Financial Services Report

Our Take

For the past two years, there has been a definitive “theme” to Congress.  For example, two years ago the congressional agenda was primarily driven by the plethora of legislative deadlines that needed to be met.   Last year, of course, was the election.   Now, 102 days into the current Administration, it is becoming apparent that the best way to define this Congress is like an act in four parts.  The first one ran from Jan 3rd through the President’s day recess and it mainly consisted of the ceremonial activities associated with a new session and a new administration.  The second act was the six-week work period between the end of the President’s Day Recess and the Easter Break, where both the Administration and the key players in Congress were figuring out their respective roles, and how to play them.  

We are now one week into the third “Act” of this Congress, and it will be a major one, lasting nearly twelve weeks until the start of the August Recess.  For Congressional watchers, and other policy stakeholders, this will be the crux of the congressional workload, where major issues like tax reform, Dodd-Frank reform, and flood insurance will have their proverbial foundations poured, and we will have a good sense whether it will be possible to build on those foundations or whether they are constructed of worthless rhetoric.  Additionally, many ancillary issues will be addressed through the appropriations process, as Congress will need to work on legislation to fund the government following the expiration of the CR at the end of the fiscal year.  Finally, depending whether the Health Care reform effort can get through the Senate (and back through the House) there could be a second reconciliation measure that beyond tax reform, could sweep in other GOP priorities – such as CFPB reform.  
 
After slogging through those twelve weeks, the August recess will be a time for feedback as members will be in their districts for large stretches of time and should expect continued energy from the respective bases.   Upon their return to Washington, we will start the fourth part, which will happen to run through the end of the first quarter of the next year.   By that point, any substantive legislative efforts not close to completion are likely to rot on the vine, because by the of March 2018 will mark the start of election season thus bringing Capitol Hill back to gridlock Americans have become accustomed to.
 
  

Looking Ahead

Near Term

• After passing a short-term extension last week, House and Senate negotiators are expected to bring a long term continuing resolution bill to keep the government funded until September 30, 2017 to the floor this week.  
• The Senate will continue to work on confirming President Trump’s appointees, with the nomination of SEC Commissioner Jay Clayton on Monday.  Senate Banking is also going to hold two major hearings this week, first on the US / EU Covered Agreement for Insurance, and then on Thursday a hearing on flood insurance.
• The House Financial Services Committee is going to mark-up the Chairman’s CHOICE Act on Tuesday.  While the mark-up of a similar bill last fall lasted less than hour, things are expected to remarkably different on Tuesday, with Committee Democrats expected to follow the playbook of their colleagues on the Energy and Commerce Committee for the Obamacare repeal bill, and will drag things out to make it as painful as possible.   

The Past Week

Legislative Branch
House
House Advances Bill Subjecting Fannie and Freddie to FOIA Requirements
On Thursday, the House voted 425-0 to approve a bill (H.R. 1694) that would subject housing giants Fannie Mae and Freddie Mac to Freedom of Information Act (FOIA) requirements as long as the institutions are under government conservatorship. Both Fannie and Freddie were placed under conservatorship following the 2008 financial crisis and Republicans in particular have long sought to reform the institutions.
 
House Financial Services Committee Holds Hearing on Dodd-Frank Replacement
On Wednesday, House Financial Services Committee held a hearing on Chairman Jeb Hensarling’s (R-TX) sweeping rewrite of financial regulations known as the Financial CHOICE Act (H.R. 10). With battle lines well established, the hearing proved uneventful, with a focus on the major
Dodd-Frank provisions that Republicans oppose, namely the Financial Stability Oversight Council’s ability to designate nonbanks as systemically important financial institutions (SIFIs), the structure and funding of the Consumer Financial Protection Bureau (CFPB), and the orderly liquidation authority (OLA) provided to the Federal Deposit Insurance Corporation (FDIC). A markup on the bill, which is fiercely opposed by Democrats, is scheduled for Tuesday.  

Democrats also took advantage of a rarely used procedure to hold a “minority” hearing on the CHOICE Act on Friday morning.  While Senator Elizabeth Warren was presented an opportunity to testify, she did not take any questions from the Members of the Committee.
 
Senate
Acosta Confirmed as Labor Secretary to Complete Trump Cabinet
President Trump’s final Cabinet nomination, Alexander Acosta to be Secretary of Labor, was approved by the upper chamber on Thursday on a 60-38 vote. Acosta, a former member of the National Labor Relations Board, was nominated after President Trump’s initial choice, Andy Puzder, was forced to withdraw from consideration in February due to a series of mounting personal and professional controversies. The new Labor Secretary will be pressed into service as the Department reconsiders rulemakings promulgated by his predecessor, Tom Perez, most notably the Department’s fiduciary rule governing retirement investment advice and its rule drastically raising compensation for employees working overtime.
 
