Insights

TRP Financial Services Report

September 15, 2014

Although the conventional wisdom leads many to conclude that the Republicans will enhance their majorities in the House and have a better than 50-50 shot of taking over the Senate, the current debate about whether to reauthorize the Export-Import bank portends the future value of House Democrats to the business community.   With Minority Whip Hoyer and Financial Services Committee Ranking Member opposing the short term extension that is currently included in the Continuing Resolution, it is unclear whether the Republican leadership will be able move the CR without Democratic votes.  This coming week should be interesting political theater with House leadership trying to balance the conservative elements of their party, some of whom have already come half-way on a short term extension, with the hardline position of House Democrats who realize that this may be their best opportunity to secure a multi-year extension of the bank, and who are secretly hoping that the House (or Senator Ted Cruz) forces a government shut down over this issue.  (though neither are likely to do so)

Looking Ahead

 
Near Term 

  • The House comes back this week to deal with figuring out how to keep the government functioning while also dealing with funding requests for battling ISIS in the Middle East.  Votes are expected as early as Wednesday.  The House will also consider a plethora of bills under the suspension calendar, including H.R. 4137, the “Preserving Welfare for Needs not Weed Act,” and the Insurance Capital Standards Clarification Act, which may be one of the biggest Dodd-Frank “technical correction” bills passed this year.
  • The Senate is also itching to leave town and is also expected to take up a spending measure and possibly also a vote on our mid-East strategy before the end of the week.
  • On Wednesday, Fed Chair Yellen will hold a press conference following two days of FOMC
  • On Thursday the CFPB is expected to issue a new “larger participant” rule that would give it wider latitude to supervise nonbank auto lenders. 

 
Further Out 

  • Members leave town to campaign for the mid-term elections and the horse race of the mid-term elections begins in earnest.
  • The lame duck session is expected to begin after Veterans Day (November 11th) and run through December 11th. 
The Past Week

Legislative Branch
 
House
Financial Institutions Subcommittee Examines Credit Reporting
On Wednesday, September 10th, the Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled, “An Overview of the Credit Reporting System.”  Witnesses included: Stuart Pratt, President and CEO, Consumer Data Industry Association; J. Howard Beales, Professor of Strategic Management and Public Policy, George Washington University; John A. Ikard, President and CEO, FirstBank Holding Company; and Chi Chi Wu, Staff Attorney, National Consumer Law Center.  Immediately prior to the hearing Ranking Members publicly released a draft of her comprehensive consumer reporting and credit scoring reform bill, though it is unclear whether she will formally introduce the proposal this Congress.
 
Judiciary Committee Passes Bankruptcy Measure for TBTF Banks
On September 10th the House Judiciary Committee passed H.R. 5421, the “Financial Institution Bankruptcy Act of 2014” by a voice-vote.  The legislation modifies Chapter 11 of the Bankruptcy Code, to facilitate an efficient and effective bankruptcy process for a significantly large financial institution to replace the Title II orderly resolution authority established by Dodd-Frank.  According to Chairman Goodlate the bill would allow for a financial firm to continue operating in the normal course to “preserve the value of the enterprise for the creditors of the bankruptcy without a significant impact on the firm's employees, suppliers and customers.” While achieving bipartisan support there were some questions about whether the bill could effectively set up a process that allowed the transfer of assets over the course of the weekend.
 
Maloney Urges CFPB to do more on Overdraft Fees
On Tuesday, Congresswoman Carolyn B. Maloney (D-NY) sent a letter to the CFPB urging the Bureau to take additional steps on overdraft fees, noting that CFPB has the authority to limit overdraft fees charged to bank accounts.  The Congresswoman’s letter made two specific requests, first that the CFPB limit the amount banks can charge for overdraft fees so that the fees are “reasonable and proportional,” and second that the Bureau set new rules for expanded opt-in requirements to also include the use of checks and Automated Clearing House (ACH) transactions (i.e., direct debit transfers used by consumers to pay bills). Maloney is also the sponsor of H.R. 1261, the Overdraft Protection Act, which would impose even stricter regulations on the use of overdraft fees.
 
Senate
Banking Committee Continues Oversight of Dodd-Frank
On Tuesday, the Senate Banking Committee held a hearing entitled, “Wall Street Reform: Assessing and Enhancing the Financial Regulatory System” that may have been the last Dodd-Frank oversight hearing that Chairman Johnson will hold.  While the clear focus of the hearing was to ascertain which outstanding Dodd-Frank rules would be completed by the end of the year, a point made clear by the Chairman’s first question to the witnesses, other issues such as  resolution planning, SIFI designation, Bitcoin, rules of insurance companies and the absence of criminal prosecution were also discussed. 
 
In response to the Chairman’s first question we learned that Federal Reserve Board Governor Daniel Tarullo, FDIC Chairman Gruenberg and Comptroller Curry hope to complete the risk retention rule by the end of the year, though Tarullo did note that although the Fed is in the “home stretch” of the rulemaking that timeframe may slip.   CFPB Director Richard Cordray indicated that the CFPB is working on mortgage reform implementation, including the Home Mortgage Disclosure Act (HMDA), while SEC Chair Mary Jo White made it clear that the SEC is focused on Title VII and the executive compensation rules.   Chair White also noted that the SEC will endeavor to address Regulation SCI and other market structure issues by the end of the year, and CFTC Chairman Timothy Massad announced that the CFTC will be acting on a rule on special entities next week, and that the Commission is also working on a re-proposal of the margin rule.
 
While other issues discussed during the hearing, such as capital standards for insurance companies, raising the threshold for SIFI designations and how to best address questions about the resolution authority / living wills issue both drew strong bipartisan support, the most interesting bipartisan duo to share a sentiment had to be Senator Elizabeth Warren (D-MA) and Senator Richard Shelby (R-AL) both who expressed frustration with the lack of criminal prosecutions against banking executives for the actions that caused the financial crisis. 
 
