Insights

Financial Services Report (9/30)

September 30, 2019
The House and Senate are in recess for the next two weeks. When they return they will need to finalize the spending bills before the November 21st deadline. There are also rumors about an aggressive hearing schedule in the House Financial Services Committee, including the potential for CFPB Director Kranniger to appear as part of her semi-annually required attendance. And of course, there is possibility that all of it is eclipsed by impeachment proceedings.

 
From the Campaign Trail
This Week's Polls
 
On Monday, the Democratic National Committee released the participation requirements for the November Democratic Presidential Primary debates. To qualify for the debates, candidates must have received contributions from at least 165,000 unique donors and passed one of two polling thresholds: (1) 3 percent support in four qualifying polls; or (2) 5 percent support in two early-state polls. Both thresholds are increases from the requirements for the September and October debates.
 
The RealClearPolitics average of polls for 9/13-9/24 shows former Vice President Joe Biden maintaining his lead, while Sen. Elizabeth Warren (D-MA) continues to rise in the race for the Democratic nomination. Vice President Biden is at 28 percent, Sen. Warren is at 21 percent, Sen. Bernie Bernie Sanders (I-VT) is at 17 percent, and Sen. Kamala Harris (D-CA) and South Bend Mayor Pete Buttigieg are both around five percent.
 
Policy Proposals
 
Sanders Wealth Tax: On Tuesday, Sen. Sanders proposed his plan for a "tax on extreme wealth" consisting of an escalating tax on household assets. Intended to target the top .1 percent of households in America (approximately the 180,000 wealthiest), the tax would start at 1 percent on household wealth over $32 million and escalate through eight brackets maxing out at 8 percent on wealth over $10 billion. All thresholds would be halved for individuals and the tax would be enforced by a "national wealth registry." The campaign estimates that it would generate $4.35 trillion over a decade.
 
Rolling out the tax, Sen. Sanders told the New York Times that he doesn't "think billionaires should exist." To this end, his proposal is significantly more aggressive than Sen. Warren's previously proposed "ultra-millionaire tax," which would would max out at 3 percent on wealth over a billion dollars. Later in the week, the Washington Post reported that advisors to Vice President Biden—the last of the "Big Three" candidates not to have proposed a wealth tax—were weighing their own slate of tax proposals, which could include a transaction tax on stocks and bonds.
 
Warren Adds to Lobbying Proposal: On Friday, Sen. Warren released her plan to "Strengthen Congressional Independence from Corporate Lobbyists," which aims to reduce corporate lobbyist's influence in policymaking by decreasing lawmakers' reliance on outside technical expertise. The plan, which builds on a previously introduced plan, consists of: (1) reinstating and modernizing the Office of Technology Assessment; (2) increasing funding for congressional support agencies; and (3) increasing the pay of congressional staff to attract a more competitive workforce.
 
Last Week in the House
 
The Floor
 
On Wednesday,the House passed the SAFE Banking Act (HR 1595) by a vote of 321-103. This legislation would provide a legal safe harbor to financial institutions doing business with state-legal cannabis and cannabis-related companies. Currently, these businesses largely lack access to financial services given the compliance risks associated with banking federally illegal businesses. Only one Democrat voted against the legislation, which also drew the support of slightly less than half of Republicans, though still enough to easily clear the 290 vote threshold required.
 
Prior to bringing the bill to the floor, Democrats added two provisions intended to broaden the legislation's Republican appeal: hemp banking protections and a prohibition on the re-institution of the Obama-era Operation Chokepoint. The provisions are perceived as providing the bill with an easier path forward in the Senate, particularly after Banking Committee Chairman Mike Crapo (R-ID) indicated his intention to move legislation on the topic earlier this month. Regardless, it is possible further changes will be necessary to move the bill through the upper chamber.
 
Hearings and Markups
 
SEC Oversight (9/24): On Tuesday, all five SEC commissioners appeared before the Financial Services Committee. Setting the tone for the hearing, Committee Chairwoman Maxine Waters (D-CA) questioned the commission’s fulfillment of its role as “Wall Street’s cop on the beat,” which gave way to Democratic calls for an expansion of corporate disclosures and scrutiny of the recently approved Regulation Best Interest (Regulation BI) that sets standards of care for broker dealers. For their part, Committee Republicans focused on duplicative and burdensome regulations posing a barrier to capital formation and pushed back on environmental, social, and governance (ESG) investing standards that some want to add to public company reporting requirements. Other themes of note include bipartisan concerns about the implementation of the Current Expected Credit Loss (CECL) accounting standard and general regulatory uncertainty towards digital assets.
 
Race and Gender Gap (9/24): On Tuesday the Financial Services Subcommittee on Diversity and Inclusion held a hearing examining the racial and gender wealth gap, which subcommittee Chairwoman Joyce Beatty (D-OH) called "real, unacceptable, and actually much larger than people think." Members and witnesses from both parties acknowledged the significant challenges posed by the racial and gender wealth gaps and discussed avenues to addressing both, including home ownership for the former and paid parental leave for the latter.
 
Threats to the US Financial System (9/25): On Wednesday, the Financial Services Subcommittee on Consumer Protection held a hearing examining threats to US financial stability. Democrats on the Committee were eager to criticize the Trump administration for watering down the Dodd-Frank regulatory regime, offering concerns about leveraged lending, bank consolidation, and “shadow banking.” Meanwhile, a few Republican members of the Committee used the hearing to express their frustration with accounting changes mandated by FASB's Current Expected Credit Losses (CECL) model. One area of agreement that lawmakers found was on the issue of cybersecurity, as members on both sides of the aisle stressed that financial regulators must do more to protect consumers and the financial services industry from illicit cyber activities.  
 
Senior Housing Finance (9/25): On Wednesday, the Financial Services Housing Subcommittee held a hearing on the Federal Housing Administration's (FHA) Home Equity Conversion Mortgage (HECM) Program, which provides a federal backing on reverse mortgages to senior homeowners. During the hearing, lawmakers expressed concern at reverse mortgage participants falling into foreclosure and debated legislative proposals to improve reverse mortgages, including Rep. Denny Heck's (D-WA) Preventing Foreclosures on Seniors Act (discussion draft), which includes a number of provisions intended to reduce reverse mortgage foreclosures.
 
Debt Collectors (9/26): On Thursday, the Financial Services Committee held a hearing examining the debt collection industry. During the hearing, Democrats expressed concern at a number of issues relating to debt collection, including harassment and deceit by bad actors, discrimination, student debt, and the collection of “zombie loans.” Several also criticized the Consumer Financial Protection Bureau’s (CFPB) proposed overhaul of its debt collection rule. While acknowledging the problems posed by bad actors in the debt collection space, committee Republicans broadly emphasized the debt collection industry’s importance to the broader economy and defended CFPB’s rulemaking as an attempt to modernize and clarify decades-old statutes. 
 
Real-Time Payments (9/26): On Thursday, the Financial Services Committee's Fintech Task Force convened a hearing during which witnesses and members from both parties agreed on the importance of deploying a real-time payments system in the United States. The Federal Reserve’s proposed FedNow system for real-time payments was discussed as well, receiving comments on the set implementation date of 2023 and the risks that would come with transitioning between payments systems. Committee Republicans’ concern focused on the potential pitfalls of having a government agency implement such a system, emphasizing the lack of competition from the private sector. Democrats on the committee supported the Fed’s approach to the matter and asserted that the Fed’s ability to implement a system with ubiquitous reach would benefit every party to the financial system.  
 
Timmons Named to Financial Services Committee: On Tuesday, Rep. William Timmons (R-SC) was appointed to the House Financial Services Committee to replace Rep. Sean Duffy (R-WI), who resigned from Congress on September 23rd.
 
Bills Introduced
 
International Insurance Standards Act (Heck and Budd): Similar to legislation that has passed Congress twice before, this bill would ensure that the United States agrees to capital standards that acknowledge the equivalence of the US system.
 
Financial Transparency Act (Maloney and McHenry): Requires the eight regulatory agencies on the Financial Stability Oversight Council (FSOC) to adopt standards for their collection and dispersion of data.
 
Cybersecurity and Financial System Resilience Act (McHenry): Requires the Federal Reserve to provide an annual report and Congressional testimony on its cybersecurity efforts.
 
Shareholder Protection Act (Malinowski and Cleaver): Requires that corporate political spending be annually approved by shareholders. The bill is the House companion to legislation that Sen. Bob Menendez (D-NJ) introduced in May.
 
Other Activity
 
Facebook Responds to Cleaver: On Tuesday, David Marcus, head of Facebook's Calibra unit, sent a letter to senior Financial Services Committee member Emanuel Cleaver (D-MO) pledging to furnish to federal financial regulators any information relevant to the investigation or review of the under-development Libra digital currency. The letter also reiterates the Libra Association's commitment to cooperate with US regulators and refrain from launching until regulatory concerns are addressed. It is a response to a group of letters that Rep. Cleaver sent to Mr. Marcus and federal regulators in August.
 
Last Week in the Senate
 
The Floor

On Thursday, the Senate cleared a House-passed continuing resolution (HR 4378) keeping the government open through November 21 and extending key programs including flood insurance and the Export-Import Bank. 16 Republicans voted against the measure, which passed by a vote of 81-16.
 
President Trump signed the measure on Friday, punting the government's impending funding deadline until later in the Fall. In the meantime, lawmakers will continue work to reach a long-term funding agreement. The Appropriations Committee marked up five more bills last week, bringing its total to 10, but none of those have yet reached the floor. While the House has passed 10 bills, significant work remains to reach a bipartisan, bicameral agreement that is also palatable to the White House, particularly over the questions of border security funding.
 
Earlier in the week, the Senate confirmed Brian McGuire to be Deputy Under Secretary of the Treasury for Legislative Affairs by a vote of 88-6. The nomination of Majority Leader Mitch McConnell's (R-KY) former chief of staff was briefly held up by Sen. Rand Paul (R-KY) earlier in the month.
 
