THE BIG PICTURE

Republicans are expected to move on to tax reform after recess having failed to pass Obamacare repeal legislation. The White House’s Hill liaison has laid out a plan that would include markups in September, House passage in October, and Senate passage in November. However, Senate Finance Chairman Orrin Hatch only promised a markup sometime in the fall.

Mueller Impanels Grand Jury in Russia Investigation: Special Counsel Robert Mueller has impaneled a Washington, D.C. grand jury for his Russia probe. This is a major step in his investigation of alleged collusion between President Trump’s 2016 campaign and Russia.

President Trump Signs Sanctions Bill: President Trump signed into law on August 2 new sanctions against Russia, Iran, and North Korea. The legislation was overwhelmingly supported by both parties and both chambers of Congress. When he signed the legislation, President Trump released a signing statement claiming that multiple aspects of the bill violate the Constitution. “Since this bill was first introduced, I have expressed my concerns to Congress about the many ways it improperly encroaches on Executive power, disadvantages American companies, and hurts the interests of our European allies,” the President stated. According to President Trump, the legislation will make it more difficult for him to negotiate with Russian President Vladimir Putin and other world leaders.

Treasury Department Highlights Need to Increase Debt Limit Soon: The Treasury Department has been pushing for a “clean” debt ceiling increase by September 29. Treasury Secretary Steven Mnuchin met with Senate Majority Leader Mitch McConnell (R-KY) and Minority Leader Chuck Schumer (D-NY) on August 1 to discuss the issue. The debt ceiling increase is needed sometime this fall and is expected to be a tough vote for both parties.

Congress will also need to vote to fund the government by either passing a series of appropriations bills or a continuing resolution that would keep the government funded at current levels.

Senators Tom Cotton (R-AR) and David Perdue (R-GA) Introduce Immigration Bill: Republican Senators Cotton and Perdue have worked with the Trump Administration to introduce a bill that would dramatically curb legal immigration by halving over a decade the number of people who receive legal permanent resident status. The legislation would reduce the kinds of relatives immigrants can bring into the country.

Christopher Wray Sworn in as FBI Director: New FBI Director Christopher Wray was sworn in on August 2. In a statement after his swearing in, Wray said that he is “excited, humbled, and grateful” to work alongside the professionals at the FBI.

ON THE HILL LAST WEEK

The House was out of session, but the Senate stayed in and did some housekeeping, clearing a backlog of nominations.

Senate Confirms Dozens of Nominees: The Senate confirmed a backlog of about 65 nominees on August 3, including several from the Commodity Futures Trading Commission, the Treasury Department, and the Department of Housing and Urban Development. Among the nominees confirmed were:

  • David Malpass, Undersecretary for International Affairs, Treasury Department
  • David Kautter, Assistant Secretary for Tax Policy, Treasury Department
  • Chris Campbell, Assistant Secretary for Financial Institutions, Treasury Department
  • Brent McIntosh, General Counsel, Treasury Department
  • Andrew Maloney, Deputy Undersecretary, Treasury Department
  • J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission
  • Brian Quintenz, Commissioner, Commodity Futures Trading Commission
  • Rostin Behnam, Commissioner, Commodity Futures Trading Commission
  • Neal Rackleff, Assistant Secretary, Housing and Urban Development
  • Anna Farias, Assistant Secretary, Housing and Urban Development

Senate Moves to Block Recess Appointments: In a procedural move to block President Trump from making appointments over August recess, Senator Lisa Murkowski (R-AK) made arrangements for nine “pro forma” sessions—meetings that last roughly a minute—that will enable the Senate to be in session every three business days. This will prevent the President from making recess appointments. The Senate has used this move for decades, including last year when they prevented former President Obama from appointing a Supreme Court justice during recess.

HOUSE FINANCIAL SERVICES COMMITTEE

Chairman Jeb Hensarling (R-TX) Seeks Investigation into Political Activity by Consumer Financial Protection Bureau (CFPB) Director Richard Cordray: In a letter sent July 28, Financial Services Chairman Jeb Hensarling asked the U.S. Office of Special Counsel to investigate whether CFPB Director Richard Cordray violated a ban on political activity by federal employees. It has been reported that Cordray is considering a run for governor next year in his home state of Ohio. Under the Hatch Act, certain activities in advance of a formal bid for office are prohibited.

LEGISLATION INTRODUCED OR PROPOSED

Senators Tim Scott (R-SC) and Mark Warner (D-VA) Introduce Credit Score Competition Act: On August 1, Senators Scott and Warner introduced the Credit Score Competition Act. The legislation directs the Federal Housing Finance Agency to create a process by which credit scoring models can be validated and approved for use by Fannie Mae and Freddie Mac (GSEs) when they purchase mortgages. Currently, the GSEs are mandated to consider a decades-old credit scoring model that does not take into account consumer data on rent, utility, and cell phone bill payments.

