Progeny of S. 2155 Proliferate (June 20)

Update 280: Progeny of S. 2155 Proliferate; Hensarling’s HFSC on a Deregulatory Mission

After S. 2155, this year’s wide-ranging banking bill, was signed into law last month, House Financial Services (HFSC) Chair Rep. Jeb Hensarling—perhaps emboldened by the wide margins by which S. 2155 passed—has continued his crusade against the United States’ financial regulatory regime.   

In May, Rep. Blaine Luetkemeyer said he expected Hensarling to advance a series of securities and capital markets deregulation bills.  They have since moved quickly and are worth watching as stand-alones or attached to large legislative vehicles.




Here are the highlights for five of the most consequential bills recently adopted by Hensarling’s Committee, with varying degrees for bipartisan support.  

  • H.R. 6035, Streamlining Communications for Investors Act

The Streamlining Communications for Investors Act was introduced on June 7, by Rep. Ted Budd, a vulnerable North Carolina Republican on the DCCC’s “Red to Blue” watch list. H.R. 6035 directs the SEC to revise Rule 163(c) to allow a well-known seasoned issuer (WKSI) to authorize an underwriter or dealer to act as its agent or representative. The representative/agent acts by communicating about offerings of the issuer’s securities prior to the filing of a registration statement. H.R. 6035 cleared the HFSC along party lines 31-23.

H.R. 6035 is probably too deregulatory to survive in the Senate if passed by the House as a stand-alone, but it could still pass in a package of bills. H.R. 6035 should be on a watch list for those worried about capital markets law. As Ranking Member Waters put it in the markup, “Simply because the WKSI is familiar with the regulators doesn’t mean the security they offer is not risky.”

  • H.R. 5749, Options Market Stability Act

The Options Market Stability Act was introduced on May 10 by Rep. Randy Hultgren, a vulnerable Illinois Republican facing serious opposition from Democrat Lauren Underwood in the fall. Last week, H.R. 5749 passed the HFSC 53-0 after an amendment by Democratic Rep. Bill Foster was adopted by the full committee. The bill would implement a risk-adjusted approach to value centrally-cleared options as it relates to capital rules to more accurately reflect exposure and promote options market-making activity.  

The Current Exposure Method requires options contracts to be calculated on their notional face-value rather than through a risk-adjusted value which reflects actual exposures. Changing this calculation will incentivize the use of hedged positions and would reduce the amount of capital required to place those positions and reduce overall exposure.

Rep. Foster’s amendment to the bill would direct regulators to adopt a calculation of counterparty credit risk. After passing HFSC unanimously, H.R. 5749 has a good chance of being adopted by the Senate given its full bipartisan support.

  • H.R. 5877, Main Street Growth Act

The Main Street Growth Act was introduced in the House in May by Rep. Tom Emmer, who represents a safely Republican district in central Minnesota. On June 7, the HFSC reported the bill out 56-0.  The measure allows venture exchanges to register under the Securities Exchange Act, allowing non-public companies in their early stages to trade shares without oversight from state securities regulations. Since long-term returns from public markets generally outperform returns from venture exchanges, incentivizing venture investments over public markets investments could prove dangerous.

Some observers characterize the Main Street Growth Act as the “Jobs Act 2.0.”  The 2012 Jobs Act eased securities regulations and created a way for companies to use crowdfunding to issue securities. Consumer groups criticized the Jobs Act for potentially increasing investor exposure to fraud. There is little evidence the Jobs Act ultimately spurred much hiring, if any.

  • H.R. 5323, Derivatives Fairness Act

The Derivatives Fairness Act was introduced on March 19 by Rep. Warren Davidson, a safe-seat Republican representing a western-Ohio district. The measure cleared the House Financial Services Committee by a recorded vote of 34-26 on March 21. The bill would eliminate the requirement that banks hold capital against certain uncleared derivatives. Specifically, banks would be allowed to remove derivatives from fair value adjustment, interrupting banks’ protection against the failure of counterparties to pay derivatives obligations.

Credit valuation adjustment requirements were put in place following the 2008 financial crisis. Ostensibly, H.R. 5323 is meant to ensure that United States companies are not disadvantaged relative to their European counterparts, who pay less for derivatives. However, there is little compelling evidence to demonstrate that derivatives are negatively impacting American companies compared to their overseas competitors, and this bill is yet another proposal for deregulation without desideratum.

  • H.R. 5037, Securities Fraud Act of 2018

The Securities Fraud Act of 2018 was introduced on February 15 by Rep. Thomas MacArthur, a vulnerable Republican representing a flippable New Jersey district that Hillary Clinton won. The bill ostensibly aims to reduce state enforcement burdens on companies listed on national securities exchanges by reducing some state-level oversight on these exchanges.

The bill cites differences between state and federal civil enforcement actions, as well as the burden of dual regulatory regimes, as an encumbrance to publicly traded companies in the United States. By eliminating state regulatory requirements and oversight, the bill would jeopardize investor protections, without clear reason. The SEC also has an ongoing hiring freeze and is understaffed for its current workload; removing state enforcement would further increase the burden on the already overburdened federal regulator.

