Legislative Activity

Hensarling to Release Plan to Replace Dodd-Frank

House Financial Services Committee Chairman Jeb Hensarling (R-TX) is set to unveil details about the Republican plan to replace the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) with a “pro-growth” alternative during a speech to the Economic Club of New York on Tuesday, June 7. Although such a proposal is unlikely to see any movement in the 114^th Congress, it serves as yet another messaging piece about the Republicans’ agenda in 2017 and beyond. The proposal will likely include, among other things, regulator relief for well-capitalized financial institutions and provisions that peel back the authority of the Financial Stability Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB  or Bureau).

Puerto Rico Debt Fix Back on Track

Following fairly broad-based support for the Puerto Rico Oversight, Management, and Economic Stability Act” or “PROMESA” at the House Natural Resources Committee markup held on May 25, the bill is expected to receive a full vote in the House this week. As reported previously, while exactly how the bill will be handled in the Senate appears uncertain at present, it is likely that Senators will take up and pass the bill as passed by the House. Given that timing is of the essence (July 1 is when the Commonwealth’s next large bond payment comes due), lawmakers will need to work through any remaining obstacles expeditiously in order to a meet this critical deadline.

To help the process along, both Treasury Secretary Jack Lew and the White House are pushing Congress to deliver the bill to the President’s desk without further delay. Senator and Democratic presidential candidate Bernie Sanders (I-VT), however, this week plans to introduce an alternative to PROMESA. His bill will seek to create a public corporation to purchase bonds issued by Puerto Rico that the government or its agencies believe cannot be paid back to debt holders. The corporation would be funded through the U.S. Treasury and run entirely by residents of Puerto Rico. Such a plan, however, would essentially constitute a federal “bailout,” something that both Treasury and House members of both parties oppose.

Congressional Republicans Seek to Halt DOL’s Fiduciary Rule

Two weeks ago, the Senate joined the House in passing a resolution to block the Department of Labor’s (DOL) Fiduciary Rule that imposes a fiduciary duty on financial professionals that advise retirement accounts. Despite such opposition, President Obama has indicated that he will veto such measures and that the Department of Labor will move forward with implementation of the final rule. The DOL, however, is now facing a challenge outside of Congress:  Eight industry and trade groups last week filed a lawsuit in Texas federal court seeking an injunction to halt the final rules.

Relatedly, following heavy criticism for failing to take the lead and ceding initial work on the Fiduciary Rule to DOL, the Securities and Exchange Commission (SEC) has plans to issue in April 2017 its version of the rule, which will require both investment advisers and brokers to meet a fiduciary standard for advice to retail customers.

This Week’s Hearings:

• June 7: The Senate Banking, Housing, and Urban Affairs Committee will hold a hearing titled “Bank Capital and Liquidity Regulation.”

• June 8: The House Financial Services Task Force to Investigate Terrorism Financing will hold a hearing titled “The Enemy in our Backyard: Examining Terror Funding Streams from South America.”

Regulatory Activity

CFPB Takes Aim at Short-Term Lending

The CFPB has released its proposed rules on payday, vehicle title, and certain high-cost installment loans.  The proposal generally covers loans with a term of 45 days or less and loans with a term greater than 45 days, provided that they: (1) have an all-in annual percentage rate greater than 36 percent; and (2) either are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle. Comments are due September 14, 2016, and, according to the CFPB, will “be weighed carefully before final regulations are issued.” The Bureau has published proposed model forms in conjunction with the rulemaking, as well as a fact sheet summarizing the rulemaking.

At a field hearing on the rulemaking last week, CFPB Director Richard Cordray touted the Bureau’s “extensive research” in promulgating the rulemaking and stated that the Bureau does “not intend to disrupt the basic underwriting approaches taken by many banks, credit unions, and traditional finance companies, as well as some newer entrants, which offer installment loans in ways designed to assure that consumers can afford to repay them.” However, the proposed rules lack a key provision that would have provided an exemption from certain underwriting requirements if the monthly payment did not exceed 5% of the borrower’s gross monthly income. Without this provision, however, banks are essentially frozen are out of the market. Additionally, public reaction to the proposed rules has revealed real concerns that the regulations will ostensibly cut off access to credit for many Americans that rely on such loans.

In addition to the proposed rules (coming in at 1300+pages), the Bureau published a request for information, specifically seeking comment on: (1) potential consumer protection concerns with loans that fall outside the scope of the proposal but are designed to serve similar populations and needs as those loans covered by the proposal; and (2) business practices concerning loans  falling within the Bureau’s proposal’s coverage that raise potential consumer protection concerns that  are not addressed by the proposal. Comments are due on October 14, 2016.

Fed Proposes Capital Requirements for Insurance Companies, Considering Regulatory Relief for Midsize Banks

The Board of Governors of the Federal Reserve System on Friday, June 3, unveiled two proposals that seek to alter the way insurance companies calculate their capital reserves and, for systemically important insurers, the way they utilize liquidity to protect against risk. First, the advanced notice of proposed rulemaking (ANPR) applies to both insurers that contain a depository entity within their corporate structures, as well as those insurers designated as non-bank systemically important financial institutions (SIFIs) by the FSOC. Specifically, the ANPR lays out a framework for how these two types of insurers will both measure and maintain their capital levels. At the meeting, each of the Governors and staff members who spoke stressed the need for public feedback on the framework laid out in the ANPR. In a separate notice of proposed rulemaking (NPR), the Board issued guidelines for how those insurers designated as SIFIs will be required to: (1) measure and maintain adequate liquidity levels; and (2) set up internal oversight of their risk management processes. Comments for both the ANPR and NPR are due on August 2, 2016.

Separately, Daniel Tarullo, a member of the Board of Governors of the Federal Reserve System, has indicated that the Board will likely eliminate the qualitative requirements in the annual stress test program for most midsize banks as early as 2017. Governor Tarullo explained that “banks that are under $250 billion in assets and are basically very traditional banks can be taken out of the qualitative side of the test. I hope and expect that will relieve a lot of the compliance costs.” Governor Tarullo also offered that the Board can achieve “what it needs on risk management and capital planning at those regional banks with the normal supervisory program that we have over the course of the year.”  At the same time, the Board is considering imposing more stringent requirements on the biggest banks.