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The 2020 legislative docket: AML reform, GSEs, Dems v. regulators

WASHINGTON — With both an election looming along with the prospect of a Senate impeachment trial, the window for Congress to pass any banking-related legislation next year will be extremely tight.

Still, some observers say banking issues will be on the agenda at least in the House, particularly when it comes to Democrats' scrutiny of industry executives and oversight of Trump administration regulators.

In an interview, House Financial Services Committee Chairwoman Maxine Waters, D-Calif., said the panel will continue to shine a bright light on Trump administration changes to agencies such as the Consumer Financial Protection Bureau and the management of large banks such as Wells Fargo, while also highlighting concerns about cryptocurrency and private equity.

“We are going to be paying a lot of attention to the Consumer Financial Protection Bureau, which was organized when we did the Dodd-Frank reforms,” Waters said.

She said the agency "has been undermined" by Director Kathy Kraninger and former acting Director Mick Mulvaney.

"They never liked it ... even though we had discovered, when we did those reforms, that consumers were not being taken care of by anybody.”

The legislative branch will go into the new year with major policy issues unresolved, such as reform of the government-sponsored enterprises, obstacles to banks serving marijuana businesses in states where the substance is legal and how to combat the money laundering risk of shell companies opening bank accounts.

Analysts agree that Democrats' primary focus will be on oversight, but they note that the House could still try to advance some financial services bills next year.

“I think in the first half of next year, we are going to see some movement on politically palatable messaging bills out of the House,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading. “We’ll probably have a couple housing hearings, we will have oversight of [the administration’s Community Reinvestment Act] proposal, things like that.”

Legislative efforts in the Senate are even less certain after Banking Committee Chairman Mike Crapo, R-Idaho, in December all but crushed the banking industry's hopes of Congress enacting a pot banking bill already passed by the House.

Here are the key legislative issues for banks to watch in 2020.

Rep. Carolyn Maloney, D-N.Y.
AML reform
A bill to require startup businesses to report their true owners — or "beneficial owners" — to the Financial Crimes Enforcement Network passed the House in late 2019. It was intended to relieve banks from the burdens of "know your customer" rules and strengthen anti-money-laundering efforts by cracking down on anonymous shell companies.

The bill’s House passage came after a long effort of negotiations between Rep. Carolyn Maloney, D-N.Y., and Republican committee members.

The banking industry has supported the bill because it removes the duty of financial institutions to identify the beneficial owners of their business clients.

While many Republicans have been turned off by the potential of new compliance burdens and privacy concerns for small businesses needing to report the information, a former Senate staffer said the Banking Committee has done enough work on the legislation to move it through committee during the first quarter of 2020.

Four Democrats and four Republicans sponsoring the Senate version, the Illicit Cash Act, hope they can quell concerns that it will be overly burdensome to small businesses. While the House bill would impose an annual disclosure requirement on small businesses, the Senate version would only require businesses to report beneficial-ownership information when a change of ownership takes place.

“There was even enough progress that some of the staff at the Banking Committee thought there was a chance of a December markup on beneficial ownership,” the former staffer said. “It does seem to me that issue has a reasonable chance of having a markup in the first quarter.”
Marijuana plants stand in a flower room at the grow facility for Sense of Healing dispensary in Denver, Colorado.
Pot banking
For six years, lawmakers from states with legal marijuana laws have been focused on giving cannabis businesses access to banking. Financial institutions are wary to serve the burgeoning sector since marijuana is still a banned narcotic under federal law.

Rep. Ed Perlmutter, D-Colo., capitalized on Democrats' taking control of the House in 2018 and pushed for the House Financial Services Committee to pass the Secure and Fair Enforcement Banking Act, or SAFE, Banking Act. The bipartisan bill would bar federal regulators from penalizing financial institutions for providing services to the pot industry and ancillary businesses.

Perlmutter’s negotiations with Republicans made it an easy bill for the House to pass. He added language to the bill to protect industrial hemp businesses and formally end Operation Choke Point.

But Crapo may have killed the bill’s prospects. After signaling that he was hoping to hold a vote on pot banking efforts before the end of 2019, he shifted gears in December and announced his opposition to the SAFE Banking Act.

Despite the bill’s dim prospects, analysts say they think it could still be attached to must-pass spending legislation.

“We still see room for a last-minute compromise or inclusion of a narrower package in the 2021 spending bill that Congress is likely to pass before the end of next year,” said Jaret Seiberg, a policy analyst at Cowen Washington Research Group, in a note last month.
Charles Scharf, then the chief executive officer of Visa, speaks during the Institute of International Finance G-20 Conference in Shanghai, China.
Oversight
In a divided Congress, it is hard to move any legislation. But with Democrats controlling the House, Trump administration regulators and key figures in the financial services industry can expect to be called to testify before Waters' committee.

