Financial Services Report

Our Take

This weekend marked the one-year anniversary of the Trump Administration.   To quote those great American poets, what a long strange trip it’s been.  The President campaigned on running our government in a very different manner and he certainly has delivered.  This past weekend saw funding for the federal government run out due to intense partisan bickering over immigration and massive protests occurring around the country.  Amid all of this, it was nice to see just a little bit of normalcy.

Looking Ahead

Near Term

• The Senate will attempt to start the process for breaking the impasse on funding the government at noon Monday.   It is unclear at this time whether they will be successful.
• On Tuesday, the Senate Banking Committee is scheduled to hold a confirmation hearing for three nominees: Jelena McWilliams to be the new head of the Federal Deposit Insurance Corp.; Marvin Goodfriend to join the Fed as a board member; and Thomas Workman to be on the Financial Stability Oversight Council as the Insurance Industry representative.

Further Out

• The Senate Banking Committee is set to hear from Treasury Secretary Steven Mnuchin on the Financial Stability Oversight Council’s (FSOC) Annual Report to Congress On January 30^th.
• The House Financial Institutions Subcommittee will hold a hearing on FinTech on January 30^th.
• The House Financial Services Oversight and Investigations Subcommittee will also hold a hearing on how human traffickers exploit US Financial Markets on January 30^th.

The Past Week

Legislative Branch
House
House Passes Bill to Ease Mortgage Disclosure Rules
Prior to its drama on a government shutdown, the House passed a bill last week that would lessen the requirements certain lenders would need to complete under the provisions of the Home Mortgage Disclosure Act (HMDA). In a 243-184 vote, lawmakers voted to add new exemptions for smaller institutions and reduce the amount of data that lenders traditionally need to report.   Specifically, the legislation would exempt small banks and credit unions from HMDA reporting obligations if they have originated 1,000 or fewer closed-end mortgages in each of the two preceding calendar years or 2,000 or fewer open-ended lines of credit in each of the two preceding calendar years.  Similar language has been included in the reg relief bill the Senate is still expected to take up in the near future. 
 
HFSC Advances 15 Bills in Markup
In a two-day markup last week, the House Financial Services Committee considered a set of bills on issues including restricting the ability of the Consumer Financial Protection Bureau (CFPB) to regulate the insurance industry and increasing the amount of retroactive analyses that regulators are required to perform on their past rules. As in previous markups, some bills were passed on a bipartisan basis, while others were advanced on strict party lines. Two bills, one dealing with lawyers who collect debt, and another that would have made changes to the Volcker rule were pulled from consideration.   In addition, another bill, H.R. 2319, the Consumer Financial Choice and Capital Markets Protection Act passed on a bipartisan vote, though five Republicans voted against it.  The markup comes in the shadow of the pending consideration in the Senate on a regulatory relief bill (S. 2155), such that Ranking Member Maxine Waters (D-CA), criticized that bill and encouraged all Democrats to vote against it in her opening statement.

Senate
Banking Committee Approves Powell as Fed Chair for Second Time
On Wednesday, the Senate Banking Committee again approved the nomination of Jerome Powell to be the next Chair of the Federal Reserve on a 22-1 vote. Powell had originally been approved in December, but the vote had to be taken again due to Senate rules on the changeover between yearly sessions. As in the last vote, Sen. Elizabeth Warren (D-MA) was the only member of the panel to oppose Powell’s nomination, and reportedly demanded to recorded vote.  If the Senate is unable to confirm Powell before the end of current Fed Chair Janet Yellen’s term on February 3^rd, she will remain in place until he is confirmed. 
 
Heller, Manchin Introduce Bill to Help BDCs
On Thursday, the bipartisan pair of Sens. Dean Heller (R-NV) and Joe Manchin (D-WV) introduced S.2324, Small Business Credit Availability Act, which aims to modernize rules for Business Development Companies (BDCs) that make loans to small businesses. The rules changes include a simpler disclosure requirement system and reducing paperwork for BDCs, which the senators believe would “allow BDCs to raise capital in the safe efficient manner as traditional operating companies.” Similar legislation has been introduced by Rep. Steve Stivers (R-OH) in the House.
 
Six GOP Senators Write to White House on FSB Role in U.S. Regulation
On Thursday, a group of six Republican senators – Sens. Tom Cotton (R-AR), Mike Crapo (R-ID), Pat Toomey (R-PA), David Perdue (R-GA), Thom Tillis (R-NC), John Kennedy (R-LA) – wrote to President Trump asking that he take “appropriate action” to address the role of the international Financial Stability Board (FSB) in the U.S. regulatory framework. The senators accuse the FSB of being a regulatory body that “operates with minimal oversight” and that they are concerned that the FSB has “been driving a significant amount of U.S. policymaking regarding financial regulation.”
 
