Money Matters: This Week in Washington

This Week in Washington for February 19, 2018

February 19, 2018

Dina Ellis and Casey Miller

THE BIG PICTURE

The nation continues to mourn the 17 students and staff who were killed in the mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida on Wednesday. The shooting has ignited debate on the need for gun control legislation and the state of mental health care in the United States. President Trump visited survivors in the hospital and met with first responders on Friday, en route to spending his holiday weekend at Mar-a-Lago. In a move that shocked Washington, on Friday special counsel Robert Mueller handed down an indictment against 13 Russian nationals and three Russian companies over interference in the 2016 election. The 37 page indictment detailed a sophisticated effort dating back to 2014 to engage in “information warfare against the United States of America.” The purpose of this operation was to “communicate derogatory information about Hillary Clinton, to denigrate other candidates such as Ted Cruz and Marco Rubio, and to support Bernie Sanders and then-candidate Donald Trump.” President Trump, who has long decried the Russia investigation as a hoax, initially considered the indictment a victory proving there was no collusion. By later in the weekend however, his view had shifted and he issued a series on controversial tweets, seeming to blame the FBI’s allocation of resources to the Russia investigation on its failure to prevent the tragic shooting in Florida. A bipartisan proposal to protect DACA recipients that would have given a path to citizenship to 1.8 undocumented immigrants and provided US$25B for border security failed on Thursday in the Senate by 54-45, leaving the DREAMers in limbo. An amendment to include an immigration framework backed by the President garnered only 39 votes. While just last month President Trump indicated he would sign any bill put before him, he complicated the negotiations by making clear he would not sign any deal that did not reform aspects of legal immigration programs, such as family-based migration and the diversity visa lottery. A second federal judge has ordered DHS to resume processing DACA renewal applications. U.S. District Court Judge Nicholas Garaufis issued a preliminary injunction on Monday, temporarily blocking the Trump administration from ending DACA protections on March 5th. His opinion explained “If the decision is allowed to go into effect prior to a full adjudication on the merits, there is no way the court can ‘unscramble the egg’ and undo the damage caused by what, on the record before it, appears to have been a patently arbitrary and capricious decision.” The decision has little immediate impact, as Judge William Alsup already imposed a similar injunction in January. The Trump administration has appealed Judge Alsup’s decision directly with the Supreme Court. The 4th Circuit Court of Appeals echoed the 9th Circuit in issuing an injunction on President Trump’s latest travel ban, relying frequently on the President’s own tweets in an opinion saying “the President of the United States has openly and often expressed his desire to ban those of Islamic faith from entering the United States. The Proclamation is thus not only a likely Establishment Clause violation, but also strikes at the basic notion that the government may not act based on religious animosity.” The Supreme Court has already granted a stay on these injunctions however, and so the travel ban remains in effect. The Supreme Court will hear arguments this term. President Trump unveiled his budget proposal on Monday. In a break from previous Republican balanced budget rhetoric, this budget anticipates adding US$1T to the deficit each year. Some highlights include:

_* a 13% increase in defense spending

• a 18.3% cut to HUD’s budget

• cuts to Medicare and Medicaid by US$554B and US$250B respectively over the next decade

• eliminating the NEA and NEH

• cutting the EPA budget by over one-third, specifically targeting the fund which cleans up superfund sites for cuts

• granting the CFTC the authority to collect user’s fees to the tune of US$32M

• a 3.5% budget increase for the SEC, while eliminating the reserve fund established by Dodd-Frank

• slashing funding for the State Department by 23%

• a cut of US$78M to funding for the National Flood Insurance Program

• a restriction on the CFPB’s enforcement authority and an elimination of its independent funding, putting its budget under congressional oversight by 2020_

Other highlights of last week include:

• On Monday President Trump rolled out his infrastructure plan, a US$1.5T initiative that includes only US$200B in federal funding. Top Democrats were quick to criticize the terms, contrasting it with the recent tax cut. Sen. Chris Murphy (D-CT) said “If the president truly wants a $1.5 trillion infrastructure plan, I'm all for it … Let's repeal his giant tax giveaway to the rich and use that money to start rebuilding America.”

• The fallout from the scandal surrounding former White House Aide Rob Porter continues as Rep. Trey Gowdy (R-SC), Chairman of the House Oversight Committee, launched an investigation into the policies and processes by which interim security clearances are investigated and adjudicated within the Executive Branch, particularly in relation to Mr. Porter. Rep. Gowdy sent letters to both FBI Director Christopher Wray and White House Chief of Staff John Kelly demanding information.

