United States: President Trump Signs Bill Providing Regulatory Relief To Regional And Community Banks

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Reform Act"). The Reform Act provides regulatory relief to regional and community banks, including from certain requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").

The Reform Act refines financial institution regulatory requirements to create a more tiered regulatory framework based on an institution's asset size. The Reform Act responds to concerns from the banking industry that, despite the lower risk posed by regional and community banks, the oversight and compliance obligations imposed by the Dodd-Frank Act and other post-financial crisis regulations unnecessarily burdened, or at a minimum disproportionately burdened, these banks with compliance costs and organizational challenges.

Regulatory Relief for Regional Banks

The Reform Act provides meaningful relief from enhanced supervision and prudential standards that apply to regional banks, including by:

  • Increasing the asset threshold for "systemically important financial institutions" or, "SIFIs," from $50 billion to $250 billion;
  • Immediately exempting bank holding companies with less than $100 billion in assets from enhanced prudential standards imposed on SIFIs under Section 165 of the Dodd-Frank Act (including but not limited to resolution planning and enhanced liquidity and risk management requirements);
  • Exempting in 18 months bank holding companies with between $100 billion and $250 billion in assets from the enhanced prudential standards;
  • Limiting stress testing conducted by the Federal Reserve to banks and bank holding companies with $100 billion or more in assets;
  • Increasing the asset threshold for requiring banks and bank holding companies to conduct "company-run" stress tests from $10 billion to $250 billion; and
  • Increasing the asset threshold for requiring a publicly-traded bank holding company to establish a separate risk committee of independent directors from $10 billion to $50 billion.

Despite the Reform Act's changes, federal banking regulators retain broad discretion to impose additional regulatory requirements, including stress testing and risk oversight procedures, based on safety and soundness and U.S. financial system stability considerations. In addition, the Reform Act does not modify many other post-crisis regulatory requirements that were imposed on certain regional banks other than by the Dodd-Frank Act, such as the Federal Reserve's comprehensive capital analysis and review (or "CCAR") process.

Regulatory Relief for Community Banks

We expect that the Reform Act will meaningfully reduce the compliance burdens faced by community banks. Key provisions of the Reform Act that will benefit community banks include:

  • Simplified Capital Requirements. The Reform Act directs the federal banking regulators to adopt rules to create a new community bank leverage ratio for banks and bank holding companies with less than $10 billion in assets, to be set at between 8 percent and 10 percent and to be calculated by dividing tangible equity by average assets.

    If such a bank or holding company complies with this leverage ratio, the bank or holding company would be exempt from the Basel III risk-based capital and leverage requirements and, in the case of a bank, would be "well capitalized" for the Prompt Corrective Action rules.
  • Qualified Mortgages. Under the Reform Act, most residential mortgage loans held in portfolio by banks with less than $10 billion in assets will be designated as "Qualified Mortgages" or "QMs." Such loans will be considered QMs and meet the ability to repay test if the loans do not include a prepayment penalty, do not have points and fees that exceed 3 percent of the loan amount, and do not have negative amortization or interest-only features, and if the bank documents the debt, income and financial resources of the borrower.

    Note that this QM designation may not transfer to another financial institution if the residential mortgage loan is sold, although the designation would likely transfer if the loan is acquired via a merger with another financial institution and the loan is retained in the acquirer's portfolio.
  • Appraisal Exemption for Qualifying Rural Loans. The Reform Act exempts residential mortgage loans from federal appraisal requirements if the property is located in a rural area, the lending bank can document that an appraiser is not available in "a reasonable amount of time" (as described in the Reform Act), and the transaction value is less than $400,000. Any loan that takes advantage of this appraisal exemption will likely be subject to limitations on its transfer that may reduce the loan's marketability to investors in the secondary mortgage market.
  • Longer Exam Cycle. The Reform Act increases the asset threshold under which an institution can qualify for an 18-month examination cycle to $3 billion in total assets, compared to the prior threshold of $1 billion in total assets.
  • Expanded Application of the Small Bank Holding Policy Statement. The Reform Act requires the Federal Reserve to raise the asset size limit for the Federal Reserve's Small Bank Holding Company Policy Statement from $1 billion to $3 billion. Under this policy statement, qualifying bank holding companies can operate with higher leverage, use more leverage in connection with an acquisition under certain circumstances, and may be exempt from the Basel III risk-based capital and leverage requirements.
  • Escrow Account Exemption. The Reform Act requires the federal banking regulators to adopt rules to exempt banks with less than $10 billion in assets that originated fewer than 1,000 residential first mortgage loans in the prior calendar year from establishing escrow accounts for property tax and insurance payments for higher-priced mortgages, if the bank also originated a residential mortgage loan in a rural or underserved area in the prior calendar year, and the bank does not otherwise maintain such escrow accounts for mortgage loans other than higher-priced loans or as an accommodation to distressed consumers.

    Note that this exemption will not apply to any residential mortgage loan that is originated subject to a commitment to be acquired by another financial institution that does not meet the conditions of this exemption – which will include many investors in the secondary mortgage market.
  • Volcker Rule Exemption. The Reform Act exempts all banks with less than $10 billion in assets, and their holding companies and affiliates, from the Volcker Rule provided that the institution has total trading assets and liabilities of 5 percent or less of total assets, subject to certain limited exceptions.
  • HMDA Exemption. The Reform Act exempts banks that originate less than 500 mortgages a year from additional Home Mortgage Disclosure Act disclosure requirements that were originally imposed by the Dodd-Frank Act, provided that the bank has not received a "needs to improve" CRA rating during the last two exams or a "substantial noncompliance" CRA rating during the last exam.

Implementation of the Reform Act

Many of the Reform Act's changes must be implemented through rules adopted by the federal banking regulators, and certain changes remain subject to substantial regulatory discretion of the federal banking regulators. As a result, the full impact of the Reform Act will remain unclear for some time.

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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