Waters said she will continue to press the CFPB to focus on protecting consumers, as well as conduct oversight of the megabanks, “with a particular focus on Wells Fargo.”

She plans to bring in Wells Fargo’s new chief executive, Charlie Scharf, and members of the board of directors to testify before the committee.

The Community Reinvestment Act has also been a key priority for House and Senate Democrats. In December, Waters led a group of Democrats in crashing the Federal Deposit Insurance Corp. board meeting where a revamped CRA proposal was approved.

Congressional Democrats have raised concerns that the proposal drafted by the Office of the Comptroller of the Currency and FDIC would weaken the law aimed at combating redlining. Waters indicated at a hearing that she plans to call Comptroller Joseph Otting to testify.

She said the committee also will continue to watch Facebook as it plans to launch its own cryptocurrency known as Libra. She has previously objected to Facebook launching Libra altogether.

“We are going to pay attention to Facebook and cryptocurrencies and Libra that is being rolled out by [CEO] Mark Zuckerberg,” Waters said.

Waters also said the committee will examine the private equity industry, a target of Sen. Elizabeth Warren, D-Mass., in her presidential campaign.

“I think that we can separate out the good private equity firms from the bad ones,” Waters said. “We might be able to come around on some of those issues with private equity and hedge funds to make sure that we understand how they are working — who is being advanced and who is being disadvantaged.”
Senate Banking Committee Chairman Mike Crapo
GSE reform
With Congress struggling to pass comprehensive housing finance reform, the Trump administration in 2019 announced steps to prepare the government-sponsored enterprises Fannie Mae and Freddie Mac to exit conservatorship.

Lawmakers could go back to the drawing board in 2020 to draft a new housing finance framework. But any legislative progress is unlikely.

Yet observers do expect heavy scrutiny from Democrats in both chambers of the administration's GSE plans.

“We are going to work with them,” Waters said of the Federal Housing Finance Agency, led by Director Mark Calabria. “I know that they have a proposal. I know that we have, for us, what we think is important for any reforms that must be maintained, like the 30-year mortgage and some other things. … But we are not running from them.

"And we are not categorically denying whatever work they’ve tried to do. But we’ve got to come together and work and see.”

Ahead of the administration’s report on GSE reform, Crapo outlined his own plan to fix the nation’s housing finance system.

“Congress is either incapable or unwilling on legislating on comprehensive mortgage finance reform,” Boltansky said. “They have attempted, they have failed. … I think that everything that [Treasury Secretary Steven Mnuchin] does is going to be heavily scrutinized. I think that everything Director Calabria does is going to be scrutinized.”

All of the Senate Banking Committee Democrats in December demanded more details on the administration’s proposal, sending a letter to Calabria and Mnuchin with more than 20 bullet points about aspects of GSE reform that they hope to better understand.

Yet lawmakers' focus on Calabria's plans could signal their acknowledgment that GSE reform legislation is off at the table at the moment.

“Even that letter, I think basically to me is a definitive signal that even Democrats know that this is going to be an administrative story,” Boltansky said. “Each question was: Show us your work."
Acting White House Chief of Staff Mick Mulvaney
CFPB bill
At the beginning of 2019, one of Waters’ immediate priorities was the Consumers First Act, a bill aimed at reversing steps taken by former acting CFPB Director Mick Mulvaney to weaken the bureau.

Her bill would limit the number of political appointees the CFPB can hire, restore supervision and enforcement authority in the agency’s fair-lending office, and resume CFPB exams of companies for compliance with the Military Lending Act, among other things.

Although the bill is viewed as dead on arrival in the Republican-controlled Senate, Waters said her committee will continue to focus on the CFPB.

“It’s very important to us to make sure that the Consumer Financial Protection Bureau is not undermined and weakened,” Waters said. “If anything it should be strengthened.”
Rep. Jesus "Chuy" Garcia, D-Ill.
National rate cap
Another pro-consumer bill introduced by House Democrats in 2019 would establish a national 36% interest rate cap on lending products.

But the legislation, sponsored by Rep. Jesús “Chuy” Garcia, D-Ill., is likely a nonstarter in the Senate and has also found detractors among some moderate Democrats in the House.

The bill would extend the same rate cap now in place for loans to military service members to all consumers.

In December, Waters held a briefing with members of her caucus about the bill and the legislation was not considered in a committee markup scheduled for the same month.