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House Financial Services Committee to Discuss the “Financial CHOICE Act” at April 26 Hearing
On April 19, House Financial Services Committee Chairman Jeb Hensarling (R-TX) announced that the Committee will hold a hearing to discuss the Financial CHOICE Act next Wednesday, April 26. Touted as a potential replacement for the Dodd-Frank Act, the proposed new law—which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs—was unveiled last June by Chairman Hensarling in a speech to the Economic Club of New York and was subsequently approved by the Committee last September. The hearing will focus on an updated discussion draft of the bill at next Wednesday’s hearing.
If enacted, the Financial CHOICE Act would, among other things, tailor a bank’s supervision to its risk profile/business model and provide for an independent exam appeals process, while also providing for and imposing more stringent penalties in cases of fraud or deception. Other provisions of the bill would repeal the Volcker Rule, strip the CFPB of its examination powers, and “UDAAP” enforcement authority and also discontinue small business loan data collection. And, finally, the Act would bring the CFPB, FDIC, OCC, FHFA, NCUA, and the Fed’s supervisory functions under the congressional appropriations process, thereby mandating a cost-benefit analysis and, in some cases, congressional approval prior to the release of any new regulations.
According to a press release from GOP Committee members, the proposed new law is based upon two central principles: (i) “all banks need to be well-capitalized” but (ii) “Dodd-Frank’s one-size-fits-all regulations . . . make[] no sense and hurt[] smaller, hometown banks and credit unions that did nothing to cause the last financial crisis.” To this end, the Financial CHOICE Act seeks to ease capital standards for community banks and credit unions that “elect to maintain enough capital to ensure that if they get in trouble, taxpayers won’t be forced to bail them out.” Meanwhile, offering a very different response to the release of an updated draft of the bill, Maxine Waters (D-CA), the Ranking Member of the Financial Services Committee, released a statement reiterating numerous objections to what she terms “the Wrong Choice Act.” Among other things, Rep. Waters argues that the proposed law “prioritize[s] the needs of Wall Street over the needs of hard-working Americans,” and “would take away much needed protections and put our economic security at risk.”
House Financial Services Committee Chairman Issues New Subpoena to CFPB
On April 4, House Financial Services Committee Chairman Jeb Hensarling issued a new subpoena to the CFPB, giving the Bureau a May 2 deadline to comply with its request for documents, which related to auto lending, payday lenders, and investigations into a company that allegedly charged higher interest rates to minorities on auto loans, as well as a national bank allegedly involved in the improper sales practice of creating deposit and credit card accounts without consumer consent. The subpoena also repeats some requests made by the Committee in previous subpoenas as a response to the Bureau’s failure to perform its legal obligations to produce the requested documents. As outlined in Schedule A’s second item of the April 4 subpoena, the Committee requests “all records relating to any instance whatsoever, from January 4, 2012 – present, in which any CFPB employee directed another federal government employee not to transmit to any Member, Committee, or Subcommittee of Congress records requested or subpoenaed by any Member, Committee, or Subcommittee of Congress.”
As previously covered in InfoBytes, over the past 17 months, GOP members of the Committee, who believe that the CFPB likely has and continues to violate the Administrative Procedure Act, have issued three investigative reports based on internal CFPB documents obtained by the Committee.
CFPB Director Cordray Faces Tough Questioning During House Financial Services Committee Hearing
On April 5, CFPB Director Richard Cordray appeared before the House Financial Services Committee in order to “report on the Bureau’s activities and face questions from lawmakers about the harm those activities cause consumers.” As explained in a memorandum issued by the Committee in advance of the hearing, Section 1016 of the Dodd-Frank Act requires the Bureau Director to publish a semi-annual report on the Bureau’s activities and to testify on the report before the House Financial Services and Senate Banking Committees. The April 5 hearing explored the Bureau’s most recent two reports—Spring 2016 and Fall 2016.
Committee Chairman Jeb Hensarling (R-Texas) used Wednesday’s hearing to, among other things, make a case for the firing of the Director for cause. Describing the Bureau as an “unelected, unaccountable and unconstitutional” agency, the Chairman argued that “[f]or all the harm inflicted upon consumers, [Director Cordray] should be dismissed by the President.” The Chairman thereafter “call[ed] upon the president—yet again—to do just that, and to do it immediately.” In addition to debating the constitutionality of the agency, the Committee also spent time discussing the timing (and true extent) of the Bureau’s involvement in certain recent investigations and enforcement actions the CFPB has taken credit for.
Meanwhile, the Democrats on the Committee urged Cordray to stand firm amid efforts to oust him. In her opening statement, the Panel’s Ranking Member, Rep. Maxine Waters (D-Calif.) thanked the Director for his “sustained strong leadership” and for “doing exactly the job [he is] supposed to do,” and “doing it well.” Rep. Waters also characterized the Bureau as “an invaluable ally to consumers” whose “work must continue.”
