money matters

This Week in Washington for May 30, 2017

By Dina Ellis and Casey Miller

THE BIG PICTURE

On May 23rd, President Trump released his budget, which will serve as the starting point for negotiations with Congress. The budget proposal slashes social programs by more than $1T over 10 years, which includes large cuts to Medicaid, food stamps, and welfare programs. Domestic discretionary spending would be capped at $429B per year, below 2004 levels, while military spending would rise to $722B per year.

Senate Banking Committee Ranking Member Sherrod Brown (D-OH) criticized the budget’s cuts to housing aid for low-income urban and rural communities. The budget cuts the Department of Housing and Urban Development’s (HUD) budget by about $7B. It eliminates funding for the Community Development Block Grant program, which supports a variety of community investments, affordable housing, and rural water infrastructure. It also eliminates the HOME Investment Partnerships program, which helps communities create and maintain affordable rental housing and homeownership opportunities.

House Financial Services (HFS) Committee Chairman Jeb Hensarling (R-TX) praised the President for proposing “a budget that puts us on a path to fiscal sanity,” while Committee Ranking Member Maxine Waters (D-CA) called the budget “cruel and senseless” and said that it “abandons Main Street and the vulnerable.”

Provisions of the President’s budget impacting the financial services industry include:

• Saving $35B over 10 years by making, among other things, changes to financial regulations, possibly including the elimination of the government’s power to unwind megabanks. The savings include funds that would no longer need to be set aside for orderly liquidation authority. However, according to a statement made by a top adviser to Vice President Mike Pence several days after the budget was released, the Administration may decide to reform rather than eliminate entirely the government’s power to unwind failing banks.

• Funding for the Securities and Exchange Commission (SEC) remaining flat, at $1.6B.

• Deep cuts to the Consumer Financial Protection Bureau (CFPB). The budget document states that it “proposes to limit CFPB’s funding in 2018 to allow for an efficient transition period and bring a newly streamlined agency into the regular appropriations process beginning in 2019.” Changes to the CFPB are expected to save $145M next year and $6.8B over 10 years.

• Balancing the budget in part by depending on mortgage giants Fannie Mae and Freddie Mac, and counting on $142.4B in projected profits from the companies over the next 10 years. This inclusion in the budget directly contradicts the Administration’s stated position of wanting to reform Fannie and Freddie.

• A $30M fee designed to partially fund upgrades to the Federal Housing Administration, including its risk management system. Lenders objected to the fee, and executive director of the Community Home Lenders Association Scott Olson said that the upgrades should be funded out of the large FHA surplus, “instead of creating a new fee that will be passed along to homebuyers.”

LAST WEEK ON THE HILL

House Leaders Dropping Repeal of the Durbin Amendment in the Financial CHOICE Act: After HFS Chairman Jeb Hensarling battled with some of his own Committee members over a provision in the Financial CHOICE Act that would repeal the Durbin Amendment’s cap on debit card fees included as part of the 2010 Dodd-Frank Act, the provision will be dropped from the CHOICE Act. Leading the charge against repealing the price-control provision were Reps. David Young (R-IA) and Dennis Ross (R-FL). On one side of the issue were bankers, who wanted to keep the repeal language in the bill to return interchange fees to a market-based pricing system, and on the other side were retailers, restaurants, and airlines from across the nation who wanted price controls to remain in place.

Repeal of the Durbin Amendment was the biggest sticking point for the CHOICE Act, which is a top GOP priority. Republican sources on May 24th said that House leaders will no longer seek to repeal the Durbin Amendment. Chairman Hensarling has said he wants to play the “long game” with the legislation, saying that there are “larger ideas [that] may take several Congresses [to come to] fruition.” Bolstering the GOP’s position on the bill is the recent CBO report that states “the biggest U.S. banks likely would not get relief from the new banking rules in the legislation,” despite the Democrats’ popular talking point that it is a handout for big banks.