Schumer Durbin Introduce Anti-Corporate Inversion Bill
On Wednesday, Senators Charles Schumer (D-NY) and Dick Durbin (D-IL) introduced legislation to curb the practice of corporate inversions to reduce domestic tax liabilities.  The bill comes after a flurry of attention to foreign based mergers by companies seeking to reduce their taxes.  The legislation would disinenctivize the practice by:

  • Repealing the debt-to-equity safe harbor so that limitations on the interest expense deduction will apply to all inverters, regardless of their financial leverage;
  • Reducing the permitted net interest expense to no more than 25 percent (down from 50 percent) of the subsidiary’s adjusted taxable income;
  • Repeal the interest expense deduction carry forward and excess limitation carry forward so that inverters cannot take advantage of the deduction in future years; and
  • Require the U.S. subsidiary to obtain IRS preapproval annually on the terms of their related-party transactions for 10 years immediately following an inversion.

Then on Thursday, Finance Committee Ranking Member Orrin Hatch threw cold water on the proposal saying that he didn’t see how the bill could pass this year, while House Ways and Means Chairman Camp said that Congress should continue to focus on the broader issue of tax reform rather than the narrow issue of inversions.
 
Cybersecurity Bill to be Considered in Lame Duck?
While speaking at the Merchant-Financial Services Cybersecurity Summit on Wednesday, Senator Saxby Chambliss (R-GA) the top Republican on the Senate Intelligence Committee expressed his cautious optimism that the Congress may pass a cyber-security bill during the lame duck.  Chambliss also echoed House Intelligence Committee Chairman Mike Roger’s sentiment that America was in, and losing a cyber-war.  While recent headlines focused on retailers who have suffered a cyber-attack that impacts customer payment information Rogers and Chambliss both shared concerns about the potential for some type of catastrophic attack against the nation's critical infrastructure, like a power grid or water system.   It is worth noting that earlier in the week, Senate Intelligence Committee Chair Feinstein (D-CA) told reporters that she had not spoken with the Senate Majority Leader Harry Reid about a timeline for moving her cyber-security bill.
  
Select Highlights from the Administration
 
Treasury
Treasury Reportedly Examining Hedge Fund Tax “loop-holes”
Last week Bloomberg reported on a letter that the US Treasury sent to Senate Finance Committee Ron Wyden back in August indicating that they were examining how to end a “loop hole” that hedge funds use in order to route their investments through an insurance company in a low tax countries like Bermuda.  Whether the issue is conflated into efforts to crack down on corporate inversions remains unclear, however there is bipartisan support for addressing this issue as House Ways and Means Chair David Camp called for reforming the process as part of his comprehensive tax reform proposal released earlier this year.
 
Federal Reserve Board
Fed Creates Its Own Financial Stability Committee
On Friday, the Wall Street Journal reported that the Federal Reserve Board was creating a special committee, to be led by Fed Vice Chair Stanley Fischer, and will include governors Daniel Tarullo and Lael Brainard to monitor potential threats to financial stability.  According to reports, the genesis of the committee belongs to Vice Chair Fischer, though it is unclear how  this group will interact with the FSOC or with the Fed’s own Office of Financial Stability Policy and Research.
 
Securities and Exchange Commission (SEC)
Office of Risk Assessment Created
On Thursday the SEC announced that it was creating an Office of Risk Assessment within its Division of Economic and Risk Analysis (DERA).  This new office is intended to help the SEC with its work as part of the Financial Stability Oversight Council (FSOC) as well as coordinate the use of data-driven risk assessment tools and models to support a wide range of SEC activities. 
 
Consumer Financial Protection Bureau (CFPB)
Advisory Board Holds Meeting on Technology and Access to Financial Services
On Thursday, with timing that only can be described as it is better to be lucky than good, the CFPB’s Consumer Advisory Committee, met to talk about trends and themes related to technology and access to financial services.  While not explicating mentioning the Iphone 6 and its NFC payments system, Director Cordray’s remarks clearly indicated that the Bureau was looking to get more active in the mobile payments area.
 
CFPB Issues Final Rule on International Money Transfers
On September 12th, the CFPB issued its final rule for international money transfers.  This rule adds a news definition for larger participants for certain products in the international money transfer market, and is anticipated to cover around 25 of the largest players in the market.   The rule is effective as of December 1, 2014 and among other things requires providers to disclose information about the exchange rate, fees, the amount of money that will be delivered abroad and the date the money will be available. 
 
Next Week’s Schedule
On Tuesday, September 16th at 10:00am in Room 215 Dirksen, the Senate Finance Committee will hold a hearing entitled, “"Retirement Savings 2.0 – Updating Savings Policy for the Modern Economy"

On Tuesday, September 16th at 10:00am in Room 538 Dirksen the Senate Banking Committee will hold a hearing, entitled “Examining the State of Small Depository Institutions.”

On Wednesday, September 17th at 10:00am in Room 2128 Rayburn, the Oversight and Investigations Subcommittee will hold a hearing entitled, “Oversight of the Financial Stability Council.”

On Wednesday, September 17th at 2:30pm in Room 538 Dirksen, the Economic Policy Subcommittee will hold a hearing entitled, ““Who is the Economy Working For? The Impact of Rising Inequality on the American Economy.” 

On Thursday, September 18th at 11:00am in 538 Dirksen, the Senate Banking Committee will hold a hearing entitled, “Assessing and Enhancing Protections in the Consumer Financial Services.”

On Thursday, September 18th at 2:30pm in 342 Dirksen, the Permanent Subcommittee on Investigations will hold a hearing entitled, “Tax Audits of Large Partnerships.”