Financial Services Report (12/17)

Our Take

Many believe that the overarching theme of Congress 2019 will be one of gridlock, with little legislative action expected to ultimately end up on the President’s desk – save perhaps an infrastructure and data privacy legislation.   And to the casual observer, that may ultimately appear to be correct, but beneath the surface Democrats are going to be doing a lot of work.  This will take the form of an oversight agenda that may be broadened to take into account businesses and industries beyond those connected to or adjacent the Trump organization.  It will also be true for legislative initiatives, as sophisticated actors are working with both 2019 and 2021 in mind.  Like the NFL, Congress is a copycat league, and Congressional Democrats appear eager to mirror the strategy that Republicans utilized between 2010 and 2017 if given the chance.   Keen watchers of Congress over the next years will be wise to keep that in mind rather than focus on the apparent dearth of legislative activity.

 
Looking Ahead

Near Term

• A very light week (one might add, appropriately for this late in the year) as the House will not be back until Wednesday.
• Congress and the White House are trying to find a solution to fund the outstanding portions of the government, who are set to shut down on Friday.   Complicating the negotiations – which primarily are about wall funding at this point – is the concern that many House Republicans who either lost their elections or retired will not be coming back to DC seven days before Christmas.  That calculation, along with the need to find 60 votes in the Senate, has titled the power of the negotiations to Democrats.
•  The Senate Judiciary Committee Antitrust Subcommittee will hold a hearing on Wednesday aimed at comparing US and EU competition policies.   This issue, along with data privacy will be one that will continue to receive a significant amount of attention next year.

Further Out

• The new Congress will convene on January 3^rd.

The Past Week

Legislative Branch

House
House Chairs for 116^th Congress Announced
On Monday, the Chairs of four high-profile Committees for the 116^th Congress were announced, including: Rep. Maxine Waters (D-CA) for the Financial Services Committee, Rep. Richard Neal (D-MA) for the Ways and Means Committee, Rep. Nita Lowey (D-NY) for the Appropriations Committee, and Rep. Frank Pallone (D-NJ) for the Energy and Commerce Committee. The rest of the committee chair nominees (list) were selected the following day. There were no surprises among this list, as all those nominated are either current Ranking Members, or senior committee members replacing a retiring Ranking Democrat. The nominated chairmen still technically need to be approved by the full Democratic caucus and that formality will take place after the new Congress is sworn-in in January.
 
HFSC Financial Institutions Subcommittee Holds Hearing on CECL Accounting Standard
On Tuesday, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing where a bipartisan group of lawmakers expressed their concerns about the transition to the Current Expected Credit Loss (CECL) accounting standard.  Interestingly, while three of the four panelists, with the sole exception being Moody’s economist Mark Zandi, expressed concerns that CECL standard could present serious compliance challenges, Zandi did noted that under a CECL standard of accounting banks should be afforded more capital relief. 
 
Brady Makes Another Push at Moving a Series of Tax Provisions
On Monday, House Ways and Means Committee Chairman Kevin Brady released a more narrowly tailored year-end tax package in an effort to find a vehicle that can pass both chambers before the end of the year.  While this proposal removed several provisions of the broader package from earlier in the month, the bill still includes tax relief for disaster effected areas, some of the RESA provisions, numerous technical corrections to the Tax Cuts and Jobs Act (TCJA), and Internal Revenue Service (IRS) reform.  It also added several healthcare provisions—a five-year delay of the medical device tax, a two-year delay of the health insurance tax, one year delay of the Cadillac tax, and a permanent repeal of the tanning tax, while it eliminated the retroactive renewal of 26 tax extenders among other provisions.   Despite this slimmed down version of the legislation it is unclear whether additional changes would be necessary to secure passage before the end of the year.
 
Google CEO Pichai Appears Before Judiciary Committee
On Tuesday, the House Committee on the Judiciary held a hearing entitled “Transparency & Accountability: Examining Google and its Data Collection, Use and Filtering Practices” with Google CEO Sundar Pichai. During the hearing, nearly every Republican present—including Majority Leader Kevin McCarthy, who had requested that Pichai testify – expressed concern that Google products exhibit an anti-conservative political bias.  Not surprising, this perspective was heavily criticized by Committee Democrats. Beyond the partisan difference, it is worth noting that Members from both sides of the aisle questioned Google's data privacy practices, particularly with regards to consumer awareness of data collection.  Responding to these questions, Mr. Pichai reiterated Google's support for a national data privacy standard. 
 
