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Cyber Security Galvanizes the 114th

Congress Makes the Most of First 12 Days in Session

Stuart Quinn    |    Housing Policy

  • The President’s budget has arrived in the 114th Congress, committee assignments are complete and the policy agenda continues to materialize with each passing week.
  • Cyber security remains the clear front-runner for actionable legislation in the new Congress as committees have conceded jurisdictional debates (for the mean time) and the dialogue to design effective national data breach legislation is underway.
  • The race against the next election cycle continues and February introduced forthcoming policy debates over tax reform and funding of the Highway Trust Fund
  • As expected, Housing and Urban Development faces harsh criticism on the Hill for the reduction in the upfront mortgage insurance premium.

Federal Housing Administration

The House Financial Services Committee inaugural oversight hearing lasted four and a half hours as Housing and Urban Development (HUD) Secretary Julian Castro came under scrutiny for recent FHA policy changes. The examination of the health of FHA’s mortgage mutual insurance fund (MMIF) is not a new tool with which Congress can bludgeon HUD, but recent adjustment to the upfront mortgage insurance premium paid by borrowers who take out FHA mortgages increased the hostilities. The mortgage insurance premium paid by borrowers contributes a stream of revenue to the fund, by reducing the premium, the agency has extended the duration of time it will take to meet their minimum capital reserve requirements. The statute states two percent reserves are required and the committee Chairman, Jeb Hensarling, demands that the capital reserve ratio comply with the letter of the law. The hearing proceedings were partisan, with Democrats applauding the adjustment and Republicans raising questions over the safety and soundness implications of the fund being under the statutory capital ratio.

Further criticism was aimed at HUD for what some representatives cited as inconsistent application of the False Claims Act applied to minor underwriting discrepancies for loan files submitted under FHA’s Direct Endorsement Program. There have been reports that FHA is close to modifying the instances in which the legal tool will be applied and an official announcement may come as early as the end of the month.  However, the issue is jurisdictionally tricky given that changes require agreement between both HUD and the Department of Justice. In order for lenders to begin the process of moving down the credit score bands for mortgage loans, more clear guidance is needed on when the risk associated with those loans is officially transferred. The treble charges pose uncertainty and have resulted in hesitancy of lenders due to inconsistent application and varying magnitude of penalties. A follow-up hearing on the Federal Housing Administration with independent witness testimony took place on February 26 before the Subcommittee on Housing and Insurance, while Secretary Castro made his budgetary case before the House Committee on Appropriations on February 25.

Tax Reform

The toxic nature of tax reform reared its head when the administration had to retreat from their proposal to terminate the “Qualified Tuition Plan,” or in IRS terminology, “529 Plans.” The program allows contributions to be made and the beneficiaries can then apply the funds to eligible education costs at universities without receiving a tax penalty on interest accrued. There was dissent among the administration’s own party in Congress and pressure from a number of trade groups, leading the White House to roll back their proposal. The whole process exemplifies the sensitivity to modifying any part of the tax code, let alone the enormity of overhaul.

A second toe in the water to measure the temperature of corporate tax reform came in the Administration’s budget proposal. The Administration proposed a onetime 14 percent tax on $2.1 trillion of corporate profits held abroad and there after a 19 percent minimum tax on foreign earnings. It should be mentioned that the President’s budget only serves as guiding recommendations, while Congress will largely determine the quantity and final routing of funds to appropriate agencies. Though both parties agree that the current tax framework allowing for companies to defer the tax when profits are not repatriated or brought back to the United States does not incentivize healthy domestic growth, politicians remain conflicted on the appropriate means to reach a policy resolution. The administration’s proposal earmarks the money raised from the proposed onetime 14 percent tax to be allocated to the Highway Trust Fund (HTF). The HTF temporary funding is estimated to expire in the middle of May. Due to the high-level consensus that the tax loophole should be shut and that the Highway Trust needs to be funded, the tenor of the more detailed debates will likely determine if the outlook for comprehensive corporate tax reform is attainable or illusory.

Alternative proposals for funding the HTF have included the prospect of raising the federal gas tax to partially fund the HTF. If the tax were to be increased, it would reduce the estimated opportunity savings consumers have been and likely will continue to experience from the drop in oil prices. As of mid-February the Energy Information Administration estimates the decline in oil price will equate to, on average, $750 less spent on oil per household in 20151.


Momentum continues to build behind establishing national data breach legislation. Over the previous year, hundreds of millions of records have been compromised. The day before a Senate hearing scheduled on the topic of data breach standards, Anthem, the second largest health insurer in the U.S., announced that their systems had been breached. There is active dialogue on both the House and Senate side to introduce legislation in the coming weeks. The two hearings hosted on the issue have allowed representatives to take stock of the key issues of contention. The probability of passage will likely hang on the strength of the preemption language in the legislation. The majority of testifying witnesses before both the Senate and House agreed that weak preemption language would not be satisfactory and lose support from enterprises operating across the United States. Soft preemption language would only establish a base line, allowing for states to overlay additional, stricter policies for data breach notifications. Effectively, the use of weak preemption language simply creates a 49th standard, rather than creating uniformity in compliance. The complexity of operating across all of the existing standards would persist without a strong preemption clause and remain burdensome to smaller operators.

The Administration has also been vocal on this issue and on February 13th, the President took action. Through an Executive Order, the President directed the Department of Homeland Security to fund the creation of a nonprofit that will develop voluntary standards based on best practices of information sharing and analysis between the private and government sectors. However, the Executive Order does not provide a liability protection for information shared, which would require Congressional action. A number of active information sharing and analysis centers operate today within different industries; however, there continues to be a push from both the federal and local governments to increase enrollment of companies participating.

At the state level, the New York Department of Financial Services is also looking to proceed with a number of initiatives to ensure that financial services companies’ security meets their standards. In a report titled: “Cyber Security in the Insurance Sector,” the department indicated that they would like to see more comprehensive participation in information sharing organizations. The survey conducted indicated that 86 percent of companies estimated their information security budgets would increase over the next three years and there were serious concerns over emerging technologies and the sophistication of attacks. The monetary penalties inflicted by breaches should be concerning to companies of all sizes. Losses for larger companies have been incredibly steep with estimated losses across Target, Sony and Home Depot at $248 million2, $15 million3 and $28 million4 respectively (accounting methods vary by company and some costs are ongoing, please see links below for further detail).

Number of Total Vetoes

Number of Total Vetoes

Overall, legislative ambitions are high, but it remains to be seen what can both make it to the President’s desk and survive upon arrival. The resistance to compromise in Congress over the previous three sessions has left Presidential veto usage at the lowest level of any President in the 20th century. Today, there are a grand total of three vetoes over the period of six years, with one coming recently on the Keystone XL Pipeline. The President will likely use this tool freely if something partisan happens to make it to his desk, one of the benefits of no longer being bound by reelection. The majority in Congress will continue to emphasize oversight of government agencies and focus on small to mid-sized businesses. Along this theme, the first few hearings held by the Senate Banking Committee in 2015 focused on regulatory burden for small and midsize banks. Slight modifications to alleviate regulatory burden for smaller institutions could easily gain traction, but anything as politicized as rolling back the Dodd-Frank Act will not receive amicable treatment from the President’s pen.

[2] Target, p.1
[3] Sony, p.6
[4] Home Depot, p.7

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