Ambiguities in the language of the bill make it unlikely to gain sufficient support to clear a house vote without revisions. H.R. 5037 is opposed by Democrats including Rep. Carolyn Maloney, the Ranking Member of the HFSC, Subcommittee on Capital Markets, Securities, and Investments. Joseph P. Borg, director of the Alabama Securities Commission, also opposes the bill, outlining the alternative avenues for capital formation (such as the private market and crowdfunding) as the real reasons behind the lack of public initial public offerings. The bill has four Republican co-sponsors: Davidson, Tenney, McHenry, and Faso and is currently in public hearings.  

Next Steps

Of the above, watch for the Options Market Stability Act and the Main Street Growth Act to advance to the Senate as viable products. Each bill earned unanimous HFSC support. Whether they are buried in the “Senate graveyard” remains to be seen. Regardless, Chair Hensarling will continue to push for deregulation until the end of his time as chair. Watch for a House Financial Services Committee markup tomorrow covering three securities bills, H.R. 5970, H.R. 6130 and H.R. 6139.

S. 2155: Critical Backward Glance (May 25)

Update 274 —  S. 2155: Critical Backward Glance

and a Sneak Peek Ahead on the Bill and Progeny

Whatever the merits of S. 2155, the current moment of good feeling surrounding 91 consecutive months of economic growth will not last forever.  If the (inevitable) downturn is sharp, the bill and its supporters may come under scrutiny for enacting the deepest and most comprehensive rollback of Dodd-Frank to date.

Opponents of the bill should take pride in holding the line in the Senate — in the five months between its introduction and the vote on final passage, the number of Democratic cosponsors went from 9 to 12.  The House Democratic leadership and whips cut support down to 17 percent of the caucus, half the amount in the Senate.

Hats off to the progressive groups who helped accomplish this result such as Americans for Financial Reform and Center for American Progress.

Good long weekends and recesses and Memorial Day all.




Counter-Intuitive, Countercyclical Economics

The regulatory rollback codified by S. 2155 is reckless from an economic standpoint. Since the Dodd-Frank Act (DFA)’s passage, the US economy has mounted an impressive recovery from the depths of the great recession. Still, the economy has not yet completed a full business cycle since DFA became law.  The protections put in place after the crisis have yet to be tested in a downturn. While it is rational to re-examine regulatory rules, it could easily turn out to be premature to begin chipping away at DFA’s foundation without sufficient time to review its total impact.

Since regulators and industry did not see warning signs in the lead-up to the great recession, giving them discretion to find the right approach to regulation after the great recession is unwise. Tailoring is dangerous when systemic risks go unseen. Beyond weakening rules for the biggest banks, expect more bad mortgages on bank portfolios with the rollbacks in qualified mortgage (QM) rules, appraisals, escrow and manufactured housing.  Additionally, the Volcker Rule change, community bank provisions, and Home Mortgage Disclosure Act (HMDA) exemptions substantially reduce disclosure. All of these factors could work together to produce the recipe for another crash.

Big Banks Win, Small Banks Stiffed

2155’s proponents argued that these rollbacks are desperately needed to help community banks that are struggling with undue compliance costs. While it might be true that community banks are closing their doors, a closer look at the legislation makes it hard to see how S. 2155 addresses these concerns.   Community banks will see some benefit to their bottom lines thanks to exemptions from Basel III rules, the Volcker rule, and the HMDA reporting requirements.

The big winners in S. 2155 are the big banks with assets between $50 and $250 billion. These big banks stand to benefit substantially from rollbacks on enhanced supervisory standards including stress tests, living wills, and capital ratios.  This is likely to set off a wave of consolidation in the industry. Historically, no factor has impacted M&A activity in the banking sector more than de-regulation, and S. 2155 is one of the most significant deregulatory bills to become law in 20 years. S. 2155 might be good for the community bankers who stand to cash out, but it will only hasten the demise of the institutions they manage.

Weak Polling in Every Region

2155 polls dismally among the voters that Democrats are relying on to take back the House in November. 67 percent of voters oppose loosening bank regulations, and a full 78 percent think that big banks have too much influence on Congress.  Possessing great instincts, Minority Leader Nancy Pelosi and House Financial Services Committee Ranking Member Maxine Waters worked hard to whip votes against the bill. With polling numbers so bad, it is little wonder that experienced Democratic leadership took pains to dissuade members from supporting the bill. On the eve of such an important election season, Wall Street campaign funding is not worth the risk of alienating a public that has little sympathy for historically profitable banks.

Lies, Damn Lies

The public has been badly misled about S. 2155’s impact, which proponents have artfully branded the “community bank bill.”  How lacking was the public information about it? In a New York Times bold call out, the paper referred this week to the legislation as “a bill to lift strict rules on small and medium banks.” Banks with between $50 billion and $250 billion are not small or medium sized. They include 25 of the 38 largest banks in the country that together hold $3.5 trillion in industry assets.

Will the GOP seem a 2155 2.0?  The bill’s champions like to say this is as far as they would ever go in rolling back DFA, but the GOP has already set its sights on the next chance to do even more damage to systemic risk rules.  The House appropriations package released just this week includes numerous riders that cut DFA further, including handicapping the SIFI designation process, mandating fewer living wills, providing stress test relief for non-banks, and directing tailoring for similarly-situated banks.

