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  • President Trump Releases 2018 Budget Proposal; Key Areas of Reform Target Financial Regulators, Cybersecurity, and Student Loans

    Federal Issues

    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.”

    Federal Issues Treasury Department POTUS HUD budget Privacy/Cyber Risk & Data Security Student Lending Bank Regulatory FSOC

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  • Treasury Secretary Mnuchin Testifies Before Senate Banking Committee, Provides Overview of Policies and Goals

    Federal Issues

    On May 18, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Domestic and International Policy Update” with U.S. Treasury Secretary Steven Mnuchin—his first hearing since being sworn in. Committee Chairman Mike Crapo (R-Idaho) opened the full committee hearing asserting that “[w]e want our nation’s banks to be well-capitalized and well-regulated, without being drowned by unnecessary compliance costs. Undue regulation chills innovation and imposes significant and unnecessary costs and burdens on financial institutions and companies, often disproportionately on smaller ones.” Sen. Crapo further stressed that “[h]ousing finance reform remains the most significant piece of unfinished business following the crisis, and it is important to build bipartisan support for a path forward.” Ranking member Sherrod Brown (D-Ohio) likewise delivered opening remarks. Sen. Brown stated that regulation improvements for banks, shadow banks, and the financial services industry must be “based on facts” and that a better way to improve the economy and create jobs would be through “an effective means like infrastructure investment” rather than the “thoroughly discredited” trickle down approach.

    Mnuchin was the only witness at the May 18 hearing, offering testimony and answering questions concerning, among other things, (i) currency manipulation; (ii) the establishment of a “Monitoring List” of closely watched economies; (iii) comprehensive tax reform (stating that a goal of 3 percent GDP or higher is “achievable if we make historic reforms to both taxes and regulation”); (iv) regulatory reform (noting that the Treasury’s initial report will offer “recommendations to provide relief for community banks and make regulations more efficient and effective and appropriately tailored”); (v) imposing sanctions and efforts to combat terrorist activities and financing; and (vi) housing finance reform (maintaining that Treasury plans to work with Congress to ensure both ample credit for housing and that taxpayers are not put at risk).

    Mnuchin faced questions from several Senators after he testified, including Sens. Jon Tester (D-Mont.), Catherine Cortez Masto (D-Nev.), and Bob Corker (R-Tenn). In response Sen. Tester’s question as to whether Mnuchin could commit that the President’s tax relief plan would not add to the debt, Mnuchin replied that “any plan that we put forward we believe should be paid for with economic growth.” Sen. Cortez Masto asked what the Treasury was doing about the Trump Administration’s lack of focus on policies supporting American consumers and homeowners, questioning, “Why doesn’t President Trump’s Executive Order that rolls back Wall Street reforms mention consumer or investor protection even once? Why doesn’t it direct you to consider the financial needs of borrowers, students, service-members, seniors, homeowners?” Accordingly, Sen. Corker asked whether Mnuchin is "strongly committed to finally dealing with housing finance reform in an appropriate way,” to which Mnuchin replied, “My strong preference is to do it through congressional action.”

    Federal Issues Treasury Department Senate Banking Committee

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  • FHFA Director Testifies Before Senate Banking Committee, Provides Overview of Housing Finance System and Prospects for Reform

    Federal Issues

    On May 11, the Senate Banking Committee held a hearing at which FHFA Director Mel Watt fielded questions from lawmakers about the conservatorships of Fannie Mae and Freddie Mac (the Enterprises) and prospects for housing finance reform. In his opening statement, Committee Chairman Mike Crapo (R-ID) noted that Fannie and Freddie have been in conservatorship for close to nine years, and stated that “a housing finance system dependent on two government sponsored enterprises in perpetual conservatorship is not a sustainable solution.” According to Sen. Crapo, because approximately 70 percent of mortgages are backed by the federal government, “if the housing market experiences a downturn, taxpayers could again be on the hook for billions of dollars.” Ultimately, the Chairman set forth his position that housing finance reform should be considered the “most significant piece of unfinished business following the financial crisis.” 

    Meanwhile, FHFA Director Watt testified that, under his leadership, FHFA has “responsibly balanced” and met its “multiple statutory mandates to manage the Enterprises’ day-to-day operations.” He also identified some of the key changes and reforms that have taken place during the conservatorships, including: (i) requiring the Enterprises to emphasize sound underwriting practices in their purchase guidelines; (ii) reducing the Enterprises’ retained portfolios by over sixty percent since 2009; and (iii) developing effective loss mitigation programs, which include aligning the Enterprises’ loss mitigation standards and developing updated loan modification and streamlined refinance products to follow the Home Affordable Modification Program and the Home Affordable Refinance Program.

