Financial Services Report

July 23, 2018

Looking Ahead

Near Term

  • The Senate is expected to take up its version of a minibus spending bill comprised of the financial services, interior, transportation and agriculture spending measures this week.
  • The Senate Banking Committee will hold anominations hearing on Thursday to consider multiple vacancies, including SEC Commissioner, Head of Ginnie Mae, and the Director of OFR.
  • USTR Lighthizer is scheduled to appear before the Senate Appropriations Committee on Thursday, where NAFTA and Tariffs is expected to dominate.
  • The House is scheduled to take up three health care related bills this week.
  • The House Financial Services Committee is holding its last mark-up of the summer on Tuesday.
  • The House and Senate are expected to vote on the final, conferenced version of the National Defense Authorization Act (NDAA), the law the sets defense policy this week.  Included in that legislation are major changes to the CFIUS process.

Further Out

  • August doldrums for the House.
  • The Senate is going to be in session – supposedly for the weeks of August, 13, 20th and 27th.   Efforts to schedule the Judiciary hearing for the Justice Kavanaugh appointment for mid-August seem to be slipping but could still happen.  

The Past Week

Legislative Branch
House Narrowly Passes Interior-Financial Services Minibus
On Thursday, the House passed an appropriations minibus (H.R. 6147) that included the FY19 Interior-Environment and Financial Services-General Government (FSGG) spending bills on a narrow 217-199 vote. Fifteen Republicans joined all voting Democrats in opposing the measure, which included a series of policy riders opposed by the minority party, such as subjecting the Consumer Financial Protection Bureau (CFPB) to the congressional appropriations process. The Senate is aiming to consider its own version of a minibus containing the FSGG bill this week, although that legislation currently lacks many of the controversial policy riders that were included in the House bill.  
Royce and Blumenauer Introduce Flood Insurance Bill
Reps. Ed Royce (R-CA) and Earl Blumenauer (D-OR) introduced a bill (H.R. 6402) last week that would extend the National Flood Insurance Program (NFIP) for another stopgap period. In addition to extending the program through November 30, the bill would make slight changes to the beleaguered flood insurance program such as requiring communities to develop repetitive flood mitigation plans. The NFIP is currently due to expire on July 31 and the House is expected to consider an extension bill this week before leaving for the August recess. On the Senate side, Banking Committee Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) introduced legislation that would extend the program through 2023.
House Passes JOBS Act 3.0 With Near-Unanimous Support
The House passed the Jobs and Investor Confidence Act (S. 488) by a vote of 406-4 on Tuesday. Commonly referred to as JOBS Act 3.0 and aimed at increasing access to capital, the bundle of 32 individual bills resulted from a compromise between Republicans and Democrats on the House Financial Services Committee. In addition to being non-controversial, the bill has been broadly acclaimed by both parties as well as industry. House Majority Leader and author of the original JOBS Act Kevin McCarthy (R-CA) said “The JOBS Act 3.0 is the latest evidence of this House’s commitment to expanding opportunity for American workers and investors” while the New Democratic Coalition Chairman Jim Himes (D-CT) said “this bill is an example of how Congress can and should work together constructively on solutions to strengthen our economy.” It is unclear what timeline the Senate has in mind to consider the package.
Powell Optimistic in Semi-Annual Report to House
Federal Reserve Chairman Jerome Powell delivered his Semi-Annual Monetary Policy Report to the House Financial Services Committee Wednesday after delivering the same report to the Senate Banking Committee on Tuesday. During the House hearing, Powell noted low unemployment and inflation approaching the Fed’s two percent target and said that he expected the Fed to continue raising interest rates. Members pressed Powell to discuss the impacts of tax reform and the Trump Administration’s trade policies, which he generally sidestepped.  Democrats used the hearing as an opportunity to push back against Powell’s positive characterization of the economy, primarily citing stagnant real wages. On the regulatory front, Powell discussed the ongoing process of simplifying the Volcker rule and the rulemaking timeline for the banking regulatory relief law passed earlier in the year.
House Financial Services Panel Talks Digital Currency
On Wednesday, the House Financial Services Subcommittee on Monetary Policy and Trade held a hearing entitled “The Future of Money: Digital Currency.”   The focus of the hearing was on the extent to which the federal government should consider cryptocurrencies as money, as well as their potential effect on domestic and foreign economies. The Subcommittee also evaluated the merits of any uses by central banks of cryptocurrencies to better understand the future of both digital currencies and physical cash. The panel — consisting of four representatives from stakeholder organizations — expressed varying opinions about the future of cryptocurrency as money, but unanimously agreed that it’s too early for the central banks to step in and exercise more control.  
Democrats Hammer CFPB Nominee Kraninger
On Thursday, the Senate Banking Committee held a confirmation hearing for the nominees to head the Consumer Financial Protection Bureau (CFPB) and Export-Import Bank (Ex-Im), Kathleen Kraninger and Kimberly Reed, respectively. While Democrats had called for the hearing to be put on hold in order to provide Ms. Kraninger and the Trump Administration to respond requests for information, the hearing went on nonetheless. While there were two nominations on the panel, the hearing focused almost exclusively on the CFPB nominee.  Chair Crapo indicated that he hoped the committee vote would occur as soon as the week of July 31.
Democrats focused the majority of their ire was Kraninger’s perceived lack of consumer finance experience and her role in some of the Trump Administration’s more controversial policies – most notably the separation of immigrant families at the nation’s southern border. Kraninger said she had no decision-making role in those activities and that she planned to take on a manager role at the Bureau while relying on CFPB staff expertise. While a number of specific issues were brought up — payday lending, arbitration, and credit bureau oversight among others — Kraninger largely avoided specifics.