Once again, a big bank de-regulation bill has passed during improved economic times under the guise of helping the little guy.  A few years down the road, when big banks need another bailout, it will be the little guy who ends up footing the bill, he believes.. While the President calls DFA a disaster, it is S.2155-style deregulation that often becomes history’s culprit.  We not address the effect of headlines reporting campaign contributions in big dollars from the financial firms benefiting from the bill to incumbents who voted for it.

House Votes Tuesday on S.2155 (May 18)

Update 272: House Votes Tuesday on S. 2155; Big Bank Bill Carries More Than Systemic Risk

News came this week that the Senate has prevailed on the House GOP leadership to let S. 2155, the largest rollback of Dodd-Frank to date, to schedule a vote on the bill, which is now slated for next Tuesday.

It is all over but the voting, with the bill expected to pass the House by a comfortable margin.  How comfortable, and for whom? The political implications and risks for Aye votes here in a populist cycle may not be worth the headlines, despite the contributions.  See more below.

Good weekends all,



S. 2155 House Vote

Next Tuesday, the House is expected to vote on S.2155, The Economic Growth, Regulatory Relief and Consumer Protection Act. Thanks to significant Democratic support in March, the bill passed the Senate with a final vote total of 67-31.

Posturing for future employment opportunities, soon-to-retire Financial Services Committee Chairman Jeb Hensarling has since stalled the bill, pushing for even more deregulatory measures in line with recently passed House bills. Having made his point, Hensarling relented last week, and House Speaker Paul Ryan signaled that the chamber would take up S. 2155 as written.

In exchange, Senate Majority Leader Mitch McConnell agreed to take up a package of HFSC banking bills that have passed committee with bipartisan support. Initial reports suggest that the legislation might not get floor time, and might instead be attached to must-pass bills later in the year. According to Rep. Luetkemeyer, the package of House bills that will be considered by the Senate will focus on capital markets, securities, insurance, and banking.

Revisiting S. 2155 and Systemic Risk

Section 401: This provision would damage the Dodd-Frank Act’s regulatory architecture for some of the largest banks in the country. It increases the threshold for the automatic application of enhanced prudential standards from $50 billion to $250 billion in consolidated assets. These standards include stress testing, living will submissions, and a modified liquidity coverage ratio.

Proponents of the bill express comfort in the Fed’s ability to tailor the application of these standards based on the size, complexity, and risk profile of these institutions. Critics of the bill do not believe tailoring can be effective given the failure of regulators and industry actors to spot systemically sensitive parts of the sector in the lead up to financial crises.

Section 402: Under this provision, custody banks would no longer have to hold capital against funds deposited at certain central banks to meet the Supplementary Leverage Ratio (SLR). The bill defines a custody bank that would reduce capital requirements for two of the most systemically important custodial banks in the world, State Street and BNY Mellon, and would pressure Congress to expand the exclusion to even larger banks in the future.

The provision was roundly criticized by former regulators. Former Fed Chair Paul Volcker, former Fed Governor Daniel Tarullo, and former FDIC Chair Sheila Bair all raised concerns about section 402 specifically before it passed the Senate.

Fed Ready to Run with Discretion

S.2155’s defenders insist the legislation is not deregulatory, and instead supports regulatory recalibration by giving the Fed discretion to apply enhanced prudential standards to banks between $100 billion and $250 billion. Since it passed the Senate, however, Trump-era Federal Reserve rule proposals offer a glimpse into their deregulatory approach to supervisory standards, including proposals to:

  • reduce enhanced supplementary leverage ratio (ESLR) capital rules applied to Globally Systemically Important Banks (G-SIBs) and their subsidiaries.
  • alter the Stress Capital Buffer by loosening stress testing assumptions, reducing aggregate capital at the largest 34 banks by $30 billion.

Governor Brainard and FDIC Chair Gruenberg each oppose the ESLR rule proposal, which would result in the GSIB subsidiaries holding $121 billion less in capital at their FDIC-insured subsidiaries. These regulators understand what the nominees Trump has trotted out do not: neither the sector nor regulators are able to get regulations right without a structure in place to ensure systemic stability. S.2155 undermines the structure that has been in place for banks between $50 billion and $250 billion.

Vice Chair Randal Quarles as well as Fed Governor nominees Richard Clarida and Michelle Bowman appear to be of one mind when it comes to passing S.2155. Each has advocated for tailoring supervisory standards on the basis of the “size, complexity, and risk-profile” of financial institutions. While they insist they will be able to make the right choices on supervisory standards, it is hard to imagine that they or their successors will be right in every case.

Just a decade ago, regulators and industry alike fell asleep at the wheel and lead the country to crisis. In response, Congress passed the Dodd-Frank Act to prevent the system from coming apart again. Now, just as the economy is getting back to stable footing, Republicans, Trump-appointed regulators, and even some Democrats are ready to ease standards for some of the largest banks in the country.

