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President Trump Releases 2018 Budget Proposal; Key Areas of Reform Target Financial Regulators, Cybersecurity, and Student Loans
On May 23, the White House released its fiscal 2018 budget request, A New Foundation for American Greatness, along with Major Savings and Reforms, which set forth the President’s funding proposals and priorities. The mission of the President’s budget is to bring spending under control by proposing savings of $57.3 billion in discretionary programs, including $26.7 billion in program eliminations and $30.6 billion in reductions.
Financial Regulators. The budget stresses the importance of reducing the cost of complying with “burdensome financial regulations” adopted by independent agencies under the Dodd-Frank Act. However, the proposal provides few details about how the reform applies to federal financial services regulators. Identifying the CFPB specifically, the budget states that restructuring the Bureau is necessary in order to “ensure appropriate congressional oversight and to refocus [the] CFPB’s efforts on enforcing the law rather than impeding free commerce.” Major Savings and Reforms assert that subjecting the Bureau to the congressional appropriations process would “impose financial discipline and prevent future overreach of the Agency into consumer advocacy and activism.” The budget projects further savings of $35 billion through the end of 2027, resulting from legal, regulatory, and policy changes to be recommended by the Treasury once it completes its effectiveness review of existing laws and regulations in collaboration with the Financial Stability Oversight Council. The Treasury review is being performed as a result of the Executive Order on Core Principals.
Dept. of Housing and Urban Development. As previously reported in InfoBytes, the budget proposes that funding be eliminated for the following: (i) small grant programs such as the Self-Help Homeownership Opportunity Program, which includes, among others, the Capacity Building for Community Development and Affordable Housing Program (a savings of $56 million); (ii) the CHOICE Neighborhoods program (a savings of $125 million), stating state and local governments should fund strategies for neighborhood revitalization; (iii) the Community Development Block Grant (a savings of $2.9 billion), over claims that it “has not demonstrated results”; and (iv) the HOME Investment Partnerships Programs (a savings of $948 million). The budget also proposes reductions to the Native American Housing Block Grant and plans to reduce costs across HUD’s rental assistance programs through legislative reforms. Rental assistance programs generally comprise about 80 percent of HUD’s total funding.
Cybersecurity. The budget states that it “supports the President’s focus on cybersecurity to ensure strong programs and technology to defend the Federal networks that serve the American people, and continues efforts to share information, standards, and best practices with critical infrastructure and American businesses to keep them secure.” Law enforcement and cybersecurity personnel across the Department of Homeland Security (DHS), Department of Defense, and the FBI will see budget increases to execute efforts to counter cybercrime. Furthermore, the National Cybersecurity and Communications Integration Center—which DHS uses to respond to infrastructure cyberattacks—will receive an increase under the budget.
Student Loan Reform. Under the proposed budget, a single income driven repayment plan (IDR) would be created that caps monthly payments at 12.5 percent of discretionary income—an increase from the 10 percent cap some current payment plans offer. Furthermore, balances would be forgiven after a specific number of repayment years—15 for undergraduate debt, 30 for graduate. In doing so, the Public Service Loan Forgiveness program and subsidized loans will be eliminated, and reforms will be established to “guarantee that borrowers in IDR pay an equitable share of their income.” These proposals will only apply to loans originated on or after July 1, 2018, with the exception of loans provided to borrowers in order to finish their “current course of study.”
Dept. of the Treasury. The budget proposes to, among other things: (i) eliminate funding for new Community Development Financial Institutions Fund grants (a savings of $220 million); and (ii) reduce funding for the Troubled Asset Relief Program by 50 percent, “commensurate with the wind-down of TARP programs” (a savings of $21 million).
Response from Treasury. In a statement released by the Treasury, Secretary Steven T. Mnuchin said the budget “prioritizes investments in cybersecurity, and maintains critical funding to implement sanctions, combat terrorist financing, and protect financial institutions from threats.” Furthermore, it also would “achieve savings through reforms that prevent taxpayer bailouts and reverse burdensome regulations that have been harmful to small businesses and American workers.”
Treasury Announces FSOC Executive Session on May 8
Earlier this week, the Treasury Department announced that on Monday, May 8, Secretary Mnuchin will preside over an executive session of the Financial Stability Oversight Council (FSOC). According to a Treasury Department press release, the preliminary agenda includes:
- a discussion of the April 21 Presidential Memorandum on Council designations;
- an update on the annual reevaluation of the designation of a nonbank financial company;
- a discussion of interagency regulatory collaboration and the Feb. 3 Executive Order on core principles for financial regulation;
- a discussion of the FSOC’s 2017 Annual Report; and
- an update on bank holding companies’ living wills and resolution planning.
Consistent with FSOC’s transparency policy, the meeting may be made available via live webcast and/or can be viewed after it occurs. Meeting minutes for the most recent Council meeting are generally approved at the next Council meeting and posted online soon afterwards.
Meeting minutes for past Council meetings are available here.
Readouts for past Council meetings are available here.
