Talking Federal Home Loan Banks; CFPB Plan Furthers Tech Anger at Biden Regulators; SEC's Crypto Accounting Workaround
Capitol Account: Free Weekly Edition
This was one of those weeks where the wild U.S. political news made the small world of financial regulation feel, well, small. But at Capitol Account we kept our heads down — and found a surprising amount of things to cover.
Of course, we looked at GOP vice presidential nominee J.D. Vance’s interesting and counter-intuitive record on financial policy. It ranges from bashing Wall Street and Gary Gensler to loving crypto (as well as FTC chief Lina Khan). And with Silicon Valley billionaires rushing to endorse Donald Trump, in no small part over frustration with the SEC chair’s approach to crypto, we noted that it was an interesting time for the CFPB to put out a rule proposal on earned wage access. It provoked similar ire among Democrats in the fintech world.
Outside the political realm, we dug into the wonky and little-known process that big banks are using at the SEC to circumvent its controversial crypto accounting guidance. We also checked in on the Capital One-Discover megamerger, and explained how the company’s new $265 billion “community benefit” plan isn’t greasing the skids for regulatory approval as much as the banks might hope. For our Friday interview, we sat down with the Washington advocate for the Federal Home Loan Banks. He has a lot on his plate.
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Friday Q and A: The Federal Home Loan Banks have spent much of their nine decades of existence largely under the radar in Washington. But that’s changed substantially over the past two years.
Most notably, the FHFA, the federal overseer of the system, has been conducting an extensive review of their operations. It concluded in a November report that the banks have strayed from “serving their public purpose” of supporting housing and community development. Now the regulator is looking to make some fixes.
Scrutiny of the FHLBs on Capitol Hill has also grown in the wake of the regional banking crisis. Lawmakers are demanding answers about why they were lending billions of dollars to firms on the brink of collapse, potentially putting taxpayers at risk. And there have been pointed questions about how helping out Silicon Valley Bank, which catered to wealthy tech entrepreneurs and their businesses, can be squared with the system’s affordable housing mission.
We sat down this week with Ryan Donovan, who took the helm of the Council of Federal Home Loan Banks trade association in September 2022 – just in time to be really busy. A former head of advocacy at the Credit Union National Association, Donovan started his career working for his hometown congressman, Richard Gephardt. He later was an aide for Rep. Brad Sherman on banking issues. Read on for Donovan’s thoughts on the FHFA review, last year’s bank turmoil and why he’s warning those looking to make changes to the FHLB system that “if you break it, you buy it.”
What follows is our (lightly edited and condensed) conversation.
Capitol Account: You spent many years lobbying for credit unions. Was this job a big change?
Ryan Donovan: What I liked about the home loan bank system was that it’s just like the credit union system. It's a system of cooperatives. They're in the financial services space. They're mission driven – and they're doing great work. Those were things that I had advocated for in the past, and I knew I could do here.
CA: Step back a bit, and tell us what the home loan banks do.
RD: Our members are banks, credit unions, insurance companies, [Community Development Financial Institutions]. Our mission, if you had to put it in one sentence, is to provide liquidity to our members to support housing and community development.
CA: Liquidity is another word that not everyone understands.
RD: It's the lifeblood of financial institutions. What we try to do is give them the ability to take the assets that are on their books – in our case mostly housing-related assets, mortgages, mortgage backed securities – and they pledge them to us as collateral for loans. So that they've got liquid resources to make additional loans.
CA: Not unlike what Fannie Mae and Freddie Mac do?
RD: We're set up to do it differently. We do have an asset acquisition program, where we will buy mortgages from our members. But the primary book of business is…making loans to our members.
CA: Fannie and Freddie are, of course, political lightning rods. FHLBs aren’t close to that, but there has been a lot more attention lately.
RD: This has been a sleepy area. The home loan banks haven't had a history of telling their story, raising their head above the water line. But over the last two years, we've done that. We've really had to do that in the wake of FHFA's review.
A: The FHFA effort is very focused on affordable housing, and its report has suggested some sweeping changes. What do you think?
RD: Certainly one of the themes raised during the review was, what's our nexus to housing? Today, the nexus to housing is in the collateral that we can accept. It's what Congress has said we're allowed to accept. There are voices out there that think that that should mean something else. That's what FHFA is exploring. From our perspective, the world is the way that it is today. If it's going to change, Congress ought to be the entity that changes it. Not FHFA.
CA: Toward that end, you recently responded to the agency’s request for public comment on the FHLB’s mission, and highlighted the recent Loper Bright Supreme Court decision that limited agencies’ leeway in exercising their power. Is that a warning?
RD: It was about 200 words of a 6,000 word letter. Frankly, I think it would've been malpractice not to. It's out there, and it needs to be recognized.
CA: What’s the bigger point you want to make?
RD: Through that comment letter, and I think through our other advocacy, we're trying to articulate: Hey, this is where we think the box is. We're operating squarely within that box. And if the shape of the box has to change, Congress ought to be the one to change it.
CA: What are you most concerned about in the FHFA review?
RD: I'll be honest, we do have a lot of concerns…But more generally, anything any government agency does – whether it's FHFA, the Fed, Treasury – that makes it more complicated for our members to access the home loan banks, reduces our value proposition. Because it's harder for us to lend.
CA: It sounds like your general position is, if it ain’t broke, don’t fix it.
RD: Yes, if it's not broken, don't fix it. But if you break it, you buy it. That's what the real concern is. That's why we gave a constructive response to the [agency’s request for input]...I don't think policy makers want to be responsible for breaking it…(Friday)
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Tech Angst: The CFPB proposed to apply loan-disclosure requirements to “earned wage access” products, immediately drawing condemnation and legal threats from the fintech industry. It’s the latest in a string of Biden-era regulatory policies directed at nascent companies that, cumulatively, are eroding support for Democrats in the tech sector, long a stronghold for the party.
