Top Six Banking Debates in Congress This Fall

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WASHINGTON — The banking committees are set to resume debate over housing finance reform when Congress returns from summer recess on Monday, but the issue will be just one of many facing lawmakers during a busy fall.

Below is a list of some of the biggest banking issues lawmakers may address between now and January amidst larger discussions over potential military action in Syria and the looming fiscal crisis.

No. 1: Mortgage finance reform
Unsurprisingly, efforts to reform the government-sponsored enterprises are expected to remain a top priority for both the Senate Banking and House Financial Services committees in the coming months.

Before Congress broke for its month-long recess, momentum was building to overhaul Fannie Mae and Freddie Mac. The House Financial Services Committee passed Chairman Jeb Hensarling's bill to unwind the GSEs, while Senate Banking Committee Chairman Tim Johnson and Sen. Mike Crapo, the panel's top Republican, signaled they would take up the issue together in the fall.

"I think you can officially calculate the fall as 'all housing all the time,' with some other efforts put in between," said James Ballentine, executive vice president for congressional relations and political affairs at the American Bankers Association.

Still, it remains highly unlikely a bill will be enacted this year, and it's even unclear what tangible progress can be made.

One of the biggest questions yet to be answered is whether Hensarling is able to move his bill to the House floor for a successful vote — particularly given a packed legislative schedule now focused on Syria and the budget for the next fiscal year, which begins Oct. 1. Lawmakers may also have to contend with the debt ceiling earlier in the fall than previously expected, with the Treasury Department now predicting the U.S. could breach its spending limit by mid-October.

"The macro events kind of crowd out a lot of things on the calendar," said Brian Gardner, a policy analyst at Keefe, Bruyette & Woods. "You add in Syria and an accelerated schedule for a continuing resolution [for the budget] and the debt ceiling, and September becomes a very crowded month. At this point it's tough to see how a GSE bill can get to the House floor. I don't think it's possible."

Observers added that Hensarling may also have difficulty getting the necessary votes on his controversial bill without adopting some changes to bring more Republicans on board. Because the Protecting American Taxpayers and Homeowners Act would not include any kind of government backstop for the housing market, it is unlikely to attract any Democratic supporters. But many moderate Republicans are wary of the bill for the same reason.

"House leadership will likely work on changes sufficient to allow a majority of members to vote to support the PATH Act — that is, a significant majority of the Republican conference. The House vote is likely to be quite partisan," said Daniel Crowley, an attorney at K&L Gates.

Meanwhile, Johnson and Crapo are expected to move forward on bipartisan legislation in the Senate Banking Committee, reaching out to various stakeholders. The duo are due to hold a hearing on Sept. 12 examining the "essential elements of reform." In crafting a bill, they will likely draw from a bipartisan bill by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., which is backed by several other members of the banking panel. If Johnson and Crapo produce a bill in coming months, it's possible the committee could take a vote on it before yearend, though a timetable is very difficult to predict before legislation is even introduced.

Another open question for the housing industry remains the fate of Rep. Mel Watt, D-N.C., who has been nominated as director of the Federal Housing Finance Agency. The Senate Banking Committee sent Watt's nomination to the chamber floor in July, but it's unclear whether or when Majority Leader Harry Reid will schedule a vote on the nominee, whom many Republicans generally oppose for the position, citing his lack of technocratic experience.

"[W]e expect the White House to expend a considerable amount of political capital in the upcoming debate over the use of military force in Syria, which lessens its capacity to force other issues such as Rep. Watt's nomination to head the FHFA," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading, in a note to clients earlier this month. He added that the Syria debate "reinforces" earlier pessimism that Watt can garner enough votes for the position.

Towards the end of the year, lawmakers will also need to decide again on whether to extend a tax break for debt forgiven under short sales and other mortgage modifications. The Mortgage Forgiveness Debt Relief Act is set to expire on Dec. 31, though several bills have been introduced in the Senate to extend the provision for one or two years. The law, passed in 2007, was most recently extended as part of the last-minute deal to avert the so-called fiscal cliff at the beginning of the year.

Should Congress grant it, another extension "should be a positive for housing, as we believe there would be more foreclosures absent short sales and mortgage modifications," said Jaret Seiberg of Guggeheim Securities in a note to clients late last month. He added, however, that passage of another extension for the tax break is "far from a slam dunk."

No. 2: Battle over Fed chair nomination
Another major focus for the Senate banking panel this fall will be consideration of a new Federal Reserve Board chairman. With Fed Chairman Ben Bernanke's current term due to expire Jan. 31, predictions about his successor abound, with Harvard economist Lawrence Summers and Federal Reserve Board Vice Chairman Janet Yellen said to be at the top of the list. The confirmation hearing for whomever the White House ultimately chooses will be a closely watched event for the industry, and any nominee is expected to face numerous banking policy questions about issues ranging from capital standards to implementation of the Dodd-Frank Act to whether some institutions are still "too big to fail."

"Nominees to replace the Fed chairman and other Federal Reserve Board governors will be very high profile and will take up a lot of the committee's time and attention," said Aaron Klein, director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center.

That could be particularly true if the president selects Summers as his nominee. The former Treasury secretary has already garnered opposition from Senate liberals such as Sen. Sherrod Brown, D-Ohio, and Elizabeth Warren, D-Mass., who have been actively supporting Yellen for the spot. Lawmakers are also likely to take a hard line on Summers' past support for repealing the Glass-Steagall Act, which Warren and others see as helping to fuel the financial crisis. Yellen, in contrast, is a relatively uncontroversial nominee and would likely engender much less resistance.