Following Hearing, House Financial Services Committee Chairman Formally Introduces Financial CHOICE Act of 2017
On April 26, the House Financial Services Committee held a hearing to discuss The Financial CHOICE Act – a GOP proposal to “reform the financial regulatory system” that was initially introduced and considered, though differing in a number of respects from the current version, but not adopted in the last Congress. The hearing debated the merits of a discussion draft, which was released on April 19 by Committee Chairman Jeb Hensarling (R-TX). Shortly after Wednesday’s hearing, Chairman Hensarling formally introduced H.R. 10, The Financial CHOICE Act of 2017. An Executive Summary of the proposed legislation has also been released.
The April 26 hearing – a video of which can be accessed here – included testimony from the following witnesses:
- Mr. Peter J. Wallison, a Senior Fellow and Arthur F. Burn Fellow, Financial Policy Studies with the American Enterprise Institute
- Dr. Norbert J. Michel, a Senior Research Fellow, Financial Regulations and Monetary Policy, with the Heritage Foundation
- The Honorable Michael S. Barr, a Professor of Law at University of Michigan Law School
- Mr. Alex J. Pollock, a Distinguished Senior Fellow with the R Street Institute
- Dr. Lisa D. Cook, an Associate Professor of Economics and International Relations at Michigan State University
- Ms. Hester Peirce, a Director in the Financial Markets Working Group and Senior Research Fellow at the Mercatus Center at George Mason University
- Mr. John Allison, Former President and Chief Executive Officer with the Cato Institute
On April 28, Democrats held a separate hearing pursuant to Clause (d)(5) of Rule 3 of the Committee rules, which entitles members of the minority party to call its own hearing on any matter that is the subject of a majority hearing. The second hearing day – a video of which can be accessed here – included testimony from the following witnesses:
- The Honorable Elizabeth Warren, United States Senator
- Rohit Chopra, Senior Fellow, Consumer Federation of America
- Corey Klemmer, Corporate Research Analyst, Office of Investment, AFL-CIO
- Rev. Willie Gable, Pastor, National Baptist Convention USA, Inc.
- John C. Coffee Jr., Adolf A. Berle Professor of Law, Columbia University
- Rob Randhava, Senior Counsel, Leadership Conference on Civil and Human Rights
- Melanie Lubin, Maryland Securities Commissioner, North American Securities Administrators Association
- Emily Liner, Senior Policy Advisor, Economic Program, Third Way
- Amanda Jackson, Organizing and Outreach Manager, Americans for Financial Reform
- Ken Bertsch, Executive Director, Council of Institutional Investors
- Sarah Edelman, Director, Housing Policy, Center for American Progress (CAP)
Ranking Minority Member Maxine Waters (D-CA) also used the hearing to express her strong disapproval of what she has dubbed the “Wrong Choice Act.” Among other things, the ranking member alleged that the proposed legislation would “destroy[] Wall Street reform, gut[] the Consumer Financial Protection Bureau, and returns us to the financial system that allowed risky and predatory Wall Street practices and products to crash our economy.”
President Trump Issues Two Memoranda to Treasury; Instructs Secretary to Review FSOC Processes for Designating Nonbank Financial Companies as SIFIs and Treasury’s Orderly Liquidation Authority under Dodd-Frank
On April 21, President Trump issued a Presidential Memorandum directing the Secretary of the Treasury to conduct a review of the Financial Stability Oversight Council (FSOC) processes for determining whether nonbank financial companies are financially distressed and designating nonbank financial companies as “systemically important.” The memorandum explains that a review of these processes is needed because the designations “have serious implications for affected entities, the industries in which they operate, and the economy at large.” The memorandum requires the Secretary to report within 180 days on whether:
- the FSOC’s processes are sufficiently transparent and provide adequate due process protections;
- a FSOC designation “give[s] market participants the expectation that the Federal Government will shield supervised or designated entities from bankruptcy”;
- a determination regarding a nonbank’s systemic importance should include “specific, quantifiable projections of the damage that could be caused to the United States economy”;
- the processes appropriately account for the costs of designation; and
- potential designees receive adequate guidance on how to reduce their perceived risk and a “meaningful opportunity to have their determinations or designations reevaluated in a timely and appropriately transparent manner.”
The memorandum further directs the Secretary to include SIFI designation recommendations, including any proposed legislative measures, for improving the processes and opine on whether such processes are consistent with the Administration’s “Core Principles.” The secretary is also directed to make any recommendations for legislation or regulation that would further align FSOC’s activities with the Core Principles.
The President issued a second Memorandum, directing the Secretary to review and report on the Orderly Liquidation Authority (OLA) under Dodd-Frank, with the goal of understanding the “OLA’s full contours and acknowledge the potentially adverse consequences of its availability and use.” Specifically, the memorandum requires that the Secretary assess the following:
- “the potential adverse effects of failing financial companies on the financial stability of the United States”;
- whether the framework for employing OLA is consistent with the Core Principles;
- whether “invoking OLA could result in a cost to the general fund of the Treasury”;
- whether the use or availability of OLA could lead to excessive risk taking or . . . otherwise lead[] market participants to believe that a financial company is too big to fail; and
- whether a new chapter in the U.S. Bankruptcy Code would be a “superior method of resolution for financial companies.”
