Financial Services Report (12/3)

Our Take

Earlier this week, while defending Leader Pelosi’s effort to put down a rebellion of members who believe that she has been Leader long enough, the folks at Pod Save America painted a broad brush against all moderates – and in the process conflating the problem solvers caucus with the New Dems – by saying that being a moderate was an identity, not an ideology.  While this wasn’t the first attack in the so-called “Green Tea Party” that may pit the more liberal members of the caucus against those who have real challenging re-election bids, it was one of the loudest since the Democrats won the House of Representatives back.   While it is easy to criticize those who don’t have the luxury of having massively safe districts, and therefore need to appeal to more than just primary voters, it will be interesting to see whether these voices, who appear to prefer the perfect over the good, will recognize that it is a lot easier to shape that good when you control the agenda and that, whether they like it or not, it is these suburban districts where the majority is won or loss in 2020.

Looking Ahead

Near Term

• Both chambers will return to Washington next week as lawmakers seek to clear the seven outstanding appropriations bills. Congress faces a distinct possibility of a government showdown over border wall funding — a top priority for President Trump. If lawmakers are unable to reach a deal, another continuing resolution (CR) will likely be required to fund the government into early next year.
• The passing of former President George H.W. Bush has added an additional wrinkle to the timing with Congress considering a one- or two-week funding extension, that could push the deadline to the 21st of December.
• The House Financial Services Committee was scheduled to hold three hearings this week, one on the National Debt (a favorite issue of the outgoing Chairman); one on Housing Reform (also a pet issue for  Chair Hensarling); and one Oversight of the FHA hearing that would be at the Housing and Insurance Subcommittee.   With the Congressional schedule in flux due to the funeral ceremony for President Bush, it is possible that these could be rescheduled.
• The Senate Banking Committee is scheduled to hold two hearings this week, one an overview of work that Fannie and Freddie have been doing, and the other on the issue of Proxy Advisors that appears to be gaining steam.
• The full Senate could vote on Kathy Kraninger to lead the BCFP as early as Tuesday, though it could be later in the week.  If confirmed, Ms. Kraninger would lead the Bureau for the next five years. 

Near Term

• The Senate Banking Committee is scheduled to hold a SEC oversight hearing with Chairman Clayton on December 11th.
• The House Financial Services Subcommittee on Monetary Policy and Trade is scheduled to hold a hearing entitled "Evaluating the Effectiveness of the International Financial Institutions" on December 12

 

The Past Week

Legislative Branch
House
Democrats Appear to Solidify Leadership Questions
This past week, House Democrats got together to hold their leadership elections.  As expected, the top three of Nancy Pelosi, Steny Hoyer and Jim Clyburn all won their races to retain their positions as Speaker, Leader and Whip respectively when the new Congress convenes on January 3rd.   Minority Leader Pelosi’s victory showed a potential weakness, as 32 of her colleagues voted against her in the secret ballot election, and three left their ballot blank.  In order to win the vote for Speaker, Representative Pelosi would need to win 218 votes (if all members are present and voting) and is reported to be spending the time between now and the January 3rd vote securing a sufficient number for the majority.  
 
Beyond the “big three” the leadership elections previewed the potential next wave of Democratic leadership, as Ben Ray Lujan, Hakeem Jeffries and Cheri Bustos were elected to serve as Assistant Democratic Leader, Caucus Chair and DCCC Chair respectively.
 
Brady Releases End of Year Tax Package – Chance of Passage Remains Cloudy
On Monday, House Ways and Means Committee Chairman Kevin Brady (R-TX) released a package of tax legislation containing several components including: (1) the retroactive extension of more than two dozen expired tax extenders for tax year 2018; (2) relief for victims of natural disasters including Hurricane Florence and the California wildfires; (3) a number of retirement and savings provisions previously contained in Tax Reform 2.0’s Family Savings Act, including rules intended to facilitate the offering of multiple employer plans (MEP); (4) Tax Reform 2.0’s American Innovation act intended to incentivize innovation and entrepreneurship; (5) technical corrections to the Tax Cuts and Jobs Act (TCJA); and (6) the Taxpayer First Act (H.R. 5444), a bipartisan Internal Revenue Service (IRS) reform and modernization bill. Although Chairman Brady described the proposals as a “broad, bipartisan package,” it faces substantial Democratic opposition, with Senate Finance Committee Chair Ron Wyden (D-OR) criticizing the process through which the bill was released and other Democrats general skeptical of providing fixes to Congressional Republicans’ most substantial legislative victory. In addition, questions about how to pay for the measure complicated House passage, and the bill’s expected floor vote was canceled Friday morning.   Negotiations continue and it is possible a more narrow bill could still advance before the end of the year.   
 
