United States: Financial Regulatory Reform Legislation Proceeds Through Congress

On May 22, 2018, the U.S. House of Representatives ("House") passed S. 2155, the "Economic Growth, Regulatory Relief, and Consumer Protection Act." The bill was passed on a bipartisan basis with a vote of 258-159. The bill was previously passed by the U.S. Senate ("Senate") on March 14, 2018.1 Now that identical legislation has passed both houses of Congress, the bill will go to President Trump for his signature, which is expected in the coming days. Once effective, the new law will provide modest regulatory relief to regional and community banks.

The House had sought to incorporate additional financial regulatory reforms into the Senate bill. However, proponents of the Senate bill were concerned that any changes to the language would upset a carefully assembled, filibuster-proof Senate coalition. News reports indicate that, in exchange for agreeing that the House would vote on S. 2155 without amendments, House Financial Services Committee Chairman Jeb Hensarling

(R-TX) was assured that the Senate will consider additional financial regulatory reform measures which passed the House earlier this Congress. Despite the bicameral compromise, it is unclear whether there is enough time in the legislative calendar to bring up additional financial regulatory reform legislation. Nevertheless, the enactment of S. 2155 represents a significant victory for financial regulatory reform advocates.

Perhaps the most significant aspect of the new law is the relaxation of thresholds for the application of certain regulatory requirements. Under the new law, institutions with total consolidated assets of less than $250 billion may no longer be subject to some of the more onerous requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), as discussed below. In addition, even in cases where the new law does not explicitly apply a higher threshold for a particular regulatory requirement, this legislative change could encourage federal banking agencies to reconsider other thresholds across the bank regulatory framework. These reforms may ease the pathway for the further growth and consolidation of regional banks, which previously may have strategically limited their growth to avoid triggering enhanced regulatory requirements.

The following is a summary of some of the principal components of the new law.

  • Enhanced Prudential Standards. Section 165 of the Dodd-Frank Act imposed various enhanced prudential standards (EPS) on bank holding companies2 with $50 billion or more in total consolidated assets, including, among other things, resolution planning requirements, short term debt limits, and contingent capital requirements. Under the new law, the Board of Governors of the Federal Reserve System ("Federal Reserve") will be required to apply certain EPS only to bank holding companies with $250 billion in total consolidated assets, and to any bank holding companies, regardless of asset size, that have been identified as global systemically important bank holding companies. In addition, if the Federal Reserve makes a determination that application of such EPS is appropriate to prevent or mitigate risks to the financial stability of the United States or to promote the safety and soundness of the institution, the Federal Reserve will also be authorized (though not required) to apply such EPS to bank holding companies with total consolidated assets of $100 billion or more. 3 In addition to relaxing the threshold for application of EPS, the new law will require the Federal Reserve to tailor EPS on an individual basis or by category. Such tailoring was previously optional. 4