As previously covered on InfoBytes, GOP committee members have been calling for the abolition of the CFPB, suggesting both that “President Trump should immediately fire CFPB Director Richard Cordray” and that “the agency must be functionally terminated,” so that “[c]onsumer protection can instead come through an accountable and constitutional process.” By contrast, Democrats on the committee have consistently urged the President to reject calls by GOP members to fire the CFPB Director noting, among other things, that an attempt by the President to fire Director Cordray “for cause” would be hard-pressed to withstand a legal challenge.
Supporting America’s Innovators Act of 2017 Passes in House Vote
On April 6, a bipartisan bill entitled, Supporting America’s Innovators Act of 2017 (H.R. 1219) was received in the Senate after passing through the House by a 417-3 margin. The securities-related bill – which is now pending before the Senate Committee on Banking, Housing, and Urban Affairs, amends the provisions of the Investment Company Act of 1940 that require venture capital funds with more than 100 investors to register with the SEC. As previously reported in InfoBytes, the bill would serve to raise the cap on the number of investors from 100 to 250, thereby facilitating greater access to venture capital funding for small businesses and startups. In a press release issued by the House Financial Services Committee, the bill’s sponsor, Rep. Patrick McHenry explains that H.R. 1219 is intended to, among other things, “address the challenges facing angel investing so that startups and small businesses can have better access to capital,” by “creating a regulatory framework that encourages innovation and growth, while ensuring that shareholder and investor protections remain strong.”
House Financial Institutions and Consumer Credit Subcommittee Examines Transparency in the Financial Regulatory System
On March 6, the House Financial Institutions and Consumer Credit Subcommittee held a hearing to consider the need to increase transparency in the financial regulatory system and examine opportunities for reform. According to a committee memorandum, the purpose of the hearing was to examine both (i) “the impact the rules and processes from federal financial agencies . . . have had on financial companies and their customers”; and (ii) “opportunities for reform of these federal financial agencies, with the aim of improving transparency, accountability and due process for regulated persons and entities and their customers.” As explained by Chairman Blaine Luetkemeyer in a committee press release following the hearing, “ambiguous guidance, contradictory rules, and aggressive enforcement has led to confusion for financial companies seeking to comply with Dodd-Frank and other Obama-era rules.” And, the Chairman continued, “the greatest impact is on the customers of those financial companies, who in many cases have been left clamoring for access to financial services, and paying more for the ones they’ve been able to retain.”
Four witnesses offered testimony and answered questions before the committee:
- Greg Baer, President of the Clearing House Association, focused his testimony on the critical importance of the due process clause and the Administrative Procedure Act, and how “a transparent [rule-making] process tend[s] to produce better regulation,” while the lack thereof has “adverse consequences on the quality of rules being administered and the ability of our banking system to support economic growth.”
- Norbert Michel, a senior Research Fellow at the Heritage Foundation, testified, among other things, that “for decades, the U.S. regulatory framework has increasingly made it more difficult to create and maintain jobs and businesses that benefit Americans,” and that, “[o]ne of the main reasons the regulatory regime has been counterproductive for so long is because it allows regulators to micromanage firms’ financial risk, a process that substitutes regulators’ judgments for those of private investors.”
- Amias Moore Gerety, Former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury discussed both (i) how the post-crisis Wall Street Reforms “strengthened our financial system and supported our economic recovery,” and (ii) how “the ability to deliver regulation that is appropriate to the risk is the central question for policy makers designing financial regulation—both of individual institutions and for the constantly evolving financial system as a whole.”
- Bill Himpler, an Executive Vice President at the American Financial Services Association shared what he viewed as a contradiction between his belief that “[c]redit should not be limited to the wealthy or those with perfect credit scores,” and his observation that the “CFPB seems to believe that credit should only be extended to those borrowers who do not present any risk.”
CFPB Director to Testify Before Financial Services Committee on April 5 to Discuss Semi-Annual Reports
On March 31, the Financial Services Committee announced it will hold a hearing on Wednesday, April 5 at 10:00 a.m., entitled “The 2016 Semi-Annual Reports of the Bureau of Consumer Financial Protection.” According to the Committee Memorandum, the hearing—which will be held in room 2128 of the Rayburn House Office Building—will examine the Bureau’s Ninth and Tenth semi-annual reports covering the period of October 1, 2015 through March 31, 2016 and April 1, 2016 through September 30, 2016 respectively. Director Cordray, the only scheduled witness, will provide testimony on the reports.
House Subcommittee Holds Hearing to Discuss the Impact of Regulations on Access to Credit
On March 28, the House Subcommittee on Financial Institutions and Consumer Credit held a hearing that examined recent trends in lending and how the current regulatory climate impacts the availability of credit for consumers and small businesses. According to a memorandum issued prior to the hearing by the House Financial Services Committee, the hearing sought to address the decline in “[l]ending by community financial institutions . . . since the passage of the Dodd-Frank [Act].” Specifically, the memo notes that in the six years prior to the Dodd-Frank Act, small bank lending was more than 150 percent above large bank lending. In the more than six years after Dodd-Frank, small bank lending has been nearly 80 percent below large bank lending. A witness list for the single-panel hearing (along with links to prepared remarks submitted by each witness) included the following stakeholders:
- Scott Heitkamp, President and Chief Executive Officer, ValueBank Texas, on behalf of the Independent Community Bankers of America;
- Holly Wade, Director, Research and Policy Analysis, National Federation of Independent Businesses;
- J. David Motley, President, Colonial Companies, on behalf of the Mortgage Bankers Association; and
- Michael Calhoun, President, Center for Responsible Lending.
