US Regulatory Research
House Financial Services Committee Chairman Waters Outlines Her Committee Priorities
On 16 January, U.S. House Committee on Financial Services Chairman Maxine Waters (D-CA) delivered remarks before the Center for American Progress, which outlined her agenda as the Chairman of the House Financial Services Committee. In her speech, Waters identified the following priorities, among others:
· CFPB: Waters said she wants to ensure a strong Consumer Financial Protection Bureau (“CFPB”) and “robust” financial regulation that protects consumers, investors, and the economy. She also said the intends to introduce a bill that “reverses many of [former Acting Director of the CFPB Mick Mulvaney’s] harmful actions,” particularly his decision to fire all members of the Consumer Advisory Board.
· Housing: Waters advocated for a set of core “principles” that should be part of any housing reform legislation, including: (i) “maintaining access to the 30-year fixed rate mortgage”; (ii) “ensuring sufficient private capital is in place to protect taxpayers”; (iii) “requiring transparency and standardization in a way that ensures a level playing field for all financial institutions, especially credit unions and community banks”; and (iv) “ensuring access to affordable rental housing.”
· Diversity and Inclusion: Waters announced that she will be creating a Subcommittee on Diversity and Inclusion that will be “dedicated to looking at diversity and inclusion issues under the Committee’s jurisdiction.”
· International Affairs: Waters said she will “ensure that accountability and effectiveness at the international financial institutions remain strong [and] that broad public debate about the [International Monetary Fund’s] and the multilateral development banks’ policies remain active.”
· Sanctions: Waters said she will “closely monitor” the developments on Russian sanctions, hold the Trump Administration accountable, and work to ensure that the “strongest possible sanctions” are implemented against Russia.
In her speech, Waters also said that she will focus the House Financial Services Committee on issues related to FinTech, and said that it is critical that the committee work to foster “responsible innovation with the appropriate safeguards in place to protect consumers and without displacing community banks and credit unions.”
House Financial Services Committee Ranking Member Sends Letters to Agencies Regarding Brexit Vote
On 15 January, U.S. House Financial Services Committee Ranking Member Patrick McHenry (R-NC) sent letters to the leaders of the Federal Reserve (“Fed”), Department of Treasury (“Treasury”), Securities and Exchange Commission (“SEC”), and Commodity Futures Trading Commission, in which McHenry requested updates following the UK Parliament’s vote on the Brexit Withdrawal Agreement. Specifically, McHenry asked for an update from each agency on its “plans to mitigate risks that may arise from yesterday’s vote, particularly as they relate to” (i) “U.S. financial institutions,” (ii) “cross-border trade in financial services,” (iii) “derivatives markets,” (iv) “insurance contracts,” and (v) any “equivalency considerations.”
Senator Sends Letters to Treasury Secretary and Bank CEOs Regarding Calls
On 18 January, Senator Elizabeth Warren (D-MA) announced that she had sent a letter to Treasury Secretary Steven Mnuchin asking for detailed information about calls Mnuchin made in December 2018 to the CEOs of the nation’s six largest banks. On 23 December, the Treasury announced that Mnuchin had called the CEOs about whether they had adequate liquidity during a sustained period of stock market losses. Senator Warren also sent letters to the CEOs about the nature of the calls.
Congressman Urges Agencies to Issue Formal Rulemaking on Supervisory Guidance
On 18 January, Congressman Blaine Luetkemeyer (R-MO) sent letters to the leaders of the Fed, Federal Deposit Insurance Corporation (“FDIC”), Office of the Comptroller of the Currency (“OCC”), and National Credit Union Administration, in which Leutkemeyer encouraged those agencies to begin a rulemaking process to adopt as formal regulation the principles of the Interagency Statement Clarifying the Role of Supervisory Guidance (“Interagency Statement”). The Interagency Statement, issued September 11, 2018, clarifies the distinction between supervisory guidance and formal rules, and according to Luetkemeyer, “[has] the potential to alleviate the burden in financial institutions, make supervision more consistent, and end the process of ‘regulation by enforcement.’” Luetkemeyer, however, is concerned by reports that “examiners continue to issue matters requiring attention (MRAs) and supervisory directives based off guidance documents” and not “based on violation of a statute, regulation or order.” Luetkemeyer believes that these actions of examiners violate the principles of the Interagency Statement and should be stopped by formal regulation adopting those principles.