Republican HELP Members Urge Acosta to Finalize New Fiduciary Rule Review
Immediately after his his confirmation, but before he was officially sworn in, as Labor Secretary, Republican senators on the Senate Health, Education, Labor, and Pensions (HELP) Committee wrote to Alexander Acosta urging him to conduct a review of the Labor Department’s fiduciary rule as directed by an executive order signed by President Trump in February. The rule was delayed by 60 days following the President’s request, and the senators ask Acosta to complete any review “before any part of the rule becomes applicable.” Opponents of the rule have feared that the review process may extend beyond the rule’s implementation date, now set for June 9.
 
Banking Committee to Hold Hearing on U.S. – EU Covered Agreement
The Senate Banking Committee will hold a hearing on the covered agreement between the United States and European Union regarding insurance regulation on Tuesday. The hearing comes after a similar panel session in the House Financial Services Housing and Insurance Subcommittee in February. American and European negotiators reached the deal just before the President Trump took office in January of this year, but the new administration has yet to take a position on the agreement. Republicans have criticized both the agreement and the negotiation process as unfair to the American state-based system of insurance regulation.
 
Finance Committee Unanimously Approves USTR Nominee Lighthizer With Waiver
After a brief controversy regarding a needed waiver, United States Trade Representative (USTR) nominee Robert Lighthizer was unanimously approved by the Senate Finance Committee on Tuesday. The vote came after Committee leadership negotiated a deal that paired Lighthizer’s nomination with legislation addressing a shortage in coal miners’ health benefits. The Committee also approved a waiver for Lighthizer for his work with foreign governments in trade negotiations in the 1980s and 1990s, although some Republicans argued that a waiver is unnecessary. Lighthizer could be considered on the Senate floor as soon as this week.
 

Select Highlights from the Administration

The White House
Trump Announces Outline of Tax Reform Package
On Wednesday, the White House announced the broad tenets of its upcoming effort to dramatically overhaul the U.S. tax code, amounting to a massive tax cut for both individuals and corporations. Among the more notable provisions, the corporate tax rate would be lowered from its current level of 35 percent to 15 percent –  including for small businesses – and the number of individual income tax brackets would drop from seven to three at tiers of 10 percent, 25 percent, and 35 percent. Significantly, while the proposal did include a reference to a one-time repatriation effort for American capital held overseas, the White House did not endorse the border-adjustment tax (BAT) as a way to fund other tax cuts.
 
Federal Reserve
Brainard Says Fed Wants Larger Role in FinTech Rules
On Friday, in a speech at Northwestern University, Federal Reserve Board Governor Lael Brainard indicated that there should be a larger role for the Federal Reserve as regulators look to shape the rules for the emerging financial technology or “FinTech” industry.  Noting that many of the disruptive fintech companies utilize a tradition bank partner in some manner or form, Brainard argued that as companies “work out the kinks” the nature of the fintech industry creates a role for regulators to ensure that any negative impact of one company doesn’t undermine trust in the entire banking system.  She went on to add that the “OCC's proposal raises interpretive and policy issues for the Federal Reserve regarding whether charter recipients would become Federal Reserve members or have access to Federal Reserve accounts and services, such as direct access to payment systems.”
 
Government Accountability Office (GAO)
GAO Says Privatizing Flood Insurance Could Benefit FEMA
A report released last week by the Government Accountability Office (GAO) suggested that further expanding the private flood insurance market could free resources for the Federal Emergency Management Agency (FEMA) to focus on flood preparedness and mitigation. The National Flood Insurance Program (NFIP) is currently $26.4 billion in debt and is up for reauthorization in Congress this year. The Senate Banking Committee is likely to discuss the report in their hearing on NFIP reauthorization on Thursday,
 
Consumer Financial Protection Bureau (CFPB)
CFPB Says Student Loan and Mortgage Servicers Breaking Law by Failing to Offer Consumer Protections
On Wednesday, the Consumer Financial Protection Bureau announced the result of supervisory work in the student loan and mortgage servicing industry, asserting that some servicers are violating laws by failing to provide borrowers with legal protections. Among the specific charges, the CFPB said that student loan servicers did not refund charges imposed on borrowers who had wrongly been denied the ability to defer payments on their loans and that mortgage servicers did not deliver required foreclosure protection information. The report also cited $6.1 million that the CFPB has recovered from auto loan originators on behalf of 16,000 allegedly wronged consumers.
 
CFPB Releases New Report on Boosting Diversity in Mortgage Industry
On Thursday, the CFPB released a new report outlining strategies to boost diversity and inclusion within the mortgage industry. The report specifically advocates for encouraging leadership to support initiatives, integrate principles of inclusion in recruiting and hiring, and using data to track progress on diversity initiatives.
 
Office of the Comptroller of the Currency (OCC)
Curry Urges Banking to Innovate in Speech on Fintech
In a speech on Friday, Comptroller of the Currency Tom Curry urged the banking industry to pursue its own technological advances as regulators grapple with the rise of financial technology, or fintech. The OCC’s plans to offer a special purpose bank charter for fintech firms has come under fire from state-level regulators, who have sued in order to prevent the federal agency from moving forward. Curry also lauded the progress fintech firms have made in professionalizing their efforts, saying fintech discussions now focus on meeting community needs, financial inclusion, and collaboration. Curry’s term as Comptroller is technically over, but he will remain on as head of the agency until his replacement is confirmed.