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On May 3, Commodities Futures Trading Commission (CFTC) Commissioner Rostin Behnam emphasized that the Financial Stability Oversight Council (FSOC) should take the lead in evaluating the future of oversight and regulation of the fintech industry. In his keynote address to a financial regulatory conference in Washington, D.C., Behnam highlighted the rise of cryptocurrencies as an example of the need to “identify and craft an appropriate path forward for ensuring that legal issues resulting from these technologies are identifiable and solvable before they cross the horizon.” According to Benham, FSOC, due to its mandate in the Dodd-Frank Act, has the authority to, among other things, convene financial regulators for collaboration and propose policy direction based on input from all stakeholders. Acknowledging the need for all market participants and regulators to be aligned when it comes to fintech regulation, Benham stated that “anything less than decisive action by policymakers in the short term” will lead to uncertainty.
Houses passes two bipartisan bills to ease stress test requirements and nonbank challenges to SIFI designations
On April 11, by a vote of 245-174, the House passed H.R. 4293, the “Stress Test Improvement Act of 2017,” which would amend the Dodd-Frank Act to modify stress test requirements for bank holding companies and certain nonbank financial companies. Among other things, H.R. 4293 prohibits the Federal Reserve Board’s (Board) to object to a company’s capital plan “on the basis of qualitative deficiencies in the company’s capital planning process” when conducting a Comprehensive Capital Analysis and Review (CCAR), and reduces the frequency of stress testing from semiannual to annual. As previously covered in InfoBytes, on April 10, the Board issued its own proposed changes intended to simplify the capital regime applicable to bank holding companies with $50 billion or more in total consolidated assets by integrating the Board’s regulatory capital rule and CCAR and stress test rules.
Separately on April, 11, the House passed H.R. 4061 by a vote of 297-121. The bipartisan bill, “Financial Stability Oversight Council (FSOC) Improvement Act of 2017,” would require FSOC to consider the appropriateness of subjecting nonbank financial companies (nonbanks) designated as systemically important to prudential standards “as opposed to other forms of regulation to mitigate the identified risks.” Among other things, the bill would also require FSOC to allow nonbanks the opportunity to meet with FSOC to present relevant information to contest the designation both during an annual reevaluation, as well as every five years after the date of final determination.
President Trump releases 2019 budget proposal; key areas of reform include appropriation shifts, cybersecurity, and financial crimes
On February 12, the White House released its fiscal 2019 budget request, Efficient, Effective, Accountable, an American Budget (2019 budget proposal), along with Major Savings and Reforms (MSR) and an Appendix. The mission of the President’s budget sets forth priorities, including imposing fiscal responsibility, reducing wasteful spending, and prioritizing effective programs. However, the 2019 budget proposal has little chance of being enacted as written and does not take into account a two-year budget agreement Congress passed that the President signed into law on February 9. Notable takeaways of the 2019 budget are as follows:
CFPB. Under the MSR’s “Restructure the Consumer Financial Protection Bureau” section, Congress and the current administration would implement a broad restructuring of the Bureau to “prevent actions that unduly burden the financial industry” by restricting its enforcement authority over federal consumer law. Among other things, the proposed budget would cap the Federal Reserve’s (Fed) transfers this year at $485 million (an amount equivalent to its 2015 budget) and eliminate all transfers by 2020, at which point the Bureau’s appropriations process would shift to Congress.
Commodity Futures Trading Commission (CFTC). As stipulated in the Appendix, the budget proposes legislation, which would authorize the CFTC to collect $31.5 million in user fees to fund certain activities and would bring the Commission’s budget to $281.5 million for 2019. According to the administration, if the authorizing legislation is enacted, it would be “in line with nearly all other Federal financial and banking regulators.”
Cybersecurity. The 2019 budget proposal requests funding for the Department of Homeland Security (DHS) and the Department of Defense (DOD) to execute efforts to counter cybercrime. The DOD funds would go towards efforts to sustain the Cyber Command’s 133 Cyber Mission Force Teams, which “are on track to be fully operational by the end of 2018.” Furthermore, the administration states it “will improve its ability to identify and combat cybersecurity risks to agencies’ data, systems, and networks.”