In a press release issued by the Financial Services Committee following the hearing, majority members of the subcommittee identified the “Key Takeaways from the Hearing,” as (i) “Dodd-Frank has left Americans with fewer choices, higher costs and less freedom”; (ii) “Financial institutions are exiting entire lines of business, limiting the availability of products and services for consumers”; and (iii) “[t]he Financial CHOICE Act will increase access to credit for consumers and capital for small businesses.”
An archived webcast of the hearing may be accessed here.
House Oversight and Investigations Subcommittee Explores Dodd-Frank’s “Too Big to Fail” Designation Process
On March 28, the House Oversight and Investigations Subcommittee held a hearing that examined the processes used by the Financial Stability Oversight Council to designate nonbank financial companies under Section 113 of Dodd-Frank. As discussed in a memorandum issued prior to the hearing by the House Financial Services Committee, the hearing was also scheduled to go over the findings of a recent Financial Services Committee Staff Report, including concerns over whether FSOC has acted inconsistently in exercising its power to designate certain nonbank companies as “too big to fail.” During the hearing, the subcommittee heard from the following witnesses:
- Dr. Douglas Holtz-Eakin, President, American Action Forum
- Dr. Paul Kupiec, Resident Scholar, American Enterprise Institute
- Professor David Zaring, Associate Professor, Legal Studies and Business Ethics, The Wharton School, University of Pennsylvania
- Mr. Alex J. Pollock, Distinguished Senior Fellow, R Street Institute
In a press release available on the Financial Services Committee webpage following the hearing, the majority members of the subcommittee identified the “Key Takeaways from the Hearing,” as: (i) “[t]he Dodd-Frank Act created an arbitrary threshold that the FSOC uses to designate systemically important financial institutions (SIFIs); (ii) “FSOC’s process for designating SIFIs in essence codifies "too big to fail" and poses a threat to the U.S. economy”; (iii) “[t]he Financial CHOICE Act, the Republican plan to replace Dodd-Frank and promote economic growth” would “end[] ‘too big to fail’ and bank bailouts.”
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.
House Financial Institutions and Consumer Credit Subcommittee Hearing Examines Decline in New Bank/Credit Union Charter Applications
In an afternoon hearing on March 21 entitled “Ending the De Novo Drought: Examining the Application Process for De Novo Financial Institutions,” Members of the House Financial Services Financial Institutions and Consumer Credit Subcommittee met to examine the impact that the Dodd-Frank Act has had on the creation of new or “de novo” financial institutions. According to a majority staff memorandum released in advance of the hearing, the number of new, or “de novo,” bank and credit union charters has declined to historic lows since the passage of the Dodd-Frank Act. From 2010 to 2016, there were only five new bank and 16 new credit union charters granted. In comparison, between 2000 and 2008, 1,341 new banks and 75 new credit unions were chartered.
Three of the witnesses – each of whom appeared on behalf of a banking industry group – generally agreed that the Dodd-Frank Act has, to some extent, had a “chilling impact” on the creation of new banks:
- Kenneth L. Burgess, speaking on behalf of the American Bankers Association noted, among other things, that “in the five years since Dodd-Frank was enacted, the pace of lending was half of what it was several years before the financial crisis. Some banks have stopped offering certain products altogether, such as mortgage and other consumer loans.”
- Keith Stone, representing the National Association of Federally-Insured Credit Unions, noted that “[t]he compliance requirements in a post-Dodd-Frank environment have grown to a tipping point where it is nearly impossible for many smaller institutions to survive, much less start from scratch.”
- Patrick J. Kennedy, Jr., appearing on behalf of the Subchapter S Bank Association, noted that “[m]any banks exited the mortgage loan business because of the complexity and uncertainty resulting from Dodd Frank, the CFPB and related rulemaking.”
The fourth witness, Sarah Edelman, offered an alternative explanation for the decline in new bank applications to the FDIC. Ms. Edelman—who is currently the director of housing finance at the Center for American Progress—testified as to her belief that the “decline” in “[t]he number of new bank applications to the FDIC . . . is largely the result of macroeconomic factors, including, historically low interest rates reducing the profitability of new banks, as well as investors being able to purchase failing banks at a discount following the financial crisis.”
In December of last year, the FDIC released a handbook entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions, which provides an overview of the business considerations and statutory requirements that de novo organizers face as they work to establish a new depository institution and offers guidance for navigating the phases of establishing an insured institution. Rather than establish new policy or offer guidance, the Handbook instead “seeks to address the informational needs of organizers, as well as feedback from organizers and other interested parties during recent industry outreach events.” Comments were due February 20. Additional resources are available through an FDIC website dedicated to applications for deposit insurance.