Hearings and Markups
 
Faster Payments (9/25): On Wednesday, the Banking Committee held a hearing on faster payments featuring representatives of the Clearing House and the Federal Reserve, who respectively promoted their rival faster payments services. While members broadly acknowledged the importance of real-time payments, they differed significantly on what structure the market for such a service should take. On the Republican side of the dais, several senators expressed concern that the Fed as a government agency enjoys unfair advantages that prevent meaningful competition from a private sector competitor, and that the Fed’s entry into faster payments could prevent the ubiquitous deployment. Committee Democrats, in contrast, broadly supported FedNow as a public sector competitor and warned against ceding payment infrastructure to a consortium of major banks. 
 
Bills Introduced
 
ILLICIT CASH Act (Warner): Includes a number of corporate transparency and anti-money laundering provisions, including: (1) establishing federal reporting requirements for the mandated disclosure of all beneficial ownership information to be maintained in a federal database; (2) facilitating talent recruitment and interagency coordination by FinCEN; and (3) addressing the protection of personally identifiable information for AML purposes. The proposal was introduced with a group of seven bipartisan cosponsors.
 
Disaster Assistance Simplification Act (Rubio, Cornyn, Cruz, Kennedy, and Scott): Prohibits HUD from penalizing victims of qualified natural disasters who apply for but decline SBA disaster loans.
 
Other Activity
 
Brown Critical of CFPB Restitution Efforts: On Thursday, Banking Committee Ranking Member Sherrod Brown (D-OH) sent a letter criticizing the Consumer Financial Protection Bureau's "failure to provide monetary relief to harmed consumers." The letter cites research indicating that weekly restitution from Bureau actions has fallen from $43 million per week to $925 thousand per week under Director Kathleen Kraninger and former Acting Director Mick Mulvaney and notes several recent instances where the Bureau has declined to require restitution for victims. It is particularly critical of the Bureau's recent settlement with debt collector Asset Recovery Associates for violations of the Fair Debt Collection Practices Act, which it alleges "shortchanges" consumers and was made without legal basis.
 
Warren Urges SEC to examine "Inflated Bonds": On Thursday, Sen. Elizabeth Warren (D-MA) sent a letter calling on the Securities and Exchange Commission to take immediate action to address inflated bonds, which a recent Wall Street Journal report indicated are on the rise. In the letter, Sen. Warren compares inflated corporate bond ratings to inflated ratings on mortgage backed securities in the years leading up to the financial crisis, raises concerns that rating agencies have a conflict of interest leading to inflated ratings, and questions SEC "inaction" on the topic.
 
Last Week in the Administration
 
White House Weighs Imposing Capital Restrictions on China Investment
On Thursday, Bloomberg reported that White House officials are weighing restrictions on US investments in Chinese companies, including potentially requiring the Chinese companies to be "de-listed" from US stock exchanges, prohibiting government pension funds from investing in Chinese markets, or even outright banning US investments in China. While administration sources indicated that the move would be intended to protect US investors from poor supervision of Chinese financial markets, such an action would be a major setback for negotiations to resolve the two country's ongoing trade tensions, which are set to resume October 10 in Washington. The White House declined to comment on the matter.
 
Trump Signs Limited-Scope US-Japan PTA
On Wednesday, President Trump and Japanese Prime Minister Shinzo Abe signed a limited-scope trade agreement on the sidelines of the UN General Assembly. The deal provides for tariff reduction and TPP-styled preferential treatment for US agricultural exports and targeted tariff reduction on certain Japanese industrial goods, as well as a framework for digital trade between the two countries. While the agreement notably omits a formal protection against future US auto tariffs, it was accompanied by a pledge that both countries will "refrain from taking measures against the spirit" of the agreement. Although limited enough in scope to avoid Congressional approval, some analysts have pointed to the deal as a potential first step towards a comprehensive trade agreement between the world's first and third largest economies.
 
Banking Regulators Update Appraisal Threshold
On Friday, the Federal Reserve, FDIC, and OCC adopted a final rule increasing the appraisal threshold for residential real estate transactions from $250,000 to $400,000, a move meant to accomodate inflation in real estate prices since the threshold was last raised in 1994. The rule also incorporates the Economic Growth, Regulatory Relief, and Consumer Protection Act's appraisal exemption for rural residential properties and requires that institutions review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice.
 
SEC Advances Three Rules
On Thursday, the Securities and Exchange Commission announced the adoption of three pieces of rulemaking: (1) a rule establishing a framework for the regulation of exchange trade funds (ETF); (2) a proposed amendment to modernize the Commission's Rule 15c2-11, which governs quotations for the sale of over-the-counter (OTC) securities; and (3) a rule extending "test-the-waters" accommodation—which allows issuers broader flexibility to gauge market interest in an IPO prior to filing and is currently only available to emerging growth companies—to all issues.