• On Friday, former Massachusetts Governor and failed presidential nominee, Mitt Romney officially launched his bid for retiring Sen. Orrin Hatch’s seat in Utah.

• A group of Senate Democrats have written a letter urging HUD’s inspector general to investigate allegations that Secretary Ben Carson’s family has inappropriately benefitted from his position, saying “[reports] raise concerns that Secretary Carson's family may stand to benefit financially from his role leading HUD, and may have had access to information that should not be available to individuals who are not government employee.”

LAST WEEK ON THE HILL

HOUSE FINANCIAL SERVICES COMMITTEE

Committee Holds Hearing on “Examining the Current Data Security And Breach Notification Regulatory Regime”: On February 14, the Subcommittee on Financial Institutions and Consumer Credit held a hearing on “Examining the Current Data Security And Breach Notification Regulatory Regime.” The purpose of the hearing was to examine opportunities to reform current federal and state data security regulatory regimes in order to close any gaps in data security and data breach regulation, and reduce vulnerabilities and shortcomings in the system. One witness, Aaron Cooper, stated “As cybersecurity threats grow increasingly dangerous, it is critical that we establish rational, collaborative approaches to protecting the interests of affected stakeholders to include individual consumers.”

• Mr. Aaron Cooper, Vice President, Global Policy, BSA – The Software Alliance

• Ms. Kim Sponem, Chief Executive Officer & President, Summit Credit Union, on behalf of the Credit Union National Association

• Mr. Nathan D. Taylor, Partner, Morrison & Foerster LLP

• Professor Marc Rotenberg, President, Electronic Privacy Information Center, and Adjunct Professor, Georgetown University Law Center

• Mr. Paul Rosenzweig, Senior Fellow, R Street Institute

Committee Holds Hearing on “Legislative Proposals Regarding Derivatives”: On February 15, the Subcommittee on Capital Markets, Securities, and Investment held a hearing on “Legislative Proposals Regarding Derivatives.” The purpose of the hearing was to examine legislative proposals to amend provisions of Title VII of the Dodd-Frank Act, harmonize and reconcile differences between SEC and the CFTC guidance and rulemaking, and provide targeted relief to entities that use derivatives to mitigate risk.

• The Honorable Kenneth E. Bentsen, Jr., President & CEO, Securities Industry and Financial Markets Association (SIFMA)

• Mr. Thomas C. Deas, Chairman, National Association of Corporate Treasurers, on behalf of the Coalition for Derivatives End-Users

• Mr. Andy Green, Managing Director of Economic Policy, Center for American Progress

• Mr. Scott O’Malia, Chief Executive Officer, International Swaps and Derivatives Association, Inc.

Committee Holds Hearing on “Examining De-risking and its Effect on Access to Financial Services”: On February 15, the Subcommittee on Financial Institutions and Consumer Credit held a hearing on “Examining De-risking and its Effect on Access to Financial Services.” “De-risking” refers to the practice of financial institutions to terminate relationships and close the accounts of clients and merchants deemed as “high risk,” unprofitable, or complex, in order to avoid legal liability and greater regulatory scrutiny. The purpose of the hearing was to examine the key drivers of “de-risking,” review the ongoing effects of de-risking, and consider regulatory and legislative opportunities for Congress and the Administration to ensure equal and consistent access to the financial system. During the hearing Subcommittee Chairman Blaine Luetkemeyer (R-MO) said “we must continue to shine light on this issue so that we can understand the root causes of ‘de-risking’ and the implications it has on our economy, both at home and abroad.”

• Mr. Bryan A. Schneider, Secretary, Illinois Department of Financial & Professional Regulation, on behalf of the Conference of State Bank Supervisors

• Mr. Tim Baxter, President, SwypCo ATM Solutions, on behalf of the National ATM Council

• Mr. Jason D. Oxman, Chief Executive Officer, The Electronic Transactions Association

• Dr. Manuel Orozco, Director, Migration, Remittances and Development, Inter-American Dialogue

ON THE FLOOR

Legislations Passed: The House passed two financial services bills on Wednesday:

• H.R. 3299, the Protecting Consumer’s Access to Credit Act of 2017 (Rep. Patrick McHenry (R-NC)) passed along mostly party lines, 245-171, with Democrats wary of its appearance of favoring the payday lending industry by restoring the “valid-when-made” doctrine that was called into question by the Second Circuit’s 2015 decision in Madden v. Midland Funding LLC.