Financial Stability Oversight Council (FSOC). Currently FSOC (which is comprised of the heads of the financial regulatory agencies and monitors risk to the U.S. financial system) and the Office of Financial Research (OFR) (FSOC’s independent research arm) receive funding through fees assessed on certain bank holding companies with assets of at least $50 billion as well as nonbanks supervised by the Fed. However, the 2019 budget proposal would require FSOC and OFR to receive their funding through the normal congressional appropriations process.
Flood Insurance. Outlined in the MSR is a budget request that would reduce appropriations for the National Flood Insurance Program's flood hazard mapping program by $78 million. The funding reduction is designed to “preserve resources for [DHS]’s core missions”; however, the administration plans to work to “improve efficiency in the flood mapping program, including incentivizing increased State and local government investments in updating flood maps to inform land use decisions and reduce risk.” Additionally, contained within the Appendix is a proposal for a “means-tested affordability program” that would determine assistance for flood insurance premium payments based on a policyholder's income or ability to repay, rather than a home's location or date of construction.
Government Sponsored Enterprises. Noted within the MSR, the budget proposes doubling the guarantee fee charged by Fannie Mae and Freddie Mac to loan originators from 0.10 to 0.20 percentage points from 2019 through 2021. The proposal is designed to help “level the playing field for private lenders seeking to compete with the GSEs” and would “generate approximately $26 billion over the 10-year Budget window.”
HUD. The 2019 budget proposal eliminates funding for the following: (i) the CHOICE Neighborhoods program (a savings of $138 million), on the basis that state and local governments should fund strategies for neighborhood revitalization; (ii) the Community Development Block Grant (a savings of $3 billion), over claims that it “has not demonstrated a measurable impact on communities”; (iii) the HOME Investment Partnerships Program (a savings of $950 million); and (iv) the Self-Help and Assisted Homeownership Opportunity Program Account (a savings of $54 million). The budget also proposes reductions to grants provided to the Native American Housing Block Grant and plans to reduce costs across HUD’s rental assistance programs through legislative reforms. Rental assistance programs generally comprise about 80 percent of HUD’s total funding.
SEC. As stipulated in the MSR, the budget proposes eliminating the SEC’s mandatory reserve fund and would require the SEC to request additional funds through the congressional appropriations process starting in 2020. According to the Appendix, the reserve fund is currently funded by collected registration fees and is not subject to appropriation or apportionment. Under the proposed budget, the registration fees would be deposited in the Treasury’s general fund.
SIGTARP. As proposed under MSR, the 2019 budget would reduce funding for the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) “commensurate with the wind-down of TARP programs.” According to the proposal, “Congress aligned the sunset of SIGTARP with the length of time that TARP funds or commitments are outstanding,” which, Treasury estimates, will be in 2023. This will mark the final time payments are expected to be made under the Home Affordable Modification Program (HAMP). As previously covered in InfoBytes, SIGTARP delivered a report to Congress last month, which identified unlawful conduct by certain of the 130 financial institutions in TARP’s Making Home Affordable Program as the top threat to TARP and, thus, the agency’s top investigative priority.
Student Loan Reform. Under the 2019 budget proposal, a single income-driven repayment plan (IDR) would be created that caps monthly payments at 12.5 percent of discretionary income. Furthermore, balances would be forgiven after a specific number of repayment years—15 for undergraduate debt, 30 for graduate. In doing so, the Public Service Loan Forgiveness program and subsidized loans will be eliminated, and reforms will be established to “guarantee that all borrowers in IDR pay an equitable share of their income.” These proposals will only apply to loans originated on or after July 1, 2019, with the exception of loans provided to borrowers in order to finish their “current course of study.”
Treasury Department. Under the 2019 budget proposal, safeguarding markets and protecting financial data are a top priority for the administration, and $159 million has been requested for Treasury’s Office of Terrorism and Financial Intelligence to “continue its critical work safeguarding the financial system from abuse and combatting other national security threats using non-kinetic economic tools. These additional resources would be used to economically isolate North Korea, complete the Terrorist Financing Targeting Center in Saudi Arabia, and increase sanctions pressure on Iran, including through the implementation of the Countering America’s Adversaries Through Sanctions Act.” The budget also requests a $3 million increase from 2017 to be applied to the Financial Crimes Enforcement Network’s authority to administer the Bank Secrecy Act and its work to prevent the financing of terrorism, money laundering, and other financial crimes.
