December 22, 2018

December 22, 2018

Happy solstice! The year might not be ending exactly as we’d hoped (keep reading), but we look forward to celebrating the holidays with our loved ones, and we hope that you have joyful plans as well. Thank you for your friendship and support throughout 2018, and best wishes for a prosperous and productive 2019. The Eris offices will be closed next week, and the Golden Apple will return on January 4, 2019.

The shutdown — A portion of the federal government shut down at midnight, when the most recent continuing resolution expired. The Senate had passed an extension until February 2019, but after the President said that he would not sign a bill that didn’t include funding for his proposed border wall, the House passed legislation that included that funding. The Senate did not vote on that revised proposal today. Funding bills remain undone for Agriculture, Commerce-Justice-Science, Financial Services, Homeland Security, Interior-Environment, State-Foreign Operations, and Transportation-HUD.

Federal employees in essential positions in those areas — which include TSA and Customs & Border Protection — are expected to keep working, though their paychecks will likely be delayed. The government loan guarantee programs (e.g., FHA) will not be processing any mortgage applications until the shutdown ends. Matters pending in federal court will continue, but work will slow down as non-essential personnel are furloughed. Activities that are funded by direct fees, such as visa applications and bank examinations, will continue without interruption. Answers to frequently asked questions and links to individual agencies’ contingency plans are here.

Hensarling chairs a last hearing on housing finance reform — The House Financial Services Committee held the last hearing of the 115th Congress on Friday morning, and it was a doozy: ten witnesses, more than four hours from start to finish. The topic was the Bipartisan Housing Finance Reform Act of 2018, a discussion draft produced by Chairman Jeb Hensarling (R-TX) with Rep. John Delaney (D-MD), who is also leaving Congress this year, and Rep. Jim Himes (D-CT). Witnesses representing most of the major industry participants, including the Mortgage Bankers Association, the National Association of Realtors®, US Mortgage Insurers, the National Association of Home Builders, the Community Home Lender Association and the National Association of Federal Credit Unions agreed on the need for Congressional action, the need to preserve a government guarantee, and the need to create a stable regulatory structure for the secondary market. Hensarling called the bill “a grand bargain” that could be the basis for meaningful reform in the next Congress.

Royce, Velázquez introduce bill to stop GSE lobbying — At Friday’s hearing, retiring Rep. Ed Royce (R-CA) said that housing finance reform was “the great undone work” of the last economic crisis. He said he had tried to rein in the government-sponsored enterprises in 2003 and 2005, and blamed their “outsized political pressure” for exacerbating the crisis. This week, he and Rep. Nydia Velázquez introduced the Fannie Mae and Freddie Mac Lobbying Regulation Act, which would prohibit the GSEs from engaging in any activity that would need to be reported as lobbying as long as the enterprises are in conservatorship or receivership.

FDIC may ease limits on brokered deposits — The Federal Deposit Insurance Corporation (FDIC) Board voted this week to seek comment on an advance notice of proposed rulemaking that includes a “comprehensive review” of the agency’s approach to brokered deposits and the interest rate caps on banks that are less than well capitalized. “Since the statutory brokered deposit restrictions were put in place in 1989, and amended in 1991, the financial services industry has seen significant changes in technology, business models, and products,” the agency said. Comments are due within 90 days.

Let’s talk CECL — The Federal Accounting Standards Board’s current expected credit losses (CECL) methodology was a topic of discussion all over town, and FASB announced plans to make that conversation public in January. The Board will host a public roundtable discussion on implementation issues after the first of the year. The date and location will not be announced until early next month, but topics will include a proposed alternative to the income statement impact of the current expected credit losses (CECL) model, and the consideration of charge-offs and recoveries as a component of the vintage disclosures.

Banking agencies announce three-year phase-in for CECL — The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve System published a final rule on the implementation of the CECL methodology. The rule allows financial institutions to phase in over three years the adverse effects on regulatory capital that may occur as a result of the new standard. That three-year phase-in starts when the final rule takes effect, on April 1, 2019.