• H.R. 3978, a bill originally intended to deal with mortgage disclosures, ended up as a package containing five bills, including:

  • H.R. 3978: TRID Improvement Act (Rep. French Hill (R-AR));

  • H.R. 3948: Protection of Source Code Act (Rep. Sean Duffy (R-WI));

  • H.R. 1645: Fostering Innovation Act of 2017 (Rep. Kyrsten Sinema (D-AZ));

  • H.R. 4546: National Securities Exchange Regulatory Parity Act (Rep. Ed Royce (R-CA));

  • H.R. 2948: To amend the S.A.F.E. Mortgage Licensing Act of 2008 to provide a temporary license for loan originators transitioning between employers, and for other purposes (Rep. Steve Stivers (R-OH))It passed by a 271-145 vote. While House Financial Services Committee Chairman Jeb Hensarling (R-TX) touted the legislation’s provisions that would “cut through layers of red tape and help level the playing field.” Rep. Maxine Waters (D-CA) struck a more critical tone, issuing a statement saying “H.R. 3978 has been dramatically expanded without input from Democrats to include several highly problematic and damaging bills.”

LEGISLATION INTRODUCED AND PROPOSED

SAFE Lending Act: Sen. Jeff Merkley (D-OR) introduced the Stopping Abuse and Fraud in Electronic (SAFE) Lending Act. The SAFE Lending Act would crack down on some of the worst abuses of the payday lending industry, particularly in online payday lending, and protect consumers from deceptive and predatory practices that strip wealth from working families.

Data Breach Proposal: While not yet formally released, Rep. Blaine Luetkemeyer (R-MO) has been circulating a draft of a bill that would seek to create new standards for the handling of data breaches. Rep. Carolyn Maloney (D-NY) will serve as a co-sponsor.

THIS WEEK ON THE HILL

Capitol Hill will be quiet this week during the Presidents’ Day Recess, February 20 – February 24.

THE REGULATORS

Fannie Mae and Freddie Mac Report 2017 Losses, Requiring Bailouts: Following passage of the Tax Cuts and Jobs Act, Fannie Mae has announced a US$6.5B loss for 2017, requesting an infusion of US$3.7B from Treasury, while Freddie Mac has reported a US$3.3B loss, requiring a US$312M bailout.

CFTC Announces Formation of Subcommittees to Deal with Digital Currency Oversight: At a February 14 public meeting, the CFTC’s Technology Advisory Committee brought together experts from both the public and private sector, hosting several panels on blockchain, virtual currencies and related futures products, machine learning and artificial intelligence, automated trading, and cybersecurity. CFTC Commissioner Brian Quintenz urged the creation of a self-regulatory organization in the cryptocurrency space. He also expressed his view that “the CFTC should not attempt to make value judgments about which new products are worthwhile and which are not - the markets, investors, and consumers need to decide that for themselves. However, the CFTC should aggressively target fraudulent and manipulative behavior, whether in the derivatives markets or in the underlying cash markets.”

CFTC Chairman Giancarlo Announces Increase in Scrutiny of Bitcoin Markets: In his testimony before the Senate Agriculture Committee on Thursday, CFTC Chairman Giancarlo spoke about the agency’s greater regulatory scrutiny of cryptocurrency exchanges, while also noting that they will need more support and resources to make meaningful progress toward accomplishing this goal. He said that he suspects tax evasion and other illicit activities are widespread in cryptocurrency markets and indicated that the CFTC is “serious about enforcement.”

CFTC Issues Customer Advisory on Virtual Currency Pump-and-Dump Schemes: The CFTC is advising customers to avoid pump-and-dump schemes that can occur in thinly traded or new “alternative” virtual currencies and digital coins or tokens. Customers were warned not purchase virtual currencies, digital coins, or tokens based on social media tips or sudden price spikes. They were advised to thoroughly research virtual currencies, digital coins, tokens, and the companies or entities behind them in order to separate hype from facts.

CFPB Requests Feedback on the Bureau’s Supervision Program: The Bureau issued a Request for Information Wednesday, seeking comments and information from interested parties to assist in assessing the overall efficiency and effectiveness of its supervision program and whether any changes to the program would be appropriate. This was the fourth in a series of RFIs announced as part of Acting Director Mick Mulvaney’s call for evidence to ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers.

Senators Ben Cardin (D-MD) and Chris Van Hollen (D-MD) Warn CFPB Acting Director: Following reports that CFPB acting Director Mick Mulvaney intends to strip enforcement powers from the CFPB Office of Fair Lending and Equal Opportunity, Maryland Senators Ben Cardin and Chris Van Hollen issued a warning in a letter, stating “As with any regulator, the actions of the CFPB affect the behavior of the entities it regulates. In stripping the enforcement authority of an office that has vigorously pursued cases against discriminatory lenders, you are sending a signal that the CFPB may not step in to provide oversight and enforcement against racial discrimination by financial institutions.”