On January 23, the U.S. Court of Appeals for the D.C. Circuit dismissed an appeal by the Financial Stability Oversight Council (FSOC) after both parties filed a joint stipulated motion to voluntarily dismiss the case. The litigation began in 2015 when a national insurance firm sued FSOC over its designation of the firm as a nonbank systemically important financial institution (SIFI). In March 2016, the district court issued its opinion agreeing with the insurance firm and finding the FSOC determination arbitrary and capricious because it failed to consider the financial impact the SIFI designation would have on the firm. FSOC appealed the court’s ruling but after a change in FSOC leadership, agreed to jointly dismiss the appeal with the insurance firm.
For more InfoBytes coverage on SIFIs, click here.
On December 14, the Financial Stability Oversight Council (FSOC) released its 2017 annual report. The report reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. Highlights include:
- Cybersecurity. The report notes that financial institutions need to work with regulators to improve cybersecurity resilience and better understand risks. FSOC encourages the creation of a private sector council of senior executives to work with government officials and focus on ways cyber incidents may affect business operations.
- Marketplace Lending. FSOC acknowledges that marketplace lending is still an evolving model with potential risks, such as the misalignment of incentives. However, the report notes the platform’s potential to reduce costs and expand access to credit.
- New Technology. The report discusses challenges for supervision and regulation of virtual currencies and distributed ledger technology. FSOC observes that current regulatory practices were designed for more centralized systems, in comparison to the decentralization of data storage in this new landscape.
On July 21, the Treasury Department announced that on Friday, July 28, Secretary Steven T. Mnuchin will preside over an executive session of the Financial Stability Oversight Council (FSOC). According to a Treasury press release, the preliminary agenda includes:
- a discussion about Volcker Rule recommendations presented in the Treasury’s June 2017 report, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions”;
- an update on annual reevaluation requirements for designating nonbank financial companies; and
- a discussion regarding pending litigation brought against FSOC.
Consistent with FSOC’s transparency policy, the meeting may be made available via live webcast and can be viewed after it occurs. Meeting minutes for the most recent FSOC meetings are generally approved at the next meeting and posted online soon afterwards.
Meeting minutes for past meetings are available here.
Readouts for past meetings are available here.
On June 8, by a vote of 233-186 with no Democrats voting in favor of the bill and one Republican voting against, the House passed the Financial CHOICE Act of 2017 (H.R. 10), as amended, which would repeal or modify provisions of Dodd-Frank and restructure the CFPB. Committee Report 115-163 accompanying House Resolution 375, which provided for consideration H.R. 10 and recommended that the resolution be adopted, outlines the provisions introduced to overhaul existing financial regulations. Included were five additional amendments incorporated into H.R. 10 introduced by members of Congress:
- Rep. Jeb Hensarling (R-Tex.): “Revises provisions subjecting certain FDIC and National Credit Union Association functions to congressional appropriations, relating to appointments of positions created by [H.R. 10], and providing congressional access to non-public [Financial Security Oversight Council] information”;
- Rep. Joseph Hollingsworth (R-Ind.): “Allows closed-end funds that are listed on a national securities exchange, and that meet certain requirements to be considered ‘well-known seasoned issuers’”;
- Rep. Lloyd Smucker (R-Pa.): “Expresses the sense of Congress that consumer reporting agencies and their subsidiaries should implement stronger multi-factor authentication procedures when providing access to personal information files to more adequately protect consumer information from identity theft”;
- Rep. Martha McSally (R-Ariz.): “Requires the Department of Treasury” to submit a report to Congress regarding its efforts to work with Federal bank regulators, financial institutions, and money service businesses to ensure that legitimate financial transactions along the southern border move freely”; and
- Rep. Ken Buck (R-Colo.), “Requires the [General Services Administration] to study the [Consumer Law Enforcement Agency’s] real estate needs due to changes in the Agency’s structure. It would then authorize the GSA to sell the current CLEA building if CLEA’s real estate needs have changed and there is no government department or agency that can utilize the building.”
The bill now advances to the Senate where it is unlikely to pass in its current form—a fact acknowledged by both Democrats and Republicans.
