TRP Financial Services Report

November 24, 2014
President Obama’s Executive Order on Immigration certainly stirred the rhetorical pot.  Its impact on the political environment is still to be determined.  Certainly it may impact the end of the year spending bills – though then again, it may not.  We continue to hear that the Chairs of the Appropriations Committee, and House and Senate Leadership support an omnibus appropriations bill – but whether all the pieces can come together in the week that Members of Congress return from Thanksgiving remains TBD.      What is clear is that once Republicans take control of the entire Congress in 2015 their rank and file members are eager to keep immigration on the front burner.  What that means and more importantly, how impacts other issues on the agenda, such as tax reform or Dodd-Frank Reform will become clearer in the New Year. 

Looking Ahead
Near Term 
  • Lame Duck Agenda – will the President’s Immigration announcement scuttle everything?

    • TRIA – while reports late Friday indicated that talks were at a standstill, we always believe it is darkest before dawn and a TRIA bill will be passed before the end of the year.
    • Extenders – House Republicans continue to push for a 1 year extension while Senate Democrats are calling for a two year bill.  Middle ground might be found in a two year bill that makes certain pet provisions (R&D, EITC) permanent. 
    • National Defense Authorization – Could be on the Senate floor the week of December 1st, but both sides still have a few significant issues to work out.
  • Today is the deadline for a nuclear arms deal with Iran
Further Out 
  • According to reports, Federal Reserve Board Governor Jerome Powell said that the Fed rate increase may occur around mid-2015, though the timing will be data dependent.
  • Absent congressional action – TRIA expires on December 31, 2014.
The Past Week
Legislative Branch
Hensarling Reelected Chair – Appoints Subcommittee Leadership        
It came as no surprise that Jeb Hensarling was reelected as Chair of the House Financial Servcies Committee earlier this week.  Then on Thursday, he announced his subcommittee leadership, which due to elections and retirements looks a little different than last Congress.  Next year the subcommittee chairs will be:
Capital Markets and Government-Sponsored Enterprises Subcommittee: Remains the same with Scott Garrett;
Financial Institutions and Consumer Credit Subcommittee:  Randy Neugebauer, who currently chairs the Housing and Insurance Subcommittee will replace Shelley Moore Capito who was elected to the Senate;
Housing and Insurance Subcommittee: Blaine Luetkemeyer, who replaces Neugebauer;
Monetary Policy and Trade Subcommittee: Bill Huizenga, who replaces John Campbell who retired; and
Oversight and Investigations Subcommittee: Sean Duffy, an outspoken critic of the CFPB, will replace Patrick McHenry who was recently named a member of GOP leadership.
In addition, the Committee announced on Friday that the following newly elected members will be added to the committee:  Dold, Guinta, French Hill, Mia Love, Bruce Poliquin, Schweikert, Tipton and Roger Williams.  Interestingly, Dold, Guinta and Schweikert were all formally on the Committee, though only Dold and Guinta were recently returned to Congress after losing in 2012.  Democrats are still determining who will be on the Committee, though Maxine Waters is expected to retain the Ranking Member position.
Cummings Continues to Press for Data Breach Information
On Tuesday, Congressman Elijah Cummings, the Ranking Democrat on the House Oversight and Government Reform Committee, along with Senator Warren (D-MA) wrote to 16 financial firms, including Goldman, GE, Bank of America and others, asking for information about data breaches and seeking detailed briefings from their IT security officers.  The broadside followed on a letter that Cummings sent to the State Department on Monday about reports of a data breach there, and on letters to retailers on the same topic he sent the previous week.
FHFA Director Watt Testifies Before Senate Banking
On November 19th, the Senate Banking Committee held a hearing entitled, the Federal Housing Finance Agency.  Federal Housing Finance Agency Director Mel Watt was the sole witness.  The hearing was primarily an oversight hearing over the FHHA, which manages the GSE’s while they are in conservatorship, and topics discussed included: Guarantee Fees, Down payment requirements, principal reduction and housing market reform. 
Sherrod Brown Holds Hearing on Regulatory Capture