Republicans and Democrats Announce Committee Assignments
On 15 January, the Republican Steering Committee announced five new members to join the U.S. House Financial Services Committee.
On 17 January, the Democratic Steering Committee announced its members to serve on the U.S. House Financial Services Committee.
SEC & Securities
SEC Charges Nine for EDGAR Hack
On 15 January, the SEC charged nine defendants for (i) hacking into the SEC’s online Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system to acquire material nonpublic information and (ii) trading on that information. The defendants include an individual hacker in Ukraine, six individual traders in California, Ukraine and Russia, and two foreign entities. According to the complaint, the Ukrainian hacker make false statements and utilized multiple deceptive techniques to acquire thousands of nonpublic “test filings” from the SEC’s EDGAR system’s servers. Some of these test filings contained material nonpublic information that was sent to the traders who used it to place securities trades prior to the information being made public. The SEC requested the court to order the defendants to, among other things: (i) "disgorge, with prejudgment interest, all illicit trading profits, avoided losses or other ill-gotten gains received by any person or entity" due to the alleged actions, and (ii) pay civil penalties.
SEC Orders Stay of All Outstanding Administrative Proceedings
On 16 January, the SEC stayed all outstanding administrative proceedings because of the federal government shutdown. The SEC Order states that the stay is “effective immediately and shall remain operative pending further order of the Commission.”
Fed Proposes Rule Amending Company-Run Stress Testing Requirements
On 8 January, the Fed issued a proposed rule amending the company-run stress test and supervisory stress test rules in order to conform with Section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act. The proposed amendments would, among other things:
· raise the minimum asset threshold for state member banks required to conduct company-run stress tests from $10 billion to $250 billion;
· revise the frequency with which state member banks with assets greater than $250 billion would be required to conduct stress tests;
· generally remove the hypothetical “adverse” scenario from the stress tests; and
· revise the scope of applicability of the company-run stress testing requirements for certain savings and loan holding companies.
Comments on the proposed rule are due by 19 February.
Fed Publishes Minutes from December FOMC Meeting
On 9 January, the Fed published the minutes from its 18-19 December Federal Open Markets Committee (“FOMC”) meeting. According to the minutes, the December decision to raise rates by a quarter percentage point to a range between 2.25% and 2.5%, while unanimous, was met with some reluctance from a few members who believed the lack of inflationary pressures argued against another increase. Specifically, the minutes stated, “With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier.” The minutes noted that the low-inflationary backdrop means the Fed can “afford to be patient about further policy firming.” The minutes also indicated that Fed officials believe that “[c]oncerns over escalating trade tensions, global growth prospects, and the sustainability of corporate earnings growth were among the factors that appeared to contribute to a significant drop in U.S. equity prices.” The next FOMC meeting will be held on 29-30 January.
Fed Vice Chairman Clarida Speaks on Monetary Policy for 2019
On 9 January, Fed Vice Chairman Richard Clarida delivered remarks before the Money Marketeers of New York University in a speech entitled “Monetary Policy Outlook for 2019.” In his speech, Clarida said that he and his colleagues’ goals are “to implement a monetary policy that will sustain economic growth and maximum employment at levels consistent with our 2 percent inflation objective.” Clarida said that the initial conditions for the real economy in 2019 are “favorable” and that “above-trend growth is likely to continue in 2019.” He also said that at each future FOMC meeting, he will consider “what, if any, adjustment to [FOMC’s] policy stance is warranted to achieve and sustain our dual-mandate objectives.” Clarida indicated that the FOMC “is discussing the pros and cons of different long-run approaches to monetary policy implementation” and is “weighing the costs and benefits of an implementation system with abundant reserves.” In closing, he said that he believes the Fed can “afford to be patient about assessing how to adjust our policy stance to achieve and sustain our dual-mandate objectives.”