President Trump Releases 2018 Budget Proposal; Key Areas of Reform Target Financial Regulators, Cybersecurity, and Student Loans
On May 23, the White House released its fiscal 2018 budget request, A New Foundation for American Greatness, along with Major Savings and Reforms, which set forth the President’s funding proposals and priorities. The mission of the President’s budget is to bring spending under control by proposing savings of $57.3 billion in discretionary programs, including $26.7 billion in program eliminations and $30.6 billion in reductions.
Financial Regulators. The budget stresses the importance of reducing the cost of complying with “burdensome financial regulations” adopted by independent agencies under the Dodd-Frank Act. However, the proposal provides few details about how the reform applies to federal financial services regulators. Identifying the CFPB specifically, the budget states that restructuring the Bureau is necessary in order to “ensure appropriate congressional oversight and to refocus [the] CFPB’s efforts on enforcing the law rather than impeding free commerce.” Major Savings and Reforms assert that subjecting the Bureau to the congressional appropriations process would “impose financial discipline and prevent future overreach of the Agency into consumer advocacy and activism.” The budget projects further savings of $35 billion through the end of 2027, resulting from legal, regulatory, and policy changes to be recommended by the Treasury once it completes its effectiveness review of existing laws and regulations in collaboration with the Financial Stability Oversight Council. The Treasury review is being performed as a result of the Executive Order on Core Principals.
Dept. of Housing and Urban Development. As previously reported in InfoBytes, the budget proposes that funding be eliminated for the following: (i) small grant programs such as the Self-Help Homeownership Opportunity Program, which includes, among others, the Capacity Building for Community Development and Affordable Housing Program (a savings of $56 million); (ii) the CHOICE Neighborhoods program (a savings of $125 million), stating state and local governments should fund strategies for neighborhood revitalization; (iii) the Community Development Block Grant (a savings of $2.9 billion), over claims that it “has not demonstrated results”; and (iv) the HOME Investment Partnerships Programs (a savings of $948 million). The budget also proposes reductions to the Native American Housing Block Grant and plans to reduce costs across HUD’s rental assistance programs through legislative reforms. Rental assistance programs generally comprise about 80 percent of HUD’s total funding.
Cybersecurity. The budget states that it “supports the President’s focus on cybersecurity to ensure strong programs and technology to defend the Federal networks that serve the American people, and continues efforts to share information, standards, and best practices with critical infrastructure and American businesses to keep them secure.” Law enforcement and cybersecurity personnel across the Department of Homeland Security (DHS), Department of Defense, and the FBI will see budget increases to execute efforts to counter cybercrime. Furthermore, the National Cybersecurity and Communications Integration Center—which DHS uses to respond to infrastructure cyberattacks—will receive an increase under the budget.
Student Loan Reform. Under the proposed budget, a single income driven repayment plan (IDR) would be created that caps monthly payments at 12.5 percent of discretionary income—an increase from the 10 percent cap some current payment plans offer. Furthermore, balances would be forgiven after a specific number of repayment years—15 for undergraduate debt, 30 for graduate. In doing so, the Public Service Loan Forgiveness program and subsidized loans will be eliminated, and reforms will be established to “guarantee that borrowers in IDR pay an equitable share of their income.” These proposals will only apply to loans originated on or after July 1, 2018, with the exception of loans provided to borrowers in order to finish their “current course of study.”
Dept. of the Treasury. The budget proposes to, among other things: (i) eliminate funding for new Community Development Financial Institutions Fund grants (a savings of $220 million); and (ii) reduce funding for the Troubled Asset Relief Program by 50 percent, “commensurate with the wind-down of TARP programs” (a savings of $21 million).
Response from Treasury. In a statement released by the Treasury, Secretary Steven T. Mnuchin said the budget “prioritizes investments in cybersecurity, and maintains critical funding to implement sanctions, combat terrorist financing, and protect financial institutions from threats.” Furthermore, it also would “achieve savings through reforms that prevent taxpayer bailouts and reverse burdensome regulations that have been harmful to small businesses and American workers.”