On Friday, the Senate Banking Committee Subcommittee on Financial Institutions and Consumer Protection held a hearing on recent reports of regulatory capture at the New York Fed.  NY Fed President William Dudley was the sole witness.  As expected, Senators Warren, Brown, and Merkley took turns hammering Mr. Dudley over allegations that the NY Fed has been complacent in its regulatory responsibilities.  Of particular note, was an exchange by Senator Warren where she asked Dudley to initiate a follow up to the so-called “Beim Study,” a 2009 report that Report found that N.Y. Fed officers were “excessively deferential to their superiors and that the entire organization was excessively deferential to the banks.  In another testy exchange, Senator Warren suggested that either Dudley fix these problems are she would get someone who could.  Currently the NY Fed President is not selected by the President, but Senator Reed (D-RI) has introduced S. 2937, which would require the NY Fed to be treated like other Presidential nominees and obtain the “advice and consent” of the US Senate.
Aging Committee Holds Hearing on Victim Assisted Fraud
On Wednesday, the Senate Aging Committee held a hearing on victim assisted fraud and the role of industry to prevent it.  Witnesses from three major general purpose reloadable gift (GPR) cards testified along with a representative from the retailers.  During the hearing it was disclosed that in order to eliminate the chance for criminals to misuse their technologies both GreenDot and InComm were transitioning away from PIN reloadable cards to a “swipe reload” system that required the card holder to be present to add funds to their GPR card.
Warren and Manchin Op-Ed calls for Fed nominees to focus on “ordinary Americans”
On Tuesday, in a joint op-ed that ran in the Wall Street Journal, and which previewed the line of questions they would ask NY Fed President Dudley later in the week, Senators Warren (D-MA) and Manchin (D-WV) urged the President to nominate non-Wall Street insiders for the two vacancies on the Fed Board.  It was unclear from their statement whether a “community banker” would meet this threshold.  Also, ironically, one reading of the Op-Ed is that it is asking the President to nominate Warren for one of the posts.
Select Highlights from the Administration
Weiss Nomination Continues to Take Hits
On Tuesday, the ICBA announced that it was expressing serious concerns about the nomination of Lazard Banker Antonio Weiss to be Treasury Under Secretary for Domestic Finance.   ICBA’s letter came the same day that Ron Wyden (D-OR) the current chair of the Finance Committee that is responsible for approving the nomination indicated that it was unlikely his committee would move Weiss before the end of the year. 
Federal Reserve Board
Fed Announces A Review of Bank Oversight and Rules to limit Ownership of Physical Commodities
In an effort to show proactive effort, but during a week where Governor Daniel Tarullo and NY Fed President Dudley were before separate Senate Committees investigating Fed activities, the Fed announced on Thursday that its Inspector General (IG) is reviewing the central bank’s oversight of large banks and how information and disputes over supervisory matters are shared among relevant officials.
Then during his testimony before the Senate Permanent Subcommittee on Investigations on Friday,  Governor Tarullo shared that the Fed will issue a formal rule in the first quarter of next year that will impact banks’ physical commodities trading.
Federal  Deposit Insurance Corporation (FDIC)
On Tuesday the FDIC, along with the Fed and the OCC, announced that it had unanimously agreed to issue a proposal that would revise the way it calculates payments for the agency fund that protects depositors against bank failures.  The changes, which were approved over the concerns of both State Street and the Clearing House, will only apply to “large internationally active banking organizations that currently determine their regulatory capital ratios under the advanced approaches rule, or may use the advanced approaches rule in the future—generally those with at least $250 billion in total consolidated assets or at least $10 billion in total on-balance sheet foreign exposures.” 
Securities and Exchange Commission (SEC)
Commission Approves Reg SCI
On Wednesday, the SEC announced its long awaited REG SCI, an effort to improve market stability under high frequency traders, as well, in part, a response to concerns raised by the book Flash Boys.  According to reports earlier in the week, the other two Democratic Commissioners (Kara Stein and Luis Aguilar) were trying to broaden the rule to cover more trading activity.  Perhaps this pressure caused Chair White to note that she had instructed the Commission staff to consider whether it would be necessary to expand an SCI type of system on broker-dealers or transfer agents. 