Democrats in Support: Not Just Systemic Risk

Americans this cycle have been especially clear  about their discontent with the appearance and reality corruption in national politics,  Supportive Democrats — incumbents this year — supported S. 2155 and took a gamble..and got scorched with banner front-page headlines and embarrassing stories in some of their largest in-state papers.

With the midterms looming, indications are that Democratic support for the bill is waning relative to support it received in the Senate only two months ago.   Minority Leader Pelosi and Ranking Member on HFSC Maxine Waters are actively rallying Democrats in opposition to the bill.While a number of House Democrats appear ready to add their names to the bill, observers predict Democratic support in the House will fall below 70 votes.


Dereg Now, Dereg Whenever (Apr. 25)

Update 266 – Dereg Now, Dereg Whenever:
Capital Rules Debate Pits Quarles vs. Quarrels

If rapidly increasing economic growth, historic highs in financial industry profits, and capital markets in record territory of late all call for deregulation, there’s no bad time for it.  And if proponents of financial deregulation control the House, Senate, and White House — for now — this is most certainly the time, regardless of sectoral circumstances.

Here’s the story of the GOP working with financial regulators and market participants to bring down the “hairpin turn ahead” sign because no more accidents were occurring.




Last Week, Federal Reserve Vice-Chair for Supervision Randal Quarles appeared before House and Senate Committees to answer questions on his approach to supervisory standards.  In recent weeks, the Fed has issued revisions to a number of fundamental post-crisis standards. Quarles’ innocuous words like “efficiency” and “recalibration” belie the serious systemic implications these rulemakings have.  Leading regulators at the Fed and other regulatory bodies have raised important objections.

This while a Senate Banking bill, S.2155, sits at the doorstep of the House.  The Economic Growth Regulatory Relief and Consumer Protection Act would empower the Fed to free 25 of the largest 34 banks from stress testing, living wills, and the liquidity coverage ratio.  Quarles’ rulemakings suggest he is eager to tailor the same DFA pillars that S.2155 would deregulate.

These efforts look like a solution in search of a problem. The banking sector has been unprecedentedly profitable for three years running, lending remains strong, and the economy as a whole is gaining steam.

GOP Regulatory Pref: Capital over Supervisory

Reduced capital levels run counter to what some Republican appointees and officials have suggested about the value of capital requirements. In 2016, then-Chair of the Senate Banking Committee Richard Shelby said that for years, he has “urged regulators to implement strong capital standards.”  Just a year ago, Jerome Powell suggested capital levels were just right. Now in power, conservatives seem determined to relax rules for the largest banks under the guise of “modernization,” a familiar deregulatory term.

Capital Regimes Pre- and Post-Crisis

Capital held by the five largest banks doubled from 2008 to 2015, but only from 3 percent to 6 percent. Today, equity capital requirements range from 7 percent to 11 percent of risk-weighted assets, but it appears Quarles is primed to permit a reduction in capital levels.

Proposed Revisions

Enhanced Supplementary Leverage Ratio (ESLR) – On April 11, the Federal Reserve and the Office of the Comptroller of the Currency (OCC) issued a proposal to reduce the enhanced supplementary leverage ratio capital rules applied to Globally Systemically Important Banks (G-SIBs) and their subsidiaries. The proposal’s impact varies from bank to bank, but would slash some ESLR by up to 40 percent. Currently, G-SIBs must maintain a minimum SLR of more than 5 percent (3 percent plus a 2 percent buffer). G-SIB subsidiaries must maintain a 6 percent SLR. The new proposal would take the 2 percent buffer and turn it into a figure equal to one half of the firm’s GSIB surcharge. Subsidiaries’ SLRs would fall from 6 percent after similar tailoring.

•  The FDIC estimates this will result in the GSIB subsidiaries holding $121 billion less in capital at their FDIC-insured subsidiaries. Quarles sought to temper critics who cite this figure by predicting that aggregate capital will fall by just $400 million among bank holding companies. Nevertheless, the discrepancy here is troubling, indicating the Vice-Chair does not see systemic risk residing in subsidiaries across these firms’ operations. In the past, it was the norm for the regulatory bodies like the Fed and FDIC to be on the same page when it comes to capital requirements.

Stress Testing/Capital Buffers – On April 10, the Federal Reserve proposed a new “stress capital buffer” that totals the amount equal to losses incurred during a hypothetical stress test or 2.5 percent, whichever is greater. The revision would replace the existing requirement that 2.5 percent of risk-weighted assets be held as capital. It also replaces the quantitative objection to a firm’s capital plans under CCAR.  Under the new proposal, if a bank has common equity tier 1 capital of 8 percent and it falls to 5 percent, the bank’s stress capital buffer would be 3 percent. This would be added to the minimum 4.5 percent common equity requirement to total 7.5 percent. Federal Reserve estimates suggest this will lead to increased capital among GSIBs, but lower levels of capital among non-GSIBs.

Some analysts are concerned, however, that the loosening of assumptions related to balance sheet growth and the time horizon for expected dividend payments, would ultimately reduce overall capital levels. Recent stress testing data projects these proposals would lower capital at major banks by $30 billion. Goldman Sachs expects the eight largest banks to reduce equity capital by $54 billion as a result of potential stress test changes.