While Elon Musk’s Trump endorsement shocked no one, it was notable to see the co-founders of venture capital goliath Andreessen Horowitz this week release a 90-minute podcast screed against Team Biden’s approach to new technologies. Explaining their backing of the former president, the VC firm’s founders Marc Andreesen and Ben Horowitz described themselves as driven into the GOP’s arms by a series of Washington battles in recent years. Their Exhibit A: Gensler’s crusade against digital assets.
The CFPB’s move is causing similar exasperation in the fintech sector, which has had its share of frustrations with the FDIC and other regulators, as well.
“This is the final straw for me,” says Phil Goldfeder, the CEO of the American Fintech Council and a former Democratic New York State Assembly member from Queens. “More and more, we’re seeing an ideological drive to regulate certain products within financial services that, while in the name of consumer protection, are actually doing more harm than good.”
Gensler and CFPB chief Rohit Chopra, of course, deny that they are hostile to start-ups. Instead, they stress that regulatory guardrails facilitate innovation – not halt it. Chopra has been particularly proud of the bureau’s coming “open banking” rules, expressing hope that they will boost small companies by allowing consumers to more easily switch providers across a range of financial services.
In the case of earned wage access, the CFPB was faced with how to regulate a growing business that allows employees to get some of their money before payday (typically for a fee or a “tip”). The bureau concluded that under current industry practices, it’s hard for consumers to understand the full scope of costs they face. The proposed rule would require Truth in Lending Act disclosures, which typically include borrowing costs and finance charges.
The industry, however, sees a law written for lending as a poor fit for its advances, which it argues are more akin to an ATM transaction. Customers, the firms emphasize, are accessing money they’ve already earned. The CFPB’s rule could raise companies’ compliance costs and threaten their growth with little consumer benefit, representatives said…(Thursday)
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Crypto Workaround: The banking industry-led campaign to overturn the SEC’s controversial accounting guidance on holding crypto assets seemed to be dealt a fatal blow last week, when the House was unable to revive a bill nullifying the policy. But unbeknownst to many, a Plan B was already in the works.
The agency, it turns out, has been in discussions for months with a handful of large lenders about how to get around the dictates laid out in its staff accounting bulletin, known as SAB 121. The talks have already cleared the way for some banks and brokers to avoid the requirements. However, many details remain a mystery – including the names of the firms – shrouded by a byzantine and non-public system employed by the SEC’s chief accountant’s office. It’s known internally as the “no-object process.”
The saga of how banks are getting out of SAB 121 is complicated, but has big implications for firms that want to custody crypto. The bulletin calls for companies that hold tokens to keep them on the balance sheet as an asset and a liability. Banks have been especially upset about the accounting treatment because it means that they need to keep more capital – a predicament that makes it too costly for them to get into the business. With the recent creation of bitcoin ETFs and the expected launch of ether products in the coming weeks, it’s a growth area. But established custodian banks have been kept out.
Not surprisingly, Wall Street lobbied lawmakers for a fix. Earlier this year the House and Senate passed a Congressional Review Act resolution nullifying the policy, but President Joe Biden vetoed it. Last week, the House was unable to muster a two-thirds majority to override the veto – making the industry’s play at the SEC even more consequential.
Some hints about the closed-door negotiations emerged during last week’s floor debate. Maxine Waters, who was leading the Democrats’ effort to uphold the veto, argued that the entire issue was “moot.” But she was vague as to why.
“One special interest group representing large custody banks has provided the SEC with targeted modifications to SAB 121,” Waters said. “I understand that the SEC may be close to reaching an agreement on these modifications, which would ensure that well-regulated entities, like custody banks, can offer crypto custody services consistent with SAB 121.”
The announcement seemed to take Financial Services Chairman Patrick McHenry by surprise. “There is this rumor that has been going about, that there is this resolution at the SEC with a group of banks, and they are going to let certain banks custody digital assets in some deal that is being made,” he said. “I have no details of it.” The Republican asked Waters if there was “paper on this or any published accounts.”
She replied that the agency is “close to working out a deal” with a custody bank.
Sources say that Waters was more or less right when it comes to the big picture, but incorrect when she said that SAB 121 will be modified. It still stands. Instead, the firms that have gotten a nod from the chief accountant after proposing changes for how they will safeguard crypto assets.
Here’s how an SEC spokesperson explained it in a statement this week:
“Staff Accounting Bulletin 121’s disclosure and accounting guidance remains unchanged. Further, it is not the case – as has been reported – that the staff guidance creates ‘exceptions’ for certain entities that safeguard crypto assets. Rather, certain broker dealers and custody banks have sufficiently demonstrated to SEC staff that their fact patterns are different from those described in SAB 121, such as the ability to facilitate crypto asset transactions or safeguard custody crypto assets while addressing the risks and uncertainties identified in SAB 121. Importantly, this includes ensuring that customers maintain ownership of their assets even in the case of a resolution or bankruptcy. Under those circumstances, as long as their customers receive the same protection for the safeguarding of crypto assets as they do in custody arrangements, their balance sheet treatment is also the same as custody arrangements.”
If that sounds confusing, it is. But the upshot is that the SEC wants banks, in the event of a collapse that sends them into receivership, to be able to protect clients’ crypto just like they do cash, stocks and bonds. Each firm that has been meeting with the chief accountant’s office has offered its own plan for doing that – it involves creating a separate legal entity to hold the tokens, sources said. It also could include setting up a unique wallet for each customer…(Tuesday)
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