    Director Watt also acknowledged that “FHFA knows probably better than anyone that these conservatorships are not sustainable” and urged Congress to act on several issues related to housing finance reform, including:

    • developing a transition process to a new housing finance system to avoid disruption to the housing finance market;
    • determining whether the federal government should provide taxpayer backing for the conservatorship, and if so, in what form;
    • addressing the role the Enterprises might play in the reformed housing finance system and what statutory changes to their organizational structures, purposes, ownership and operations will be needed to ensure that they play their assigned roles effectively; and
    • identifying what regulatory and supervisory structure and authorities will be needed in a reformed system, and who will have responsibility to exercise those authorities.

    Furthermore, Director Watt noted that under the provisions of the Enterprises’ Preferred Stock Purchase Agreements, on January 1, 2018 the $1.2 billion buffer protecting the Enterprises against having to make additional draws of taxpayer support in the event of an operating loss in any quarter would be reduced to zero, at which time “neither Enterprise will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support.” Director Watt warned that such a situation could erode investor confidence and “stifle liquidity in ways that could increase the cost of mortgage credit to borrowers.” Accordingly, the Director argued that the Enterprises “need some kind of [capital] buffer to shield against short-term operating losses” that could “result in an additional draw of taxpayer support and reduce the fixed dollar commitment Treasury has made to support the Enterprises.”

    Reaction of Industry Organizations. In a statement issued shortly after the hearing, Camden R. Fine, President and CEO of Independent Community Bankers of America (ICBA), expressed support for Director Watt after his testimony, agreeing about the need for Fannie and Freddie “to retain their earnings and to start rebuilding their capital buffers.” Meanwhile, Competitive Enterprise Institute (CEI) financial policy expert John Berlau was critical of what he called “an unfair, ongoing government policy of confiscating all Fannie/Freddie shareholder profits.” According to Mr. Berlau, the Enterprises’ “perilous financial state is the direct result of the Obama administration’s 2012‘Third Amendment’ policy, which confiscates all of Fannie and Freddie’s profits for the US Treasury.” He argued that curtailing this policy would allow the Enterprises to “retain some earnings and build capital to spare taxpayers another bailout.”

    Federal Issues FHFA Senate Banking Committee Fannie Mae Freddie Mac ICBA Treasury Department

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  • CFPB Issues Request for Information on Small Business Lending; Prepares to Implement Section 1071 of Dodd Frank Act

    Agency Rule-Making & Guidance

    On May 10, the CFPB announced the issuance of a Request for Information on various aspects of the market for small business loans as the Bureau prepares to implement Section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and report information concerning credit applications made by women-owned, minority-owned, and small businesses. The Request includes questions grouped in five categories: (i) defining what constitutes a small business; (ii) data points the Bureau will require to be submitted and collected; (iii) types of lenders involved in small business lending and the appropriate institutional coverage for the data collection requirements; (iv) types of financial products offered to small businesses generally, and those owned by women and minorities in particular; and (v) privacy concerns related to the data collection.

    The CFPB also released Director Cordray’s prepared remarks in advance of a field hearing on small business lending where he introduced the Request for Information and issued a related press release. Comments are due 60 days after the Request for Information is published in the Federal Register. The Bureau also released a report, entitled “Key Dimensions of the Small Business Lending Landscape,” which presents the CFPB's perspective on the market for lending to small, minority-owned and woman-owned firms and gaps in its understanding.

    A couple of industry groups have already weighed in regarding expected difficulties with the application of Section 1071. In a letter sent Tuesday in advance of the field hearing, the National Association of Federally-Insured Credit Unions (NAFCU) urged the CFPB to exempt its members from any rulemaking that compels disclosure of business loan information. NAFCU Regulatory Affairs Counsel Andrew Morris cites the unique characteristics of credit unions, and that such data collection “may yield confusing information about credit unions and further restrict lending activity as a result of increased compliance costs.” The letter notes that “[c]redit unions serve distinct fields of membership, and as a result, institution-level data related to women-owned, minority-owned and small business lending substantially differs in relation to other lenders.”

