Housing Finance Reform to Dominate Legislative Agenda in 2014

WASHINGTON — The new year is less than a week old, but lawmakers are already rapidly running out of time if they want to forge ahead on key initiatives such as housing finance reform in 2014.

With the midterm elections coming in November, Congress only has a relatively brief opening before partisan dysfunction, already at historic levels after fights over the budget, filibuster rule changes and other issues, grinds all legislative activity to a halt.

"The most important factor next year is the elections," said Daniel Crowley, a partner at law firm K&L Gates. "The closer we get to the elections, the less likely we are to see legislation. It's a very narrow window."

Yet the looming elections may also prod lawmakers to action, particularly because the 113th Congress has the dubious distinction of being the "least productive" Congress in history halfway through its session. Just 58 bills became law in 2013, including many that simply named post offices.

Below is a look at some of the banking issues in banking that lawmakers are likely to focus on in the months ahead.

GSE Reform

Without a doubt, efforts to overhaul the housing finance market are likely to remain at the top of the congressional agenda in 2014.

"This year, let's face it — I really do think the elephant in the room is housing finance reform," Sen. Bob Corker, R-Tenn., said in an interview shortly before the Christmas recess.

Corker teamed up with Sen. Mark Warner, D-Va., to introduce a proposal last summer to unwind Fannie Mae and Freddie Mac and establish an explicit government backstop for the mortgage market.

Senate Banking Committee Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the ranking member on the panel, are now leading efforts to draft a bipartisan plan to overhaul the government-sponsored enterprises, likely drawing on the Corker-Warner bill. They failed to meet their stated goal of releasing legislation by yearend, but have pledged to move forward with a bill soon.

"Since it appears that we will need to prioritize finalizing this housing reform legislation, that will be number one," Crapo said in an interview about the panel's priorities.

Johnson added in a statement that the issue is "at the top of our list," noting that the committee "will continue to work tirelessly on reform as quickly as possible."

Analysts predict that banking leaders are likely to produce a proposal sometime in the first two months of 2014, opening the process back up to further discussion by lawmakers, industry officials and advocates. But how, and at what pace, efforts move from that point remains to be seen.

"There could be a markup possible sometime in the first quarter of the year, but after that it becomes very blurry," said Brian Gardner, an analyst at Keefe, Bruyette & Woods.

If the Banking Committee is able to advance legislation, all eyes would then turn to the White House and Senate leadership to decide whether or not to push the bill further, amidst other priorities like the budget, immigration and tax reform.

"The question will be, at what point does the Obama administration weigh in on GSE reform in a significant way? That could tilt the debate, depending on how they weigh in," said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association.

Ballentine added that there are additional procedural worries if and when a bill makes it to the Senate floor.

"I'm concerned that any vehicle that is moving on GSEs or something else will be used as a Christmas tree — that concerns outside of reform could bring it to a halt," he said. "Once you start getting a sense that that type of legislation has momentum, it may attract some barnacles that you won't be able to take off and that could be to the detriment of the legislation."

Over in the House, meanwhile, efforts to reform the market remain in limbo. Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, introduced his own, much more conservative plan to overhaul the GSEs this summer. The Protecting American Taxpayers and Homeowners Act quickly passed out of the banking panel before the August recess, but it has since stalled. Predictions are mixed on whether the plan could gain new life this winter with a vote on the House floor.

"I'm not sure I can control anything — my jurisdiction is the House Financial Services Committee, not the floor of our chamber — but I am encouraged by my conversations with our Republican leader who controls the floor, who is a supporter of the PATH Act," Hensarling said in a recent interview. "I'm hopeful we'd see something fairly early in the new year."

Some analysts suggested that the failure to get the bill to the floor during the fall is a reflection of divisions within the Republican caucus over backing a plan that is deeply unpopular with the housing industry. But others expressed optimism, pointing to Hensarling's sway with Republican leadership, along with the considerable distractions that popped up during the fall, like the fight over the budget and the government shutdown.