New accounting standard for loan losses – Federal reserve rules include a new accounting standard for loan losses.  This is significant, as it requires banks to forecast and set aside money for easily foreseeable loan losses before they occur. In the lead up to the financial crisis, banks were not recognizing losses well. Since capital rules are in place to guard against unforeseen losses, combining loan loss projections (for anticipated losses) with capital requirements is potentially dangerous.


Source: Federal Reserve Bank of Atlanta; Federal Financial Institutions Examination Council; Journal of Economic Perspectives; Keefe, Bruyette & Woods; regulatory filings


Brainerd on Cyclicality – In the first dissent since the Federal Reserve began to publicly disclose votes, Governor Lael Brainard voted in opposition to a rule that slashes the enhanced supplementary leverage ratio. In a recent speech, Brainerd said it was too soon to consider lowering capital requirements for big banks and urged against making judgements about the current capital and liquidity coverage before a full economic cycle has been completed.

•  Gruenberg on ESLR – FDIC Chair Martin Gruenberg reaffirmed support for the SLR set in 2014, refusing to join the Fed and OCC in issuing the new proposed rule. Gruenberg said leverage ratio requirements are “among the most important post-crisis reforms,” and that “the existing simple approach has served well in addressing the excessive leverage that helped deepen the crisis.”

•  Sen. Warren – At last week’s Senate Banking Committee hearing, Sen. Warren reminded Vice Chair Quarles that taxpayers were left holding the bag when the big banks didn’t hold enough capital. Under the new rule, JP Morgan, Citigroup, and Morgan Stanley could reduce capital by more than 20 percent at their bank subsidiaries and still meet leverage capital requirements. Wells Fargo and Bank of America can each reduce their capital by more than 15 percent.

•  Wall Street Journal – Even the Wall Street Journal’s editorial board criticized the Fed’s proposed supplementary leverage ratio reduction. The board pointed out that the current 6.6 percent leverage ratio among GSIBs is only slightly greater than their losses during the stock market crash in 2008. Reducing them any further would only endanger the system, the editorial board argued.

S. 2155 in this Context

These proposals reflect Quarles’ apparent objective, to include risk-profiling in the financial regulatory capital regime.  Increased tailoring of enhanced prudential standards has been a primary post-crisis goal of congressional Republicans. Critics see tailoring as little more than a euphemism for sotto voce deregulation.

When a handful of Senate Democrats joined with Republicans to pass S. 2155, they voted to give the Federal Reserve a wide purview to tailor enhanced prudential standards on a variety of fronts for banks between $100 and $250 billion in assets.  These pillar revisions include changing the approach to company run stress tests, living wills, and liquidity requirements.

Faced with congressional questioning about how he would customize supervisory standards, Quarles highlighted four key risk profiles for supervisory standards on an individual bank– size, complexity, interconnectedness, and character of bank portfolios. In a rare case of a GOP-led Senate bill ceding authority to the Fed, S. 2155 gives the Fed sweeping discretion to tailor systemic risk rules set by DFA.

What’s Next?  Rules on Fed’s Radar

In his testimony, Quarles hinted more deregulation is on the way at the Fed.  Before the HFSC, Quarles attacked the Volcker Rule, implied he would reduce the risk-based capital surcharge at some of the nation’s largest banks, and hinted that he wanted to end limits on capital distributions due to weakness in risk management at large banks. In front of the Senate, Quarles outlined his plans improve the “regulatory efficiency” of stress testing, calibrate the LCR for non-GSIBS, and enhance stress testing transparency.

While Quarles is powering ahead, S. 2155 is currently held up in the legislative progress. The bill passed a Senate floor vote more than a month ago, 67-31, but has since been held up in the House. This is because Rep. Jeb Hensarling, the outgoing Chairman of the House Financial Services Committee, is refusing to rubber stamp the legislation. For the moment, he has the backing of House Republican leadership. Negotiating with Hensarling would surely involve making the bill more deregulatory, and that would risk alienating cosponsoring Democrats and dissolving the bill’s bipartisan backing.


The Dog Catches the Bus (Apr. 13)

Update 263 – The Dog Catches the Bus:
Mick Mulvaney’s Mysterious Mission at CFPB

This week saw Consumer Financial Protection Bureau (CFPB) Director Mick Mulvaney appear before both the House Financial Services and Senate Banking Committees. After years of working aggressively in Congress to shred the Bureau to pieces, Mulvaney is charged with the operating it; the dog that chased the bus so long now finds himself in the driver’s seat.

The particular spectacle may not be repeated.

Mulvaney’s mission is slated to end soon, as the President may appoint a full time Director this summer to replace him.  Former Director Richard Cordray’s term would have ended — and therefore Mulvaney’s time as Acting Director is set to end — on June 22.

What has Mulvaney done, or not done, with, or to, the Bureau?  We examine this below.

Good weekends all,


CFPB’s Intended Mission

The Consumer Financial Protection Bureau was created under the Dodd-Frank Act to bring all financial protection regulatory mandates under the roof of a single agency and to provide consumers with a remedy against predatory mortgage brokers, credit card issuers, payday lenders, and other fraudulent financial actors.  The Bureau was intended to be funded independent of political considerations and lobbying campaigns.