Monetary Policy and Trade Subcommittee Holds Hearing on International Financial Institutions
On Wednesday, the House Financial Services Subcommittee on Monetary Policy and Trade held a heating entitled ““Evaluating the Effectiveness of the International Financial Institutions” with Under Secretary of the Treasury for International Affairs David Malpass. During the hearing, lawmakers expressed concern that financing from the International Monetary Fund would go towards assisting Pakistan in repaying Chinese. Under Secretary Malpass pushed back on these concerns, saying "We are working and making clear within the IMF that if it were going to supply any funding to Pakistan it would not be used to repay Chinese loans”
 
Judiciary Subcommittee Exams Competition Policy with the Antitrust Regulators
On Wednesday, Yesterday, the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing entitled “Oversight of the Antitrust Enforcement Agencies” featuring testimony from Federal Trade Commission Chairman Joseph Simons and Assistant Attorney General for the Antitrust division Makan Delrahim. In his opening statement, Judiciary Committee Chair Bob Goodlatte (R-VA) cautioned against moving away from the consumer welfare standard of antitrust in favor of more “subjective” methods. For their part, Committee Democrats attributed heightened levels of corporate consolidation to a lack of antitrust resources, alleging lax treatment by the Trump Administration, and judicial rulings that have “narrowed” the scope of antitrust laws. Other topics receiving considerable Member interest included prescription drug prices, the ASCAP-BMI consent decrees, and consumer data privacy.
 
HFSC Democrats Send Letter to CFPB  Criticizing Military Lending Act Enforcement
On Friday, Ranking Member Maxine Waters (D-CA) led a group of 23 Democratic members of the House Financial Services Committee sent a letter to recently sworn-in the Consumer Financial Protection Bureau (CFPB) Director Kathleen Kraninger alleging that CFPB has “ceased” enforcing the Military Lending Act and urging her to “resume a consistent supervisory role” on the issue. Under recently named acting White House Chief of Staff Mick Mulvaney, CFPB ended its use of supervisory examinations to enforce compliance with MLA, rather relying on complaints—a move that has prompted significant criticism from Congressional Democrats. The authors called on Director Kraninger to commit to action in writing by December 21.
 
Senate
Mnuchin Deputy Muzinich Confirmed
On Tuesday, the Senate voted 55-44 to confirm Justin Muzinich to serve as Deputy Secretary of Treasury. Sens. Chris Coons (D-DE), Richard Blumenthal (D-CT), Angus King (I-ME), and Bill Nelson (D-FL) joined all Republicans present to approve the nomination in an otherwise party-line vote. The 41-year old Mr. Muzinich currently serves as Counselor to Treasury Secretary Steven Mnuchin, in which role he was a major architect of the 2017 Tax Cuts and Jobs Act. Mr. Muzinich will be the first official to fill the Treasury Department’s number two spot during the Trump administration.
 
Collins Joins Democrats to Pass IRS Donor Disclosure Disapproval
On Wednesday, Sen. Susan Collins (R-ME) joined every member of the Senate Democrats to pass a resolution of disapproval of an Internal Revenue Service (IRS) rule shielding many non-profit groups from disclosing their donors by a single vote.  The rule, issued July by the IRS, removed requirements that certain non-profit groups—some of which can engage in politics—disclose donors of more than $5000 dollars. It is unclear whether the Senate will take up the vote against next year, when the Republican majority will increase by one vote, as this vote will expire at the end of the session and the House is not likely to act before going out.  
 
