Wednesday, November 15, 2017

Senators approve proposal to ease financial regulatory requirements

By Andrew A. Turner, J.D.

Senate Banking Committee members have reached bipartisan agreement on proposed legislation that would change the financial regulatory framework by raising the threshold for applying enhanced prudential standards to bank holding companies from $50 billion to $250 billion. “The package is targeted toward helping community banks, credit unions, mid-sized banks, regional banks and custody banks,” according to the press release announcing the agreement. The regulatory relief package also includes consumer protections for veterans, senior citizens, and victims of fraud. 

The agreement was announced by Senate Banking Committee Chairman Mike Crapo (R-Idaho) and Banking Committee members Joe Donnelly (D-Ind), Heidi Heitkamp (D-ND), Jon Tester (D-Mont), and Mark Warner (D-Va). Crapo said that the proposals would “foster economic growth by right-sizing regulation.” The legislative proposal includes provisions intended to:

  • improve consumer access to mortgage credit;
  • provide regulatory relief for small financial institutions and protect consumer access to credit;
  • provide protections for veterans, consumers, and homeowners; and
  • tailor regulation for banks to better reflect their business models.

Tailoring regulations. Bank holding companies with total consolidated assets between $50 billion and $100 billion would be exempt from enhanced prudential standards immediately, and bank holding companies with total consolidated assets between $100 billion and $250 billion would be exempt 18 months after the effective date. The proposed legislation would also require changes to the supplementary leverage ratio for custodial banks and the treatment of municipal obligations.

Mortgage credit. Mortgage loans that are originated and retained in portfolio by an insured depository institution or an insured credit union with less than $10 billion in total consolidated assets would be deemed qualified mortgages. A tailored exemption from appraisal requirements would be applied to mortgage loans with a balance of less than $400,000 if the originator is unable to find a state-certified or state-licensed appraiser.

The bill would also provide regulatory relief to small depository institutions from disclosure requirements under the Home Mortgage Disclosure Act. Other provisions target barriers to jobs for loan originators; access to manufactured homes; real property retrofit loans; escrow requirements for consumer credit transactions; and the wait period for lower mortgage rates.

Credit access. Capital simplification for qualifying community banks would establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8 percent and not more than 10 percent. Banks with less than $10 billion in total consolidated assets that maintain tangible equity in an amount exceeding the community bank leverage ratio would be deemed to be in compliance with capital and leverage requirements.

Community bank relief would exempt banking entities from the Bank Holding Company Act if they have (1) less than $10 billion in total consolidated assets, and (2) total trading assets and trading liabilities that are not more than 5 percent of total consolidated assets.

Reporting requirements would be reduced for depository institutions with less than $5 billion in total consolidated assets that satisfy other appropriate criteria. Federal savings associations with less than $15 billion in total consolidated assets would be permitted to operate with the same powers and duties as national banks without being required to convert their charters. The consolidated asset threshold would be raised from $1 billion to $3 billion for well managed and well capitalized banks to qualify for an 18-month examination cycle.

Protections. Credit bureaus would be required to include in a consumer’s file fraud alerts for at least a year under certain circumstances, provide consumers one free freeze alert and one free unfreeze alert per year, and provide further protections for minors. Other sections are aimed at protecting veterans’ credit and aiding senior protection.

Senator reaction. Senator Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, questioned the wisdom of legislation “rolling back so many of Dodd-Frank’s protections” while banks made “record profits last year.” Senator Bob Corker (R-Tenn), a member of the Senate Banking Committee, countered that the reforms will ease the regulatory burden that Dodd-Frank created for community banks. Similarly, Sen. Thom Tillis (R-NC) commented that “Dodd-Frank’s harmful one-size-fits-all model” has restricted access to capital with burdensome regulations.

Senator Tom Cotton (R-Ark) applauded the agreement, which includes the PACE Act, legislation Cotton introduced earlier this year that requires Truth in Lending Act disclosure for Property Assessed Clean Energy (PACE) loans that target low-income and elderly Americans with predatory home loans.

Industry comments. Marcus Stanley, policy director at Americans for Financial Reform, worried that the proposal strips away mandates to maintain regulatory oversight and “opens the door for Trump-appointed regulators to severely weaken the rules applying to large regional banks.” On the other hand, Rob Nichols, American Bankers Association president and CEO, welcomed the regulatory reform legislation for including mortgage rule changes, longer examination cycles for community banks, charter flexibility for federal savings associations, and stress test relief.

While urging Congress to continue working toward policies which consider risk rather than arbitrary asset thresholds, the Consumer Bankers Association and Financial Services Roundtable saw the agreement as an important step forward by giving the Federal Reserve Board flexibility to make a more complete assessment when designating certain institutions systematically important.

The Independent Community Bankers of America expressed its support for a legislative agreement that included ICBA-advocated provisions to increase exemption thresholds for Home Mortgage Disclosure Act reporting, provide “qualified mortgage” status for portfolio mortgage loans at most community banks, expand eligibility for the 18-month regulatory examination cycle, and ease appraisal requirements to facilitate mortgage credit in local communities.

Meanwhile, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, offered a series of recommendations to revitalize small business lending. The “Financing Main Street Agenda” includes five core recommendations: replace asset thresholds with multifactor risk assessments; reduce the burden of stress testing and capital planning while preserving benefits; harmonize U.S. capital and liquidity rules with international standards; reassess the Volcker Rule; and improve the regulatory process.

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