The CFPB has taken action on behalf of consumers in the aftermath of issues like the Equifax data breach and the Wells Fargo’s fake account scandal. Since the Bureau’s opening in 2011, it has taken enforcement action in cases of unfair, deceptive, and abusive acts and practices, discrimination, illegal mortgage-related compensation, and illegal debt-relief advance fees. It has also returned $12 billion to almost 30 million consumers who suffered losses at the hands of predatory lenders and debt collectors.

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Mulvaney’s Contempt for the Mission

Enforcement: Mulvaney has made it his mission so far to weaken the agency from the inside.  Through his first five months he has not opened a single enforcement action and has discontinued four that were started by Richard Cordray.  While Mulvaney claims that his predecessor likewise did not issue an enforcement in his first six months, the acting director is unlikely to issue new enforcements going forward like Cordray did.  Yesterday, he confirmed that “Regulation by enforcement is done, we’re not doing it anymore.”

Funding:  Mulvaney is working to starve the CFPB of funding. Each quarter, the CFPB requests funding from the Federal Reserve. In January, Mulvaney requested $0 in funding for the CFPB, insisting $177 million in its bank would be sufficient. Fiscal conservatives applauded the move, but most observers were baffled. Without proper funding it is unlikely the Bureau will be able to carry out whatever limited function Mulvaney allows for.

Payday Lending:  Mulvaney has also opened up a re-examination of the final payday lending rule, which was exhaustively commented on and revised during Cordray’s Directorship. Payday loans started borrowers on negative long term debt cycles leading to credit card delinquency, unpaid bills, overdraft payments, and bankruptcy. The payday lending rule requires lenders to consider borrowers’ ability to repay a loan by completing a full-payment test on loans, having a principal payoff-option for certain short-term loans, providing less risky loan options, and limiting the amount of times a borrower can be debited. Mulvaney is expected to weaken the rule and its enforcement. Consumer advocates view CFPB dropping the Golden Valley Lending and three other payday lending cases involving interest rate charges of up to 950 percent as worrisome precedent.

Mulvaney’s Ideology

Director Mulvaney has been caught speaking from both sides of his mouth. This week, before the relevant House and then Senate committees, Mulvaney has actively campaigned against his own position as Director and pleaded for slashes to its budget and funding mechanism.

Funding:  Per Dodd-Frank, the CFPB is not subject to the Congressional appropriations process and instead is funded by the Fed. This is not uncommon in the banking regulatory space as it prevents political winds from derailing Wall Street’s watchdogs. Mulvaney claims this is inappropriate and wants to see the Bureau subject to the same funding shenanigans that the IRS suffers under. This would be uniquely dangerous for the CFPB as the acting director himself voted in 2012, 2013, 2014, and 2015 to defund the consumer agency while a member of the House.

Governance:  While Mulvaney pleads for more Congressional interference in the Bureau’s funding mechanisms, he suggests that the Bureau’s governance structure be altered from the single Director model to a Board. He claims that this is to prevent radical shifts in the CFPB’s mission and function as leadership changes while simultaneously arguing that he is not acting with any partisanship as acting director, instead enforcing the letter of the law. Mulvaney also went so far as to advocate for Congressional approval of CFPB rules, which would be a stunning abdication of a federal agency’s rulemaking responsibility. Finally, Mulvaney wants to give the President direct authority over the agency’s director, making the director easier to fire.

Oversight: Mulvaney also wants more policing of the CFPB, asking Congress for an inspector general’s office to be housed at the agency to monitor the bureau. This increased legal scrutiny is largely unnecessary and would make the bureau function less efficiently.

Small Business Perspective

Recent polling reveals that entrepreneurs and small-business owners support the CFPB’s mission. The small business poll showed 84 percent of entrepreneurs believe the CFPB is needed to prevent predatory practices, ensure fair treatment of small businesses and consumers, and provide fraud protection.  Just 29 percent of small-business owners think CFPB funding should be subject to Congressional appropriations.

What Comes Next?

Mulvaney’s hearings came along with reporting that the CFPB is exploring enforcing an unprecedented $1 billion fine against Wells Fargo for auto insurance and mortgage lending abuses. This stems from an investigation started under Richard Cordray. Such a fine would be the Bureau’s first under Mulvaney’s stewardship, and would align with the CFPB’s intended mission. Given Mulvaney’s apparent disdain for the organization he runs, these reports are far from certain.

Key will be CFPB’s decision on the payday lending rule. Given that then-Congressman Mulvaney’s campaigns were largely financed by payday lenders, it is hard to be optimistic that he will effectively curb payday lending abuses in any significant way.  It is unknown how long Mulvaney will stay on the job. His time as Acting Director expires on June 22, but he could stay in the role as long as President Trump does not appoint a successor to Richard Cordray. Who the President may ultimately appoint to lead the agency next is anyone’s guess.

Omnibus Situation (Mar. 22)

Update 258 — Omnibus Situation:
Last Stop Before Two-Week Recess

As of this writing on Thursday afternoon, one more piece of Congressional business remains before members and staff can start a long and long-awaited recess.  Once again, Congress confronts a deadline of midnight tomorrow to keep the federal government funded. But no one wants to wait that long.

