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New York Fed Unveils Community Advisory Group to Offer “Views and Perspectives” Held by Local Community Stakeholders
On April 12, the Federal Reserve Bank of New York (New York Fed) launched the “Community Advisory Group” (CAG)—a “private-sector advisory group,” that is composed of leaders from the non-profit sector and will meet at least three times a year to advise the New York Fed “on socio-economic and financial conditions faced by communities in the Second District” of the Federal Reserve System. According to the Community Advisory Group Charter, “[t]he primary goal of the Group is to present . . . views and perspectives on the economy and monetary policy held by individuals and households in a diverse set of communities.” The Charter also explains that the 10-15 Group members, selected by the New York Fed to serve a three year term, will be appointed “based on their ability to represent the views of one or more communities in the Second District.” The Group’s first meeting is scheduled for April 19.
HUD Issues Restated Consolidated Financial Statements for 2016 and 2015 Correcting $520 Billion in Errors
On March 1, HUD-OIG issued an Independent Auditor's Report (Auditor’s Report) (2017-FO-0005) on HUD’s fiscal years 2016 and 2015 (Restated) consolidated financial statements. The Auditor’s Report—issued in accordance with the Chief Financial Officers Act of 1990—revealed, among other things, eleven “material weaknesses,” seven “significant deficiencies,” and five “instances of noncompliance” with applicable laws and regulations. Each of these findings related to what the auditor described as HUD’s “inability to establish a compliant control environment, implement adequate financial accounting systems, retain key financial staff, and identify appropriate accounting principles and policies.” The dollar amount of errors corrected in HUD’s 2016 and 2015 notes and consolidated financial statements were $516.4 billion and $3.4 billion, respectively. The Auditor’s Report further noted that there were several “unresolved audit matters,” which “restricted [the auditor’s] ability to obtain sufficient, appropriate evidence to express an opinion. Based on these observed issues, the Auditor’s Report recommended, among other things, that HUD (i) reassess its current consolidated financial statement and notes review process to ensure that sufficient internal controls are in place to prevent and detect errors; (ii) evaluate the current content of HUD’s consolidated note disclosures to ensure compliance with regulations and GAAP; and (iii) develop a plan to ensure that restatements are properly reflected in all notes impacted.
Testimony before the House Subcommittee on Transportation, Housing and Urban Development. On March 16, shortly after the Restated Financial Statements and Auditor’s Report were released, David A. Montoya, Inspector General of HUD, testified before the House Subcommittee on Transportation, Housing and Urban Development, and Related Agencies concerning, among other things, “HUD’s inability to maintain an effective financial management governance structure, which [the OIG has] reported on for the last 3 years and which contributed to [the OIG’s] issuing disclaimers of opinion as part of [their] annual audits of HUD’s financial statements.”
- A link to an archived webcast of Hearing can be accessed here.
- A copy of the Inspector General’s Testimony before the House Subcommittee on Transportation, Housing and Urban Development can be accessed here.
A copy of the Inspector General’s October 2016 Statement Summarizing the Major Management and Performance Challenges Facing HUD for Fiscal Year 2017 and Beyond can be found here.
Departing Federal Reserve Governor Offers Final Thoughts
On April 4, outgoing Federal Reserve Governor Daniel K. Tarullo presented his departing thoughts on the Fed’s response to the “worst recession since the Great Depression.” In his speech, Tarullo discussed the Fed’s initial post-crisis regulatory response and how it addressed the “too-big-to-fail” concept—positing that the “quick action in assessing the firms, recapitalizing them where needed, and sharing the results of the stress tests with the public stands as one of the turning points in the crisis.” On the subject of the Dodd-Frank Act, Tarullo noted that “partisan divisions” have prevented necessary substantive enhancements from being made, such as changing various thresholds to narrow the scope of strict prudential requirements and relieve the burdens placed on small community banks, and changing the Volcker Rule to make it less complicated. Tarullo summarized his position by stating that “[e]ight years at the Federal Reserve has only reinforced my belief that strong capital requirements are central to a safe and stable financial system” and that furthermore, “it is crucial that the strong capital regime be maintained, especially as it applies to the most systemically important banks. Neither regulators nor legislators should agree to changes that would effectively weaken that regime, whether directly or indirectly.” Tarullo’s last day at the Fed was April 5.
Legislation Proposed to Create Consistent Financial Data Reporting Standards Across Federal Agencies
On March 16, Congressmen Darrell Issa (R-Calif.) and Jared Polis (D-Colo.) introduced the Financial Transparency Act of 2017 (H.R. 1530), a bipartisan bill intended “to amend securities, commodities, and banking laws to make the information reported to financial regulatory agencies electronically searchable.” Specifically, H.R. 1530 would require the Treasury Department to disseminate data standards for all financial regulatory agencies, while directing each agency to transform its regulatory reporting regime from disconnected documents into standardized, searchable data. The bill further provides that any information required by other laws to be public must be published as open data, and includes specific directives for the SEC to improve that agency’s existing data reporting regime.
