A discussion draft of the financial regulatory relief bill that Senate Banking Committee Chairman Richard Shelby (R-Ala) has been mulling has been released, along with a section-by-section summary. The far-reaching bill aims to ease restrictions on mortgage credit, reduce the examination and supervision burdens on smaller institutions, tighten up the Financial Stability Oversight Council’s process for designating systemically important financial institutions, and make technical corrections to the Dodd-Frank Act. It also would initiate an inquiry into reorganizing the Federal Reserve System.
Many of the provisions of the discussion draft should be non-controversial, including some that mirror bills passed by the House of Representatives and sent to the Senate in April. Perhaps in an effort to gain bipartisan support, the bill apparently would make no changes to the structure or authority of the Consumer Financial Protection Bureau.
Organization. The “Financial Regulatory Improvement Act of 2015” is divided into eight titles:
- Title I—Regulatory Relief and Consumer Access to Credit
- Title II—Systemically Important Bank Holding Companies
- Title III—Greater Transparency for the Financial Stability Oversight Council Process for Nonbank Financial Companies
- Title IV—Improved Accountability and Transparency in the Regulation of Insurance
- Title V—Improving the Federal Reserve System
- Title VI—Improved Access to Capital and Tailored Regulation in the Financial Markets
- Title VII—Taxpayer Protections and Market Access for Mortgage Finance
- Title VIII—Dodd-Frank Wall Street Reform and Consumer Protection Act Technical Corrections
The summary makes clear there is no intent to require the FOMC to use any particular rules in its decision-making; rather, the Committee is to disclose the rules that it has used.
The bill would call for two actual changes. First, the President of the Federal Reserve Bank of New York would become subject to the Senate’s advice-and-consent authority. Second, the FOMC would assume the authority to set the interest rates for banks’ reserve accounts. However, the bill would create an independent commission to investigate the reorganization of the Fed’s districts.
Mortgage and consumer credit. Title I of the bill includes both provisions that are intended to aid in credit availability and provisions that would reduce regulatory burdens on smaller banks. Credit-related provisions include:
- creating a process for residents to ask the CFPB to designate their area as a rural area, which would give mortgage lenders more flexibility;
- allowing mortgage loans held in the originating lender’s portfolio to be considered Qualified Mortgages as long as riskier loan terms are not included;
- excluding insurance escrow amounts from a loan’s points and fees for determining whether a loan is a high-cost mortgage;
- easing lending restrictions on manufactured home loans; and
- removing the need for a three-day waiting period after a mortgage loan disclosure and before the loan closing when the only change is an interest rate decrease.
- reducing the need for annual privacy notices;
- creating an ombudsman within the Federal Financial Institutions Examination Council to assist financial institutions;
- doubling the asset threshold for the 18-month examination cycle, to $1 billion;
- indexing many Dodd-Frank Act dollar thresholds for inflation;
- permitting highly rated community banks to use short form Call Reports in two quarters each year; and
- exempting from the Volcker Rule banks that have $10 billion or less in assets or that are owned by a holding company with $10 billion or less in assets.
A BHC being considered for SIFI designation would be entitled to receive information on the basis of the proposal and to participate in the deliberations. Designations would be reconsidered at least once every five years, again with significant input from the BHC.
If the FSOC decides to consider a nonbank financial company for SIFI designation, the company would have a right to information and participation comparable to what is afforded a BHC. Designations would be revisited annually, and the company would be entitled to an FSOC hearing every five years. As far as SIFI designations, the bill does not include any specific protections for insurance companies or other nonbank financial companies.
Under the bill, all members of the FSOC’s agency governing boards would be entitled to attend FSOC meetings. According to the summary, only the heads of each agency currently can attend and participate in meetings. Unlike some earlier proposals, the bill would not require that congressional committee chairmen be welcomed.
Insurance regulation. Shelby’s proposal notes that it is the sense of Congress that the McCarran-Ferguson Act remains the best way to regulate the business of insurance. The bill also would prevent the Federal Deposit Insurance Corporation from taking assets of a savings and loan holding company that also is an insurance company without the agreement of the company’s state insurance regulator that doing so will not interfere with the liquidation of the company or the recovery of its policyholders.
Should there be international discussions on capital standards for insurance companies, the bill instructs the Fed and FDIC to develop a consensus position with state insurance regulators. The Fed and the Treasury Department would be required to keep Congress informed on any international discussions.
GSEs. Under the bill, Fannie Mae and Freddie Mac guarantee fee increases could not be used for any purpose other than GSE business functions or housing finance reform. The Treasury department would be prohibited from disposing of any GSE preferred stock other than as directed by Congress.
Additionally, there would be minimum annual levels of required private sector risk-sharing. Risk-sharing minimums would increase by at least 150 percent each year, and at least half of the total amount would be transactions that allow the GSEs to share single-family mortgage credit risk with the private sector on mortgage loans prior to receiving a guarantee—“front-end risk sharing.”
"Myth vs. Reality." In advance of the Banking Committee hearing, Shelby posted a "Myth vs. Reality" comparison of the bill in an effort to dispel some misunderstandings about his intent. Many of the points address the effects the bill would have on the FSOC.
According to Shelby, the bill would not change the asset threshold for what constitutes a SIFI. The FSOC still could designate a $50 billion BHC a SIFI, and a $500 billion BHC would automatically be a SIFI. The difference would be that an institution in the $50 billion-to-$500 billion range would be designated only after a detailed analysis.
The proposed SIFI process for nonbanks is based on procedures the FSOC already has implemented or should be using, Shelby asserts. The procedures would reveal to companies the risks that are of concern to regulators, which could help companies reduce those risks. That would be good for the entire financial system, Shelby observes.
Regulators' authority to require stress tests and resolution plans or impose other prudential standards would not be reduced, Shelby says. The agencies simply would have more discretion, which would enhance their ability to tailor regulatory requirements to a bank's needs.
Shelby emphasizes that the bill might result in non-binding recommendations on reorganizing the Federal Reserve System districts, but it will not result in the restructuring of the Fed. Neither would the bill prescribe any specific rules for the FOMC's use in setting monetary policy.
Shelby also rejects assertions that the bill would allow mortgage lenders to return to originating excessively risky loans. The new type of Qualified Mortgage that would be created would require lenders to retain 100 percent of the risk of a loan--as opposed to the 5 percent "skin in the game" requirement--thus ensuring the lender suffered the entire loss from any loan that failed.
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