Luetkemeyer seeks to block CECL — Meanwhile, Rep. Blaine Luetkemeyer, Chairman of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, introduced legislation to prohibit the federal banking agencies from requiring compliance with the CECL standard. He also sent letters to FASB Chairman Russell Golden and SEC Chairman Jay Clayton asking that FASB reconsider the rules and change its internal processes to restore required pre-issuance field testing, and introduce independent investor surveys. Eight Republican members of the House Financial Services Committee co-signed the letters.

FSOC flags risks in cybersecurity, central counterparties, and reference rates — The Financial Stability Oversight Council’s annual report, published this week, recommended legislative action to boost the federal regulators’ ability to oversee third-party service providers in order to monitor cybersecurity risk, and recommended that the CFTC, Federal Reserve, and SEC coordinate the supervision of all central counterparties designated as systemically important financial market utilities (FMUs). FSOC also recommended that the Alternative Reference Rate Council (ARRC) continue its plans for transitioning from LIBOR to SOFR, and that market participants look for opportunities to use SOFR in new transactions.

Federal agencies ask for comment on Volcker Rule exemptions for community banks — The Commodity Futures Trading Commission, FDIC, Federal Reserve, Office of the Comptroller of the Currency and SEC published a notice of proposed rulemaking to ask for comment on changes to the implementation of the Volcker Rule that would exempt certain community banks. As directed by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), the proposal would lift Volcker Rule requirements for community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5 percent or less of total consolidated assets. Comments are due to the agencies within 30 days. In a letter to the agencies and the Secretary of the Treasury, House Financial Institutions Subcommittee Chairman Blaine Luetkemeyer said that Congress had intended to exempt banks of any size as long as their trading activity is limited.

Federal banking agencies propose easing rules on management interlocks — The FDIC, Federal Reserve Board, and Office of the Comptroller of the Currency issued a joint notice of proposed rulemaking this week to ask for comments on plans to raise the “major assets prohibition thresholds” for restrictions on management interlocks. Under current rules, management officials of a depository institution with more than $2.5 billion in total assets (or its affiliate) cannot simultaneously serve as a management official of an unaffiliated depository institution with assets of more than $1.5 billion (or its affiliate). The agencies propose to raise these limits to $10 billion, and propose three different approaches for increasing the thresholds based on market changes or inflation. The proposal is open for comment for 60 days.

SEC wants comment on reporting schedules — The Securities and Exchange Commission published a request for comment this week to ask for opinions about the nature, content, and timing of earnings releases and quarterly reports made by reporting companies. The SEC specifically wants comment about how the existing reporting schedule “may foster an overly short-term focus by managers and other market participants.” Comments are due to the SEC in March 2019.

CFPB announces HMDA data disclosure guidance — The Consumer Financial Protection Bureau (CFPB) published final policy guidance today that describes the loan-level HMDA data that the Bureau will make available to the public starting next year. The new data will exclude certain identifiable public HMDA data, such as the property address and the applicant’s credit score. It will also disclose ranges rather than specific values for an applicant’s age, the amount of the loan, and the number of units in the dwelling. The guidance applies to data compiled in 2018 to be published in 2019.

It’s still CFPB, but Warren wants the old one back — Kathleen Kraninger, the CFPB’s new Director, said this week that she would not pursue Acting Director Mick Mulvaney’s plans to rebrand the agency by its statutory name, the Bureau of Consumer Financial Protection Bureau. Senator Elizabeth Warren did not comment on this in the eight-page letter she sent Kraninger this week, asking the new director to take five actions to “reverse the damage done by Interim Director Mulvaney.” Warren asked Kraninger to eliminate the “dozen-plus political positions” Mulvaney created within the Bureau; recommit to “aggressive investigations of wrongdoing” and stronger enforcement; preserve the Bureau’s data-collection abilities; restore the full authority of CFPB’s Office of Fair Lending and Equal Opportunity; and quickly reinstate protections for students, military personnel, and young consumers.