Consumer Financial Protection Bureau (CFPB)
Industry Responds to Concerns about CFPB Methodology for Disparate Impact
On Wednesday, the American Financial Services Association (AFSA) released a comprehensive study that concluded that the method used by the Consumer Financial Protection Bureau (CFPB) to measure for discrimination in an auto lender’s portfolio is “conceptually flawed in its application and subject to significant bias and estimation error.”    The report notes that the CFPB only uses raw data in its analysis, failing to discount simple differences such as whether the customer is buying a new or a used vehicle, as well as other basic business practices that substantially whittle down, although not entirely eliminates, the statistical difference in the rates that minorities paid for auto loans.  The study provides additional support for H.R. 5403, which currently has 140 bipartisan cosponsors.

CFPB Announces Fine for “Buy Here, Pay Here” Dealer
On Nov. 19, the Consumer Financial Protection Bureau (CFPB) took its first action against a buy-here, pay-here (BHPH) dealer, with an $8 million civil penalty against DriveTime Automotive Group. The company also must end its unfair debt collection tactics, fix its credit reporting practices, and provide arrange free credit reports for harmed consumers. DriveTime and its finance company, DT Acceptance Corporation, make up the largest BHPH dealer in the nation, operating 117 dealerships in 20 states. According to the CFPB, nearly half of DriveTime’s contracts were delinquent at any given time. When a consumer fell behind, DriveTime’s collection calls would begin, which resulted in tens of thousands of collection calls made each weekday. At the end of 2013, the company had approximately 69,000 contracts past due. The CFPB determined that several of the company’s debt collection practices were unfair to consumers and violated the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to enforcement action, DriveTime employees were encouraged by management to harass borrowers at work. In one instance, a consumer was called at work 30 times, even after making a do-not-call request.
Cordray Expresses  His Concerns With Payments System
On Thursday, CFPB Director Richard Cordray expressed concern that the system used to process customer payments can be misused to victimize consumers unless banks and system administrators work to police and enforce safeguards. For example, he noted that the Automated Clearing House system depends on transferring sensitive borrower account information, which exposes consumers to potential security risks.  Director Cordray said the bureau is examining whether changes are needed to address concerns about transparency, such as the uncertainty consumers face about when payments will be debited from their account, and whether that could lead to overdraft charges.  Last month, the Clearing House announced that it intends to develop a real-time payments system that would allow consumers to send and receive payments directly from their accounts.
Federal Housing Financing Authority (FHFA)
FHFA Releases Strategic Plan for FY 2015-2019
On Friday, the Federal Housing Finance Agency (FHFA) released their strategic plan for FY 2015-2019 detailing the agency’s priorities as regulator of the Federal Home Loan Banks and as regulator and conservator of Fannie Mae and Freddie Mac.  FHFA’s plan includes goals for safe, sound regulated entities; ensuring liquidity in housing finance; managing GSE conservatorships.  Among the details enumerated in the document, the plan outlines the agency’s “risk-based approach” to conducting supervisory examinations, which prioritizes examinations based on the risk a given practice poses to an entity’s compliance with applicable regulations or their safety and soundness.
Office of the Comptroller of the Currency (OCC)
OCC Chief Says Compensation Rule is Coming Soon
On Friday, Comptroller of the Currency Thomas Curry indicated that regulators are nearly finished with a rule requiring financial companies to ensure incentive pay for executives doesn’t promote overly risky behavior.  This rulemaking follows a multi-agency Dodd-Frank rule—first proposed in 2011—requiring companies with more than $1 billion in assets to say how their bonus system curtails incentive pay that could promote risk.  In a speech at a Clearing House Association banking conference in New York, Curry said that “improperly structured compensation plans were a major factor in the financial crisis,” and expressed disappointment at delays in publishing a Final Rule.  Curry added that European Union compensation rules from last year may already be influencing companies’ behavior.

Next Week’s Schedule
The House and Senate are in Recess next week in observance of the Thanksgiving holiday