    • Clarification for Foreign Banks. A provision in the new law clarifies that the relaxation of the thresholds for the application of EPS does not affect the legal effect of the Federal Reserve's current EPS rules as applied to foreign banking organizations with total consolidated assets of $100 billion or more. As a result, the Federal Reserve need not make a financial stability or safety and soundness determination in order for the current EPS rules to continue to apply to foreign banking organizations. In addition, the new law clarifies that nothing contained therein limits the Federal Reserve's authority to (a) require the establishment of an intermediate holding company by such foreign banking organizations; (b) implement enhanced prudential standards with respect to such foreign banking organizations; or (c) tailor the regulation of such foreign banking organizations.
  • Stress Testing. The new law will modify the Dodd-Frank Act stress testing requirements. First, the threshold for bank holding companies to become subject to an annual supervisory stress test conducted by the Federal Reserve will be raised to $250 billion, and such stress tests will only be conducted under two scenarios (baseline and severely adverse) rather than the previous three (baseline, adverse, and severely adverse). Bank holding companies with total consolidated assets of $100 billion or more, but less than $250 billion, will be subject to supervisory stress tests conducted by the Federal Reserve on a periodic basis. Second, the new law will set the threshold for requiring financial companies and bank holding companies to conduct company-run stress tests at $250 billion, and will only require such company-run stress tests to be conducted on a periodic basis (rather than semi-annually or annually, as applicable). Finally, such company-run stress tests will need to be conducted only under two scenarios (baseline and severely adverse) rather than the previous three (baseline, adverse, and severely adverse).
  • Small Bank Holding Companies. Under the Federal Reserve's Small Bank Holding Company and Savings and Loan Holding Company Policy Statement ("Policy Statement"), certain small bank holding companies and savings and loan holding companies are permitted to operate with higher levels of debt than are generally permitted for larger institutions. The new law will raise the threshold of the applicability of the Policy Statement, from bank holding companies and savings and loan holding companies with consolidated assets of less than $1 billion, to such institutions that have consolidated assets of less than $3 billion.
  • Custodial Banks. The new law will provide relief from capital regulations for large custodial banks. The new law will require capital regulations to specify that funds of a custodial bank deposited with a central bank will not be taken into account when such custodial bank calculates the supplementary leverage ratio. A "custodial bank" is any depository institution holding company predominately engaged in custody, safekeeping, and asset-servicing activities, including any insured depository institution subsidiary of such holding company.
  • Treatment of Municipal Obligations under LCR Final Rule. For purposes of the Liquidity Coverage Ratio (LCR) final rule, 5 the new law will direct the federal banking agencies to treat municipal obligations as level 2B liquid assets if they are (a) liquid and readily-marketable; and (b) investment grade.
  • Volcker Rule. The new law will make two changes to Section 13 of the BHC Act (i.e., the "Volcker Rule"). First, the new law exempts from the Volcker Rule insured depository institutions that (i) have $10 billion or less in total consolidated assets; and (ii) have total trading assets and trading liabilities that are less than 5% of total consolidated assets. Second, the new law will amend the asset management exemption. Previously, one of the conditions for reliance on the asset management exemption was that the banking entity does not share the same name as the hedge fund or private equity fund, for corporate, marketing, promotional, or other purposes. Under the new law, a banking entity that is not an insured depository institution, a company that controls an insured depository institution, or a company that is treated as a bank holding company and is an investment adviser to a hedge fund or private equity fund can have the same name as the hedge fund or private equity fund (subject to certain conditions) and still rely on the asset management exemption.
  • High Volatility Commercial Real Estate Exposures. The new law will provide clarity to the capital treatment of acquisition, development, and construction (ADC) loans characterized as high volatility commercial real estate (HVCRE) exposures. This section of the new law will address concerns expressed by banks and industry groups regarding the complexity of the current HVCRE exposure rule and its uncertain application. 6
  • Community Bank Leverage Ratio. The new law will require the federal banking agencies to simplify the capital requirements for qualifying community banks (i.e., insured depository institutions with total consolidated assets of less than $10 billion and the requisite risk profile). Specifically, qualifying community banks that exceed a leverage ratio set by the federal banking agencies (required to be set between 8% and 10%) will be deemed to be in compliance with all other generally applicable leverage capital and risk-based capital requirements.
  • Mortgage Lending. Several provisions are included in the new law which would provide regulatory relief for certain aspects of mortgage lending. These revisions to the Dodd-Frank Act and other laws are centered on smaller banks and credit unions. Taken together, the changes are modest and will not have a wide-ranging impact on the mortgage industry. For example, the new law will provide a safe harbor from ability-to-repay (ATR) requirements for residential mortgage loans to consumers that are originated and retained in portfolio by an insured depository institution or insured credit union that has, together with its affiliates, less than $10 billion in total consolidated assets. The new law also changes Home Mortgage Disclosure Act (HMDA) reporting requirements by relieving small banks and credit unions from reporting loan-level data if such institutions make fewer than 500 open-end mortgage loans or 500 closed-end mortgage loans in a previous year. Transitional loan officer licensing, an issue that the mortgage industry has been advocating on for years, is codified in the new law. Moreover, there are certain amendments regarding the TILA-RESPA Integrated Disclosure (TRID) rule that will benefit consumers. Also, consumers stand to benefit from the restatement of the Protecting Tenants in Foreclosure Act.
  • Expanded Examination Cycle. The new law will extend the examination cycle to 18 months for banks that are well managed and well capitalized, and have total assets of less than $3 billion. The previous threshold for the expanded examination cycle was set at less than $1 billion.
  • Treatment of Small Federal Savings Associations. The new law will permit federal savings associations with total consolidated assets of $20 billion or less to have the same rights and privileges as national banks, without converting to a national bank charter.

Footnotes

1 The text of the bill is available here.

2 For purposes of Title I of the Dodd-Frank Act, the term "bank holding company" includes foreign banks or companies that are treated as bank holding companies for purposes of the Bank Holding Company Act of 1956 ("BHC Act"), pursuant to Section 8(a) of the International Banking Act of 1978, as amended.

3 Under the Dodd-Frank Act, the Federal Reserve was also required to issue regulations that require bank holding companies that are publicly traded and have total consolidated assets of $10 billion or more to establish a risk committee of the board of directors that has certain attributes. The new law raises the threshold for this requirement to publicly traded bank holding companies with $50 billion or more. Under the new law, the Federal Reserve will be permitted, but not required, to establish a risk committee requirement for publicly traded bank holding companies with less than $50 billion in total consolidated assets.

4 Upon enactment of the new law, bank holding companies and foreign banking organizations with less than $100 billion in total consolidated assets will be immediately exempt from certain EPS requirements. While the language of the new law technically only provides this immediate relief to bank holding companies, we believe it should be interpreted to also apply with respect to foreign banking organizations. For bank holding companies and foreign banking organizations with total consolidated assets of $100 billion or more but less than $250 billion, the effective date of the new law with respect to application of EPS is 18 months after the date of enactment of the new law. During the interim period between enactment of the new law and the effective date of the EPS provisions, the Federal Reserve is authorized toa exempt any bank holding company with total consolidated assets of less than $250 billion from application of EPS.

5 See 79 Fed. Reg. 61439 (October 10, 2014).

6 In November 2017, the House passed H.R. 2148, which included nearly identical language. For more information on H.R. 2148, please see our client alert.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions