When Congress returns to session on today (September 5), regulatory and housing finance reform will be on the back burner as lawmakers scramble to tackle a host of other pressing financial issues.
Those include the need to raise the U.S. debt limit, pass a government budget, provide relief for victims of Hurricane Harvey, extend the national flood insurance program and begin the laborious process of tax reform.
While those issues are not top tier for financial institutions, they have a massive stake in all four. And the road to pass anything of substantive will almost certainly be bumpy.
“We are going to have brinksmanship, it is going to be dysfunctional,” said Ed Mills, a policy analyst at FBR Capital Markets. “We are going to get something done at the last minute.”
Below is a guide to what awaits Congress this fall.
Harvey and Flood Insurance
The catastrophic hurricane that hit Texas’ Gulf Coast late last month has already highlighted the need to reform the National Flood Insurance Program, which was $25 billion in debt before the storm hit. It is set to expire at the end of the month, forcing Congress to move quickly.
“If there is any silver lining out of a disaster like Harvey, it certainly illustrates that” Congress needs “to put partisanship and rhetoric aside and do what they were elected for and that was to enact policies that affect the American people,” said Jerry Howard, chief executive of the National Association of Home Builders.
So far, the House Financial Services and Senate Banking committees have taken different approaches to flood insurance reform. Financial Services Committee Chairman Jeb Hensarling has successfully passed a bill through his panel that is designed to encourage the development of a private market alternative to the federal program.
Senate Banking Committee Chairman Mike Crapo, R-Idaho, and Sen. Sherrod Brown, D-Ohio, have introduced a bill that is a more generic six-year extension of the current program. There are two other Senate proposals that garnered attention including one by Sens. Kirsten Gillibrand, D-N.Y., and Bill Cassidy, R-La., that would extend the National Flood Insurance Program funding for 10 years, and Sens. John Kennedy, R-La., and Robert Menendez, D-N.J., have introduced a different bill that would extend NFIP funding for six years and cap premium rate increases at 10%.
For now, Congress is likely to pass a temporary extension of the flood insurance program to give itself time to work out the bigger issues involved. Given the seriousness of Harvey, Congress will not leave the issue unaddressed.
“This puts in very stark terms how integral flood insurance coverage is to protecting individuals and the resiliency of communities,” said Anthony Cimino, senior vice president and head of government affairs at the Financial Services Roundtable. “You are going to see a lot more attention on it, and I do think that this really shows that there cannot be a lapse in the program.”
Given the differences between the two approaches, flood insurance is liable to take up much of the time of the banking committees, pushing back other issues like regulatory reform and the deciding a future for Fannie Mae and Freddie Mac.
“The committees of jurisdiction are going to have to do some real legislative work in the public limelight on flood insurance,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. “That is going to really dominate their work in the weeks ahead.”
The Debt Ceiling and the Budget
Arguably the most important issue pending before Congress is whether it will raise the debt limit. The government is expected to run out of borrowing authority on September 29. If Congress does not act before then, it could cause the U.S. to default on its debt — triggering a financial crisis.
Treasury Secretary Steven Mnuchin has called for a clean debt ceiling hike, but any increase in the ability to borrow will require 60 votes in the Senate, which means it will need support from Democrats as well as conservatives.
At the same time, lawmakers also must tackle funding for the government itself, which is due to expire on October 1. If policymakers cannot strike a deal, the government would shut down.
Mnuchin highlighted both issues during a CNBC interview on Thursday, and noted that the government needs to find a way to pay for funds to rebuild the destruction left by Harvey.
“We are going to have to go to Congress and get authorization to spend more because it is absolutely critical that we spend more to help” Texas in the aftermath of Harvey, Mnuchin said.
Harvey may actually improve the chances that Congress can solve these issues.
“From a congressional standpoint, there is some benefit in helping to advance some priority issues by using potential funding for Harvey as a pillar to get those things through,” said James Ballentine, chief lobbyist for the American Bankers Association.
One big question is whether President Trump will continue to call for funding for a border wall, a key plank in his presidential campaign which is opposed by Democrats. Before Harvey, Trump threatened to shut down the government if the border wall wasn’t funded.
But the hurricane has changed discussions on Capitol Hill.
“We are discussing funding for Texas’ shorelines instead of a border wall around Texas,” Boltansky said.
Ultimately, Congress is likely to punt the debt ceiling increase for another year, but observers say any budget extension would likely be short-term.
“I just don’t know how they get through all of the” work of moving a budget bill “in a matter of 12 days,” said Ryan Donovan, chief advocacy officer at the Credit Union National Association.
Michael Brown, an economist at Wells Fargo, also said Congress is likely to take a measured approach to Harvey-relief funding.
“While it is true supplemental funding will likely be needed, the size of that funding is unknown yet,” Brown said. He said more time is needed “to assess the magnitude of the damage and assess how much extra funding they will need.”
While many analysts believe Harvey will be attached to at least one of the must-pass measures, the specifics are still unclear. It could be part of a debt ceiling increase, a continuing resolution that provides government funding until December or all three could be included in one big package.
Analysts said that, while Harvey has reduced the risk of a government shutdown in the near term, a shutdown is still possible later in the year.
“The hurricane changes things on the margin, but not as dramatic as some folks would suggest,” Brown said. “We only have a 35% probability of a partial government shutdown at the first of October, but I am concerned about December omnibus negotiations. I am concerned about a possible government shutdown in December.”
Those negotiations are taking place against the backdrop of a big-ticket push by President Trump and Republican leaders to enact tax reform.
The last tax revamp occurred in 1986 after four years of work, but Republicans have been talking optimistically about completing the package this year. That appears unlikely.
“If you have a tight September and you are punting some of the must-do things to December,” tax reform will wait, Donovan said.
Republicans still plan to use a controversial legislative procedure called reconciliation to pass tax reform. The procedure means they can pass a bill with a simple majority, bypassing the need for Democratic support, but given the number of industries affected by tax reform, a bill will still be difficult to enact.
With the congressional committees responsible for banking law busy working on flood insurance and Congress broadly focused on government funding and tax reform, changes to Dodd-Frank are tertiary.
“All of 2017 has been a slow but steady narrowing of expectations from what was possible to what is probable,” Boltansky said.
Lobbyists for the industry still think Congress can enact some reforms.
“There are things that are critically important for the country that Congress has to tend to, and there are things that are critically important for customers and the community that we hope they will be able to tend to as well,” Ballentine said. “Folks have accused Congress of not being able to walk and chew gum at the same time; I think they can do both and certainly we think the banking issues fall into that mix.”
Donovan at the Credit Union National Association said what credit unions would like to see is “common-sense regulation” and “nuanced policy changes.”
“These things should be looked at from a policy perspective and not through a political perspective,” he said.
But liberal watchdog groups looking at the congressional calendar and the political climate think the industry and GOP’s push to roll back Dodd-Frank regulations faces an uphill climb.
“Anything that is more aspirational policy wise is certainly on the back burner,” said Lisa Gilbert, vice president of legislative affairs at Public Citizen. “It is harder for [Republicans and industry] to accomplish anything, but I think the bank lobby is powerful and well-moneyed, and until we see something is killed we will assume we have to defend it.”
Cimino at the Financial Services Roundtable said the industry will keep pushing.
“The issues we have been discussing on tax reform, debt ceiling, government funding tend to be macro issues that are being dealt with at a leadership level, being dealt with at the floor,” he said. “Reg reform is still very much part of the committee of jurisdiction, and that is where we are spending a lot of our time to advance our message there.”
This article was originally published in the American Banker.