United States: Implications Of 2006 Midterm Election Results For Financial Services Legislation

Last Updated: February 2 2007
Article by Michael E. Bleier

The 2006 Congressional midterm elections caused a sea change in the control of the Congress. Democratic control of the Senate by a 51–49 margin, and of the House by 233–202, gives the Democrats larger Committee staffs, control of the legislative agendas, and the ability to call for hearings, inquiries and votes. None of the issues driving the election results was focused on the financial services industry. On Jan. 4, the Democratic leadership announced its decisions on who would be the chairs of the Congressional Committees, and who would thereby control the Committee agendas.

House of Representatives

On the House side, Barney Frank of Massachusetts has been a member of the Congress since 1981 and will now head the House Financial Services Committee, one of the largest Congressional Committees with more than 65 members. Frank has a reputation for being very astute, an avid listener, well prepared and open to discussion. His senior staffers (Jeanne Roslanowick, Chief of Staff and Chief Counsel, and Lawranne Stewart, Senior Counsel) are very capable based on experience in working with them over a four-year period regarding the federal bank regulators’ efforts to make the existing bank capital rules more risk-sensitive (Basel II) and with an operational risk capital charge. Frank has not been adverse to taking on the Federal Reserve Board by challenging its views on Basel II. His concern is that Basel II be fair and not disadvantageous to U.S. financial services organizations.

The following lists other areas of interest to Frank, and possible Committee actions:

  • Curbing predatory lending while recognizing that there is a need for subprime lending; Frank will also have the Committee look at payday lending.
  • Frank has a long-term interest in affordable housing and he will likely look at alternative mortgages.
  • GSE reform is on a list of priorities and there will likely be some resolution of GSE reform under his chairmanship.
  • Affiliation between Industrial Loan Companies (ILCs) and commercial businesses will be in difficulty; Frank has coauthored a bill that would prevent such affiliation.
  • Frank is a strong supporter of consumer safeguards and has been at odds with the OCC over the pre-emption authority that national banks have over various state laws. A possible approach is to require national banks to adopt stronger consumer protection safeguards or have states become more enforcement-focused.
  • It is quite possible Frank will call for oversight hearings with respect to the OCC, the Federal Reserve Board and other financial services regulators.
  • Federalizing student loans by making them less attractive for private lenders, with the likely support of House Speaker Nancy Pelosi, who has supported The Student Aid Reward Act.
  • Data security or data privacy is an important issue, with the focus on what the correct standards are when a breach occurs, and when should notification take place. Frank supports uniform notification standards and incentives for encrypting data.
  • Executive compensation is a key political issue and increased transparency in its disclosures is an item of concern to Frank and an issue he is likely to push. He will likely resurrect his Truth-in-Pay Bill and work to increase shareholder say in setting corporate executive pay, and to perhaps limit in some way deferred compensation.
  • The Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises likely will be very active under its new chairman, Rep. Paul Kanjorski of Pennsylvania. In addition to GSE reform, the Subcommittee will be active in looking at reforming the regulation of the insurance industry through an optional federal charter that would lead to a dual insurance system.
  • Rep. Carolyn Maloney of New York is the new Chair of the Subcommittee on Financial Institutions and Consumer Credit and she has indicated that areas of high interest to her are also data security and identity theft, for which she supports a federal standard. She also wants to get to the right result in a balanced manner that doesn’t too strongly impact the way banks do business to the detriment of their customers. Along with Frank, she has an interest in reducing regulatory burden, such as lowering the volume of CTR filings, by exempting banks’ seasoned customers from making such filings.

The Bankruptcy Reform Act may be revisited, but that will likely be done by the respective Judiciary Committees, while Financial Services may become involved.

Under the Republicans, jurisdiction over the insurance and securities industries was shifted from the House Energy and Commerce Committee to the House Financial Services Committee in 1994. As a result of the enactment of the Gramm-Leach-Bliley Act and the breaking down of Glass-Steagall, it does not make sense to transfer jurisdiction over the insurance and securities industries back to Energy and Commerce.


On the Senate side, Sen. Christopher Dodd of Connecticut will chair the Senate Banking Committee. He has been a member of the Congress since 1974 and a member of the U.S. Senate since 1980. Senator Dodd has also announced he will run for President. Frank and Dodd have a good working relationship. Being from Connecticut, Dodd is protective of the insurance industry’s interests:

  • He is very interested in the credit card industry and has been looking at capping interchange fees, enhanced disclosures, and reining in interest rate hikes.1
  • If the House passes a GSE reform bill with Frank’s support, Dodd will work for its enactment by the Senate.
  • Regarding ILCs, with the Republican loss of control, Republican Sen. Bennett of Utah will be in a weaker position to block ILC legislation that might restrict ILC affiliation with commercial firms.
  • The Committee may revisit the whole issue of payday lending and how the current interest rate cap may impact lending to military members and their families.
  • The committee will review the process for foreign investments in the United States (CFIUS).
  • Dodd has indicated he will push for a permanent solution to terrorism risk insurance (TRIA), which is set to expire at the end of 2007.
  • Hearings will be held on hedge funds and concern with the participation of pension funds and small unsophisticated investors.
  • Dodd is not firm on reopening the SOX debate.

One of the surprising results from the 2006 midterm election is that the former Republican Chairman of the House Financial Services Committee, Jim Leach of Iowa, was defeated. Chairman Leach was a fair and respected member of Congress and a very strong supporter and advocate for the Federal Reserve Board. Historically, banking issues have generally been nonpartisan and normally considered on their merits and their impact on the economy. It will be interesting to see how these election results get translated into legislation. No matter what is enacted by the Congress, President Bush still retains the veto power.


1 Sen. Carl Levin of Michigan has indicated he intends to call for oversight hearings of the credit card industry as Chair of the Senate Permanent Subcommittee on Investigations; he also may look at shell companies that don’t have an active business or significant assets.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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