CFPB Acting Director Mick Mulvaney Releases Five Year Mission Plan: On Monday, acting Director Mick Mulvaney released a strategic plan for fiscal years 2018-2022 that marked a significant shift from the Bureau’s outlook under former Director Richard Cordray. He described his plan saying, “If there is one way to summarize the strategic changes occurring at the bureau, it is this: We have committed to fulfill the bureau’s statutory responsibilities, but go no further.” He further explained that they would act with “humility and moderation,” eschewing the more aggressive tactics previously employed by his predecessor. In a statement in response Sen. Sherrod Brown (D-OH), ranking Democrat on the Senate Banking Committee, criticized this change in emphasis, saying “Banks and payday lenders have enough lobbyists working on their behalf — the mission of the Consumer Financial Protection Bureau must continue to be fighting for working families.”

The Financial Stability Oversight Council Announces an Executive Session to be Held February 21: It was announced that on Wednesday, February 21, Secretary Steven T. Mnuchin will preside over an executive session of the Financial Stability Oversight Council (Council) at the Treasury Department. The preliminary agenda includes a discussion of the Council's process for considering applications from bank holding companies or their successors under section 117 of the Dodd-Frank Act, and an update on the annual reevaluation of the designation of a nonbank financial company.

SEC Requests Increased Budget: On Monday, the SEC announced a US$1.658B budget request for fiscal year 2019 to support its core mission and expand oversight and enforcement in emerging areas such as financial innovation, market structure and cybersecurity. Chairman Jay Clayton explained “This year’s budget request reflects our top priorities of protecting investors and making sure we continue to have the most vibrant and well-functioning capital markets in the world.” The increased budget would support 4,628 positions and a US$45M increase in funding for information technology enhancements to support the agency’s cybersecurity capabilities, risk and data analysis, enforcement and examinations, and automation of business processes.

SEC Launches Share Class Selection Disclosure Initiative to Encourage Self-Reporting and the Prompt Return of Funds to Investors: On Monday the Division of Enforcement of the Securities and Exchange Commission announced a self-reporting initiative that seeks to protect advisory clients from undisclosed conflicts of interest and return money to investors. Under the Share Class Selection Disclosure Initiative (SCSD Initiative), the Division will agree not to recommend financial penalties against investment advisers who self-report violations of the federal securities laws relating to certain mutual fund share class selection issues and promptly return money to harmed clients.

SEC Suspends Trading in Three Issuers Claiming Involvement in Cryptocurrency and Blockchain Technology: On Friday the Securities and Exchange Commission suspended trading in three companies (Cherubim Interests Inc., PDX Partners Inc., and Victura Construction Group Inc.) amid questions surrounding similar statements they made about the acquisition of cryptocurrency and blockchain technology-related assets. According to the SEC’s orders, there are questions regarding the nature of the companies’ business operations and the value of their assets, including in press releases issued beginning in early January 2018. Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.

The National Credit Union Administration Announces Distribution of US$736M to Credit Unions: On Thursday the Board of the NCUA approved a US$736M distribution to eligible credit unions after the stabilization fund’s closure last year. The National Association of Federally-Insured Credit Unions’ President Dan Berger said in a statement “While we are grateful credit unions will get some money back soon, NAFCU will continue to aggressively fight for credit unions to get all their money back, not just the small portion they're due to receive.”

COMINGS AND GOING AT THE AGENCIES

Loretta Mester, President of the Federal Reserve Bank of Cleveland, Under Consideration for Fed’s No. 2 Job: Ms. Meester is under consideration to serve as vice chairwoman of the Federal Reserve Board in Washington. She spent the first 30 years of her career in various positions at the Philadelphia Fed, and has led the Cleveland Fed since 2014. The White House is also thought to be considering Richard Clarida, a managing director at Pimco, John Williams, the president of the San Francisco Fed, and Mohamed El-Erian, a former chief executive at Pimco.

Federal Reserve Chairman Jerome H. Powell Participates in Ceremonial Swearing-In: Chairman Jerome H. Powell on Tuesday participated in a ceremonial swearing-in event in the atrium of the Board's main building in Washington. The oath was administered by Vice Chairman Randal K. Quarles, who also administered it on February 5, when Mr. Powell began a four-year term as the 16th Chairman of the Board of Governors of the Federal Reserve System.