"I'm pretty confident that they'll find a way to get the PATH Act through the House," Crowley said. "This is Hensarling's first year as chairman and his first major legislative effort — he's part of the Republican leadership team and he commands a great deal of respect."

It's also possible that House and Senate efforts could play off of each other. If the Senate starts moving more seriously on a housing finance plan, the House could take notice and respond with its own vote. Even if disagreement remains, House Republicans may ultimately decide they would prefer to maintain as much negotiating power as possible in a possible conference with the Senate.

"Voting for the PATH Act is voting to move the process forward, to start the negotiations," said Crowley. "I think they will pass the bill to send a message with votes, recognizing they will have to compromise with the Senate."

Still, most observers acknowledged that it's unlikely that major mortgage finance reform legislation will be signed into law in the next 12 months. The reasons that the effort may drag out until at least 2015 are many, including the ongoing partisan squabbling in both chambers and the sheer complexity of the task. With the shortened timeframe ahead of the elections, there is only so much time to have the key debates, iron out a multitude of details, and clear all of the procedural hurdles.

"Realistically, if there's not legislation that's passed both the House and the Senate by the middle of spring, I don't see how it gets done from a logistical standpoint — because you have to reconcile the differences and get a conference report or other document out," said Gardner. "There are so many little technical issues and things we don't think about as market moving, such as affordable housing."

Still, analysts said that even if major reform doesn't occur this year, lawmakers may make such progress that it will pave the way going forward in 2015 and beyond.

"I don't think we should discount what this Congress has accomplished," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "No, there won't be a GSE reform law passed in this session, but for the first time we've actually had legislative language and we've had a slew of hearings — the debate has been advanced."

Crowley added that the work done this Congress is significant because it can be viewed as "stage setting" for the years to come.

"When we get to January 2015, in all probability we'll continue to have divided government and a lame duck president, which happens to be recipe for big legislative change that will be lasting," he said.

The Return of 'Too Big to Fail'

Another major blunder on the scale of JP Morgan's "London Whale" mess could rocket concerns over "too big to fail" to the top of the congressional agenda — but even without such an impetus, critics are expected to reinvigorate the debate soon.

The Government Accountability Office is planning to unveil in the spring a highly anticipated report measuring funding advantages at the largest banks, which could provide opponents with fresh talking points on the issue.

"We think [the report] will again underscore that 'too big to fail' is still out there," said Sen. Sherrod Brown, D-Ohio, in an interview. Brown and Sen. David Vitter, R-La., asked the GAO to study the issue in December 2012, and the two lawmakers teamed up again last spring to unveil legislation that would significantly raise capital standards at the biggest institutions.

The report will be the second of two that the GAO releases on concerns over "too big to fail." The first, published during the fall, detailed the amount of support the banking industry received during the financial crisis; significantly, however, it did not include a single topline estimate of that support.

Observers said industry and advocates alike will be looking for such a figure in the second installment, despite the fact that estimates from academics, activists and even industry measuring the size of implicit subsidies already abound.

"My sense is everyone is looking for the number, even industry is looking for a number," said Boltansky.

Lawmakers are also expected to continue their investigation of related issues, including whether the Justice Department and banking regulators have let big banks off easy in recent settlements. Attorney General Eric Holder made waves last spring by acknowledging that the size of some institutions is a factor when deciding whether or not to prosecute, fueling critics' warnings that big banks are also "too big to jail." Months later he attempted to walk back the remarks, but his initial admission is still considered a turning point in the debate.

Sen. Elizabeth Warren, D-Mass., a leading advocate on the issue, said that bank oversight will continue to be a key priority during her second year in office.

"[I]t's the committee's job to make sure that regulators implement the new Dodd-Frank rules and use their existing authority to hold large financial institutions accountable when they break the rules," she said in a statement.