SEC’s Clayton Appears Before Banking Committee
On Tuesday, in its final hearing of the 115^th Congress, the Senate Committee on Banking, Housing, and Urban Affairs held an oversight hearing with Securities and Exchange Commission (SEC) Chairman Jay Clayton. In his testimony, Chairman Clayton highlighted the SEC’s role in promoting transparency, mandating disclosure, and maintaining the functioning in U.S. capital markets. During the question and answer period, Senators focused their questioning on share buybacks, proxy voting, loan markets, and Regulation Best Interest. Republicans on the Committee praised the SEC’s enforcement work and its disclosure-based approach, although some expressed concern about activist shareholders forcing votes on what Senators deemed to be non-economic issues. Democrats sharply questioned Chairman Clayton on share buybacks and expressed alarm at current levels of corporate debt and leveraged loans in U.S. capital markets.
 
Senate Democrats Announce Committee Assignments and Ranking Members
On Thursday, Senate Majority Leader Chuck Schumer (D-NY) announced Committee Ranking Members and Democratic Committee assignments for the 116^th Congress. The Banking Committee added two new members, Senator Tina Smith (D-MN), a progressive and Senator-elect Kyrsten Sinema (D-AZ) a moderate being added to the panel.   Sinema was also named to the Commerce Committee and has expressed interest in working on FinTech issues.   The Senate Finance Committee also added two new members with Senator Cortez Mastro and Senator Hassan were both named. 
 
Republican Senators Call for Non-Bank SIFI Reforms
On Monday, Sens. Thom Tillis (R-NC), Mike Rounds (R-SD), Tom Cotton (R-AR), and David Perdue (R-GA) sent a letter to Treasury Secretary Steven Mnuchin requesting an update on the Financial Stability Oversight Council’s (FSOC) progress on reforming the systemically important financial institution (SIFI) designation process for nonbank financial companies and urging FSOC to implement “due process” affected entities and consider business models of individual firms. The letter also called upon FSOC to implement a  “transparent activities based approach” based on individual firm characteristics implemented in concert with a firm’s primary regulator and to avoid “arbitrary thresholds.
 
Cotton, Jones, Merkley Introduce Legislation to Prohibit “Live Checks”
On Monday, Sens. Tom Cotton (R-AR), Doug Jones (D-AL), and Jeff Merkley (D-OR) introduced the Unsolicited Loan Act, which would prohibit the lenders from mailing loans to consumers in the form of “live checks”—preapproved loans sent to potential borrowers in a form a ready-to-cash check.  The legislation would also preclude customers from liability for debts incurred from unsolicited live check loans.  In announcing the legislation, the bill’s bipartisan cosponsors described live checks as a predatory lending practice and noted that an analogous prohibition on mailing live credit cards has been in place for more than 50 years.
 
Schatz Announces Data Privacy Bill
On Wednesday, Sen. Brian Schatz (D-HI) led a group of 15 Senators in announcing the Data Care Act, a placeholder for consumer privacy legislation that will be introduced in the coming year.   The purpose of the bill would be to impose certain requirements for online platforms to protect consumer data and impose guardrails on its use. Although legislative has not yet been formally released, the press release noted that it will impose the following provisions—enforced by FTC rulemaking authority—on tech platforms using consumer data: (1) a requirement that firms “reasonably secure” identifying information and “promptly” inform users of data breaches involving “sensitive information;” (2) a prohibition on using consumer data “in ways that harm users;” and (3) a requirement to ensure that third parties with whom a platform shares data also meet the first two provisions.
 
Warren, Van Hollen Call for Investigation of Deutsche Bank
On Thursday, Sens. Chris Van Hollen (D-MD) and Elizabeth Warren (D-MA) sent a letter to Banking Committee Chair Mike Crapo (R-ID) calling for a “bipartisan Committee investigation” in Deutsche Bank’s compliance with Bank Secrecy Act and anti-money laundering (BSA/AML) regulations. The letter alleges that the bank has a “history of inadequate risk management,” poor corporate culture, and extensive business dealings in Russia, specifically citing the following incidents: (1) a raid against the bank’s headquarters by German police in connection with a money laundering probe earlier this month; (2) Fed Action against the bank for facilitating $10 billion in suspicious transactions for Russian shell corporations; and (3) serving as a correspondent bank allowing access to the US financial system for ABLV, a Latvian bank found to have been laundering money to evade sanctions against North Korea.
 
