How Trump’s budget affects CFPB, GSE fees, other banking priorities

Published
  • February 12 2018, 3:42pm EST
WASHINGTON — The Trump administration’s 2019 budget highlights the administration’s goal of reining in the post-crisis regulatory apparatus, with proposed cuts for several agencies including the Consumer Financial Protection Bureau.

The White House budget has been a mostly ceremonial document for much of the last 10 years, with Congress primarily relying on continuing resolutions to fund the government. This year’s budget is especially moot, since Congress passed and the president signed a deal last week that would fund the government through 2019.

But if the budget document allows President Trump to state where his priorities are, he made a point in his second budget — his first budget was released in mid-May of 2017 — of calling for reducing the various means by which financial regulators are funded.

The administration is proposing significant curbs to how the CFPB is funded, as well as further cuts to the Securities and Exchange Commission, and the Office of Financial Research.

Perhaps reflecting the influence of Mick Mulvaney, who is both the director of the Office of Management and Budget and acting director of the CFPB, the budget was especially critical of the consumer bureau. The agency’s brief history, the budget said, was “rife with examples of the poor financial and personnel management decisions.”

The 2019 budget proposal repeated the administration’s 2018 call to do away with grants for community development financial institutions, and also called for an end to special allotments for affordable housing made through the government-sponsored enterprises, although the budget also calls for doubling the GSEs’ guarantee fee tax. Meanwhile, the budget projects a net profit of $26 billion for the Federal Housing Administration over a three-year period.

The following are key takeaways of how the proposed budget would affect financial services policy.

How Trump’s budget affects CFPB, GSE fees, other bank priorities

WASHINGTON — The Trump administration’s 2019 budget highlights the administration’s goal of reining in the post-crisis regulatory apparatus, with proposed cuts for several agencies including the Consumer Financial Protection Bureau.

The White House budget has been a mostly ceremonial document for much of the last 10 years, with Congress primarily relying on continuing resolutions to fund the government. This year’s budget is especially moot, since Congress passed and the president signed a deal last week that would fund the government through 2019.

But if the budget document allows President Trump to state where his priorities are, he made a point in his second budget — his first budget was released in mid-May of 2017 — of calling for a reduction in the various means by which financial regulators are funded.

The administration is proposing significant curbs to how the CFPB is funded, as well as further cuts to the Securities and Exchange Commission, and the Office of Financial Research.

Perhaps reflecting the influence of Mick Mulvaney, who is both the director of the Office of Management and Budget and acting director of the CFPB, the budget was especially critical of the consumer bureau. The agency’s brief history, the budget said, was “rife with examples of the poor financial and personnel management decisions.”

The 2019 budget proposal repeated the administration’s 2018 call to do away with grants for community development financial institutions, and also called for an end to special allotments for affordable housing made through the government-sponsored enterprises, although the budget also calls for doubling the GSEs’ guarantee fee tax. Meanwhile, the budget projects a net profit of $26 billion for the Federal Housing Administration over a three-year period.

The following are key takeaways of how the proposed budget would affect financial services policy.

The budget would cap funding for CFPB, "an unaccountable bureaucracy"

Consistent with steps Mulvaney has already taken at the helm of the CFPB, the budget said Congress and the administration would embark on a broad restructuring of the agency to ensure it does not abuse the powers it was granted.

“To prevent actions that unduly burden the financial industry and limit consumer choice, the proposal restricts CFPB's broad enforcement authority over Federal consumer law,” the budget said. “These changes would allow CFPB to focus its efforts on enforcing enacted consumer protection laws and eliminate the functions that allowed the Agency to become an unaccountable bureaucracy with unchecked regulatory authority.”

The budget planned to cap the Federal Reserve’s transfers to the bureau in 2018 at $485 million — equivalent to its 2015 budget — and eliminate the transfers entirely by 2020. Acting CFPB Director Mick Mulvaney had already zeroed out the bureau’s request to the Fed for the second quarter of 2018.

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White House re-proposes cuts to CDFI funding

The president’s budget also eliminated funding for the Treasury’s Community Development Financial Institution program — a program meant to encourage financial investment in low- and moderate-income neighborhoods that are otherwise underserved by traditional banks.

The Trump administration’s 2018 budget also called for the elimination of most of the program, save for a $14 million administrative budget. The administration said that cutting the program would save $234 million from the FY17 enacted level and would not be missed, as the program was initially intended to “jump-start” an industry that is now “mature.”

