March 21, 2018

House Financial Services Committee Markup of Legislation

Key Takeaways

• H.R. 4790, the Volcker Rule Regulatory Harmonization Act, passed by a vote of 50-10.
• H.R. 4659, To require the appropriate Federal banking agencies to recognize the exposure-reducing nature of client margin for cleared derivatives, passed by a vote of 45-15. 

Markup

H.R. 2683, the “Protecting Veterans Credit Act of 2018”

Rep. John Delaney (D-Md.) introduced his bill and his Amendment in the Nature of a Substitute, which would create protections for veterans credit reports related to medical debt. The measure and the amendment both had broad bipartisan support.

The amended measure was favorably reported by a vote of 59-0.

H.R. 4861, the “Ensuring Quality Unbiased Access to Loans (EQUAL) Act of 2018”

Rep. Trey Hollingsworth (R-Ind.) introduced his bill, which would exempt banks from the Consumer Financial Protection Bureau’s (CFPB’s) payday lending rule, and require federal banking agencies to instead establish guidelines for short term, small dollar loans. The bill would also effectively prohibit federal preemption of state usury laws.

While several Republicans spoke in favor of the bill, the Minority was overwhelmingly critical. Reps. Maxine Waters (D-Calif.), Carolyn Maloney (D-N.Y.) Delaney, Keith Ellison (D-Minn.) and Ed Perlmutter (D-Colo.) all opposed, arguing the bill would expose consumers to predatory lending practices.

The measure was favorably reported by a vote of 34-26. 

H.R. 5076, the “Small Bank Exam Cycle Improvement Act of 2018”

Rep. Claudia Tenney (R-N.Y.) introduced her bill, which would provide relief to community banks by allowing for an 18-month onsite exam cycle rather than the typical 12-month exam cycle, as well as increase the asset threshold for eligibility for 18-month onsite exams from $1 billion in assets to $3 billion. Rep. Charlie Crist (D-Fla.), a cosponsor of the bill, voiced his support for the legislation, arguing that if bank is well-capitalized and well-managed, 12-month exams are unnecessary. Rep. Tom Emmer (R-Minn.) also supported the bill.

Amendment Offered by Rep. Waters

Waters offered an amendment that would require the Government Accountability Office (GAO) to study the impact of increasing the bill’s threshold and report back to Congress in two years to see the effect on the adjustment. Chairman Jeb Hensarling (R-Texas) supported the amendment, and it was agreed to by voice vote.

The amended measure was favorably reported by a vote of 60-0.

H.R. 5082, the “Practice of Law Technical Clarification Act of 2018”

Rep. Alexander Mooney (R-W.Va.) introduced his bipartisan bill which amends the Fair Debt Collection Practices Act (FDCPA) by excluding law firms and attorneys who are engaged in litigation activities from the definition of “debt collector.” Reps. Vicente Gonzalez (D-Texas) and Dave Trott (R-Mich.) voiced their support for the bill. Rep. Stephen Lynch (D-Mass.) opposed the bill.

The measure was favorably reported by a vote of 35-25.

H.R. 4659, To require the appropriate Federal banking agencies to recognize the exposure-reducing nature of client margin for cleared derivatives.

Rep. Blaine Luetkemeyer (R-Mo.) introduced his bipartisan bill, which would correct the unintended consequence of the supplemental leverage ratio (SLR) failing to take into account the exposure reducing nature of initial client margin in its calculation. He explained that his bill would provide an offset in the SLR, makes clearing more cost effective and easier for banks to provide clearing services. Luetkemeyer noted that previous Commodity Futures Trading Commission (CFTC) Timothy Massad also expressed concern about the SLR increasing costs for derivatives clearing, and that European regulators are also aware of the problem. Rep. David Scott (D-Ga.), a cosponsor of the bill, echoed Luetkemeyer’s comments, and added that former CFTC Commissioner Sharon Bowen and current CFTC Chairman Christopher Giancarlo have also expressed concern over the issue. He added that including client margin into the SLR calculation puts clearinghouses at a disadvantage and “driving them totally out of business.”

Rep. Frank Lucas (R-Okla.) supported the bill, explaining to members of the committee the details of clearing. He stated that the SLR discourages clearing by making it more expensive and not factoring in customer margin in the calculation. Lucas also stated that the issue directly impacts end users, and that there have been a third fewer clearing firms in the last couple of years due to the increase in costs.

Huizenga argued that the claim the bill changes Title VII of Dodd-Frank is inaccurate, as the same parameters are being followed, and that the bill would solidify competitiveness, and enhance efficiencies and effectiveness. Reps. Hensarling and Bill Foster (D-Ill.) also supported the bill, with Foster adding that it is consistent with the Treasury’s Core Principles Report on Capital Market Recommendations.

Waters voiced her opposition to the bill, stating that it would amend the Dodd-Frank Act and undermine the SLR by reducing the capital requirements for the “mega” banks. She argued that capital requirements for the largest banks are already too low, and that the bill would allow them to take on more leverage and increase profits.

Amendment Offered by Rep. Foster
Foster introduced his amendment that would add a provision to limit the risk associated with client collateral. He explained that as currently written, the SLR calculation disincentivizes clearing, and that some client collateral should be carved out of the calculation, with specific exemption criteria. After discussing working together on the bill’s language with Luetkemeyer prior to the bill going to the House floor, Foster withdrew his amendment.

Amendment Offered by Rep. Lynch

Lynch offered an amendment that would require clearinghouses designated as systemically important financial institutions (SIFIs) to go into Title II of Dodd-Frank, orderly liquidation, when they get in trouble, as it is not suitable for them to go into bankruptcy. It was determined that the amendment was not germane, as it does not fall in scope with the bill.