The legislation is expected to be brought to the House Floor for a vote as early as June 7th.

The Senate Banking Committee on May 23rd advanced four nominees, including Sigal Mandelker, to be Treasury undersecretary for terrorism and financial crimes; Heath Tarbert, to be Treasury assistant secretary for international markets and development; Marshall Billingslea, to be Treasury assistant secretary for terrorist financing; and Mira Ricardel, to be Commerce undersecretary for export administration. Democrats including Senators Sherrod Brown (D-OH) and Mark Warner (D-VA) opposed Mandelker’s nomination, with Warner saying that he will oppose her nomination until the Senate Intelligence Committee receives responses from the Treasury Department to their document requests.

The Senate Foreign Relations Committee on May 25th approved by an 18-3 vote new sanctions against Tehran—the stiffest Iran economic sanctions proposed since the 2015 nuclear pact. According to Committee Chairman Senator Bob Corker (R-TN), Russia sanctions are soon to follow.

LEGISLATION INTRODUCED AND PROPOSED

HFS Committee Republicans Release Drafts on National Flood Insurance Program: HFS Committee Republicans released a series of draft bills overhauling the National Flood Insurance Program, including: an affordability draft, a private market draft, a mapping draft, a claims processing draft, a “strengthening taxpayer protections” draft, and a mitigation draft. At issue is the question of how much to cut from the program, which is $24.6B in debt. Two coastal senators on the Senate Banking Committee, Senators Robert Menendez (D-NJ) and John Kennedy (R-LA) are drafting their own bill. The legislation is must-pass, as the program expires at the end of September.

The Administration’s budget projects $95M in savings next year and $8.9B over 10 years from overhauling the National Flood Insurance Program (NFIP).

On May 25th, Representative Pallone introduced the Gaming Accountability and Modernization Enhancement, or GAME Act. The act will allow states to legalize sports betting and online gambling if appropriate consumer protections are also in place. According to Pallone, Americans are betting up to $400B a year on sports games alone. Because of the interests of brick-and-mortar casinos and their strong lobbying presence, it is unlikely that this legislation will move anytime soon.

THE REGULATORS

On May 22nd, Department of Labor (DOL) Secretary Alexander Acosta announced that he will not further delay the fiduciary rule, which will take effect on June 9th. Despite receiving significant pressure from Republicans and industry groups, Acosta said that he was legally constrained and could not further delay the rule. Acosta penned an op-ed in the Wall Street Journal and issued guidance as to how the fiduciary rule would be enforced.

Despite the lax enforcement guidance, HFS Chairman Jeb Hensarling said that “Obama era bureaucrats in the Department of Labor may have been allowed to overrule President Trump’s wishes,” and House Education and Workforce Committee Chairwoman Virginia Foxx (R-NC) said that the “decision does not provide the relief workers and families urgently need from a deeply flawed rule.”

Government Accountability Office (GAO) to Determine Congressional Review Act Scope: The GAO will issue a study on whether guidance and bulletins issued by the Executive Branch can be easily nullified by Congress. Under the Congressional Review Act (CRA), Congress has 60 legislative days to reject a regulation with a majority vote. Senator Pat Toomey (R-PA) has led the fight to use the CRA to target guidance at the agencies. The GAO will now determine whether such guidance and bulletins should be considered regulations for purposes of the CRA.

Federal Open Market Committee Expresses Concern About Regulatory Rollback: The policymaking body of the Fed is worried that Congress and the Trump Administration may roll back regulations put in place after the 2008 financial crisis. According to minutes from their May meeting, the Committee “expressed concerns that a possible easing of regulatory standards could increase risks to financial stability.” Next month, Department of Treasury Secretary Steve Mnuchin is expected to release the first of a series of reports detailing how financial regulations could be overhauled.

