WASHINGTON — The House Financial Services Committee continued its two-day vote of 14 financial reform bills, approving measures on Wednesday to revamp the Federal Reserve, exempt certain swaps transactions from Dodd-Frank Act requirements and block lending rules for auto dealerships.
The panel debated nine bills on Tuesday and five on Wednesday, with some far more controversial than others. The debate on Wednesday centered on these other pieces of legislation:
The most important bill passed on Wednesday — and arguably the most important of the 14 bills considered this week — was a Fed reform bill offered by Rep. Bill Huizenga, R-Mich. The legislation, approved 33 to 25, would make sweeping changes to the central bank's development of interest rate policy, revamp the membership of the Federal Open Market Committee and place greater restrictions on the Fed's emergency lending powers, among other changes.
"It is imperative that the Fed adapts from its opaque structure and become more transparent and accountable to everyday Americans," Huizenga said. "We need to modify the Federal Reserve System and bring it into the 21st century."
The bill would require the Fed to adopt a rule for setting its monetary policy — a measure that Fed Chair Janet Yellen has vehemently opposed — and mandate that the Fed compare it to the so-called Taylor rule and account for any discrepancies.
The Taylor Rule is a formula that generates interest rates based on inflation trends and GDP growth as compared to historical trends. The bill would also allow the House Financial Services Committee or Senate Banking Committee to instruct the Government Accountability Office to audit the Fed's conduct of monetary policy if its rule "does not meet the statute's requirements for a valid rule."
Huizenga's bill would curb — but not fully eliminate — the Fed's emergency lending powers by raising the legal basis for it to circumstances where the central banks sees "unusual and exigent circumstances that pose a threat to the financial stability of the United States," rather than the existing standard of "unusual and exigent circumstances." Emergency lending would also have to be approved by 9 of the 12 regional Fed bank presidents in addition to 5 of the 7 Fed board governors to go into effect. The bill would also bar nonfinancial institutions from receiving emergency lending.
Additionally, the legislation would require the chairman of the Fed to appear before both the House and Senate quarterly rather than semi-annually; disclose all Fed staff salaries that exceed the GS-15 pay scale; subject all international agreements to a public notice-and-comment period; and require cost-benefit analyses on all future rules.
The New York Fed's permanent seat on the FOMC would also be eliminated, instead allowing the president of each regional Fed bank to serve on the committee every other year. The bill would also require the GAO to audit the Fed annually — another measure that Yellen has repeatedly opposed.
Rep. Gwen Moore, R-Wis., spoke for many other Democrats in criticizing the bill as an effort to expand Congress' control over an independent institution for purely political reasons.
"These are not audits based on an accounting audit, to which the Fed is subjected rigorously from outside sources," Moore said. "This is a policy audit, which is just another way to inject politics into monetary policy."
Two amendments to the bill were adopted. The first, offered by Rep. Dennis Heck, D-Wash., would require the Fed to compile data on industrial production related to the Export-Import Bank as part of its regular economic assessments. The second, offered by Rep. Maxine Waters, D-Calif., added language into the Federal Reserve Act that would change considerations for membership of the Boards of Directors of regional Fed banks to include "consumers, and traditionally underserved communities and populations." The amendment was approved by voice vote.
Another amendment by Rep. Carolyn Maloney, D-N.Y., would have struck a provision included in the transportation bill being voted on in the Senate this week. That measure would cut the Fed's dividend to member banks from 6% to 1.5%, with the balance going to fund the highway trust fund. Maloney withdrew the amendment based on an agreement with Huizenga to hold hearings on the dividend provision later in the fall. Huizenga said he was "wary" of the provision and wanted to analyze it further.
The full House may well take up Huizenga's bill, but its future beyond the lower chamber is unclear. Many of the aspects of the bill, such as the Audit the Fed and Taylor rule provisions, are similar to those in a broad financial reform bill introduced by Senate Banking Committee Chairman Richard Shelby, R-Ala. But that bill's future in the Senate is also far from certain, particularly because President Obama would almost certainly veto the bills.
CFPB Indirect Auto Lending
The committee also passed a bill 47 to 10 that would rescind the Consumer Financial Protection Bureau's 2013 guidance on indirect auto lending, which says lenders could be cited for discrimination if their partnering dealerships are charging higher loan rates to minorities.
In addition to rescinding the guidance, the bill would require the CFPB to issue a public notice-and-comment period for any future guidance on indirect auto lending; publicize any data and methodologies used to justify such a guidance, consult with the Fed, Federal Trade Commission, and Department of Justice; and to "conduct a study on the costs and impacts of such guidance to consumers and women-owned, minority-owned, and small businesses."
Rep. Roger Williams, R-Texas, one of the 126 cosponsors of the bill in the House and an auto dealer, said that the suggestion that dealerships would discriminate against customers of color is "insulting."
