Dems' brighter 2018 chances could upend bank priorities

November 8, 2017 4:48 PM

Democratic chances of retaking the House in 2018 had already looked somewhat promising due to President Trump’s low approval ratings and an energized progressive movement. But big gubernatorial victories by Ralph Northam in Virginia and Phil Murphy in New Jersey were the first hard evidence that voters are ready to act. Democrats' victory was even larger than even their most optimistic hopes: They came close to expunging the GOP’s large majority in the Virginia House of Delegates, with some races too close to call. Control of state houses helps determine the drawing of congressional districts.

After the GOP captured the U.S. House majority in 2010, Republicans quickly went to work trying to offer a counterweight to the post-crisis regulatory regime established by the previous Democratic leadership under President Obama. Various bills and hearings sought to undercut the Dodd-Frank Act and the Consumer Financial Protection Bureau, among other things.

A Democratic victory in 2018 would likely have a reverse effect, with Congress pushing for more restrictions. The deregulatory push by the current GOP leadership and the Trump administration would hit an obvious hurdle. The administration is likely at some point to choose its own CFPB director, but that person’s initiatives would likely face fierce pushback by Democratic committee chairs, just as current Director Richard Cordray has encountered.

But perhaps the biggest effect is divided power in Washington. A change of leadership is less likely in the Senate, where GOP control looks safer. If each chamber is held by a different party, that further reduces the likelihood that lawmakers can agree on legislation, including any comprehensive regulatory relief package (if that has not passed already by next year).

Here is a rundown on how a Democratic changeover in the House would affect the financial services policy landscape:

House Minority Leader Nancy Pelosi, a Democrat from California, speaks during a news conference ahead of U.S. President Donald Trumps speech to Congress at the National Press Club in Washington, D.C., U.S., on Monday, Feb. 27, 2017. The White House is sending budget targets to federal agencies today, a day before Trump is set to deliver a joint session of Congress in which hes expected to outline his priorities for the nation. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

WASHINGTON — The Democratic electoral victories in Virginia and New Jersey this week boosted hopes of the opposition party that it could take control of the House in midterm elections next year. A new balance of power in Congress would immediately change the calculation on a whole host of financial services policy initiatives.

Democratic chances of retaking the House in 2018 had already looked somewhat promising due to President Trump’s low approval ratings and an energized progressive movement. But big gubernatorial victories by Ralph Northam in Virginia and Phil Murphy in New Jersey were the first hard evidence that voters are ready to act. Democrats' victory was even larger than even their most optimistic hopes: They came close to expunging the GOP’s large majority in the Virginia House of Delegates, with some races too close to call. Control of state houses helps determine the drawing of congressional districts.

After the GOP captured the U.S. House majority in 2010, Republicans quickly went to work trying to offer a counterweight to the post-crisis regulatory regime established by the previous Democratic leadership under President Obama. Various bills and hearings sought to undercut the Dodd-Frank Act and the Consumer Financial Protection Bureau, among other things.

A Democratic victory in 2018 would likely have a reverse effect, with Congress pushing for more restrictions. The deregulatory push by the current GOP leadership and the Trump administration would hit an obvious hurdle. The administration is likely at some point to choose its own CFPB director, but that person’s initiatives would likely face fierce pushback by Democratic committee chairs, just as current Director Richard Cordray has encountered.

But perhaps the biggest effect is divided power in Washington. A change of leadership is less likely in the Senate, where GOP control looks safer. If each chamber is held by a different party, that further reduces the likelihood that lawmakers can agree on legislation, including any comprehensive regulatory relief package (if that has not passed already by next year).

Here is a rundown on how a Democratic changeover in the House would affect the financial services policy landscape:

Representative Maxine Waters, a Democrat from California and ranking member of the House Financial Services Committee, questions witnesses during a hearing in Washington, D.C., U.S., on Wednesday, Oct. 25, 2017. The hearing was titled Examining the Equifax Data Breach. Equifax Inc., already reeling from American probes into the loss of data on 145.5 million customers in a computer hack, will face an investigation in the U.K., where 694,000 consumers had information stolen. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

Leadership of the Financial Services Committee

The House Financial Services Committee will have a new chairman regardless of which party wins next year, since current Chairman Jeb Hensarling, R-Texas, is not running for reelection.

But if the Democrats retake the chamber, the likely successor to chair the committee would be Rep. Maxine Waters, D-Calif., the current ranking member.

A Waters-run committee would be a sea change from Hensarling. The longtime California Democrat is seen as further to the left on some issues than even former Democratic Chairman Barney Frank.