Additional details concerning the proposed measure are explained in a summary prepared by www.datacoalition.org. U.S. Representative Randy Hultgren (R-IL)—one of the bill’s co-sponsors and current Vice Chairman of the House Subcommittee on Capital Markets, Securities and Investment—has also promoted the legislation in an op-ed for The Guardian, entitled How to stop the next Bernie Madoff.
Federal Reserve System Releases Audited Financial Statements for 2015 and 2016
On March 24, the Federal Reserve System released the 2015–2016 combined annual audited financial statements for the Reserve Banks and Board of Governors (Board) for the years ended December 31, 2015 and 2016 (27-FMIC-B-002). The report—conducted by an independent auditing firm and reviewed by the Office of Inspector General—issues unqualified opinions on the Reserve Banks’ and Board’s financial statements and internal controls over financial reporting. According to the Federal Reserve System, the financial statements “provide a significant amount of information about the assets, liabilities, and earnings of the Reserve Banks and the Board as of December 31, 2016, including information about the composition, fair value, and earnings related to the $4.4 trillion of U.S. Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities (MBS) acquired through open market operations.”
Some of the highlights include:
- 2016 earnings for the Reserve Banks were approximately $92 billion;
- Reserve Banks provided payments of $91.5 billion to the U.S. Treasury in 2016;
- Reserve Banks’ interest income on securities acquired through open market operations totaled $111.1 billion, a decrease of $2.5 billion when compared to 2015 results, and attributable to “changes in the composition of securities held in the Federal Reserve System Open Market Account”;
- Interest expense on depository institutions’ reserve balances and term deposits during 2016 was $12 billion, an increase of $5.1 billion from 2015;
- Interest expense on securities sold under agreements to repurchase was $1.1 billion in 2016, an increase of $874 million when compared to the prior year; and
- Reserve Bank operating expenses for 2016 were $6.7 billion, which includes assessments of $2 billion for Board expenses, currency costs, and the operations of the CFPB.
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.
Case Update: PHH Corp. v CFPB
March 31 marked the deadline for the CFPB to file its brief in response to PHH Corporation in the U.S. Court of Appeals for the District of Columbia Circuit’s en banc review of the CFPB’s enforcement action against PHH for alleged violations of the Real Estate Settlement Procedures Act (RESPA). As previously covered by InfoBytes, the PHH case began as a challenge to a 2015 penalty the CFPB levied against PHH, which was collected as part of what the CFPB deemed – a “captive reinsurance arrangement.” In fighting the penalty, PHH called into question the Bureau’s constitutionality and in October 2016, a panel of the D.C. Circuit concluded both that the CFPB misinterpreted RESPA, and also that its single-Director structure violated the constitutional separation of powers. On February 16 of this year, however, the D.C. Circuit granted the CFPB’s petition for rehearing en banc of the October 2015 panel decision. In granting en banc review, the court sought guidance from the parties on three specific questions:
- Is the Bureau’s structure unconstitutional because its Director may be removed only for cause, and if so, is the appropriate remedy to sever the for-cause removal provision from the Consumer Financial Protection Act?;
- May the Court avoid addressing the constitutionality of the Bureau’s structure if it adopts the panel’s holdings as to PHH’s liability under RESPA (and should it adopt those holdings)?; and
- What is the appropriate disposition of this case if this Court concludes that the SEC’s administrative law judges are “inferior officers” under Lucia v. SEC?
Oral argument is scheduled for May 24. This Court has allocated 30 minutes per side for the argument and, as discussed further below, the Department of Justice (DOJ) has filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.
CFPB’s Brief. On March 31, the CFPB filed its brief for the en banc rehearing in PHH Corp. v CFPB urging the D.C. Circuit to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. According to the CFPB, neither the Bureau’s current single-director arrangement, nor the “for-cause” restriction on the President’s removal powers prevents the Executive branch from ensuring that the nation’s laws are implemented. Specifically, the brief explains that “[t]he President has no less control over a single-director agency than he does over a multi-member commission.” The brief also sets forth the Bureau’s position that, even “[i]f this Court determines that the Bureau’s structure is unconstitutional,” the appropriate remedy is not to invalidate the agency in its entirety, but rather to “sever the for-cause removal provision” of the Dodd-Frank Act (the Act), thereby allowing the President to remove the Bureau’s director for any reason. In addition to addressing the constitutional question, the CFPB also reiterated its argument that its RESPA interpretation is correct, that PHH and its affiliates violated RESPA, and that the Act’s statute of limitations does not apply to the Bureau’s administrative enforcement authority. And, at the direction of the court, the brief also addressed the potential effect of a decision in Lucia v. SEC that a SEC administrative law judge (ALJ) was an inferior officer under the Constitution. The ALJ used by the CFPB in the PHH enforcement proceeding was, in fact, borrowed from the SEC. Notably, Lucia v. SEC is scheduled to be argued immediately before PHH Corp. v. CFPB, on May 24, 2017.