    And, in a white paper provided to the Treasury Department, the American Bankers Association criticizes what amounts to Section 1071’s conflation of consumer and commercial lending, “recommend[ing] the elimination of any vestige of Bureau regulatory, supervisory, or enforcement authority over commercial credit or other commercial account and financial services.”

    Agency Rulemaking & Guidance CFPB Small Business Lending Dodd-Frank ECOA NAFCU ABA Treasury Department

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  • Treasury Unveils New Website to Track Federal Spending

    Federal Issues

    On May 9, the Treasury Department launched beta.usaspending.gov, a website designed to track agency expenditures and link relevant agency expenditure data with awards distributed by the government. Treasury reports that it developed the “next generation” of USAspending.gov in accordance with requirements contained in the Digital Accountability and Transparency Act (DATA Act) of 2014. The beta site indicates that it will run concurrently with the previous version of the USAspending.gov website over the summer to minimize disruptions to users' data access and provide more time to add user-centered enhancements. Once fully operational, Treasury touts that the new site will allow for searches across all federal spending data by location (state, city, county), by federal agency or by keyword for a specific policy, type of spending, or recipient.

    Federal Issues Treasury Department

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  • Treasury Department Releases Report on Troubled Asset Relief Program (TARP)

    Lending

    On April 10, the Treasury Department released the March 2017 Monthly Report to Congress on the status of its Troubled Asset Relief Program (TARP). Among other things, the report provides updates on TARP programs such as the Capital Purchase Program, the Community Development Capital Initiative, and the Making Home Affordable Program, among others. Additionally, the report highlights, among other things, administration obligations and expenditures, insurance contracts, transaction reports, and projected costs and liabilities. On May 1, the Treasury issued a monthly TARP update noting principal, investment, income, and revenue totals affecting certain TARP programs.

    Lending Treasury Department TARP Mortgages

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  • FHFA Director Appeared Before the Senate Banking Committee on May 11; Discussed Fannie/Freddie, Proposed "Underserved Markets Plans"

    Federal Issues

    On May 11, the Senate Committee on Banking, Housing, and Urban Affairs met in open session at 10:00 a.m. to discuss “The Status of the Housing Finance System After Nine Years of Conservatorship.” Federal Housing Finance Agency (FHFA) Director Mel Watt was the only witness scheduled to testify.

    The hearing comes after Fannie Mae (Fannie) and Freddie Mac (Freddie) published their first quarter financial reports. On May 2, Freddie announced $2.2 billion in net income in the first quarter—all of which Freddie expects to distribute to the Treasury, bringing the total to $108.2 billion in dividends. (See also Q1 2017 Supplement.) Notably, the $2.2 billion figure was down from its fourth quarter net income of $4.8 billion. Similarly, on May 5, Fannie reported net income of $2.8 billion in the first three months of 2017, money that will be sent to Treasury, which brings its total payments to $162.7 billion. The net income was a significant decline from the $5 billion it reported for the fourth quarter of 2016.

    Fannie and Freddie also recently released their respective “Underserved Markets Plans” for public comment. As previously covered by InfoBytes, FHFA published a final rule in the December 18 Federal Register implementing certain Duty to Serve provisions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. Among other things, these provisions require Fannie and Freddie to each adopt a formal “Underserved Markets Plan” to improve the availability of mortgage financing for residential properties that serve “very low-, low-, and moderate-income families” in three specified underserved markets: manufactured housing, affordable housing preservation, and rural markets. The Plans can be accessed through the following links:

    As explained on the FHFA’s DTS Underserved Markets Plan page, the activities and objectives in each of these Plans may be subject to change based on factors including public input, FHFA comments, compliance with the Enterprises' Charter Acts, safety and soundness considerations, and market or economic conditions. To this end, “views of interested stakeholders are sought on whether the proposed Plans would effectively serve the underserved markets if carried out as proposed, or if there are modifications that each Enterprise should consider making to its proposed Plan to better serve these underserved markets.”  The period during which the Enterprises are receiving public input on the proposed Plans will end on July 10. 

    Pursuant to the same new rule, FHFA has also published a Proposed Evaluation Guidance to provide: (i) FHFA's expectations regarding the development of the Underserved Markets Plans, and (ii) the process by which FHFA will evaluate Fannie’s and Freddie’s achievements under their Plans each year.  The deadline for public input on FHFA’s Proposed Evaluation Guidance is June 7.

    Federal Issues FHFA Congress Senate Banking Committee Fannie Mae Freddie Mac Treasury Department

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  • Treasury Announces FSOC Executive Session on May 8

    Federal Issues

    Earlier this week, Treasury 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:

    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.