McHenry to Lead HFSC Republicans
On Friday, Rep. Patrick McHenry (R-NC) was chosen by the House Republican Steering Committee to serve as Ranking Member of the House Financial Services Committee in the 116th Congress. Rep. McHenry—the current Chief Deputy Whip who was seen as a candidate to ascend the leadership ladder prior to his decision to seek pursue the HFSC position—ran unopposed after other potential candidates, including Reps. Blaine Luetkemeyer (R-MO) and Bill Huizenga (R-MI) rallied behind him. Since announcing his candidacy, Rep. McHenry has promoted his work across the aisle and spoken favorably of incoming Chair Maxine Waters (D-CA), indicating a potentially more conciliatory approach for Committee Republicans than existed under retiring Chair Jeb Hensarling (R-TX). In other notable Committee leadership news, Rep. Kay Granger (R-TX) defeated Reps. Tom Cole (R-OK), Robert Aderholt (R-AL), and Tom Graves (R-GA) to become Chair of the Appropriations Committee Republicans.  Also, Rep. Mark Meadows (R-NC) stepped aside to allow ally Jim Jordan (R-OH) to serve as Ranking Member of the Oversight committee, which paved the way for Rep. Doug Collins (R-GA) to take over as the next top Republican on the Judiciary Committee.
 
Kilmer Elected New Dem Chair
On Friday, the New Democratic Coalition elected Rep. Derek Kilmer (D-WA) as its Chair for the 116th Congress, replacing outgoing Chair Jim Himes (D-CT). Joining Rep. Kilmer will be four Vice Chairs: Reps. Terri Sewell (D-AL), Scott Peters (D-CA), Anne Kuster (D-NH), and Suzan DelBene (D-WA). Also on Friday, the Coalition inducted 30 Members-elect, bringing its projected total membership for the 116th Congress to more than 90. With Democrats having flipped more than 40 formerly red seats, the midterm elections meant an influx of membership for the group of economically moderate Democrats.
 
Senate
Shaheen leads letter to Senate Leadership for Protections for Small Businesses
On Wednesday, four Democratic Senators—Sens. Jeanne Shaheen (D-NH), Maggie Hassan (D-NH), Ron Wyden (D-OR) and Jeff Merkley (D-OR)—sent a letter to Senate leadership calling for the Senate to pass legislation before the end of the year protecting small businesses from taxation on interstate e-commerce imposed in the wake of the South Dakota v. Wayfair decision allowing states to charge sales tax on purchases made from out of state sellers. The letter argues that the enactment of online sales law across various states has created a complex web of regulation that will be especially burdensome for small businesses to navigate. In light of this issue, the authors call on Congress to institute a moratorium on collection for small businesses, as well as a prohibition on retroactive taxation.
 
Senate Banking Committee Holds BSA/AML Hearing With FinCEN, OCC, FBI
On Thursday, the Senate Banking Committee held a hearing entitled “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform” featuring testimony from several regulators tasked with enforcing Bank Secrecy Act and anti-money laundering (BSA/AML) regulations. Although Chairman Mike Crapo in his opening statement noted bipartisan support for updating decades-old BSA/AML rules, Ranking Member Sherrod Brown cautioned that efforts to increase regulatory efficiency may decrease the robustness of the BSA/AML regime. During the question and answer period, notable exchanges included several Republicans voicing support for raising the BSA filing threshold, several Democrats speaking in favor of legislation expanding beneficial ownership disclosure requirements, and significant disagreement among regulators on the need for a formalized interagency review process for BSA/AML rules.
 
Senate Votes To Invoke Cloture on Kraninger CFPB Nomination
On Thursday, the Senate voted to invoke cloture on the nomination of Kathleen Kraninger to serve as Director of the Consumer Financial Protection Bureau (CFPB) on a 50-49 party line vote. Ms. Kraninger, currently a senior official at the Office of Management and Budget (OMB), has faced substantial Democratic opposition to her nomination over an alleged lack of experience in consumer finance issues, her involvement in the Trump Administration’s separation of migrant families, and changes enacted by CFPB acting Director Mick Mulvaney. The cloture vote sets Ms. Kraninger up for a final confirmation vote as soon as this Tuesday, which she will likely clear by a similar margin.
 
Flood Insurance Extended Through 12/7
On Thursday, the House and Senate passed a seven-day extension (text) of the National Flood Insurance Program through December 7, while the Senate passed a 6-month reauthorization (S. 3628) of the program. After a 3-month extension in August, the program was set to expire on November 30, but with the extension is now set to expire this Friday—the same deadline as government funding.