Powell Offers His Perspective on Economy During Humphrey-Hawkins Hearing
On Tuesday, during a hearing before the Senate Banking Committee, Chairman Powell shared his optimistic perspective about the state of the economy, particularly as it relates to the Fed’s unemployment and inflation targets and indicated that he expects the Fed to continue raising interest rates as economic conditions improve. Committee Republicans attributed the robust economic growth to tax reform, while Democrats expressed skepticism of stagnant wages and unequal growth. Members on both sides of the aisle expressed concern that Administration trade policies could derail economic growth.    On the regulatory side, Chairman Powell indicated that the Fed would move to implement regulatory relief for small and medium-sized banks as soon as possible and emphasized the Fed’s commitment to continuing robust oversight, including stress testing, of banks. Committee Republicans and moderate Democrats promoted the recently-passed banking regulatory relief bill while some of the panel’s more liberal Democrats criticized the bill for rolling back Dodd-Frank protections. Progressive Democrats were also critical of the Fed’s recent issuance of “conditional non-failures” to three firms after its latest round of stress testing.
Quarles Confirmed for Full Term
On Tuesday, the Senate confirmed Randal Quarles to the Federal Reserve Board of Governors for a complete 14-year term. Quarles, who is also the Fed’s Vice Chair for Supervision, has served on the Board for nearly a year under an expired term, raising questions about his political independence. During this time, he has been at the forefront of a push to simplify and improve the efficiency of the banking regulatory environment. Quarles was confirmed by a vote of 66-33 vote with every Republican and a number of moderate Democrats voting in his favor.
Senators Introduce Bipartisan Retirement Package
Sens. Todd Young (R-IN), Heidi Heitkamp (D-ND), Tom Cotton (R-AR), and Cory Booker (D-NJ) introduced a bipartisan package of bills containing a set of retirement reform proposals. The bills (S. 3218; S. 3219; S. 3220) would (1) eliminate regulatory and liability barriers making it difficult for small businesses to participate in managed pool employer plans; (2) incentivize plan providers to use automatic enrollment features, (3) allow small businesses flexibility on required employee contributions; (4) reduce early withdrawal from retirement accounts by allowing employers to automatically enroll employees in emergency savings accounts; and, (5) allow employees to pre-commit their tax refunds to retirement accounts. Senate sources have indicated that the bills are intended as a follow up to the Retirement Enhancement and Savings Act (RESA) after the larger piece of legislation is passed.
Senators Introduce Affordable Housing Bill
On Thursday, a bipartisan group of Senators led by Sens. Angus King (I-ME), Maria Cantwell (D-WA), and Todd Young (R-IN) introduced the Task Force on the Impact of the Affordable Housing Crisis Act. The legislation would create a bipartisan task force to examine the consequences of lack of access to affordable housing and make recommendations to Congress as to how to better use affordable housing to improve outcomes. The National Low Income Housing Coalition and Center on Budget and Policy Priorities have already expressed support for the task force.
Senate Finance Committee Advances Rettig Nomination as IRS Commissioner
The Senate Finance Committee on Thursday voted to advance the nomination of Chuck Rettig to be Commissioner of the Internal Revenue Service (IRS) in a 14-13 party line vote. While both sides praised Rettig’s qualifications for the position, Democrats expressed alarm at a recent IRS guidance that allows certain tax exempt groups to not publish significant donors in annual IRS forms. They tied the rule into the Russia investigation, saying that it could allow foreign groups to exercise undue influence over U.S. politics and pose a national security threat. Finance Committee Ranking Member Ron Wyden (D-OR) described the Administration as “[taking] a qualified nominee and [dumping] him right into the middle of a dark money political firestorm of their own creation.”
Select Highlights from the Administration
Financial Stability Oversight Council
Zions’ Gets Vacancy Notice from Hotel California
On Tuesday, the Financial Stability Oversight Council (FSOC) produced a preliminary ruling to remove Zion Bank’s systemically important financial institution (SIFI) designation and giving it significant regulatory relief.   The designation would be one of the first de-designations by the FSOC but should come as no surprise, as Zions, was the smallest SIFI by asset size, and had undergone a significant restructuring last year in the midst of its plan to shed the designation under Section 117 of the Dodd-Frank Act. The FSOC now has 60 days to produce a final ruling on the matter. 
Consumer Financial Protection Bureau
Mulvaney Announces Innovation Sandbox and Director of Said Sandbox
Consumer Financial Protection Bureau (CFPB) Acting Director Mick Mulvaney announced the creation of a new CFPB Office of Innovation intended to encourage the development and innovation of fintech products. The office aims to provide a “regulatory sandbox” that will allow firms dealing with cutting edge technologies to do so flexibly while maintaining close contact with regulators. In his announcement, Director Mulvaney said that the purpose of the office is to “[create] an environment where companies can advance new products and services without being unduly restricted by red tape that belongs in the 20th century.” Additionally, he named Paul Watkins, the former head of Arizona’s state-level regulatory sandbox, to head the office. Cryptocurrency, blockchain, and micro-lending stand out as potential areas of focus for the office.
The States
New York
New York Issues Best-Interest Regulation for Annuities and Life Insurance
On Wednesday, regulators from New York issued their final regulation that would raise the standard of care for sales of life insurance and annuities. The new rules would stipulate that sales professionals cannot be influenced by financial incentives and compensation in their sale of products. The new regime would also require insurers to establish their own policies and procedures ensuring that brokers put the interests of their customers ahead of their own when making a recommendation. The state rule comes after the Labor Department’s fiduciary rule was officially killed in federal courts earlier this year and as the Securities and Exchange Commission (SEC) works on its own ‘harmonized’ best interest standard.