    Federal Issues Agency Rulemaking & Guidance FSOC Treasury Department

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  • President Trump Issues Two Memoranda to Treasury; Instructs Secretary to Review FSOC Processes for Designating Nonbank Financial Companies as SIFIs and Treasury’s Orderly Liquidation Authority under Dodd-Frank

    Federal Issues

    On April 21, President Trump issued a Presidential Memorandum directing the Secretary of the Treasury to conduct a review of the Financial Stability Oversight Council (FSOC) processes for determining whether nonbank financial companies are financially distressed and designating nonbank financial companies as “systemically important.” The memorandum explains that a review of these processes is needed because the designations “have serious implications for affected entities, the industries in which they operate, and the economy at large.” The memorandum requires the Secretary to report within 180 days on whether: 

    • the FSOC’s processes are sufficiently transparent and provide adequate due process protections;
    • a FSOC designation “give[s] market participants the expectation that the Federal Government will shield supervised or designated entities from bankruptcy”;
    • a determination regarding a nonbank’s systemic importance should include “specific, quantifiable projections of the damage that could be caused to the United States economy”;
    • the processes appropriately account for the costs of designation; and
    • potential designees receive adequate guidance on how to reduce their perceived risk and a “meaningful opportunity to have their determinations or designations reevaluated in a timely and appropriately transparent manner.” 

    The memorandum further directs the Secretary to include SIFI designation recommendations, including any proposed legislative measures, for improving the processes and opine on whether such processes are consistent with the Administration’s “Core Principles.” The secretary is also directed to make any recommendations for legislation or regulation that would further align FSOC’s activities with the Core Principles.

    The President issued a second Memorandum, directing the Secretary to review and report on the Orderly Liquidation Authority (OLA) under Dodd-Frank, with the goal of understanding the “OLA’s full contours and acknowledge the potentially adverse consequences of its availability and use.” Specifically, the memorandum requires that the Secretary assess the following: 

    • “the potential adverse effects of failing financial companies on the financial stability of the United States”;
    • whether the framework for employing OLA is consistent with the Core Principles;
    • whether “invoking OLA could result in a cost to the general fund of the Treasury”;
    • whether the use or availability of OLA could lead to excessive risk taking or . . . otherwise lead[] market participants to believe that a financial company is too big to fail; and
    • whether a new chapter in the U.S. Bankruptcy Code would be a “superior method of resolution for financial companies.” 

    The memorandum also requires that Secretary’s review include a quantitative evaluation of OLA’s “anticipated direct and indirect effects” as well as recommendations for improving OLA. The memo also directs the Treasury Department to refrain from making any systemic risk determination unless it determines, in consultation with the President, that the Doff-Frank criteria require otherwise.” 

    At the signing of the memo, Treasury Secretary Steven Mnuchin delivered prepared remarks, in which he assured the President and the Public that the Treasury will “work tirelessly” in its efforts to “provide a clear analysis of the extent to which the OLA encourages inappropriate risk-taking and the extent of potential taxpayer liability.”

    Federal Issues POTUS Treasury Department Dodd-Frank FSOC SIFIs Orderly Liquidation Authority

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  • Legislation Proposed to Create Consistent Financial Data Reporting Standards Across Federal Agencies

    Federal Issues

    On March 16, Congressmen Darrell Issa (R-Calif.) and Jared Polis (D-Colo.) introduced the Financial Transparency Act of 2017 (H.R. 1530), a bipartisan bill intended “to amend securities, commodities, and banking laws to make the information reported to financial regulatory agencies electronically searchable.”  Specifically, H.R. 1530 would require the Treasury Department to disseminate data standards for all financial regulatory agencies, while directing each agency to transform its regulatory reporting regime from disconnected documents into standardized, searchable data. The bill further provides that any information required by other laws to be public must be published as open data, and includes specific directives for the SEC to improve that agency’s existing data reporting regime.

    Additional details concerning the proposed measure are explained in a summary prepared by www.datacoalition.org. U.S. Representative Randy Hultgren (R-IL)—one of the bill’s co-sponsors and current Vice Chairman of the House Subcommittee on Capital Markets, Securities and Investment—has also promoted the legislation in an op-ed for The Guardian, entitled How to stop the next Bernie Madoff.

    Federal Issues Congress Treasury Department Data Collection / Aggregation

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