Select Highlights from the Administration
The White House
President and Xi Appear to Reach Détente on Trade War
On Saturday, it was announced that the President and Chinese President Xi reached an agreement to try to bring an end to the trade war, with Trump agreeing not to increase tariffs any further while negotiations continue and the Chinese agreeing to purchase more U.S. agricultural, energy and other products. The announcement means that U.S. tariffs on $200 billion worth of goods will not rise to 25 percent on Jan. 1, from 10 percent currently, as many had been concerned about it.  Despite the initial excitement surrounding the announcement, as folks read the finer details it became clearer that this was a reprieve rather than a resolution of the trade war.
 
North American Leaders Ink USMCA (née NAFTA 2.0)
On Friday, the President, Canadian Prime Minister Justin Trudeau, and now-former Mexican President Enrique Peña Nieto signed the United States-Mexico-Canada Agreement (USMCA) (text) on the sidelines of the G20 summit in Buenos Aires, Argentina. Replacing the North American Free Trade Agreement (NAFTA), the new agreement makes several notable changes to the North American trade regime, including a new labor value content rule of origin for automobiles, a 10-year exclusivity period for biologic drugs, and restrictions on data localization requirements.   In addition, the agreement contains a significant step backward for small item cross border trade by adding significant complications to the de minimis customs thresholds. 
 
With the deal inked, it will now head to Congress for consideration. Despite a push by some Republican members to consider the deal this month while Republicans retain control of the House, procedural hurdles mean that it is likely to be considered in 2019—when it will face a complicated path to approval amid substantial Democratic opposition and disgruntlement from some Republicans over certain provisions.
 
Federal Reserve
Powell Attempts to Calm President After Considerable Presidential Criticism
On Wednesday, Federal Reserve Board of Governors Chairman Jerome Powell delivered a speech at the Economic Club of New York in which said that interest rates are “just below” the level where they will not stimulate the economy. The comment marks a step back from the comments Powell made in October when he described interest rates as “a long way from neutral,” and throw a dash of uncertainty over expectations that the Fed will continue to raise rates next year. Equity markets responded favorably to the development, with stocks soaring 2.3 percent. Powell’s statement came amid a period of tension between the White and the Fed, with President Trump being harshly critical of the Fed’s rate increases. 
 
Fed Identifies “Moderate” Risk in Inaugural Financial Stability Report
On Wednesday, the Federal Reserve released the first issue of its biannual Financial Stability Report summarizing the Fed’s framework for assessing the resiliency of the U.S. financial system. The report identifies several risks in the U.S. financial system, including: (1) relatively high levels of corporate debt and “signs of deteriorating credit standards;” (2) elevated equity and commercial real estate prices; and (3) trade uncertainty.  Despite these concerns, the report describes overall risk in the financial system as “moderate” and cites well-buffered banks and healthy household borrowing as current strengths. In accompanying remarks, Fed Chairman Powell commented that “the risks of destabilizing runs are far lower than in the past,” called financial institutions more “resilient” and said that the Fed does not “detect a broad-based buildup of abnormal or excessive leverage.”
 
Office of the Comptroller of the Currency
OCC Announces 10 Percent Fee Reduction
On Friday, the Office of the Comptroller of the Currency (OCC) released a bulletin announcing a 10 percent reduction in the fees paid by regulated institutions to the OCC. In addition to the rate reduction, which is expected to reduce OCC revenues by $90 million, OCC also announced that it would begin offering refunds to institutions that leave the federal banking system during the first half of the assessment period. In an accompanying press release, Comptroller of the Currency Joseph Otting attributed the rate decrease to increased efficiency at OCC, commenting that ““the agency has demonstrated it can reduce its costs by operating more effectively and efficiently while still ensuring the federal banking system operates in a safe, sound, and fair manner.” The change will take effect next year.
 
Internal Revenue Service
IRS Releases Proposed Regulations on Business Interest Expense Deduction Limit
On Monday, the Internal Revenue Service (IRS) released proposed regulations for the provision of the Tax Cuts and Jobs Act (TCJA) limiting the business interest expense deduction for certain taxpayers. Under TCJA, the deduction for business interest is limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s adjusted taxable income; and (3) the taxpayer’s floor plan financing interest—although the limit will not apply to taxpayers whose annual gross receipts for the three previous tax years are $25 million or less, among other exclusions. Monday’s proposed rule provides definitions and general rules for calculating a taxpayer’s limitation, as well as specific rules for calculating the limitation specifically for consolidated group, partnership, and international contexts.
 
