On November 13, 2017, Senate Banking Committee Chairman Mike Crapo, along with several Democratic senators, announced an agreement on bipartisan financial reform legislation. The proposed legislation aims to lower the number of banks considered “systemically important” and thus subject to enhanced bank supervision rules. The legislation also contains provisions aimed at easing the regulatory burdens of small, midsize, and community banks.
Banks that are deemed “systemically important financial institutions” (SIFIs) are subject to enhanced supervisory rules, including increased capital, liquidity and leverage standards, as well as periodic stress tests by the Board of Governors of the Federal Reserve (the Federal Reserve). Under the proposed bipartisan legislation, the SIFI asset threshold at which point banks would become subject to enhanced supervision would be raised from the current $50 billion level (set by the Dodd-Frank Act) to $250 billion. Any bank with assets between $50 billion and $100 billion would be immediately relieved from enhanced supervision standards. Relief would be phased in for banks with assets between $100 billion and $250 billion—these banks would no longer be subject to enhanced supervisory rules 18 months after the legislation’s effective date. However, as to banks in this category, the Federal Reserve would have the discretion to both release banks from enhanced supervision earlier than 18 months, and bring banks back under enhanced supervision if the agency determines the banks are engaging in risky activities. This proposal would significantly impact the number of banks designated as SIFIs. According to the most recent data (June 2017) from the Federal Financial Institutions Examination Council (FFIEC), 44 banks have assets of over $50 billion, but only 13 have assets over $250 billion. Of the 31 banks that would no longer be classified as SIFIs, 7 (with assets between $50 billion and $100 billion) would receive immediate relief, while 24 (assets between $100 billion and $250 billion) would receive relief phased in over 18 months.
The proposed bipartisan legislation also aims to increase access to credit by easing regulatory burdens for community banks, credit unions, and small and mid-size financial institutions. The proposed legislation includes a number of reforms impacting smaller and mid-size banks with total assets under $10 billion, including:
- An exemption from the Volcker Rule if the bank’s trading assets and liabilities are equal to less than 5% of total assets;
- The establishment of a new community bank leverage ratio (to be set by banking agencies and be between 8 and 10%)—any bank satisfying this new ratio will be deemed to be in compliance with Basel III; and
- The deeming of certain mortgages originated by the bank and retained on the bank’s books as “qualified mortgages” under the Truth in Lending Act (TILA) and related rules issued by the Consumer Financial Protection Bureau (CFPB).
Additional reforms aimed at other smaller banks include:
- Reduced reporting requirements, including short-form call reports, for banks with assets under $5 billion;
- Subjecting banks with assets under $3 billion to the Federal Reserve’s Small Bank Holding Company Policy Statement (from $1 billion);
- Allowing well-managed and well-capitalized banks with assets under $3 billion to qualify for an 18-month examination cycle; and
- An exemption from certain disclosure requirements under Home Mortgage Disclosure Act for institutions initiating less than 500 closed-end mortgage loans or 500 open-end lines of credit in each of last two years.
Additional reforms proposed in the bipartisan legislation include the easing of certain regulations affecting mortgages. For example, the legislation exempts certain mortgages from appraisal requirements under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and eliminates the 3-day waiting period for TILA/RESPA mortgage disclosures if a creditor extends to a consumer a second credit offer with a lower APR. The legislation provides consumers and veterans additional protections on consumer credit reports. Finally, qualifying investment-grade, liquid, marketable muni securities would be considered level 2B liquid assets under the federal banking agencies’ Liquidity Coverage Ratio final rule.
Supporters of the bipartisan proposal argue that the proposal will “right-size” regulations by providing regulatory and compliance relief to community and small banks, while still subjecting the largest banks to SIFI rules. As a result, supporters argue the legislation would lower bank compliance costs, increase consumer access to credit (especially mortgages), allow smaller banks to expand balance sheets without the worry of falling under enhanced SIFI rules, and spur economic growth. The proposal has received support from the Independent Community Bankers of America, and the American Bankers Association has labeled the deal an “important first step” in right-sizing regulation (but still generally opposes any form of numerical SIFI asset thresholds). The deal was generally opposed by consumer groups and financial reform advocates, who oppose the rollback of Dodd-Frank regulations.
Although the proposal has won bipartisan support, its eventual fate is far from certain. Although the legislation is co-sponsored by 9 Republican and 9 Democratic senators—enough to overcome a filibuster if all Republicans vote for the measure—it may not go as far as more conservative Senate and House Republicans would prefer. The proposed legislation does not repeal large portions of Dodd-Frank nor does it overhaul the CFPB; it is thus significantly narrower than the Financial CHOICE Act passed by the House this summer. Further, given the present focus on tax reform, it is not clear when both chambers will take up the measure.
The Reed Smith Financial Regulatory practice group has a wealth of experience advising clients on the many areas of law potentially impacted by this bipartisan proposal, including capital requirements, the Dodd-Frank Act, Volcker Rule, mortgage regulation, and bank examinations. If you have any questions regarding this proposed legislation or any other banking matter, please do not hesitate to reach out to the Reed Smith Financial Regulatory team.