US indicts two Chinese hackers for theft of confidential data, calls out China for violating agreements — Yesterday representatives of the Department of Justice, the US Attorney for the Southern District of New York, the FBI, and the Department of Defense jointly announced the indictment of two Chinese nationals on charges of conspiracy to commit computer intrusions, conspiracy to commit wire fraud, and aggravated identity theft. The US said the two were members of a hacking group known to be affiliated with the Chinese Ministry of State Security’s Tianjin State Security Bureau. Victim companies involved almost every US economic sector, including banking and finance, telecommunications, automotive, aviation, medical equipment, pharmaceutical technology, oil and gas exploration, and more.

Appointments and confirmations — Jonathan Plutznik is the new Chairman of Fannie Mae’s board of directors, succeeding Egbert Perry, who steps down after ten years on the board. Comptroller of the Currency Joseph Otting will serve as Acting Director of the Federal Housing Finance Agency after Mel Watt leaves that position on January 6, pending the confirmation of Mark Calabria to the office. FHA Commissioner Brian Montgomery will serve as Acting Deputy Secretary of Housing and Urban Development after Pam Patenaude departs next month.

Coming up in Washington:

When it comes to the shutdown, your guess is as good as ours. The House has not adjourned sine die.

January 3: Members of the U.S. House of Representatives and U.S. Senate will be sworn in for the 116th Congress. No votes are scheduled in either house until January 8.

The Ellis Insight. Jim Ellis reports on political news:

President

Debates:  The Democratic National Committee has already announced their plan for the presidential debate series coming in 2019 and 2020. The program will feature a dozen candidate debates, six in mid to late 2019, with the remaining forums to be scheduled before the key 2020 primaries.

Changing the Republicans’ approach of 2016 where they divided a large candidate field by poll standing, relegating the weakest candidates to their own debate that quickly was coined a “junior varsity” assembly, DNC chairman Tom Perez said that the “double-header” term would be a better description of their format. Each city hosting a debate will have programs on successive nights. The fields will be determined through drawing lots to determine which candidates will appear on the first night, and who would participate on the second evening.

The 2019 debates will precede the early primaries and caucuses and could possibly include California because the state’s early voting process will begin simultaneously with the Iowa Caucus and New Hampshire primary.

South Carolina:  Though South Carolina hosts one of the first four nominating events within the presidential cycle, commonly known as the “First in the South” primary, the Republicans may not schedule a 2020 version.

Doing so would not be unprecedented. The state Republican Party followed a similar course in 2004 to ensure that President George W. Bush had no impediment to obtaining unified support from the South Carolina delegation. Because of President Trump’s demonstrated strength in this state, party leaders are considering again following such a course. In any event, the Democratic primary will definitely be held and likely scheduled for February 29th.

Pete Buttigieg:  South Bend, IN Mayor Pete Buttigieg (D) announced that he will not seek re-election to a third term and is expected to join the presidential campaign sometime early next year. Mr. Buttigieg, who is openly gay, will bank on strong support from the LGBT community and its allies as he builds a base within the Democratic Party. Though officially mum about running for President, he is already heading to Iowa for speaking appearances this coming weekend.

Bernie Sanders:  The Democracy for Action organization surveyed what they claim are 94,000 self-identified progressives asking their preference for the 2020 Democratic presidential nomination. As was the case in 2016, the most liberal faction of the Democratic Party is again lining up behind Vermont Senator Bernie Sanders. In this new survey, he captured 36% support.

Again falling far behind, as she has already done in other polls, Massachusetts Senator Elizabeth Warren attracts only 8%, falling to single digits even within a group where she should draw strong support. In second position is former Vice President Joe Biden followed by Rep. Beto O’Rourke (D-TX). The two captured 15 and 12%, respectively.

Senate

Colorado:  Sen. Cory Gardner (R), possibly the most vulnerable Republican Senator standing for election in 2020 because of his state’s recent leftward electoral lurch, has drawn a second Democratic challenger. Former state House Speaker Andrew Romanoff filed a 2020 US Senate campaign committee late last week, indicating that he intends to become a candidate. Previously, the executive director of the Colorado Statewide Parent Coalition, Lorena Garcia, announced her candidacy for the Democratic nomination.

Others, such as Rep. Ed Perlmutter (D-Golden), former state Treasurer and ex-gubernatorial candidate Cary Kennedy, and ex-state Senator and 2018 gubernatorial candidate Mike Johnston are all viewed as possible Democratic Senatorial candidates.

Iowa:  Democratic leaders nationally and in Iowa are making it clear that they would like to recruit former Governor and US Agriculture Secretary Tom Vilsack (D) into the Senate race in order to challenge first-term incumbent Joni Ernst (R). The former Governor and cabinet secretary, however, was vague when asked about his intentions, if not incomprehensible.

As reported in many places, Mr. Vilsack responded that, “the door’s not open, closed, shut. I don’t even know where the door is.”  It appears apparent that Mr. Vilsack, who was last on the Iowa ballot in 2002, is less than committed to making another statewide run.

Kansas:  Sen. Pat Roberts (R), at 82 years of age and a clear retirement prospect particularly after a difficult 2014 re-election campaign, is already drawing a probable 2020 Democratic challenger. Former US Attorney Barry Grissom (D) again reiterated that he is seriously considering entering the Senate campaign in the next cycle. Sen. Roberts has not yet committed to seeking re-election.

Tennessee:  Sen. Lamar Alexander (R) released a statement this week announcing that he does not intend to seek re-election to a fourth term in 2020. Prior to being elected in 2002, Mr. Alexander had served as US Education Secretary under President George H.W. Bush, and as Tennessee Governor for two terms. He is the only person in Tennessee history who served as both Governor and US Senator.

The Senate opening will ignite a large field of candidates seeking the office, particularly on the Republican side. Moves will soon be made, so this story will continue to develop. The Tennessee nominating primaries won’t be held until the first week of August in 2020.

House

CA-52:  Four-term Rep. Scott Peters (D-San Diego) has officially formed an exploratory committee to test his viability in the open 2020 Mayor’s race. Before being elected to Congress, Mr. Peters was President of the San Diego City Council. The Congressman said he will decide about running for the city post in the “next few months.”  He can expect major competition from both Republicans and Democrats as a number of strong candidates are expected to vie for the office. Incumbent Mayor Kevin Faulconer (R) is ineligible to seek a third term.

ME-2:  After losing his constitutional federal lawsuit to strike down Maine’s instant run-off system, known as Ranked Choice Voting, Rep. Bruce Poliquin (R-Oakland/Bangor) has ended the full recount he requested of last month’s vote. The recount process was about half complete, and no significant change was discovered.

Mr. Poliquin lost his initial attempt at overturning Maine’s Ranked Choice Voting system in federal court but has now decided to appeal the lower court decision. He argues that the RCV, which gives more votes to people whose original candidates finish in the second tier, is unconstitutional. The Maine state Supreme Court has already ruled the system as unconstitutional for state races, but they have no jurisdiction over federal elections.

NE-2:  2018 Democratic nominee Kara Eastman, who held Rep. Don Bacon (R-Papillon/Omaha) to a 51-49% victory margin, says she will run again in the next election cycle. Ms. Eastman upset former US Representative and ex-state Senator Brad Ashford (D-Omaha) in the 2018 Democratic primary to advance into the general election.

Though Mr. Ashford is an unlikely 2020 candidate, his wife, Ann Ferlic Ashford, confirms that she is seriously considering entering the race. Should this occur, a re-match of sorts would be decided before the main rerun is even held. Nebraska’s 2nd District is politically marginal, so we can expect this contest to again be competitive.

NM-2:  New Mexico state Rep. Yvette Herrell (R-Alamogordo) looks to be taking steps to seek a re-match against the woman who defeated her 51-49% in November, attorney and now Rep-Elect Xochitl Torres-Small (D). Though Ms. Herrell is still considering filing a lawsuit over potential voting irregularities in Dona Ana County, she is “not ruling out” another congressional run in 2020.

Outgoing Rep. Steve Pearce (R-Hobbs), who just lost the Governor’s race but was subsequently elected as the New Mexico Republican Party chairman, is also not closing the door on a second comeback for the seat he vacated to run statewide in both 2008 and 2018.

NC-9:  It is now a virtual certainty that North Carolina’s 9th District will begin the new Congress as a vacant seat pending a new election. The North Carolina State Board of Elections postponed their December 21st meeting to January 11th, meaning the issue of officially certifying Republican Mark Harris’ apparent 905 vote victory will not be finally decided until almost two weeks after the new congressional session begins.

The meeting, however, is basically a formality. All sides are calling for a new election, which will almost certainly be ordered at the next BoE meeting.  A new law is likely to be enacted that will open the impending special primary election to all individuals meaning Mr. Harris may not even be re-nominated. The accusations of voter fraud surrounding his lead have severely damaged his image, therefore he would have a very difficult time of winning the seat in the special. Republicans will likely move forward with a new candidate, while Democrats are almost certain to coalesce behind their 2018 nominee, businessman Dan McCready.

The special election will likely be scheduled sometime in March. A run-off will occur if a leading party primary candidate falls under 40%.

SC-1:  Late this week, Beaufort County Councilman Mike Covert (R) confirmed that he is considering running for the 1st Congressional District seat that Democrat Joe Cunningham (D-Charleston) wrestled away from the Republicans last month.

State Rep. Katie Arrington (R), who lost to Cunningham after denying Rep. Mark Sanford (R-Charleston) re-nomination and was then involved in a serious automobile accident that landed her in the hospital for an extended stay, is likely to run again and Mr. Covert was already drawing a distinction between he and the 2018 nominee over the important off-shore oil drilling issue that was a large reason for Cunningham’s upset victory. Additionally, Rep. Sanford has yet to confirm or deny any interest in running again.

TN-5:  Immediately quelling some very early retirement rumors, Rep. Jim Cooper (D-Nashville) announced that he is definitely running for re-election in 2020. Mr. Cooper was elected to the 5th District in 2002, when then-incumbent Bob Clement (D-Nashville) ran unsuccessfully for Senate.

Governor

Kentucky:  Another Democrat is soon expected to enter the campaign against first-term Gov. Matt Bevin (R). Former state Auditor Adam Edelen has formed an exploratory committee. If he moves forward, Mr. Edelen will join Attorney General Andy Beshear and state House Minority Leader Rocky Adkins (D-Sandy Hook) as official candidates.

Mason-Dixon Polling & Strategies released the first Kentucky gubernatorial election poll for the coming cycle, and it does not provide Gov. Matt Bevin (R) with good news. The poll was taken over the December 12-15 period, and interviewed 625 Kentucky likely gubernatorial campaign voters.

According to the results, Gov. Bevin would trail Attorney General Andy Beshear, 48-40%, and even falls one point behind little known state House Minority Leader Rocky Adkins (D-Sandy Hook), 42-41%. Though many incumbents have rebounded from numbers such as these, it appears Mr. Bevin has his work cut out for him if he is to win a second term next year.

Louisiana:  Speculation is becoming rampant about the 2019 gubernatorial elections. Two new names have surfaced as potential Louisiana candidates, former US Rep. Charles Boustany (R-Lafayette) and Public Service Commissioner Eric Skrmetta (R).

The field begun taking shape once US Sen. John Kennedy (R) announced that he would not challenge Gov. John Bel Edwards (D) next year. Currently in the race are US Rep. Ralph Abraham (R-Alto/Monroe) and GOP developer Eddie Rispone. Attorney General Jeff Landry (R) is another potential candidate. Plenty of time for decisions remains, however. The candidate filing deadline is not until August 8th for the October 12th jungle primary, followed by a November 16th run-off if no one obtains majority support.