Friday, March 17, 2017

The Community Financial Institution Exemption Act: An Analysis of Its Potential Impact

By James T. Bork, J.D., LL.M.

On February 28, 2017, Congressman Roger Williams (R-TX) introduced H.R. 1264, the Community Financial Institution Exemption Act. It was referred to the House Committee on Financial Services, one of the committees on which Congressman Williams serves. The bill would (i) define the term "community financial institution" as "an insured depository institution or credit union with less than $50,000,000,000 [i.e., $50 billion] in consolidated assets," and (ii) exempt those institutions "from all rules and regulations issued by the [Consumer Financial Protection] Bureau."

Under current law, the term "community financial institution" is defined as an insured institution that has less than $1 billion in total assets, based on average total assets for the preceding three years. [12 USC 1422(10)] That $1 billion figure is adjusted annually based on the movement of the Consumer Price Index for all urban consumers, and it currently stands at between $1.1 billion and $1.2 billion. The Community Financial Institution Exemption Act does not amend that definition.

The Federal Reserve Board uses the related term "community bank" to refer generally to banks owned by organizations with less than $10 billion in assets. The enactment into law of a new definition in the context of community banking -- one that directly conflicts with existing law and common usage -- has the potential to dilute the meaning of the affected term and thereby de-focus attention that is devoted to community banking issues.

As of December 2016, there were 5,083 banks in the United States. According to a January 10, 2017, post on the Forbes web site titled "Full List: Ranking America's 100 Largest Banks," only 20 U.S. banks have assets in excess of $50 billion. As of the end of the 3rd quarter of 2016 (the most recent data available from the NCUA), there are 5,844 credit unions in the United States. Only one of those credit unions (Navy FCU) has assets in excess of $50 billion. Based on that data, one could deduce that if the Community Financial Institution Exemption Act were to be enacted, only 21 financial institutions in the United States, out of more than 10,900 currently doing business, might be subject to rules and regulations issued by the CFPB.

Owing to the Fed's repeal of regulations regarding (i) truth in savings, (ii) consumer privacy, and (iii) unfair or deceptive acts or practices (12 CFR parts 230, 216, and 227), more than 10,900 insured institutions might be, at least temporarily, without authoritative regulatory guidance on those issues. Regulatory enforcement regarding those issues might undergo a corresponding lapse. And because the CFPB's and Fed's versions of several consumer compliance regulations have diverged from one another during the past six years, authoritative guidance and agency enforcement regarding (iv) truth in lending, (v) real estate settlement procedures, (vi) equal credit opportunity, and (vii) electronic fund transfers could be similarly affected.

The bill would allow the CFPB to revoke the exemption of a specific rule or regulation, as applied to a specific class of community financial institutions. But any revocation would be effective only if "the Bureau makes a detailed, written finding that such class of community financial institutions has engaged in a pattern or practice of activities that have been detrimental to the interests of consumers and are of a type that the specific rule or regulation is intended to address." It is difficult to imagine that specific classes of institutions would begin to engage in repeated violations of the laws and regulations alluded to in the previous paragraph -- i.e., violations that would satisfy the "pattern or practice" standard. It is, therefore, possible that those pillars of consumer compliance might not be re-established quickly or easily.

James T. Bork, J.D., LL.M., is Senior Banking Compliance Analyst with Wolters Kluwer Financial Services. Prior to joining WKFS, he practiced law for several years with a focus on financial institutions, consumer banking issues, commercial lending, and business law. He was also Assistant General Counsel and Senior Compliance Attorney at a billion dollar institution. Jim has written articles and spoken on regulatory and compliance developments affecting financial institutions. He received his law degree in 1989 and earned a Master of Laws degree (LL.M.) in banking law in 1993 from the Morin Center for Banking and Financial Law at Boston University School of Law.