"In a 2013 press release by [CFPB Director Richard] Cordray, the bureau noted that consumers 'should not have to pay more for a car loan simply because of their race,'" Williams said. "As someone who has sold cars for 44 years, the comments by Director Cordray are insulting, and they have zero evidence to support them."
Rep. David Scott, D-Ga. — also a cosponsor of the bill — said that the CFPB's guidance paints auto lenders and dealerships with an unflattering brush by presuming racial discrimination. Auto dealerships were among the first to integrate their workforces and auto dealerships were among the first and most successful black-owned businesses in the country, Scott said.
"The CFPB has done the dealers a massive injustice that this bill will correct," Scott said. "When you get into this area of accusing someone of racial discrimination, that is a serious indictment, and no industry deserves that kind of treatment, and certainly not the auto dealers."
But other Democrats were not so easily convinced. Waters said that anecdotal evidence from the fathers, uncles and friends of lawmakers aside, the statistical proof shows that auto lenders have routinely charged minorities higher prices for the same or inferior credit products to buy cars than white borrowers.
"It's not about taking on small dealers or dealers like your father's or your business," Waters said, speaking to Williams. "This is about an industry that for far too long has had the kind of operation that allows them to mark up [cars], and have targeted minority communities, and it has been proven."
Debate on the measure wandered substantially into broader concerns about racial discrimination in general (and at the CFPB in particular) to questions of due process and whether CFPB is competent to investigate anything.
Committee Chairman Jeb Hensarling, R-Texas, closed the sprawling debate by saying the matter at hand is due process, and that the CFPB has wrongly circumvented an explicit exemption for auto dealers in Dodd-Frank by backdoor means. The agency should spend more of its energy addressing discrimination complaints within its own ranks than seeking them at auto dealerships, where they may or may not exist, Hensarling said.
"American citizens have been denied their due process by this attempted non-rulemaking rule by the CFPB," Hensarling said. "I find it somewhat ironic again that an institution where we have heard dramatic testimony of actual discrimination based on gender based on color, that we are somehow now entrusting this institution to be the forefront of civil rights."
The bill's bipartisan support notwithstanding, Senate Democrats and the president have resisted all legislative efforts to rein in or otherwise steer the CFPB, making it unlikely this legislation will ultimately be enacted.
Inter-Affiliate Swaps Bill
The panel approved a bill 57 to 0 by Rep. Gwen Moore, D-Mo., that would explicitly exempt inter-affiliate swaps — swaps that are traded between affiliates of the same company — from most of the reporting and clearing requirements imposed on swaps by the Securities and Exchange Commission and Commodity Futures Trading Commission, so long as the company is an "end user".
Title VII of Dodd-Frank laid out an elaborate regulatory structure for the previously unregulated swaps market, and one of the important changes was to require that certain kinds of swaps — such as interest rate and credit default swaps — be centrally cleared. The law also required companies with large swaps portfolios or dealing businesses to register as swap dealers or major swap participants if their nominal swap dealing asset value exceeded $8 billion per year. Swaps transactions also have to be recorded at central "swap data repositories" for analysis by regulators and, ultimately, the public.
Dodd-Frank included an "end user" exemption from all of those requirements, deciding that companies using swaps to hedge their exposures to fluctuations in certain commodity markets like wheat, oil or gas ought not to be subject to added costs just to conduct normal business. Moore's bill, she said, codifies the practice of extending that exemption to affiliates and to swaps dealt between affiliates into law. The bill was offered and approved without debate.
"I believe we are at that magic point where all parties are satisfied," Moore said.
Moore offered a manager's amendment to her bill that more explicitly restricts the exemption to non-financial companies or their affiliates, which was accepted without objection.
Critics of Dodd-Frank's swaps market reforms have complained about the effect that the law has on the ability of end users to make legitimate hedges, and various popular attempts have been made to more strongly codify their exemption from the law. An identical version of Moore's bill passed the 113th Congress, and similar "end-user exemption" bills have been offered in both chambers before. Of all efforts to reform Dodd-Frank, the end user exemption issue is probably the most innocuous, because it changes no policy but rather solidifies existing policy in law.
Final Votes on Most Important Bills
Finally, the panel took roll call votes on legislation it debated on Tuesday. Here are their tallies:
- A bill by Rep. Blaine Luekemeyer to stop banking regulators from assisting the Justice Department's "Operation Choke Point" was approved 35 to 19.
- A bill by Rep. Andy Barr, R-Ky., to give loans that are held in portfolio automatic "Qualified Mortgage" status was passed 38 to 18. An amendment pushed by Waters to place an asset limit on the exemption was defeated 34 to 21.
- Legislation by Rep. French Hill, R-Ark., to delay enforcement of new mortgage disclosures until Feb. 1 was approved 45 to 13.