The measure was favorably reported by a vote of 45-15. 

H.R. 4790, the Volcker Rule Regulatory Harmonization Act

Rep. French Hill (R-Ark.) introduced his bill, which would streamline the compliance and enforcement regime for the Volcker Rule. Hill noted that several former Obama-appointed financial regulators have expressed support for simplifying the Volcker Rule, and argued that the rule itself has harmed liquidity in debt markets. Hill also praised the $10 billion asset threshold for Volcker compliance as a way to reduce the compliance burden of the Rule on community banks.

Foster introduced his Amendment in the Nature of a Substitute, which he noted had been negotiated on a bipartisan basis with Hill. Foster noted that Former HFSC Chairman Barney Frank supported his Amendment, which would ameliorate some of the Volcker Rule’s current issues stemming from regulating “by committee.” Foster argued that consolidating rulemaking at the Federal Reserve will drive transparency, and that the Federal Reserve will be required to consult with other regulators when forming rules. Foster also drew attention to continued oversight by the SEC and CFTC of different financial institutions, and its empowering of the FDIC and preservation of the FDIC’s backup authority to protect the Deposit Insurance Fund (DIF). Foster also argued in support of the $10 billion threshold in the bill as opposed to eliminating the rebuttable presumption for those banks, noting that community financial institutions would still need to maintain compliance operations related to Volcker even if they were exempted from the rebuttable presumption. Foster also praised the cap at 5% of trading assets for those banks, as 5% losses at a well-capitalized financial institution will not touch the DIF.

Waters opposed the amendment vigorously and praised the Volcker Rule as necessary to protect taxpayers from future financial crises and accompanying bailouts. Waters noted that the bond market has seen record new bond issuance despite Volcker’s implementation, and said that “most other metrics” show a “healthy, liquid corporate bond market.” Waters said the bill’s $10 billion threshold would give a “Congressional thumbs up” for small financial institutions to engage in proprietary trading. Waters noted that Federal Deposit Insurance Corporation (FDIC) Vice Chair Tomas Hoenig called that measure a “loophole.” She also criticized the bill for “cutting out” the Securities and Exchange Commission (SEC) and CFTC from the rulemaking process, given the important role they play in overseeing trading markets. Perlmutter spoke against the $10 billion exemption provision, voicing concern that hedge funds would take advantage of this provision.

Hill rebutted criticisms of the legislation, noting that there are sizeable safety and soundness requirements still in place for banks that his bill would not impact. Representatives from both parties, including Randy Hultgren (R-Ill.), Hensarling, Hultgren, Scott, and Huizenga also supported the amendment and the bill.

The amended measure was favorably reported by a vote of 50-10. 

HR 5051, the “Public Company Registration Threshold Act”

Rep. Sean Duffy (R-Wis.) introduced his bill, which would streamline the shareholder registration threshold for all issuers, provide the SEC authority to increase it further, remove the non-accredited investor threshold, and increase the deregulation threshold consistent with that of banks. Duffy explained that the bill is aimed at assisting main street businesses avoid the “burdensome” requirements of the SEC that “limit their growth,” and is particularly aimed at helping businesses in rural America. Hultgren also spoke in favor of the bill, saying there are significant barriers for small businesses to obtain capital to fund their innovation and growth, and Congress must acknowledge the difference between small, startup companies and large, established companies.

Waters spoke in opposition to the bill, saying it would increase investor exposure to risky private offerings by lifting the cap on the number of unaccredited investors that can hold a company’s unregistered stock. Waters noted that the JOBS Act established higher registration standards and deregistration thresholds for banks and bank holding companies, investors in these specific entities retain important sources of financial information even without registration, which would not be the case for public companies targeted by the bill.

The measure was favorably reported by a vote of 34-26. 

HR 5323, the “Derivatives Fairness Act”

Rep. Warren Davidson (R-Ohio) introduced his bill, which would exempt uncleared derivatives transactions with end users from the credit valuation adjustment (CVA) calculation required under the Basel III regulatory framework. Davidson explained that during the financial crisis, banks suffered significant counter-party credit risk losses on their over-the-counter derivatives contracts, which resulted mostly from fair value adjustments on derivatives rather than counter-party defaults. Davidson noted that hedging activity by end users did not contribute to the financial crisis and does not create “meaningful” systemic risk. Davidson continued that because the European Union exempts CVA charges on transactions between EU-based banks and nonfinancial corporations, US-based banks are at a competitive disadvantage, explaining that his legislation aims to correct that discrepancy and reduce parity with the EU regulatory framework. Hollingsworth spoke in favor of the legislation, noting that regulatory burdens impose higher costs on US companies and end users. Hultgren also voiced his support for the legislation, saying it makes it easier to use derivatives to hedge for market risks.

Waters spoke in opposition to the legislation, saying it would ease safeguards and allow banks to ignore certain risks when calculating the capital buffers mandated by regulators to protect against failure during adverse economic conditions.

Amendment Offered by Rep. Kihuen

Rep. Ruben Kihuen (D-Nev.) offered an amendment that would strike the underlying legislation and replace it with a requirement for the Financial Stability Oversight Council (FSOC) to conduct a study on the impact of the CVA implementation requirements on the US and other countries so that Congress and regulators have a clear understanding of the impact of different international standards. Waters spoke in favor of the amendment. The amendment was not adopted.

The measure was favorably reported by a vote of 34-26.

For more information on this markup, click here.