Speaking to the National Association of Real Estate Brokers, FHFA Director Mel Watt said that Fannie and Freddie will not adopt the use of new credit scoring models until 2019 at the earliest. Disputing claims that alternative data systems could significantly increase homeownership among minorities and low-income households, Watt said “the short-term impact on access to credit will not be nearly as significant as was first imagined or as the public discourse on this issue has suggested.”

THE REGULATORS

Office of the Comptroller of Currency (OCC) Solicits Public Comments on Revising the Volcker Rule: The Office of the Comptroller of the Currency (OCC) is seeking public input on revising the final regulation implementing section 619 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (commonly known as the Volcker Rule). The agency on August 2 sent to the Federal Register for publication a notice that solicits public input on whether certain aspects of the implementing regulation should be revised to better accomplish the purposes of section 619 while decreasing the compliance burden on banking entities and fostering economic growth.

Head of OCC Issues Statement Regarding CFPB Rule on Arbitration Agreements: Comptroller of the Currency Keith Noreika issued a statement on July 31 urging Congress to block the CFPB’s controversial rule on mandatory arbitration clauses in financial product contracts. He also said that because Congress is considering the use of the Congressional Review Act to overturn the Final Rule, he will not petition the Financial Stability Oversight Council (FSOC) to stay the effective date of the rule. It is not clear, however, that the Senate has the 51 votes to overturn the Rule.

OCC Files Motion to Dismiss in Fintech Case: The OCC on August 2 re-filed a motion to dismiss its suit with the Conference of State Bank Supervisors. The OCC said the Conference failed to show real harm it suffered from the OCC’s proposal to grant fintech firms a special-purpose national bank charter. The OCC had filed a motion to dismiss on July 28, but Judge James E. Boasberg of the U.S. District Court for the District of Columbia struck the OCC’s filing because the motion contained too many footnotes.

Acting Comptroller of the Currency Keith Noreika said on August 4 that he views the agency's fintech charter as complimentary to community banks. "My own view is though FinTech and community banking aren't mutually exclusive, I think they are actually quite necessary to one another," Noreika said in an interview.

CFPB Unveils Prototypes of "Know Before You Owe" Overdraft Disclosure: The Consumer Financial Protection Bureau (CFPB) on August 4 unveiled new Know Before You Owe overdraft disclosure prototypes designed to improve the model form that banks and credit unions already provide to consumers weighing overdraft coverage. The Bureau is currently testing four prototypes that aimed at making the costs and risks of opting in to overdraft coverage easier to understand and evaluate. People who frequently attempt to overdraw their checking accounts typically pay almost US$450 more in fees if they opted in to debit card and ATM overdraft coverage, according to a new CFPB study published on August 4.

CFPB Issues Warning to Companies Regarding Pay-By-Phone Fees: The Consumer Financial Protection Bureau (CFPB) on July 31 issued a bulletin warning companies about pay-by-phone fees. The Bureau is concerned about companies potentially misleading consumers about the purpose and amount of certain pay-by-phone fees or keeping them in the dark about cheaper payment options. The bulletin also reviews guidelines to help consumer financial companies comply with the law.

MetLife Suit Paused until Treasury Department Acts on “Systemically Important Financial Institution” Label: The U.S. Court of Appeals for the District of Columbia on August 2 put on hold a government appeal over a “Systemically Important Financial Institution” label that the trial court held was wrongly applied to MetLife. The suit is on hold until the Treasury Department issues a report addressing the Financial Stability Oversight Council’s authority to apply the label to nonbank companies. “This decision provides the current administration time to determine whether any of FSOC’s positions in this case should be reconsidered and whether it is appropriate for the government to continue pressing this appeal,” said MetLife spokesman Christopher Stern.

Shared National Credit review finds risk remains high, but underwriting and risk management continue to improve: Risk in the portfolio of large syndicated bank loans declined slightly but remains elevated, according to the Shared National Credit (SNC) Program Review released on August 2 by the Federal Reserve Board (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). The high level of credit risk in the SNC portfolio stems primarily from distressed borrowers in the oil and gas (O&G) sector and other industry sector borrowers exhibiting excessive leverage. The review also found that credit risk management practices at most large agent banks continued to improve, consistent with the 2013 Interagency Guidance on Leveraged Lending. Other findings include:

  • The percentage of non-pass commitments decreased year-over-year from 10.3 percent to 9.7 percent of the SNC portfolio. Commitments rated special mention and classified decreased from US$421.4B in 2016 to US$417.6B in 2017.
  • Leveraged lending was the primary contributor to the overall special mention and classified rate. Leveraged loans comprised 64.9 percent of all SNC special mention and classified commitments. O&G loans comprised 25.7 percent of all SNC special mention and classified commitments.
  • The agencies noted US$317B of leveraged loans in the respective agent banks' lowest-rated pass category, raising additional supervisory concerns should economic conditions decline.