“The CDFI Fund was created more than 20 years ago to jump-start a now mature industry,” the budget said. “In addition, private institutions should have ready access to the capital needed to extend credit and provide financial services to underserved communities.”

Like last year’s budget, the FY19 proposal would extend the CDFI Bond Guarantee Program, which allows CDFIs to issue bonds guaranteed by the Treasury, because it comes “at no cost to taxpayers” and “requires no credit subsidy.” Despite the president’s plan to gut the fund, Thanks in part to credit union advocacy efforts, Congress allocated $222 million to the fund in 2017, demonstrating its broad bipartisan support.

Doubling of the G-fee tax, affordable housing resources slashed

Trump’s budget calls for doubling the guarantee fee tax that Fannie Mae and Freddie Mac charge loan originators to 20 basis point from fiscal year 2019 to fiscal year 2021. Instead of letting the tax expire as planned in 2021, the budget seeks to extend it through 2023.

“This proposal would help to level the playing field for private lenders seeking to compete with the GSEs,” said a budget document which added that the higher guarantee fees would generate roughly $26 billion over the 10-year budget window.

By law, the Federal Housing Finance Agency forced Fannie and Freddie to begin charging an additional 10 basis points in guarantee fees in 2012. The intent of the tax was to help Congress pay for a tax cut at the time.

The g-fee tax was opposed by the mortgage industry at the time and its proposed expansion is likely to generate further protest.

Though the budget treats Fannie and Freddie as non-budgetary private entities, the government-sponsored enterprises have a $258 billion line of credit at the Treasury Department because they are in conservatorship. Under a 2012 agreement between the FHFA and Treasury, the GSEs send all their profits to Treasury. The deal was amended last year to allow Fannie and Freddie to hold $3 billion each in capital to protect against quarterly fluctuations in income.

Because of a tax cut bill signed at the end of last year, Fannie will need to tap Treasury for $4.7 billion as a result of a one-time charge related to tax-deferred assets, the budget said. Freddie will need to borrow $400 million from Treasury.

“Through December 31, 2017, the GSEs have paid a total of $278.8 billion in dividend payments to Treasury on the senior preferred stock. The Budget estimates additional dividend receipts of $184.7 billion from January 1, 2018, through 2028,” said a budget explanation document from the White House.

The budget proposal would also do away with The Housing Trust Fund, which is run by the Department of Housing and Urban Development and provides grants to states for affordable housing. The proposal would additionally zero out The Capital Magnet Fund, which is managed by the Treasury’s Community Development Financial Institutions Fund.

“The budget would devolve some affordable housing activities to state and local governments who are better positioned to comprehensively address the array of unique market challenges, local policies, and impediments that lead to housing affordability problems,” said the document, which added that the current systems is “fragmented” with “varying rules and regulations that create overlap and inefficiencies, as well as challenges to measuring collective performance.”

Elimination of SEC reserve

While the agency reserved its most aggressive comments for the CFPB — long-reviled as a rogue agency with excessive power by Republicans — the budget also called for less-visible changes to regulatory funding.

The budget asked Congress to eliminate the Securities and Exchange Commission’s reserve fund — paid for by user fees and intended to finance technological upgrades at the securities regulator — because it has “come to represent an extension of the Agency's regular appropriation rather than the emergency reserve it was intended to be.”

The fees would instead be diverted to the Treasury’s general fund for deficit reduction. House Financial Services Committee Chairman Jeb Hensarling, R-Texas, had included a provision to cut the fund in the Financial Choice Act, a bill to roll back several provisions of the Dodd-Frank Act.

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The budget proposes folding OFR into Treasury

The propriety of the appropriations process was also cited as the administration’s reason for asking Congress to fold the Office of Financial Research into the rest of the Treasury Department. At present, the OFR — the independent research arm of the Financial Stability Oversight Council — is funded through assessments on financial institutions with more than $50 billion in assets. The Treasury Department had said in its June 2017 regulatory blueprint that it preferred to fold the office into the Treasury's operations and budget.

“The budget proposes to impose appropriate congressional oversight of these functions by subjecting Council and OFR activities to the normal appropriations process,” the budget said. “The budget reflects continued reductions in OFR spending commensurate with the renewed fiscal discipline being applied across the Federal Government.”