A Divided Congress: What It Means for Financial Services

Nov 7, 2018News

A Divided Congress: What It Means for Financial Services


On November 6, 2018, an increasingly polarized electorate voted for a divided Congress. Democrats took control of the House while Republicans maintained a majority in the Senate. Congressional insiders argue that although this will make it difficult for Congress to pass major legislation in financial services over the next two years, Congress will be far from inactive.

Congressional leadership will begin officially announcing committee assignments over the next several weeks. For now, it is expected that Senators Mike Crapo (R-ID) and Sherrod Brown (D-OH) will resume their posts as chairman and ranking member, respectively, of the Senate Banking Committee.

In contrast, the House Financial Services Committee will see major changes. Representative Maxine Waters (D-CA-43) is expected to take the gavel from Rep. Jeb Hensarling (R-TX-5) and Rep. Patrick McHenry (R-NC-10) is expected to become the committee’s ranking member.

Rep. Waters has served in Congress since the 1990s and has a mixed record in financial services. In the past, she has referred to bankers as “gangsters” and threatened to tax them “out of business.” More recently, Rep. Waters voted against a financial services deregulation bill (S.2155) that became law last May, despite it gaining some support from her Democratic colleagues.

At the same time, Rep. Waters has long-standing relationships with many in the financial services sector. “You have to think about the personalities here too,” said Thomas Brown, a partner in Paul Hastings LLP. “Rep. Waters is a well-known quantity within the financial services world. She has the issues that she’s passionate about, but she’s also been supportive of industry and is respected as somebody you can work with — if not to support, at least to not vocally oppose initiatives that are supportive of a particular industry objective.”


So what should the financial services sector expect from Rep. Waters?


Many expect more subpoenas and more investigations as oversight becomes more important than legislation. “We expect Democrats will use control of the House to investigate the President and his business empire,” Jaret Seiberg, an analyst at Cowen Washington Research Group, told the American Banker on Monday. “This is less about impeachment and more about damaging the president for 2020.”

Another likely target of Rep. Waters will be Mick Mulvaney, acting director of the Consumer Financial Protection Bureau (CFPB). Rep. Waters introduced the “Consumer First Act” in October, which she claimed, “would reverse the harmful changes the Trump Administration has imposed on the Consumer Bureau by restoring the agency’s supervisory and enforcement powers and increasing the transparency and accountability needed for the agency to carry out its important mission.”

The Financial Services Committee led by Rep. Waters is also expected to review federal regulators’ plans to overhaul the Community Reinvestment Act (CRA). Rep. Waters has previously said, “[The] unilateral decision to reopen the CRA by the Office of the Comptroller of the Currency (OCC) is of great concern given that the agency has recently taken other steps on its own – without coordinating with other regulators or seeking public input – to relax its enforcement of the CRA, including by reducing the frequency of big bank exams and easing the consequences of violating fair lending laws.”

Less likely but still possible, Rep. Waters may look to pass legislation that would undo the 2015 Second Circuit decision in Madden v. Midland Funding, according to Aaron Cutler, partner at Hogan Lovells LLP. In this controversial case, a bank sold an uncollected credit card debt to a third party, who attempted to continue charging an interest rate of 27% on the amount owed – the same rate previously charged by the bank creditor. The defendant claimed that Midland Funding’s attempt to charge 27% violated New York state’s usury limit of 25%. The court ultimately determined that the rate exporting permission for banks under the National Bank Act did not extend to third-party purchasers of debt. Previous legislation to undo this ruling has garnered some bipartisan support earlier this year, but is also heavily opposed by consumer advocacy groups.

Although Rep. Waters may go after big banks and federal regulators during hearings, she may be open to passing regulatory relief for smaller community banks. “Maxine Waters’ key opposition was for relief that related to the largest financial institutions,” said Paul Merski, executive vice president for congressional relations and strategy at the Independent Community Bankers of America. “She was not opposed to very specific community bank regulatory relief. Banks of $50 billion and under could continue to see her support for regulatory relief for banks that are serving smaller communities.”

In the end, a Democratic-controlled House Financial Services Committee is likely to hold more frequent and more contentious hearings with federal regulators and large financial institutions, though it will likely have little impact. Although the House may also pass legislation that would negatively impact the financial services sector, it is unlikely to get past a Republican-controlled Senate.  

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