Fed Vice Chairman for Supervision Quarles Speaks on Insurance Supervision
On 9 January, Fed Vice Chairman for Supervision Randal Quarles delivered remarks before the American Council of Life Insurers Executive Roundtable in a speech entitled “Insurance Supervision and International Engagement.” In his speech, Quarles noted that in the Fed’s supervisory role over certain insurers, the Fed has aimed to develop policies that are “insurance-centric and appropriate for insurance risks.” Quarles pointed to the Fed’s June 2016 advanced notice of proposed rulemaking for insurance holding company capital requirements, often referred to as the “Building Block Approach” (“BBA”). Quarles said the BBA is an approach that consolidates capital requirements by aggregating the capital positions of some companies under an insurance holding company by constructing “building blocks,” which are groupings of entities in the supervised firm that are covered under the same capital regime. Regarding international insurance standard setting, Quarles noted that the Fed joined the International Association of Insurance Supervisors (“IAIS”) in 2013 and that while the standards adopted by the IAIS are not binding on the U.S., it is in the “national interest to engage in the international insurance standards-development process so that it produces standards that are appropriate for the U.S. market and consumers and for U.S. companies operating abroad.”
Fed Releases Minutes of Its December 2018 Rates Meeting
On 15 January, the Fed released the minutes of its 10 December and 19 December interest rates meetings to discuss “economic and financial developments and issues related to possible policy actions.” According to the minutes, the directors of the Federal Reserve Banks “considered discounts and advances under the primary credit program (the primary credit rate) and discussed. . .their individual assessments of the appropriate rate and its communication.” Nine of the directors voted to maintain the existing primary credit rate (2.75 percent), and three directors voted to increase the rate and establish a rate of 3 percent.
Fed Releases January Beige Book
On 16 January, the Fed released its January Beige Book, a publication about current economic conditions across the twelve Fed Districts. According to the publication, eight of twelve Fed Districts reported “modest to moderate” growth, and a majority of Districts indicated that manufacturing had expanded since the last report on 5 December 2018. The publication said that employment increased in most of the country and that all Districts “noted that labor markets were tight and that firms were struggling to find workers at any skill level.” Finally, the majority of Districts reported “modest to moderate” increases in prices. The next Beige Book publication will be on 6 March.
Fed Launches Article Series on Financial Conditions
On 16 January, the Fed announced the launch of Consumer & Community Context, which is “an article series that features original analysis about the financial conditions and experiences of consumers and communities.” The Fed stated that the “goal of the series is to increase public understanding of the financial conditions and concerns of consumers and communities.” The series will be published periodically, and each issue will have a theme.
Consumer Financial Protection Bureau
CFPB Publishes Reports on Assessments of Ability-to-Repay and Mortgage Servicing Rules
On 10 January, the CFPB published two reports assessing the effectiveness of its Ability to Repay and Qualified Mortgage (ATR/QM) Rule and its mortgage servicing rule under the Real Estate Procedures Act. The ATR/QM report found that the “introduction of the Rule was generally not associated with an improvement in loan performance” as measured by the “percentage of loans becoming 60 or more days delinquent within two years of origination.” The report also found, among other things, that: (i) “approximately 50 to 60 percent of mortgages originated between 2005 and 2007 that experienced foreclosure in the first two years after origination were mortgage loans with features that the ATR/QM Rule generally eliminates, restricts, or otherwise excludes from the definition of a qualified mortgage,” and (ii) the Rule “has not decreased access to credit [for high debt-to-income borrowers] since such mortgages meet the standard for QM loans.” The mortgage servicing report concluded that “[a]fter controlling for trends in certain observable factors, loans that became delinquent were less likely to proceed to a foreclosure sale during the months after the Rule’s effective date compared to months prior to the effective date.” This report further found, among other things, that: (i) servicers “generally said they had to make significant changes to their foreclosure processes to ensure compliance with foreclosure restrictions and that these restrictions were among the more costly provisions of the Rule to implement”; (ii) “loans that became delinquent were more likely to recover from delinquency . . . following the Rule’s effective date”; and (iii) servicers “described large one-time costs of implementing the Rule (including technology and personnel costs).”
· Jan. 22: Comments due on OCC, Fed, and FDIC proposed rule regarding proposed changes to applicability thresholds for regulatory capital and liquidity requirments.
· Jan. 22: Comments due on Fed’s proposed rule regarding prudential standards for large bank holding companies and savings and loan holding companies.
· Jan. 22: Comments due on FDIC request for information on small-dollar lending.