The House banking panel, meanwhile, is also planning to launch a more thorough investigation into the fight over "too big to fail." The committee will build on work completed in 2013, including several hearings held in the oversight and investigations subcommittee. Hensarling said he plans to introduce legislation on the topic.

In 2014 "we will have a much deeper dive, and I would anticipate legislation will flow from that," the chairman said, adding that the panel is planning to release a report "very early in the new year" that will serve as the basis for that legislation.

Reg Relief

The fight to reduce the regulatory burden, particularly for smaller institutions, is also expected to remain a central issue on the Hill.

"Our top priority will still be regulatory relief," said Paul Merski, executive vice president for congressional relations and chief economist for the Independent Community Bankers of America. "I think it will be good timing because it's an election year. There's more incentive to get some tangible successes for lawmakers."

Merski noted that there are almost two dozen such bills teed up in the House and Senate, including the Community Lending Enhancement and Regulatory Relief Act, which would provide qualified mortgage status for community bank portfolio loans and offer several other exemptions from new mortgage rules.

"That right out of the gate next year will be front and center," Merski said of the bill, noting that it already has well over 100 co-sponsors in the House and Senate.

The House in particular has been keenly focused on examining the impact of the Dodd-Frank law and the Consumer Financial Protection Bureau on smaller institutions, an effort that's likely to continue, according to several lawmakers.

"I think there are a lot of issues, especially around the CFPB and QM, that are going to have some definite impact on the banking industry," said Rep. Sean Duffy, R-Wis., in an interview. "I think you will see some bipartisanship … rally around some reforms that can actually make these rules work. So it could be a unique time for the committee to actually come together and get some good stuff done."

Rep. Shelley Moore Capito, R-W.Va., chairman of the financial institutions and consumer credit subcommittee, listed similar priorities for the coming year.

"I think we're certainly going to keep looking at the regulatory burdens, keep looking at bank consolidation, mobile payments, some of the effects of QM and how it's being rolled out — I think we're going to monitor that quite closely," she said in an interview.

Capito is also drafting legislation with Rep. Gregory Meeks, D-N.Y., that would require regulators to consider potentially duplicative or inconsistent rules before finalizing a new regulation, an effort the industry is already praising.

"That's something that is near and dear" to the industry, Ballentine said. "Regulations just seem to pile on top of one another."

Rep. Rubén Hinojosa, D-Texas, said that he'd also like to see additional leeway for community banks.

"I have lots and lots of cities, about 90 cities in my congressional district, and that includes lots of credit unions and lots of community banks. I think we need to tweak the Dodd-Frank bank reform bill so that there's some flexibility for those entities that I mentioned to be able to serve their constituents," he said in an interview. "That is going to take time. I've seen it in bills, like Sarbanes-Oxley, that took several years to be implemented and tweaked, so that it could be utilized to regulate those in financial services."

Still, looking at the Senate, it's unclear that the time is yet ripe for changes to the Dodd-Frank Act to be passed into law.

"I believe Johnson wants to leave with his tenure being securing the moat around the Dodd-Frank Act, so I don't think he wants to open it up for regulatory relief, because it could open it up to other changes," Boltansky said.

Unfinished Business

Beyond some of the major headline issues, lawmakers may also try to finally put to rest a number of pending efforts critical to banks, including passing a farm bill and finalizing proposed reforms to the flood insurance program.

Congress will also have to consider the reauthorization of the Terrorism Risk Insurance Act, a 2002 law that creates a government backstop for insurance claims related to acts of terrorism. The banking committees in both chambers held preliminary hearings on the issue in the fall, and the debate is likely to pick up steam over whether and for how long the program should be extended and the role of a private market for terrorism insurance.

"My guess is if we can move through [housing] finance reform in a very good way, we will deal with the terrorism insurance issue in time to keep any projects from being slowed down that may be being planned or are ready to break ground around the country," Corker said.