Banks and Online Lenders Ask Consumer Financial Protection Bureau (CFPB) for Clarity on Alternative Data: Banks and online lenders are asking the CFPB to not write a rule regarding alternative data, but rather to offer guidance on how it can be used. Mostly driven by fintech startups, the use of alternative data has increased in recent years as a means to help Americans without credit history get loans. New factors like utility bills, rent payment history, college majors, and graduate degrees are among the data being incorporated into credit assessments. The lenders offered their feedback in response to a request for information from the CFPB. It is unclear if the CFPB will move forward with rulemaking.

Payday Lenders May Get Break on Debt: According to Moody’s Investors Service’s May 17 report, payday lenders like Creditcorp, CNG Holdings Inc., TMX Finance LLC, and Community Choice Financial will likely get more opportunities to refinance in the next two years as the CFPB receives pressure from President Trump, lawmakers, and lawyers to drop plans for stricter rules on payday lending. The CFPB has been cracking down on payday lenders since its inception, and calls the $8.7B in collected interest and fees collected by payday lenders “excessive.”

National Credit Union Administration Chairman Asks CFPB to Reduce Regulations on Credit Unions: NCUA Acting Chairman Mark McWatters urged CFPB Director Richard Cordray to ease up on credit unions in two areas. First, he asked that credit unions be exempted from the data reporting requirements of the Home Mortgage Disclosure Act. Second, he asked that the CFPB clarify credit unions’ obligations under Dodd Frank’s rule against “unfair, deceptive, and abusive practices.” According to McWatters, the CFPB “could go far to extend relief to credit unions and ensure greater protection to consumers by providing much-needed clarity.”

Community Bankers Association Weighs in with CFPB: The Independent Community Bankers Association (ICBA)

to the CFPB regarding the Home Mortgage Disclosure Act. The ICBA urged the CFPB to “make optional the reporting of new data, significantly increase reporting thresholds to exempt more small-volume lenders, exclude reporting for commercial loans, and establish reasonable data resubmission guidelines.” The ICBA also urged in a comment letter for the CFPB to expand exemptions from restrictions on remittance transfers and to increase the safe harbor threshold from 100 to 1,200 annual transactions, exempt transfers exceeding $10k, and reduce the time for filing complaints from 180 days to 60 days.

CFPB Seeks Comments on Ability-to-Repay/Qualified Mortgage Rule: The CFPB on May 25th

the effectiveness of the Ability-to-Repay/Qualified Mortgage rule (ATR/QM rule). The ATR/QM rule requires, among other things, mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the loan, including any mortgage-related obligations according to the loan’s terms. As the CFPB released its plan on the 25th, it asked for public comment on the rule.

Court Hears Arguments on CFPB Constitutionality: The full D.C. Circuit heard arguments on May 24th in PHH v. CFPB, a case challenging the structure of the CFPB as unconstitutional. The rehearing follows a 2-1 ruling by a three-judge panel of the court that the CFPB’s structure, which does not allow the President to remove the sole director of the CFPB without cause, is unconstitutional. Judges sent mixed signals at the hearing last week, making it difficult to predict which way the court will rule, though some lawyers familiar with the case are saying that more judges are leaning toward keeping the current CFPB structure in place.

According to a poll in eight battleground states, 58 percent of voters support a commission structure at the CFPB. Sixty-three percent said a commission would make the CFPB fairer, and 62 percent said a commission would make the CFPB more accountable.

Stricter Regulation for Government-Sponsored Enterprises (GSEs): Worries about credit concentrations at the Federal Home Loan (FHL) banks are sparking conversations about stricter regulation of GSEs. Federal Housing Finance Agency Director Mel Watt showed concern about Home Loan banks’ reliance on short-term funding, stating “Overreliance on short-term funding can strain the system’s capacity to issue short-term debt at attractive spreads. Currently, market demand appears to be large enough to accommodate ample amounts of FHL Bank short-term debt, but that may not always be the case.”

