before the release effectively mooted many of the topline figures.  
Regardless, the budget always serves as a guide into an Administration’s thinking.   For example, this budget maintains the Trump administration’s priorities by bumping defense spending to $716 billion in FY19, adding $200 billion in infrastructure, and including $18 billion between FY18 and FY19 for the construction of a border wall.
In terms of Financial Services related priorities, the budget targets the funding structure of the Consumer Financial Protection Bureau (CFPB) by counting on $6.5 billion in savings through eliminating the consumer watchdog’s funding through the Federal Reserve. And beyond 2020, the White House appears to be counting savings for the entire sum of the CFPB’s funding, despite which, Administration officials did not confirm that they intended to eliminate the agency.  The President’s budget also would subject the FSOC and the Treasury Department’s Office of Financial Research (OFR) to the congressional appropriations process, with OFR in line for a 9 percent cut to its funding.  Other regulators fared slightly better, for example the SEC, which received a 3.5 percent bump to its budget, though the plan did also call for abolishing the agency’s reserve fund. Finally, the OCC would get a 7 percent trim from its FY18 funding level, although it would remain funded at a significantly higher level than its FY17 appropriation.
Other policy changes in the budget include “major savings and reforms” across different federal agencies, including a $78 million cut to the National Flood Insurance Program’s (NFIP) flood mapping program that determines who is required to purchase insurance in flood-prone areas. The Department of Housing and Urban Development would see one of the deepest cuts, a proposed 14 percent cut to $41.2 billion in FY19.  
Financial Stability Oversight Council (FSOC)
FSOC to Meet Wednesday on Prudential Designation
The FSOC plans to meet Wednesday, Feb. 21 to discuss de-designating the insurance company Prudential as a systemically important financial institution (SIFI). The Treasury’s announcement also suggests the Council will be considering the process by which regulators consider bank petitions to lose the SIFI tag that is accompanied by more regulatory scrutiny from the Federal Reserve. Finally, the Treasury notice suggests it will consider the process that it uses under Sec. 117 of Dodd-Frank, which is designed to keep banks who were bailed out under the Troubled Asset Relief Program (TARP) from escaping the Fed’s requirements.  While the announcement didn’t specify which, if any banks would be on the agenda for discussion, according to news reports it may be in response to Zion Bancorporation’s restructuring from a few months ago.
Securities and Exchange Commission (SEC)
SEC blocks Chicago Stock Exchange sale to China-based investors
U.S. regulators killed the politically sensitive sale of the Chicago Stock Exchange (CHX) to a group led by China-based investors last week, saying a lack of information on the would-be buyers threatened the ability to properly monitor the exchange after the deal. The acquisition — which was proposed in February 2016 and worth around $25 million — was led by Chongqing Casin Enterprise Group, a privately held company that invests in real estate development and financial holdings. SEC staff initially approved the sale of the exchange in August, but within minutes of the announcement SEC commissioners — led by Chairman Jay Clayton —put the decision on hold for further review, reportedly in response to suggestions from the White House. However, U.S. lawmakers from both parties had harshly criticized the deal in joint letters to the SEC, arguing that it would give the Chinese government access to American financial markets and questioning the SEC’s ability to regulate and monitor foreign owners.
Consumer Financial Protection Bureau (CFPB)
CFPB Issues RFI on Supervision Processes
Last Wednesday, the Consumer Financial Protection Bureau (CFPB) issued its fourth a request for information (RFI) in as many weeks, this one focusing on the Bureau’s supervision processes. Specifically, the CFPB is seeking comments and information from interested parties to assist in assessing the overall efficiency and effectiveness of its supervision program and whether any changes to the program would be appropriate. CFPB will begin accepting comments for 90 days once the RFI is printed in the Federal Register, which is expected to occur on February 20. CFPB also anticipates issuing RFIs in the coming weeks on (1) external engagement; (2) complaint reporting; (3) rulemaking processes; (4) bureau rules not under §1022(d) assessment; (5) inherited rules; (6) guidance and implementation support; (7) consumer education; and (8) consumer inquiries.
Mulvaney Pitches Five-Year Plan for CFPB Overhaul
On Monday, CFPB Acting Director Mick Mulvaney announced the release of a new five-year plan to reform the consumer watchdog with an aim to “serve as a bulwark against the misuse of our unparalleled powers.” The new mission statement takes a much lighter approach to regulation and seeks greater input from industry stakeholders on regulatory approaches. Summing up the changes, Mulvaney said that his vision for the CFPB would be “committed to fulfill the Bureau’s statutory responsibilities but go no further.”
CFPB Drops Lawsuit Against Golden Valley Lender
Last Tuesday, The Consumer Financial Protection Bureau (CFPB) dropped a lawsuit against Golden Valley Lending — a lender that had been charged with allegedly having interest rates up to 950 percent. CFPB had sued Golden Valley in April, alleging unfair, deceptive and abusive business practices. The dropped lawsuit comes as Mulvaney continues to make moves designed rein in the agency.
Federal Reserve
Powell Suggests Fed to Go Ahead With Rate Hikes Despite Market Turmoil
Federal Reserve Chairman Jerome Powell suggested that the U.S. central bank would push ahead with gradual interest-rate increases even as it remains on the lookout for threats to the financial system in the wake of the recent stock market rout. They were Powell’s first public comments since financial markets recently suffered their most severe bout of volatility in years, partly on concern that rising wages might spur inflation and prod the Fed into faster rate hikes. While the new Fed chairman didn’t specifically mention the steep fall in share prices, other central bank officials have played down its impact on the economy and the financial system. In their last quarterly projection in December, Fed officials penciled in three rate hikes for this year, according to the median forecast in their so-called dot plot. However, at their Jan. 30-31 meeting, some Fed watchers were concerned by the Fed’s indication of “further gradual increases in the federal funds rate,” which may have contributed to some of the market volitaility the following week.
Commodity Futures Trading Commission (CFTC)
CFTC Aims for Subcommittee on Digital Currency, Fintech
The CFTC is reportedly looking to form a subcommittee dedicated to oversight of digital currency issues and may request for additional statutory authority from Congress to regulate the emerging market. The issue took center stage during a meeting of the Commission’s Technology Advisory Committee last week, with the panel recommending new bodies to focus on cryptocurrency, distributed ledger technology, automated trading, and cybersecurity. Commissioner Brian Quintenz said that he was aiming to take a recommendation for how the spot market should be regulated to be considered at the Senate Banking Committee.