Amicus Curiae in Support of the CFPB. Also filed on March 31 were seven amicus curiae briefs, each of which offered arguments, both legal and non-legal, in favor of the CFPB’s continued existence as an independent regulator:
- Brief on Rehearing en banc of Amici Curiae State Attorneys General of the States of Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont and Washington, and the District Of Columbia in Support of Respondent
- Brief on Rehearing en banc of Current and Former Members of Congress as Amici Curiae in Support of Respondent
- Brief on Rehearing en banc of Amici Curiae Public Citizen, Inc., Consumer Federation of America, Consumers Union, National Association of Consumer Advocates, National Consumer Law Center, and Tzedek DC in Support of Respondent
- Brief of Americans For Financial Reform, California Reinvestment Coalition, Center for Responsible Lending, Consumer Action, Demos, Housing and Equal Rights Advocates, Leadership Conference on Civil and Human Rights, National Community Reinvestment Coalition, National Council of La Raza, National Fair Housing Alliance, Self-Help Credit Union, United States Public Interest Research Group Education Fund, Inc., and Woodstock Institute, as Amici Curiae in Support of Respondent
- Brief on Rehearing en banc of Separation of Powers Scholar as Amici Curiae in Support of Respondent
- Brief on Rehearing en banc of Amici Curiae Financial Regulation Scholars as Amici Curiae in Support of Respondent
- Brief on Rehearing en banc of AARP and AARP Foundation as Amici Curiae in Support of Respondent
PHH’s Brief. Briefing for PHH and amicus curiae briefs in support of the mortgage lender were due on March 17. In its opening brief and addendum, PHH focused on the separation-of-powers and remedy issues, raising the RESPA interpretation issue principally in support of the claim that the CFPB’s unconstitutional structure rendered the Bureau dangerously unaccountable. The New Jersey mortgage lender noted, among other things, that Congress has no ability to cut the agency’s budget and the President cannot remove its director without cause. As a general matter, the mortgage lender has argued that the Bureau’s creation “placed massive, unchecked federal power in the hands of a single, unaccountable director” and that “[t]he director alone rules over large swaths of the field of consumer finance, subject to virtually no restraints from the representative branches.”
DOJ Brief. As previously covered by InfoBytes, the DOJ filed its own brief in the case on March 17, arguing in support of the D.C. Circuit panel’s initial ruling and proposed remedy. The DOJ brief stated, among other things, that, “[w]hile we do not agree with all of the reasoning in the panel’s opinion,” the DOJ agrees with the panel’s conclusion that “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power” and that “the panel correctly concluded … that the proposed remedy for the constitutional violation is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.” As covered recently on InfoBytes, the DOJ presented arguments that differed both from the CFPB and from the positions previously presented by the Obama Administration in briefing submitted on behalf of the United States back in December.
Also, as mentioned above, on April 3, the DOJ filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.
Amicus Curiae in Support of PHH. The March 10 deadline in the en banc proceeding also brought about the filing of seven amicus curiae briefs in support of PHH’s claims and/or defenses. Six of these filings took the position that the Bureau’s current structure violates separation-of-powers principles:
- Brief on Rehearing en banc of the Chamber of Commerce of the United States of America as Amicus Curiae in Support of Petitioners
- Brief on Rehearing en banc of ACA International as Amicus Curiae in Support of Petitioners
- Brief on Rehearing en banc of the Cato Institute as Amicus Curiae in Support of Petitioners
- En Bank Brief of Amici Curiae RD Legal Partners, LP, RD Legal Funding, LLC, RD Legal Finance, LLC and Roni Dersovitz in Support of Petitioners
- State National Bank of Big Spring, 60 Plus Association, Inc.; and Competitive Enterprise Institute as Amici Curiae in Support of Petitioners
- Brief for the States of Missouri, Alabama, Arizona, Arkansas, Georgia, Idaho, Indiana, Kansas, Louisiana, Nevada, Oklahoma, South Dakota, Texas, West Virginia, and Wisconsin as Amici Curiae in Support of Petitioners
A seventh—filed by a combined group of 13 banking and residential real estate-related organizations—argued in support of the company’s interpretation of the RESPA. According to this brief, the CFPB incorrectly changed a long-standing RESPA interpretation that permitted the use of captive reinsurance companies under appropriate circumstances. The changed interpretation was contrary to the Act and to the CFPB’s own regulation. The brief also argued that the Bureau improperly changed the interpretation and applied the new interpretation in an enforcement action without proper notice.
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.”
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.