And once again, a budget that is not supposed to make new policy does so, with significant provisions and omissions, with some key Democratic gains.  Omnibus status and details, see below.




The Omnibus Toplines

Last night, congressional leaders and White House officials reached a deal on H.R. 1625, a 2,232 page, $1.2 trillion fiscal 2018 omnibus spending package.

Top line figures indicate:

• $629 billion in defense discretionary spending
• $579 billion in non-defense discretionary spending

The deal increases spending for appropriators by margins not seen since 2010:

• $80 billion above prior restrictions for defense-related spending
• $63 billion more for non-defense related spending

President Trump’s FY19 budget request proposed cutting $54 billion from the existing non-defense statutory cap. House Republican Appropriations bills were written at a level cutting $5 billion from the total cap.  Following the Republican majorities’ failure to enact Appropriations laws, the Bipartisan Budget Act of 2018 increased non-defense discretionary (NDD) spending by $63 billion. The omnibus conforms with the Bipartisan Budget Act of 2018 mandate.

Majority Leader McConnell, Minority Leader Schumer, Speaker Ryan, and Minority Leader Pelosi may adjust these spending numbers and strike the final deal to avert a government shutdown before midnight tomorrow.  The bill would extend the government’s spending cliff to September 30, guaranteeing six months without a major budgetary shutdown.

Negotiation Points and Resolution

The debate around the omnibus focused on a few key provisions each with their own nuances regarding funding levels, disbursement schedules, and administrative issues.  Democrats faired fairly well in these negotiations.

One victory was an item to permit the CDC to study gun violence by incentivizing municipalities to update the NICS database, which is used for background checks. Democrats also beat back attempts by Sens. Collins and Alexander to fund high risk pools in the health insurance marketplace.  Similar provisions: limiting the funding for Trump’s wall to narrow projects, primarily reinforcing and updating existing fencing.

But Democrats are not fully onboard with this bill.

—  there are no DACA protections
—  the Gateway, a key infrastructure project in New York and New Jersey is not directly funded
—  massive increases in military spending outstrip domestic discretionary increases

Freedom Caucus Republicans and Rand Paul are not enthused about this bill as it increases spending by $143 billion; they have said that Speaker Ryan and Majority Leader McConnell left too much on the table.

Policy Riders

Packed into this very large omnibus package are numerous policy riders on issues that run the gambit from health care to labor issues, to environment and more. With respect to economic policy, the following policy riders related to tax, infrastructure, and financial regulation were worked in.

Tax Riders: Apparently, the “meticulous” legislative process surrounding the Tax Cuts and Jobs Act missed a few details.

IRS Funding – Despite Trump’s expressed desire to cut IRS funding, this deal increases its budget. The omnibus also allocates $320 million to the Internal Revenue Service to support the agency as it implements the new law. Though the IRS will still be prohibited from auto-completing parts of tax returns, a continued victory for tax preparers like Turbotax. In addition, the base IRS budget was cut by $125 million from 2017 in nominal terms, making the net gain of $195 million.

The Tax “Grain Glitch” Fix – Representatives from farming states have decried a glitch in the Tax Cuts and Jobs Act that gives farmers greater tax savings if they have sold crops to farm cooperatives at a disadvantage to corporate competitors. Agricultural trade groups pushed Senators like Chuck Grassley (R-IA) and Pat Roberts (R-KS) to change this “Grain Glitch”. The proposal, that limits farmers to a 20 percent deduction of their net income from sales to cooperatives, has been included in the omnibus.

Low-Income Housing Tax Credit – In exchange for the “grain glitch” amendment to the GOP tax law, Democrats were able to win an expansion of the low-income housing tax credit by 12.5 percent from 2018 to 2021.

Infrastructure Spending:  The omnibus also includes minimal increases in infrastructure spending. While the funds are badly needed, significantly more funding is needed to address the nation’s crumbling infrastructure.  The American Society of Civil Engineers estimates, conservatively, that Congress will require a $2 trillion investment over the next decade to adequately address the nation’s infrastructure needs.

Spending Increase – The omnibus sets aside $10 billion in new spending for infrastructure including:
◦ $2.6 billion more for the Federal Highway Administration
◦ $1.2 billion more for the Federal Railroad Administration
◦ $600 million for high-speed internet

Dodd-Frank Rider: Just after the Senate passed its bipartisan banking bill, S. 2155, House Republicans continue to take aim at the Dodd-Frank Act in the omnibus bill.  But the financial services rider the GOP won here is of marginal significance, merely requiring the OMB to report on Dodd-Frank’s cost.

Cost Estimates of Dodd-Frank Implementation – The omnibus includes a provision requiring the OMB to report to the Appropriations Committee on the cost of implementing the Dodd-Frank Act.

Omnibus State of Play

This morning, the House of Representatives narrowly passed a procedural rule 211-207 to open up debate on H.R. 1625.  11 Democrats, expected to vote no, were waiting to vote when the vote was gaveled closed in a disruptive break from precedent and norms.