Select Highlights from the Administration
The White House
Trump Looks to Loosen Dodd-Frank Lending Rules
In remarks on Tuesday, President Trump said that he hopes to give banks and financial institutions more freedom to make loans to riskier customers than currently allowed under the rules of the 2010 Dodd-Frank Act. The President’s comments come as the Senate is reported to be preparing a bipartisan regulatory relief bill, and one day before Mark Calabria, chief economist for Vice President Mike Pence, (and a former Senate Banking Committee Staffer) made comments to the Exchequer Club in DC that indicated the timeline for consideration had slipped and even put overall chances of passage into law at 50 percent.   Calabria’s comments received immediate pushback from the White House, but do highlight the difficult pass to passage.   While there seems to be 60 plus votes to move the bill through a crowded Senate calendar, House conservatives are already indicating they are not happy with the deal, and have suggested that they will oppose the bills because of its lack of reforms for the Consumer Financial Protection Bureau.
 
Consumer Financial Protection Bureau (CFPB)
Mulvaney Seek No Funding from Fed for Second Quarter
In his first budgetary request to the Federal Reserve, Acting CFPB Director Mick Mulvaney wrote to Federal Reserve Chair Janet Yellen and asked for zero funding for the Bureau for the second quarter of 2018. The Acting Director justified his actions by noting that he intends to draw down from the $177 million in funds that the Bureau keeps as a reserve in case of overruns or emergencies and that those funds far exceeded his anticipated budget of $145 million dollars. The move, which generated numerous headlines, came on the heals of other actions Mulvaney has taken to modify the actions of the consumer watchdog, including revisiting the agency’s rules on payday lending and seeking public comment on the Bureau’s activities. 
 
CFPB Issues Broad Call for Evidence
The CFPB continued its new direction last week with a formal “call for evidence” that the Bureau is rightfully fulfilling its “proper and appropriate functions to best protect consumers.” The Bureau announced it would be publishing a series of Requests for Information (RFIs) involving different aspects of the Bureau’s work as a part of the new direction for the consumer watchdog under the leadership of Acting Director Mick Mulvaney. In a statement on the call for evidence, Mulvaney sad that it was “natural for the Bureau to critically examine its policies and practices to ensure they align with the Bureau’s statutory mandate.”
 
CFPB Will Reconsider Payday Lending Rule
On Tuesday, the CFPB issued a release that it intended to “reconsider” the payday lending rule finalized during Richard Cordray’s leadership of the agency. The rule limited who could take out payday loans and required lenders to ensure that borrowers could repay them before issuing the loan. Given that the rule has been finalized, it will require a formal period of notice and comment to be rescinded or altered.
 
CFPB Drops Payday Lending Lawsuit
In a continuation of the CFPB’s busy week, the Bureau dropped a lawsuit against four payday lending companies alleging that they were collecting debts that individuals did not actually owe. A statement accompanying the decision said that the Bureau will “continue to investigate the transactions that were at issue.” The case was brought by the CFPB last April when it was under the leadership of then Director Richard Cordray.
 
Commodity Futures Trading Commission (CFTC)
CFTC to Give New Consumer Protection for Virtual Currencies
CFTC Chair Chris Giancarlo announced Friday that derivatives businesses will need to gather additional information about virtual currency businesses before they can be traded under new rules. The markets trading the currencies will be required to disclose their attempts to get information from concerned parties according to the proposal presented by Chair Giancarlo at a speech in Florida. The move comes as financial regulators across the federal government grapple with the rise of cryptocurrencies and the volatility of their value in global markets.   For example, the value of BitCoin went from a high of over $14,000 to a low of under $10,000 in just three days last week.
 
Justice Department
Trump Administration Drops Appeal to MetLife Ruling on ‘Systemically Important’ Label
On Thursday, the Justice Department moved to drop its appeal to a court decision that allowed for MetLife to drop its systemically important financial institution (SIFI) tag and avoid additional regulatory scrutiny from the Federal Reserve. The case was originally decided in MetLife’s favor in March 2016, allowing the Obama Administration to file an appeal to maintain the Financial Stability Oversight Council’s decision to maintain the SIFI tag. Treasury Secretary Steven Mnuchin – FSOC’s current leader – said he was pleased with the Justice Department’s decision and that it was “consistent with the recommendation by a majority of FSOC voting members.
 
Federal Reserve
Quarles Presents Plan to Ease Bank Regs
On Friday, the Federal Reserve’s Vice Chair for Regulation, Randal Quarles, spoke to the American Bar Association’s Banking Law Committee outlining a new direction for banking regulation that would take a lighter touch. Saying he sought to make the rules more “efficient,” Quarles said that capital demands should be simplified and that the burdens of stress testing and living wills should be eased. However, he was careful not to say that banks should undergo less scrutiny, arguing that he was not advocating for an “enervation of the regulatory capital regime.” The most near-term consequence of Quarles priorities looks to be a rewriting of the leverage ratios imposed on the nation’s bank.
 
Office of the Comptroller of the Currency (OCC)
OCC Optimistic in Semiannual Report on Bank Risk
On Thursday, the OCC issued its Semiannual Risk Perspective detailing its view of the challenges facing the banking sector, with “complacency” being viewed as the primary concern. Overall, however, the report was positive on the health of the system, and Comptroller Joseph Otting said that the agency is “comfortable” with the report’s findings. On cybersecurity, the OCC believes that banks would be able to identify a serious risk before it reached a critical level. The report cautioned that a competitive lending environment was leading to an “incremental” easing of commercial underwriting standards, which could lead to increasing risk across the sector. The report is the first since Comptroller Otting took the helm at the agency.