IRS Releases Foreign Tax Credit Regulations
On Wednesday, the Internal Revenue Service (IRS) released guidance on the treatment of foreign tax credits. The regulations dealt with the enactment changes to the taxation of foreign profits contained in the Tax Cuts and Job Act, which included a Global Intangible Low-Taxed Income (GILTI) tax—a backstop intended to prevent the moving of business operations to low-tax jurisdictions by taxing foreign income taxed by foreign government at a rate less than 13.125%. Despite September rulemaking on the regulation, calculation of GILTI has remained a source of confusion for industry, including how it relates to foreign tax credits, an issue that the recent regulation attempt to address. Under the proposed rule, companies will only have to allocate half—as opposed to all—of certain domestic subsidiary costs, effectively lowering their GILTI liabilities, and will have some leeway in utilizing unused foreign tax credits. While the guidance is seen as meeting industry in the middle, experts have indicated that it will likely leave some companies with operations in high-tax jurisdictions subject to double taxation.

Next Week’s Schedule

Mon. (12/3)

• No events scheduled.

 
Tues. (12/4)

• Confirmation Hearing: Senate Finance Committee. – 10:30 AM – The Senate Finance Committee will hold a hearing on the nomination of Courtney Dunbar Jones to be a judge of the United States Tax Court. Details here.
• Hearing: House Judiciary Sub on Antitrust Enforcement – 4:00 PM – The House Judiciary Subcommittee on Regulatory Reform, Commercial, and Antitrust Law will old an oversight hearing of the antitrust enforcement agencies. Details here.

 
Wed. (12/5)

• Hearing: Senate Banking Committee on Fannie Mae and Freddie Mac – 10:00 AM – The Senate Committee on Banking, Housing, and Urban Affairs will hold an oversight hearing of pilot programs at Fannie Mae and Freddie Mac. Details here.
• Hearing: House Financial Services on the National Debt – 10:00 AM – The House Financial Services Committee will hold a hearing entitled "The National Debt: Washington, We Have a Spending Problem." Details here.
• Hearing: House Judiciary Committee on Google's Data Collection Practices – 10:00 AM – The House Judiciary Committee will hold a hearing entitled "Transparency & Accountability: Examining Google and its Data Collection, Use and Filtering Practices" featuring testimony from Google CEO Sundar Pichai. Details here.
• Hearing: Senate Judiciary Committee on China – 10:00 AM– The Senate Judiciary Committee will hold a hearing entitled "China’s Non-Traditional Espionage Against the United States: The Threat and Potential Policy Responses." Details here.
• Hearing: Joint Economic Committee on the Economic Outlook – 10:15 AM – The Joint Economic Committee will hold a hearing examining the economic outlook featuring testimony from Federal Reserve Chairman Jerome Powell. Details here.
• Hearing: House Financial Services Sub on FHA Oversight – 2:00 PM – The House Financial Services Subcommittee on Housing and Insurance will hold an oversight hearing of the Federal Housing Administration. Details here.
• Hearing: House Education and the Workforce Sub on Minimum Wage – 2:00 PM – The House Education and the Workforce Subcommittee on Workforce Protections will hold a hearing entitled "Mandating a $15 Minimum Wage: Consequences for Workers and Small Businesses. 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.
• Heritage Event on Financial Regulatory Reform – 4:00 PM– The Heritage Foundation will host an event on financial regulatory reform featuring a conversation with House Financial Services Chairman Jeb Hensarling (R-TX) Details here.

 
Thurs. (12/6)

• FTC Hearing: Competition and Consumer Protection – 8:45 AM – The Federal Trade Commission (FTC) will hold a hearing entitled "Competition and Consumer Protection in the 21st Century." Details here.
• Hearing: Senate Banking on the Proxy Process – 10:00 AM – The Senate Committee on Banking, Housing and Urban Affairs will hold a hearing entitled "Proxy Process and Rules: Examining Current Practices and Potential Changes." Details here.
• Hearing: House Energy and Commerce Sub on the RAY BAUM's Act – 10:00 AM – The House Energy and Commerce Subcommittee on Communications and Technology will hold a hearing entitled "RAY BAUM's Act: A Bipartisan Foundation for Bridging the Digital Divide." Details here.
• Hearing: House Financial Services on Housing Reform – 10:00 AM – The House Financial Services Committee will hold a hearing entitled “A Legislative Proposal to Provide for a Sustainable Housing Finance System: The Bipartisan Housing Finance Reform Act of 2018." Details here.
• CFPB Advisory Committee Conference Call – 1:00 PM – The Consumer Financial Protection Bureau (CFPB) will hold a advisory committee conference call on artificial intelligence in consumer financial services and consumer access to financial records. Details here.

 
Fri. (12/7)

• PIIE Event on Financial Stability – 12:15 PM – The Peterson Institute for International Economics (PIIE) will host an event with Fed Governor Lael Brainard to discuss current financial stability issues. Details here.