In addition to defending Dodd-Frank and the CFPB, Waters could also use her potential leadership position to push for tougher restrictions on big banks like Wells Fargo. Last month, she introduced a bill to have regulators shut down megabanks that show a pattern of consumer violations. “It’s time to hold these financial institutions accountable and put people over profits,” she said in a press release when the bill was unveiled.

Waters would also likely champion housing issues on the committee. She has long been an advocate for affordable housing measures. Meanwhile, her position on reforming the government-sponsored enterprises is similar to the approach taken by bipartisan GSE proposals in the House. In 2014, she proposed a bill to replace Fannie Mae and Freddie Mac with a cooperative-owned securities issuer.

More aggressive policy on the big banks

While the biggest banks still face somewhat unfavorable political headwinds under GOP control, the 2016 election was a favorable one for Wall Street.

That would likely change in a Democratic-controlled House where proposals to break up large institutions and crack down on consumer abuses like those tied to Wells Fargo would get more prominence. A Democratic House would be unlikely to accept restrictions on the Volcker Rule, changes to Dodd-Frank’s supervisory program for “systemically important financial institutions” or the authority of the Financial Stability Oversight Council.

The flip side, however, is that Democratic leaders in the House would support some Dodd-Frank provisions that big banks like. For example, Wall Street has generally favored the “orderly liquidation authority” regime enabling the government to resolve failed behemoths in a manner that seeks to avoid systemic effects, despite GOP attempts to repeal that authority. Democrats in the House would likely keep the resolution regime untouched.

Lower odds for regulatory relief

Banks have been clamoring for regulatory relief, arguing that seven years after the passage of Dodd-Frank is a good time to review which parts of it are necessary and which parts might go too far.

But the clock is ticking to pass a bill rolling back financial regulations.

Negotiations at the Senate Banking Committee appear to be maturing with moderate Democrats in states that Trump carried in the general election negotiating with panel chairman Sen. Mike Crapo, R-Idaho.

The House already passed the Financial Choice Act earlier this year, which was shepherded through the lower chamber by House Financial Services Committee Chairman Jeb Hensarling. That bill goes much further than what can get 60 votes in the Senate, but Hensarling appears ready to agree to whatever the Senate can pass.

However, if Democrats see good chances for a wave election next year, that may disincentivize them to cut any deals now. If a reg relief bill fails to pass and Democrats retake the House, the odds of relief go way down, particularly as many candidates are likely to be running on more progressive platforms. The liberal caucus views Dodd-Frank as a crowning party achievement and generally opposes any changes to the law.

Critiquing agency appointments

Republicans on the House Financial Services Committee practically made a sport during the past few years out of attacking Obama appointees, in particular Cordray.

The Trump administration has taken a surprisingly centrist approach to financial nominations, including Federal Reserve Board Gov. Jerome Powell as chair and former Treasury official Randal Quarles as head of supervision. But Trump may take a different approach to the CFPB and appoint someone hostile to the agency.

The next CFPB director will already be leading a turnaround at a regulator largely populated by Democrats. But with the next appointee possibly attempting to undo the bureau’s work over the last five years, Democrats would surely call the agency head to testify before the committee numerous times — just as Republicans have.

Hensarling has inundated the bureau with subpoenas, accusing it of being asleep at the wheel when Wells Fargo employees created millions of phony accounts and brought claims that Cordray violated the Hatch Act, which prevents agency heads from politicking.

Democrats could decide to treat a Trump appointee similarly which would likely be an unpleasant experience for whoever takes the helm at the CFPB.

Hope for housing finance reform?

One might think that it would be easier for the House and Senate under the same party to come to an agreement on reforming Fannie Mae and Freddie Mac. But a Democratic-controlled House and Republican-controlled Senate might actually be a better incubator for housing finance reform discussions.

When reform talks picked up in 2014, the Senate proposal led by then-Banking Committee Chairman Tim Johnson, D-N.D., and Sen. Mike Crapo, R-Idaho, who now holds the panel's gavel, promised to keep a government guarantee and emphasize the importance of the 30-year mortgage.

However, that proposal appeared to be on a crash course with Hensarling, who came up with a much different approach that would have wound down Fannie and Freddie, relying on private capital instead of a government guarantee, and would have done away with some of the affordable housing goals Democrats demanded.

The free market approach wouldn’t have explicitly gotten rid of the 30-year fixed rate mortgage, but it would have been more difficult for finance companies to offer the product and hedge the interest rate risk.

Although Hensarling plans to step down at the end of his term, the conservative House Freedom Caucus might be influential enough to stop other GOP leaders from compromising on provisions that provide an explicit government backstop. Yet a more moderate GSE reform proposal with support from House Democratic leaders and Senate GOP leaders could move the reform effort further than it has been before.