Crapo Leads Republican Letter on Private Flood Insurance Rule
On Friday, eight Republican members of the Senate Banking Committee led by Chairman Mike Crapo (R-ID) sent a letter to the five federal regulators overseeing flood insurance markets urging them to promptly adopt a rule recognizing flood insurance provided by private insurers as satisfactory for the purposes of the coverage requirements. Under the Biggert-Waters Flood Insurance Reform Act of 2012, regulators are required to issue a rule governing the mandatory acceptance of certain private flood insurance, although the letter notes that no rule has been adopted six years after the act’s passage and calls elements of a proposed November 2016 rule “not fully compliant with Congressional intent.”
 
Select Highlights from the Administration
 

The White House
White House Announces Nominees to Lead FHFA, CFTC
On Tuesday, the White House announced both Mark Calabria, Chief Economist to Vice President Mike Pence, was nominated to serve as Director of the Federal Housing Finance Administration (FHFA), and Heath Tarbert, current Assistant Secretary of the Treasury for International Market, was nominated to serve as Chair of the Commodity Future Trading Commission (CFTC).  The Calabria nomination elicited significant pushback from some industry stakeholders since he has been such a vocal critic of FHFA’s conservatorship of Fannie Mae and Freddie Mac and has advocated for the elimination of the 30-year fixed-rate mortgage.  If confirmed, Dr. Calabria will replace embattled former Congressman Mel Watts, whose term ends in January. Director Watts is the last Obama-appointee leading a federal regulator of the financial sector.
 
Chinese Concessions Ramp Up Amid Trade War Thaw
On Wednesday, Chinese state-owned companies bought 1.5 million metric tons of U.S., China’s first purchase of U.S. soybeans since ceasing new orders in July as retaliation against the imposition of tariffs on Chinese goods by President Trump. On Friday, the Chinese Finance Ministry additionally announced that it would suspend for three months the additional 25% percent tariff on US cars also imposed in July. The developments highlight a favorable week for the “truce” reached between President Trump and Chinese President Xi Jinping at the G20 Summit in Buenos Aires, Argentina at the end of November. On the US side, the Trump Administration made official its decision to delay until a 15% hike in tariffs on Chinese products, part of the arrangement reached by Presidents Trump and Xi in Buenos Aires.
 
Department of the Treasury
Treasury, USTR Reach Insurance Agreement With UK Insurance Regulators
Last week, the Department of the Treasury and the Office of the United States Trade Representative (USTR) reached an agreement (text; letter to Congress) with British regulators on prudential measures regarding insurance and reinsurance intended to provide regulatory certainty and market continuity after the United Kingdom leaves the European Union. The covered agreement will uphold the terms of the 2017 US-EU covered agreement—including the elimination of collateral and local presence requirements, streamlining prudential reporting, and providing for the exchange of information between US and UK regulators.
 
Federal Reserve
Powell Reportedly Says No Growth For Wells Fargo Until Risk Management Fixes
On Monday, Reuters reported that Federal Reserve Chairman Jerome Powell sent a letter to Senator Elizabeth Warren (D-MA) last month in which he declined to commit to requiring embattled bank Wells Fargo CEO Tim Sloan’s removal as a condition for allowing the firm to expand amid several high profile scandals. Chairman Powell’s letter was in response to a previous letter from Warren, who called for Mr. Sloan’s removal and has been an outspoken critic of the embattled banking giant. In February, the Fed placed a cap on Wells Fargo’s balance sheet amid several scandals—including employees opening unauthorized customer accounts, signing customers up for unnecessary auto insurance, and improperly foreclosing on homes—pending improvements to governance and risk management practices.
 
Consumer Financial Protection Bureau
CFPB Accused of Concealing Wells Fargo Report
On Monday, Politico published an “unpublished” report by the Consumer Financial Protection Bureau (CFPB) finding that embattled banking giant Wells Fargo charged student loan fees several times higher than those charged by some of its competitors. Obtained through a Freedom of Information Act request, the report analyses fees associated with financial products offered by 14 companies through agreements with more than 500 colleges across the country and found although Wells Fargo provided roughly one-quarter of analyzed products, the bank collected nearly half of all collected fees and had an average annual fee per account that at $50 was the highest of any examined provider. Additionally, the report flags potential non-compliance with Department of Education lending rules requiring colleges to ensure that products they promote are “not inconsistent” with their students best financial instance. The report previously gained prominence in August when Seth Frotman, then CFPB Student Loan Ombudsman, resigned his position alleging “suppression” of the report.
 