Federal Reserve Board Invites Public Comment on Corporate Governance and Holding Company Inspection Ratings Proposals: The Federal Reserve Board on August 3 requested public comment on a corporate governance proposal that it says will enhance the effectiveness of boards of directors. The proposal would refocus the Federal Reserve's supervisory expectations for the largest firms' boards of directors on their core responsibilities, which the Fed says will promote the safety and soundness of the firms. The Board also requested public comment on a proposal that it says will better align the Board's rating system for large financial institutions with the post-crisis supervisory program for these firms.

Fed Vice Chair Stanley Fischer Gives Speech on “The Low Level of Global Real Interest Rates”: Speaking in Brazil, Fed Vice Chair Stanley Fischer said that a slowdown of investment is a factor weighing on equilibrium interest rates. According to Fischer, low productivity growth and political and economic uncertainty lead to a “tepid response of capital spending to historically low interest rates.” Fischer said that policies “found in effective fiscal and regulatory measures” are more likely to boost the long-term potential of the economy than central bank actions.

Activist Group “Fed Up” Calls for Janet Yellen’s Reappointment: Fed Up, a coalition of community groups, released a report on August 3 arguing that Federal Reserve Chairwoman Janet Yellen and her policies made the recession shorter than it otherwise would have been, and called for her reappointment. According to the report “Yellen and the Fed deserve more credit for the economic recovery than does any other policymaker or institution.”

Federal Deposit Insurance Corporation (FDIC) Vice Chair James Hoenig Says High Bank Capital Distribution Payouts are Hurting Lending: In a letter to Senate Banking Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH), FDIC Vice Chairman Hoenig said that if the ten largest banks in the U.S. decreased their share buybacks and dividend payments, they could be able to increase lending by as much as US$1T. The gist of the letter is that it is high bank capital distributions and not enhanced capital requirements that are impeding lending. “Although bank capital is a critical indicator of the health of the financial industry, it continues to be discussed in sound bites rather than substantive public debate.”

FDIC Seeing Increase in New Bank Applications: After a long drought of new bank applications (only three opened between 2011 and the first quarter of 2017), the FDIC has approved six new banks since October 2016. Agency officials have said that the increase is due to the rise in interest rates and higher prices for bank stocks.

Export-Import (Ex-Im) Bank Nominee Supports “Functional” Bank but Wants Reforms: In a letter to Senate Banking Chairman Mike Crapo (R-ID), nominee to head the Ex-Im Bank former Rep. Scott Garrett (R-NJ) said that he “support[s] the president’s policy of having a fully staffed EXIM board and having EXIM functional as a U.S. credit export agency.” He noted, however, that he wanted to see the Bank reformed and modernized. While in Congress, Garrett was one of the lead opponents of the Bank.

NOMINATIONS, COMINGS AND GOINGS AT THE AGENCIES

Former Senate Aide Jelena McWilliams under Consideration for FDIC Chair: Fifth Third’s General Counsel Jelena McWilliams is under consideration to be President Trump’s FDIC Chair. McWilliams worked for both current Senate Banking Chairman Mike Crapo (R-ID) and former Banking Chairman Richard Shelby (R-AL).

OTHER NOTEWORTHY ITEMS

Fannie Mae Reports Income of US$3.2B: Fannie May reported a net income of US$3.2B in the second quarter of the year. It plans to send US$3.1B to the Treasury Department. This would bring Fannie’s total remittances to the government to US$165.8B, which is almost US$50B more than the company received from the government after the housing collapse.

Freddie Mac reported a net income of US$1.7B in the second quarter and will send US$2B to taxpayers, which would bring its total remittances to US$1.08B—almost US$37B more than the bailout received.

Financial Stability Institute Calls for Balance in Regulation: The global finance watchdog Financial Stability Institute said in a paper released August 2 that national regulators should consider lessening burdens on smaller lenders in order to help the wider market. It argued that smaller lenders should not be subject to the same capital requirements as large, multinational banks.

Digital Currency Think Tank Files Amicus Brief in IRS Case: Coin Center, a digital currency think tank, filed an amicus brief on August 3 in a case between Coinbase and the IRS. The IRS is asking for two years of user records from Coinbase, maintaining that it has reasonable cause to suspect several users in America avoided paying taxes owed on Bitcoin-related trades.

Trump Administration Considers Halving Homeowner Tax Benefit: The Trump Administration is reportedly considering lowering the US$1M cap on mortgages for the purposes of mortgage interest deduction. This would draw significant backlash from the National Association of Realtors, a group that supported the President during his presidential campaign, as well as most other housing-related organizations.