The memorandum also requires that Secretary’s review include a quantitative evaluation of OLA’s “anticipated direct and indirect effects” as well as recommendations for improving OLA. The memo also directs the Treasury Department to refrain from making any systemic risk determination unless it determines, in consultation with the President, that the Doff-Frank criteria require otherwise.”
At the signing of the memo, Treasury Secretary Steven Mnuchin delivered prepared remarks, in which he assured the President and the Public that the Treasury will “work tirelessly” in its efforts to “provide a clear analysis of the extent to which the OLA encourages inappropriate risk-taking and the extent of potential taxpayer liability.”
Treasury Renews Unchanged Information Collection on Designation of Financial Market Utilities; Seeks Public Comment
On March 28, the Treasury Department issued a request for comment on its plan to renew an information collection, without change, on the designation of Financial Market Utilities (FMUs) as systemically important financial institutions. According to the Treasury’s notice, the information will be used by the Financial Stability Oversight Council (FSOC) to “determine whether to designate or rescind the designation of an FMU under Title VIII” of the Dodd-Frank Act. The request for comment allows FMUs to submit written materials to the FSOC before the Council makes a designation decision and also permits an FMU to request a hearing or submit materials to contest the FSOC’s proposed determination. Comments on the information collection must be received by April 27, 2017 as instructed on the notice’s publication in the Federal Register.
Rep. Emmer (R-Minn) Reintroduces Financial Stability Oversight Council Reform Act
Representative Tom Emmer (R-Minn) has reintroduced the Financial Stability Oversight Council Reform Act (H.R. 1459), which is intended to increase oversight, transparency, and accountability by subjecting the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) to the regular congressional appropriations process. The proposed legislation—which has been referred to the Committee on Financial Services—would also provide for certain quarterly reporting requirements for the OFR, including an “annual work plan” subject to public notice and comment.
FSOC Releases March 2 Treasury Meeting Readout
On March 2, Treasury Secretary Steven T. Mnuchin, convened an executive session meeting of the Financial Stability Oversight Council (FSOC), to receive updates on global economic and market developments and initial staff work on the Council’s 2017 annual report. The agenda also included discussions on the “ongoing annual reevaluation of [the Council’s] designation of a nonbank financial company, including the review of materials submitted by the company and engagement with the company.”
NAFCU Recommends FSOC Use Authority to Rein in CFPB
On February 28, the National Association of Federally-Insured Credit Unions (NAFCU) sent a letter to Treasury Secretary Steven Mnuchin urging him to use his position as chairman of the Financial Stability Oversight Counsel to alleviate the CFPB's “burdensome” regulatory impact on credit unions. The letter, among other things, urges the Secretary and FSOC to use the Counsel’s authority to set aside CFPB regulations as leverage to “spur renewed dialogue between the Bureau and the federal banking agencies regarding rules that may actually pose systemic risk to the financial sector.” The NAFCU attached an appendix to the letter listing 10 CFPB rules that the group finds “ripe for further review.” The letter was sent a day before FSOC’s March 2 executive session—its first under Secretary Mnuchin. Separately, the CUNA is holding its annual governmental affairs conference in Washington this week, bringing in 5,000 credit union advocates from around the country.
Financial Stability Oversight Council will hold its first post-election meetings on November 16
On November 16, Treasury Secretary Jack Lew will preside over a meeting of the Financial Stability Oversight Council (FSOC). The agenda will include both an open and an executive session. The preliminary agenda for the open session includes an update on the work of the Alternative Reference Rates Committee, an update on the council's review of the asset management industry and revisions to the council's regulations under the Freedom of Information Act. The preliminary agenda for the executive session includes a presentation on stress tests of central counterparties conducted by the CFTC, a discussion of confidential data related to the Council’s review of asset management products and activities, and an update on the annual re-evaluation of the designation of a non-bank financial company.
Open session Council meetings are made available to the public via live webcast and also can be viewed after they occur here. Meeting minutes for the most recent Council meeting are generally approved at the next Council meeting and posted online soon afterwards. Meeting minutes for past Council meetings are available here. Readouts for past Council meetings are available here.
Bill to Change SIFI Determination Postponed
The House of Representatives delayed discussion of HR 1309, the Systemic Risk Designation Improvement Act, in an effort to give the bill’s sponsor Blaine Luetkemeyer (R-MO) additional time to propose a method to fund the estimated $115 million cost of implementing the changes in regulatory oversight. The increased oversight costs stem, in part, from provisions in the bill that would require closer involvement by the Financial Stability Oversight Council (FSOC) in determining whether a bank holding company is a Systemically Important Financial Institution (SIFI), and thus subject to enhanced supervision and macro-prudential standards by the Federal Reserve. Under the current law, originating from Title I of the Dodd-Frank Act, the FSOC looks only to whether the bank holding company has $50 billion in assets. Whereas under HR 1309, the FSOC would also factor whether a bank was subject to material financial distress, as well as the nature, scope, size, scale, concentration, interconnectedness or mix of the bank’s activities in making the SIFI designation.