Earlier this week, the Treasury Department announced that on Monday, May 8, Secretary Mnuchin will preside over an executive session of the Financial Stability Oversight Council (FSOC). According to a Treasury Department press release, the preliminary agenda includes:
- a discussion of the April 21 Presidential Memorandum on Council designations;
- an update on the annual reevaluation of the designation of a nonbank financial company;
- a discussion of interagency regulatory collaboration and the Feb. 3 Executive Order on core principles for financial regulation;
- a discussion of the FSOC’s 2017 Annual Report; and
- an update on bank holding companies’ living wills and resolution planning.
Consistent with FSOC’s transparency policy, the meeting may be made available via live webcast and/or can be viewed after it occurs. Meeting minutes for the most recent Council meeting are generally approved at the next Council meeting and posted online soon afterwards.
Meeting minutes for past Council meetings are available here.
Readouts for past Council meetings are available here.
Following Hearing, House Financial Services Committee Chairman Formally Introduces Financial CHOICE Act of 2017
On April 26, the House Financial Services Committee held a hearing to discuss The Financial CHOICE Act – a GOP proposal to “reform the financial regulatory system” that was initially introduced and considered, though differing in a number of respects from the current version, but not adopted in the last Congress. The hearing debated the merits of a discussion draft, which was released on April 19 by Committee Chairman Jeb Hensarling (R-TX). Shortly after Wednesday’s hearing, Chairman Hensarling formally introduced H.R. 10, The Financial CHOICE Act of 2017. An Executive Summary of the proposed legislation has also been released.
The April 26 hearing – a video of which can be accessed here – included testimony from the following witnesses:
- Mr. Peter J. Wallison, a Senior Fellow and Arthur F. Burn Fellow, Financial Policy Studies with the American Enterprise Institute (prepared statement)
- Dr. Norbert J. Michel, a Senior Research Fellow, Financial Regulations and Monetary Policy, with the Heritage Foundation (prepared statement)
- The Honorable Michael S. Barr, a Professor of Law at University of Michigan Law School (prepared statement)
- Mr. Alex J. Pollock, a Distinguished Senior Fellow with the R Street Institute (prepared statement)
- Dr. Lisa D. Cook, an Associate Professor of Economics and International Relations at Michigan State University (prepared statement)
- Ms. Hester Peirce, a Director in the Financial Markets Working Group and Senior Research Fellow at the Mercatus Center at George Mason University (prepared statement)
- Mr. John Allison, Former President and Chief Executive Officer with the Cato Institute (prepared statement)
On April 28, Democrats held a separate hearing pursuant to Clause (d)(5) of Rule 3 of the Committee rules, which entitles members of the minority party to call its own hearing on any matter that is the subject of a majority hearing. The second hearing day – a video of which can be accessed here – included testimony from the following witnesses:
- The Honorable Elizabeth Warren, United States Senator
- Rohit Chopra, Senior Fellow, Consumer Federation of America
- Corey Klemmer, Corporate Research Analyst, Office of Investment, AFL-CIO
- Rev. Willie Gable, Pastor, National Baptist Convention USA, Inc. (prepared statement)
- John C. Coffee Jr., Adolf A. Berle Professor of Law, Columbia University (prepared statement)
- Rob Randhava, Senior Counsel, Leadership Conference on Civil and Human Rights (prepared statement)
- Melanie Lubin, Maryland Securities Commissioner, North American Securities Administrators Association (prepared statement)
- Emily Liner, Senior Policy Advisor, Economic Program, Third Way (prepared statement)
- Amanda Jackson, Organizing and Outreach Manager, Americans for Financial Reform
- Ken Bertsch, Executive Director, Council of Institutional Investors (prepared statement)
- Sarah Edelman, Director, Housing Policy, Center for American Progress (CAP)
Ranking Minority Member Maxine Waters (D-CA) also used the hearing to express her strong disapproval of what she has dubbed the “Wrong Choice Act.” Among other things, the ranking member alleged that the proposed legislation would “destroy Wall Street reform, gut the Consumer Financial Protection Bureau, and returns us to the financial system that allowed risky and predatory Wall Street practices and products to crash our economy.”
- Jonice Gray Tucker to discuss "Trends in regulatory enforcement" at the American Bar Association Banking Law Committee Meeting
- Jessica L. Pollet to discuss "Your career is impacting your life..." at the Ark Group Women Legal Conference
- Jon David D. Langlois to discuss "Successors in interest updates" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo