United States: Highway To Reg Relief

Who thinks that bank regulatory relief and federal highway funding have anything in common? Apparently, the U.S. Congress does. In addition to highway funding and transportation measures, the Fixing America's Surface Transportation (FAST) Act, which was signed into law December 4, 2015, contains provisions providing limited, but welcome, regulatory relief for banks along with other miscellaneous measures, such as restoring cuts to the federal crop insurance program and changing dividends paid on Federal Reserve stock to larger Fed member banks. A summary of the banking related provisions follows, but it should be noted that further rule making by the CFPB will be needed before most of the changes can be finally implemented.

Privacy Notices. Financial institutions will no longer be required to send annual privacy notices provided two conditions are met: (1) the institution has not changed its privacy policies or practices since the last privacy notice was sent to customers, and (2) the institution only shares nonpublic personal information with non-affiliates under one of the statutory or regulatory exceptions that do not require an opt out, such as sharing with third parties that provide services to the bank and sharing with third parties under joint marketing arrangements for financial products and services. Currently, the privacy regulations still require annual notices with the one conditional exception for posting the notice on the institution's website. It is not clear whether those rules still apply in light of the statutory change, but hopefully, the CFPB will act quickly to revise the privacy rules.

18-Month Exam Cycle. The Act increases from $500 Million to $1 Billion the asset size threshold for depository institutions subject to an extended 18-month exam cycle. Insured depository institutions with total assets of less than $1 Billion with a CAMELS composite rating of 1 or 2 that are also considered to be well-managed and well-capitalized will be subject to a full scope, on-site exam once every 18 months rather than annually.

Small Creditors Serving Rural and Underserved Areas. The Act amends the Truth in Lending Act by removing the word "predominantly" from the section in TILA that creates an exception to certain of the CFPB mortgage rules for small creditors serving "predominantly" rural and underserved areas. Under current CFPB rules, as amended effective January 1, 2016, a small creditor serving predominantly rural and underserved areas is exempt from compliance with certain provisions of the 2013 mortgage rules. For example, a qualifying small creditor:

  • May originate portfolio loans with Qualified Mortgage (QM) status without complying with Appendix Q or the 43% debt to income ratio cap;
  • May originate QM loans with a balloon payment;
  • May originate high cost mortgages with a balloon payment;
  • Is exempt from escrow requirements for first lien higher priced mortgage loans;
  • May originate higher priced QM loans that qualify for a safe harbor compliance standard under the ATR/QM rules rather than a rebuttable presumption of compliance.

Under the revised CFPB rules, a lender meets the definition of a small creditor if: (1) it and all of its affiliates have total assets below $2 Billion, adjusted annually for inflation ($2.052 Billion for 2016), and (2) the lender and its affiliates originate fewer than 2,000 first lien mortgage loans, not including loans held in the lender's portfolio. A small creditor is deemed to be operating predominately in rural and underserved areas if more than 50% of its first lien covered mortgage loans originated in the preceding calendar year are secured by properties located in areas classified by the CFPB as either rural or underserved. The Bureau publishes annual lists of counties that qualify as rural or underserved, and the revised CFPB rules also allow census blocks not designated by the U.S. Census Bureau as "urban" to also be considered as rural.

The FAST Act removed the word "predominantly" from the relevant section of TILA. The change cannot be implemented until the CFPB issues revised rules, and it is not clear how the agency is going to interpret the change to the statutory language. Ideally, the Bureau will remove any rural or underserved area lending test, but that remains to be seen. The Act requires the Bureau to issue regulations within ninety days after passage which gives the Bureau until sometime in the first week in March at the latest.

This change will be particularly important to those lenders who are relying upon the temporary exception to the ATR/QM rules which allow a small creditor to originate balloon payment loans with QM status whether or not the small creditor serves rural or underserved areas. That temporary exception expires April 1, 2016. Hopefully, the Bureau will act in a timely fashion so as to not disrupt lending by small creditors.

The Act also requires the Bureau to establish an application process allowing a person who lives or does business in a state to petition the agency for designation of an area within that state as a "rural" area with respect to the mortgage rules. It sets forth the evaluation criteria to be used by the Bureau in making that determination and a timeline for publication of applications, a public comment period, and Bureau decisions on the applications. This process might allow areas to be designated as rural in addition to counties designated by the Bureau as rural and underserved and census blocks not designated as "urban" by the U.S. Census Bureau.

Federal Reserve Stock Dividends. National banks and state chartered Federal Reserve member banks with assets of more than $10 Billion will receive dividends on their Federal Reserve stock at a rate tied to the yield on the ten year treasury note and capped at 6%. The $10 Billion exemption threshold will be adjusted annually for inflation. Fed member banks with assets of less than $10 Billion are exempt from this change and will continue to be paid a dividend on their Federal Reserve stock at a rate of 6% annually. This change applies to dividends paid on or after January 1, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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