WASHINGTON — Congress reconvenes on Tuesday for a final four weeks of legislative business before taking another break ahead of the November elections. While it's highly unlikely that any meaningful financial legislation will become law in that short window, lawmakers are eyeing September as an opportunity to lay the groundwork for next year with a new administration and a new Congress.
The first order of business for Congress will be passing a continuing budget resolution and avoid flirting with another government shutdown right around the election.
But lawmakers will be busy throughout the month with hearings featuring top Federal Reserve Board officials and voting on a much anticipated financial reform bill. Here are five things that bear watching:
The Financial Choice Act
House Financial Services Committee Chairman Jeb Hensarling plans to hold a panel vote on a far reaching piece of financial regulation legislation that the Texas Republican says will serve as an alternative to the Dodd-Frank Act of 2010.
The bill has good odds of clearing the GOP-heavy committee, though it has virtually no chance of clearing the full House and Senate this year.
"The Financial CHOICE Act won't likely go anywhere in the current Congress, but it sets a marker as the first comprehensive legislative proposal for how Republicans could replace Dodd-Frank," said Justin Schardin, director of the Bipartisan Policy Center Financial Regulatory Reform Initiative.
An early draft of the bill released in June would allow banks that maintain a simple leverage ratio of at least 10% to get a reprieve from Basel III and certain Dodd-Frank rules. It would also restructure the Consumer Financial Protection Bureau and make other changes to Dodd-Frank.
"A public debate on a simple leverage ratio is a good one to have," Schardin said, but he added that "the main problem with a simple leverage ratio is that it encourages banks to hold riskier assets."
Ian Katz, a policy analyst with Capital Alpha Partners, said that the bill will "get changed many, many times, if it isn't killed outright."
"We really need to fast-forward past the election to have a reasonable sense of what might happen with it," he said.
Ironically, while Donald Trump, the GOP nominee, has not said whether he favors Hensarling's bill, Democratic nominee Hillary Clinton has specifically endorsed the idea of holding higher capital in return for less regulations. However, Clinton has said such a deal should be limited to community banks.
Hensarling is a longtime friend and ally of Trump's running mate, former congressman Mike Pence, who served with Hensarling in the House.
Clinton and Trump will face-off for the first of three scheduled presidential debates on Sept. 26.
Financial policy and regulation has a high probability of coming up as Trump will likely bring up Clinton's ties to Wall Street and paid speeches to companies like Goldman Sachs.
Of the two candidates, Clinton has provided more details on banking policy, laying out a plan for regulatory relief and strengthening oversight of so-called shadow banks. Trump, meanwhile, has called for repealing Dodd-Frank, imposing a temporary moratorium on all new agency regulations and restoring the 1930s-era Glass-Steagall Act, which separated commercial and investment banking.
"I would expect both Secretary Clinton and Mr. Trump to use anti-Wall Street rhetoric, if only because it polls very well," Schardin said. "I'll be interested to see if he's pressed for more details on his statements about dismantling Dodd-Frank at the debates."
Katz predicted that Clinton might use the debate to attack Trump's business record "in an attempt to undermine his back story and credibility," but said while there could be a general discussion of banking, it' s unlikely to get into the "nitty-gritty."
Fed on the Hill
There are at least two critical hearings with Fed officials in September.
On Wednesday, Kansas City Fed President Esther George and Richmond Fed President Jeffrey Lacker will testify at a House Financial Services subcommittee hearing on Fed governance, monetary policy and the economy.
Fed Chair Janet Yellen, meanwhile, will also testify on financial regulation and supervision on Sept. 28 in front of the Financial Services Committee.
George and Lacker are appearing because they are two of the more hawkish regional bank presidents at a time when many believe the Fed has kept interest rates too low for too long.
"The broader context here is that all of our benchmarks … these are really measures of where interest rates would otherwise be, would have been in the past if we were behaving the way we usually behave when growth, employment, and inflation are where they are now," Lacker said during a May Bloomberg interview. "It's pretty clear that we are departing relatively substantially from patterns of past behaviors that have been successful for us."
Rep. Bill Huizenga, R-Mich., is chairman of the Monetary Policy and Trade Subcommittee, which will hold the hearing. Huizenga has also sponsored legislation that would require the Fed to adjust interest rates according to a quantitative model or rule.
Yellen's testimony will come just a week after the Fed makes a rate decision at the Federal Open Market Committee meeting, but her testimony is ostensibly about bank regulation. She could face tough questions from Republicans who believe regulation is slowing down the economy, but she could also be grilled by Democrats who have been critical about the lack of diversity among Fed leadership.
Rep. Ed Royce, R-Calif., a member of the House banking panel, is expected to introduce a bill that would encourage more risk-sharing transactions between Fannie Mae and Freddie Mac and the private sector. The bill is unlikely to pass in the near-term, but many see it as a building block for future housing finance reforms.
"We reserve judgment on this bill's prospects until the text is released, but we are generally pessimistic regarding efforts to clear mortgage finance proposals in the waning days of the 114 Congress," wrote Isaac Boltansky, an analyst with Compass Point Research and Trading in research note. "With that being said, Washington remains broadly supportive of GSE risk-sharing efforts and the administrative embrace of these structures is likely to continue."
The Urban Institute published a paper Aug. 26 that called for expanding risk-sharing transactions. The authors include a number of housing finance thought leaders, including Jim Parrott, who was a senior adviser at the National Economic Council during the Obama Administration and is currently a policy adviser for Clinton.
The Consumer Financial Protection Bureau could issue a much anticipated rulemaking surrounding prepaid financial cards as early as September. The agency said in a May blogpost that it expected to issue the final rulemaking during the summer, but it has not yet appeared.
The initial proposal was unveiled in November 2014. Among other things, it would require prepaid cards with overdraft fees to comply with Regulation Z, the same rule that credit cards must follow.
Prepaid card issuers have been making a concerted push to change the plan, arguing that if finalized in its current form, it would make it hard to keep issuing prepaid cards.
The CFPB is also expected to receive a ruling from the U.S. Court of Appeals for the D.C. Circuit in a case between the New Jersey-based mortgage lender PHH Corp and the agency.
"Based on both court timelines and channel checks, we expect the U.S. Court of Appeals for the D.C. Circuit to release its ruling in PHH v. CFPB in the coming weeks," Boltansky wrote in a research note.
The case surrounding a Real Estate Settlement Procedures Act enforcement action has potentially far-reaching consequences. CFPB Director Richard Cordray overturned a $6.4 million administrative judge's ruling against PHH and instead sought a $109 million disgorgement.
PHH challenged the enforcement's size, the CFPB's jurisdiction and the statute of limitations and the constitutionality of the CFPB's single director structure.
"Our view is that a CFPB loss in this case would force a near-term retrenchment of the bureau's enforcement and rulemaking efforts," wrote Boltanksy, who also added that a loss "would significantly strengthen legislative efforts to shift the bureau's leadership from a single director to a commission."