The Senate banking panel will also need to vote on several other Federal Reserve Board positions. Elizabeth Duke, a Fed governor, resigned from her seat on Aug. 31, and another board member, Sarah Bloom Raskin, has been nominated for a top position at the Treasury Department and will need to be replaced if she is confirmed. It's also unclear if Yellen would continue on at the Fed if she is passed over for the chairman position, which could open up another slot.

Still, the Fed confirmation process, especially for the highly anticipated chairman position, could also be delayed due to ongoing negotiations over military strikes in Syria, several observers said. President Obama was expected to announce his pick in coming weeks but his timeline is now unclear.

"[W]e doubt that the President will announce his nominee to head the Federal Reserve while his administration has the full-court press on for Syria," said Boltansky in his client note, predicting that the White House is unlikely to announce its nominee for the position until mid-September at the earliest.

No. 3: Regulatory relief for banks
Efforts to reduce the burden for small banks from new agency rules may also continue to get some attention this fall, though it's unclear at this point if there's enough momentum to get a bill through Congress.

Several measures have been introduced over the past year, including recent legislation in the House and Senate that would reduce compliance requirements for the Consumer Financial Protection Bureau's ability-to-repay rule, among other provisions. The Community Lending Enhancement and Regulatory Relief Act is sponsored by Sens. Jerry Moran, R-Kan., Jon Tester, D-Mont., and Mark Kirk, R-Ill., and separately by Rep. Blaine Luetkemeyer, R-Mo.

"Our biggest push is going to be on the House and Senate CLEAR Act," said Paul Merski, executive vice president for congressional relations and chief economist for Independent Community Bankers of America.

Hensarling also included several regulatory relief measures in his GSE bill, including a one-year delay of the qualified mortgage rule, which some industry advocates are hoping to advance this fall.

"That's both a regulatory and legislative effort that we're undertaking. We're very active in that space," said Ballentine, warning that banks and their vendors won't be able to comply by the January deadline for QM. "If the CFPB doesn't do something, we hope Congress will look at this issue in the fall period."

No. 4: Dodd-Frank oversight
Lawmakers are likely to continue their oversight of the Dodd-Frank law, including urging suggested changes, though legislation in this area is unlikely to pass this year.

One ongoing issue of focus is likely to be the designation of systemically important financial institutions, particularly after Prudential Financial challenged the Financial Stability Oversight Council's decision to designate the insurance company as a SIFI in July.

"There continues to be interest in improving resolution authority through Dodd-Frank and the bankruptcy code, and there are issues regarding capital standards implementation from the nonbank sifis that I think will continue to get scrutiny in the wake of the Prudential decision to challenge the designation," said Klein. "That was a pretty big and surprising decision — it certainly gives pause to those who think it's a huge financial benefit for a company to be designated."

But any major tweaks to the FSOC, resolution authority, derivatives provisions or other controversial aspects of the law are still unlikely this year, in part because Johnson has positioned himself of a staunch defender of the Dodd-Frank law.

"There's not a lot of current discussion because it's quite clear that Chairman Johnson does not want to open up the law to changes. But he's leaving at the end of next year. Once you get past the 2014 elections, even the Obama administration will be willing to discuss appropriate bipartisan changes that they have not so far been willing to discuss," said Crowley. "Until then, you're going to see a lot of record creation through hearings, op-eds and other means. People should be thinking now about the changes they'd like to see in 2015."

At the same time, congressional scrutiny of key provisions is likely to continue. Lawmakers may, for example, hold a hearing when and if the final Volcker rule, a ban on proprietary trading, is released this fall.

No. 5: "Too Big To Fail"
Concerns over whether some financial institutions are still "too big to fail" gained renewed traction this spring, after the introduction of legislation to possibly break up the big banks by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La. The issue has taken somewhat of a backseat since attention turned to mortgage finance reform over the summer, but it remains one that many in the industry continue to follow closely, especially as the Government Accountability Office prepares the first of two reports on the issue expected to be released this fall.

The GAO report is expected to "feed the momentum to enact legislation to go after the mega banks," wrote Seiberg in a note to clients earlier this month. "Our big worry remains a bill that would require regulators to impose capital requirements on the mega banks high enough to offset any advantage they get from being seen as too big to fail."

It's also possible that the banking committees could schedule hearings around the report as an opportunity to discuss the issue further.

No. 6: Ag Activity
While much of the work around financial services issues will be centered in the House and Senate banking panels, lawmakers on other committees will be working on some relevant issues as well, including the reauthorization of the Commodity Futures Trading Commission and passage of a farm bill.

The agency's authorization expires at the end of the fiscal year, giving the agriculture committees in the two chambers the opportunity to review the CFTC's authority and spending levels and potentially reopen controversial derivatives provisions passed under the Dodd-Frank law.

"Some people will use that as an opportunity to make changes to Dodd-Frank," said Gardner. "But I think those are ultimately unsuccessful."

Lawmakers may also move to hammer out a final deal on a major five-year farm bill, though legislation passed out of the Senate and the House earlier this year contrast sharply on several major issues, including the nation's nutrition and food stamp programs — which House Republicans omitted from their bill that passed in July. Senate lawmakers have been urging the two chambers to move to a conference committee, which could proceed later this fall. House leaders have also indicated that they plan to take up a nutrition bill separately in coming weeks, according to media reports. The farm bill is critical for banks because it is likely to contain provisions on crop insurance and loan guarantees important for rural lenders.

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