Commodity Futures Trading Commission (CFTC) Puts Forth Bigger Budget Request: On May 23rd, CFTC Acting Chairman Chris Giancarlo submitted an FY18 budget request of $281.5M, about 12 percent higher than the $250M that the President put forth earlier in the day. Democratic CFTC member Sharon Bowen said that the request did not go far enough, and that $281.5M would not be enough for the CFTC to fulfill the demands that its mission requires.

HUD Expands Broadband Program for Low-Income Residents: ConnectHome, which seeks to provide high-speed broadband access to low-income residents, is adding 100 programs to its program. The program began in 2015 with 28 cities, with the goal of connecting 350,000 people in HUD-assisted housing by 2020.

Smaller Firms Ask SEC Chairman Jay Clayton for More Freedom: The Equity Dealers of America has said that its association is calling on the SEC and Congress to loosen the agency’s regulation for “emerging growth companies.” The association says that this will help increase the number of initial public offerings.

COMINGS AND GOINGS AT THE AGENCIES

Senior Economics Staffer at Office of the Comptroller of Currency (OCC) Appointed: Michael Sullivan, who has been at the OCC for 18 years, will become Senior deputy comptroller for economics in light of incumbent David Nebhut’s planned July retirement. Acting Comptroller Keith Noreika said that Sullivan “has a deep understanding of bank supervision and how sound economic analysis can contribute to a more safe and sound federal banking system.”

Trump Nominates HUD General Counsel: President Trump has nominated J. Paul Compton, Jr. to be general counsel at the Department of Housing and Urban Development. Compton is a partner at law firm Bradley Arant Boult Cummings and is located in its Birmingham, Alabama office. He also serves as outside counsel to the Alabama Affordable Housing Association.

The SEC announced on May 25th that Peter Uhlmann will be the managing executive in the Office of Chairman Jay Clayton. Most recently, Uhlmann served as managing executive for then-Acting Chairman Michael S. Piwowar. Prior to that, he was managing executive of the SEC’s Division of Corporate Finance.

Top Supervisory Official At Federal Reserve Retiring This Summer: According to a Fed spokesman, Timothy Clark, deputy director of the central bank’s division on bank supervision, is retiring this summer. Clark also chairs the Large Institution Supervision Coordinating Committee, which oversees eight U.S. megabanks, four European banks with the largest U.S. presence, and two “systemically important” insurance companies.

Treasury Hires Avoid Senate Confirmation: Secretary Mnuchin has hired four “counselors” as top aides at the Treasury Department, using a title that doesn’t require Senate confirmation. The hires include Craig Phillips, an ex-BlackRock Inc. executive who will oversee Treasury’s domestic finance office; Shannon McGhan, who will advise on legislative and public affairs; Dan Kowalski, who is working on budget issues, the debt limit, and infrastructure finance; and Justin Muzinich, formerly of Morgan Stanley, who is working on a tax overhaul.

Deputy Treasury Secretary nominee James Donovan, a Goldman Sachs executive, withdrew his name from consideration, citing unexpected family matters.

OTHER NOTEWORTHY ITEMS

Bankers Use Budget to Blast Tax Exemption for Credit Unions: Bankers are using the budget process as an attempt to roll back the tax exemption for credit unions, citing the fact that the federal government will forgo $35.3B over the next decade due to the credit union income tax exemption. The forecast is up 32% from last year’s estimate of $26.7B. Ryan Donovan, the Credit Union National Association’s chief advocacy officer, said that the increased estimate is likely the result of the credit union industry’s strong financial performance. Carrie Hunt of the National Association of Federally-Insured Credit Unions claimed in a May 18th letter to the House Ways and Means Committee that the exemption would generate $159B in economic activity.

Voluntary Global Code of Conduct Released: On May 25th, central bankers and foreign exchange entities released a voluntary global code of conduct, which establishes good practices for foreign exchange markets. The Foreign Exchange Working Group has spent two years developing the guidelines, which were released in London. The code contains 55 principles on ethics, risk management, compliance, transparency, confirmation and settlement procedures, and governance and information sharing.