Internal Revenue Service
IRS Releases Guidance on Tax-Exempt Organization Parking – Churches, Synagogues and other non-profits try to make sense of the new rules
On Monday, the Internal Revenue Service (IRS) released interim guidance for tax-exempt organizations computing unrelated business taxable income (UBTI) incurred through parking benefits provided to employees. Under the Tax Cuts and Jobs Act (TCJA), certain parking, transportation, and fitness benefits provided by non-profits to their employees will be treated as unrelated business taxable income (UBTI)—taxable income, such as from an on-site restaurant, incurred by an otherwise tax-exempt organization. The guidance provides relief to tax-exempt organization affected by allowing many employers to retroactively change their employee parking arrangements by March 31 in order to avoid incurring UBTI and allows affected organizations flexibility to use “any reasonable method” for determining nondeductible parking expenses. The Republican tax bill released this week (see above) would eliminate the provision.
 
IRS Proposes Regulations on TCJA Anti-Erosion Regulations
On Thursday, IRS issued proposed regulations implementing the base erosion and anti-abuse tax (BEAT) instituted under the Tax Cuts and Jobs Act (TCJA). Under the provision, large companies meeting certain thresholds of payments to international subsidiaries will be required to calculate tax liability under the normal 21% corporate rate, as well as under a BEAT rate (10% for tax years 2019 to 2025) that also applies to transfer payments, and pay under whichever method produces the greater tax liability. While the provision was intended to prevent tax erosion by imposing a minimum backstop on taxes transferred to low-tax jurisdictions, it has been the subject of concern from firms unsure of how to calculate their liabilities under the provision and concerned that it would penalize certain transactions not intended to be affected. Thursday’s proposed rule however, is perceived as alleviating some of these concerns for certain industries—interest payments on banks towards total loss absorbing capital (TLAC) debt will for instance be excluded, as will cross border payments for the cost of goods within a company.
 
Federal Trade Commission
December Edition of FTC Consumer Protection Hearings Looks at Data Breaches
On Tuesday, the Federal Trade Commission (FTC) kicked off the ninth iteration of its “Hearings on Competition and Consumer Protection in the 21st Century,” this time focused on data security. The two-day event featured several panels with a variety of stakeholders, as well as remarks from FTC staff. Highlights included a series of presentations on data breach trends in the United States, a “fireside chat” between FTC Commissioner Rebecca Kelly Slaughter and grassroots cybersecurity professional Joshua Corman, and a panel discussion on the U.S. approach to consumer data security with experts and industry stakeholders. In her closing remarks, Maneesha Mithal from the FTC Privacy and Identity Protection Division synthesized three lessons from the two days of witnesses: (1) the need for more empirical data on data breaches; (2) the existence of multiple sources of incentives for companies to invest in data security; and (3) the ineffectiveness of a “one-size fits all solution.”
 

Next Week’s Schedule

Mon. (12/17)

• No events scheduled.

 
Tues. (12/18)

• FDIC Board of Directors Meeting – 10:00 AM – The Federal Deposit Insruance Corporation (FDIC) Board of Directors will hold a meeting to discuss the proposed 2019 operating budget and projected FDIC losses, income and reserve ratios. Details here.

 
Wed. (12/19)

• SEC Open Meeting – 9:00 AM – The Securities and Exchange Commission (SEC) will hold a public item to discuss six business items. Details here.
• Hearing: Senate Judiciary Sub on Competition Law – 2:30 PM – The Senate Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights will hold a hearing entitled "A Comparative Look at Competition Law Approaches to Monopoly and Abuse of Dominance in the US and EU. Details here.

 
Thurs. (12/20)

• Hearing: House Financial Services on the National Debt – 10:00 AM – The House Financial Services Committee will hold a hearing entitled "The Peril of an Ignored National Debt." Details here.

 
Fri. (12/21)
No events scheduled