The House ultimately passed the omnibus bill comfortably Thursday afternoon by 256-167 and now it moves to the Senate.  Sen. Rand Paul has expressed vehement opposition to the bill on multiple grounds. But the omnibus package is unlikely to change in the Senate.  The only question will be how long will Sen. Paul hold the floor before the Senate is able vote. While this bill will, barring sudden snowfall, be signed into law in advance of the midnight deadline tomorrow night, the drama in the details is yet to conclude.

S. 2155 Passes Senate, 67-31
 (Mar. 16)

Update 256 – S. 2155 Passes Senate, 67-31

Now, on to the House and Conference. Or Not.

On Wednesday night, the Senate passed S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, 67-31.  The bill is the most comprehensive rollback of the Dodd-Frank Act to clear a chamber of Congress.

A summary of the bill’s top line provisions and a look at the twists and turns ahead as the bill heads to the House and possibly to conference (16th seed odds) are below. And a word about unintended consequences.

Happy weekends all,


Review of Topline Provisions

The bill provides community bank relief and increases the threshold for the automatic application of enhanced prudential standards from $50 billion to $250 billion. This de-regulates 25 of the 34 largest banks in the country, altogether worth $3.5 trillion – one-sixth of the banking sector.  Together, these banks collected $47 billion in TARP bailout funds.

The bill also instructs the Fed to tailor regulations for banks over $250 billion, allows for the deregulation of several foreign banks, and allows certain banks to omit deposits at the Federal Reserve from being subject to the Supplementary Leverage Ratio (SLR).

Enjoying the support of over 60 Senators, bill cosponsors did not allow for significant debate on the many substantive amendments that were offered by opposing Senators. 16 Democrats and one Independent Democrat voted in favor of the bill.  The only permitted changes were amendments that failed to address the unintended consequences of deregulation for safety and soundness as well as a passel of bills adopted wholesale from the House. These included an amendment protecting the Fed’s ability to tailor down standards for foreign banks and another that undermined the Liquidity Coverage Ratio by allowing certain banks to invest in less liquid, riskier, assets.

Hensarling Playing Hard to Get

S. 2155 now goes to the House either to be passed as is, or altered and pushed to a Conference Committee.  House Financial Services Committee Chair Jeb Hensarling commented yesterday that the House will not be a “rubber stamp” for the Senate measure, so it appears that an extended negotiation between Senate and Republicans in the House may be on the horizon.

After passing dozens of deregulatory bills through his Committee already this Congress and having announced his plan to retire after this term, Rep. Hensarling may be legacy-seeking, hoping to put his name on a marquis piece of legislation or looking to secure a post-Congress job.  Regardless, he is likely to make use of his soap box and perhaps raise money for colleagues from industry in anticipation of the midterms.

Speaker Ryan has reportedly promised not to advance the bill without Hensarling’s approval but odds are against Hensarling or Ryan turning this into a prolonged and substantive fight.  The House GOP is under intense pressure from the community banks to pass the bill, and Senate leadership and the White House are unlikely to have much patience.

Wait, Conference Occurred Already?

S. 2155 has already undergone a significant amount of quiet pre-conferencing.  40 provisions from a number of House bills were added to the Senate bill through last week’s manager’s amendment, an attempt to head off the need for a formal conference with ideological House Republicans. That could mean the only remaining House bills that Hensarling could demand to include during a conference — gutting the CFPB or further increasing the SIFI threshold — have already been deemed too toxic for Democratic cosponsors to stomach.

If Hensarling insists on taking a hard line in conference, the bill will lose its limited Democratic support and die on its return to the Senate. As cosponsoring Sen. Tester put it, “If [Hensarling] adds a bunch of crazy shit, it’s going to die.”

What to Watch For Now

While the possibility of a conference committee on S. 2155 is fairly remote, Republicans are in no rush to get the bill to President Trump’s desk. Letting Hensarling sound off on behalf of large banks will only help to raise more money in anticipation of the midterms and what is shaping up to be a real fight for a House majority.

Republicans will mostly likely hold onto the bill until right before an upcoming recess week (when members return to their districts to meet with community bankers) and then quietly strong arm Hensarling into accepting the bill as written.  Most observers expect the process to play out over the next two months.

For now, progressives will rest their hope on two outside shots.  One is that the bill gets worse in Conference and dies as Senate Democrats withdraw support. The other is that years of House frustration with playing second fiddle to the Senate boils over and the House GOP refuses to take the bill up. Given the amount of pre-conferencing the bill went though, these possibilities are remote.

Unintended Consequences of Deregulation

Much is said about the presumably negative unintended effects of regulation.  Much less is said about unintended consequences of deregulation. Congress can perhaps be excused for not understanding precisely how financial sector business cycles operate but they should know by now they are inevitable.

Banks have hauled down record profits three years running.  Loan rates are at historic norms, including at community banks, which have profited as much as the regional and megabanks.  We are seeing low loan losses, rising bank income, and increased risk appetites, supported often by retrospective risk models and rising collateral values. Deregulation accelerates this process and sends more institutions over the risk cliff in search of bigger margins. Does this sound familiar?

As former CEO of Morgan Stanley said just before the crisis of 2008, “We cannot control ourselves.”