United States: Regulatory Relief Act Benefits Community And Regional Banks

Norman B Antin is a Partner in Holland & Knight's Washington D.C. office

Jeffrey D Haas is a Partner in Holland & Knight's Washington D.C. office

Kevin M Houlihan is a Partner in Holland & Knight's Washington D.C. office

Shawn M Turner is a Partner in Holland & Knight's Denver office

Mark R Goldschmidt is a Partner in Holland & Knight's Denver office

William H Levay is a Partner in Holland & Knight's Washington D.C. office

HIGHLIGHTS:

  • The Economic Growth, Regulatory Relief and Consumer Protection Act (the Act), which engendered substantial bipartisan support and was recently signed into law by President Donald Trump, amends parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the landmark financial regulation overhaul that was enacted by Congress in 2010 in response to the 2008 financial crisis, as well as other laws that involve regulation of the financial industry.
  • The Act changes the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.
  • While the Act keeps in place fundamental aspects of the Dodd-Frank Act's regulatory framework, it provides meaningful regulatory relief for community and some regional banking institutions. The legislation is also likely to encourage increased mergers and acquisitions activity.

President Donald Trump on May 24, 2018, signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (the Act), which amends parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the landmark financial regulation overhaul that was enacted by Congress in 2010 in response to the 2008 financial crisis. The Act also amends other laws that involve regulation of the financial industry. The Act changes the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. The Act also makes changes to consumer mortgage and credit reporting regulations as well as to the authorities of the agencies that regulate the financial industry. The legislation engendered substantial bipartisan support.

While the Act keeps in place fundamental aspects of the Dodd-Frank Act's regulatory framework, it provides meaningful regulatory relief for community and some regional banking institutions. The legislation is also likely to encourage increased mergers and acquisitions (M&A) activity.

The following is a brief summary of select provisions of the Act.

Modified Process for Designating Systemically Important Financial Institutions

The Act changes which bank holding companies (BHCs) will be designated as Systemically Important Financial Institutions (SIFIs). Prior to passage of the Act, all BHCs with assets exceeding $50 billion were automatically designated as SIFIs and were subject to enhanced prudential standards (EPS) of the Dodd-Frank Act, which required them to undergo special stress tests, develop resolution plans, and maintain certain levels of liquidity and financial capacity to absorb losses. The Act raises the $50 billion "SIFI threshold" to $250 billion, but staggers the application of this change for certain institutions, based on the size of the BHC. Upon enactment, BHCs with total consolidated assets of less than $100 billion are no longer subject to the EPS of the Dodd-Frank Act. BHCs with total consolidated assets of $100 billion but less than $250 billion will no longer be subject to such requirements, beginning 18 months after the date of enactment. During the 18-month transition period, the Federal Reserve may exempt a BHC from any EPS requirement, and the Federal Reserve is also provided with discretionary authority to apply any EPS to a BHC within this asset category, subject to it following specified procedural requirements. BHCs with more than $250 billion in consolidated assets, as well as any domestic BHC that has been identified as a "global systemically important" BHC, remain fully subject to EPS.

Because the Act does not amend the regulations that the federal banking agencies have promulgated to implement the EPS, it will likely take some time for these agencies to amend their regulations to account for the new thresholds included in the Act.

Many of the changes in the Act amend provisions of the Dodd-Frank Act that apply at the BHC level, but not to subsidiary national banks or other insured depository institutions (IDIs). The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have adopted their own counterparts to some EPS for the bank subsidiaries that they regulate, including recovery and resolution planning. Whether the OCC and the FDIC take similar measures under their regulations and guidance to align asset thresholds with what is reflected in the Act will remain an area to watch.

Community Bank Leverage Ratio

The Act requires the federal banking agencies to promulgate a rule establishing a new "Community Bank Leverage Ratio" of 8 percent-10 percent for depository institutions and depository institution holding companies, including banks and BHCs, with less than $10 billion in total consolidated assets. If such a depository institution or holding company maintains tangible equity in excess of this leverage ratio, it would be deemed in compliance with all other capital and leverage requirements: 1) the leverage and risk-based capital requirements promulgated by the federal banking agencies; 2) in the case of a depository institution, the capital ratio requirements to be considered "well capitalized" under the federal banking agencies' "prompt corrective action" regime; and 3) any other capital or leverage requirements to which the depository institution or holding company is subject, in each case, unless the appropriate federal banking agency determines otherwise based on the particular institution's risk profile.

Act Provisions That Are Favorable to Community Banks.

A number of provisions in the Act will have a favorable impact on smaller community banks. These are briefly referenced below.

  1. Elimination of Company-Run Stress Tests. The Act exempts all banking organizations –including not only BHCs, but also depository institutions and savings and loan holding companies (SLHCs) – with less than $250 billion in total consolidated assets from the current requirement to conduct company-run stress tests. Banking organizations with $250 billion or more in total consolidated assets are still required to conduct company-run stress tests on a periodic basis but are no longer be required to do so on a semi-annual or annual basis.
  2. Increase in Small Bank Holding Company Policy Threshold. The threshold for qualifying for the Federal Reserve's "Small Bank Holding Company Policy Statement" is increased by the Act from $1 billion to $3 billion, provided the small BHC or SLHC is not engaged in significant non-banking activities, is not engaged in significant off-balance sheet activities and does not have a material amount of debt or equity registered with the U.S. Securities and Exchange Commission (SEC). The Federal Reserve retains the authority to exclude any BHC or SLHC from the policy if such action is warranted for supervisory purposes.
  3. Savings Association Election to Operate as a National Bank. Federal savings associations with total consolidated assets of $20 billion or less have the option to operate as national banks and to have the same privileges and duties as national banks without converting their charters.
  4. Increase in Asset Threshold for Requirement to Establish a Risk Committee. The Act raises the asset threshold for the requirement that a publicly traded BHC establish a risk committee from $10 billion to $50 billion or more in total consolidated assets.
  5. Increase in Asset Threshold for Qualifying for an 18-Month Examination Cycle. The Act increases the asset threshold for institutions qualifying for an 18-month, on-site examination cycle from $1 billion to $3 billion in total consolidated assets.
  6. Short Form Call Reports. The Act requires the federal banking agencies to promulgate regulations allowing an insured depository institution with less than $5 billion in total consolidated assets (and that satisfies such other criteria as determined to be appropriate by the agencies) to submit a short-form call report for its first and third quarters.
  7. Lower Risk Weight for Certain High-Risk Commercial Real Estate Loans. The Act prohibits federal banking agencies from assigning heightened risk weights to high-volatility commercial real estate (HVCRE) exposures, unless the exposures are classified as HVCRE acquisition, development and construction loans. Currently, a 150 percent risk weight applies to loans classified as HVCRE under the existing regulatory capital rules. The federal banking agencies issued a proposal in September 2017 to simplify the treatment of HVCRE and to create a new category of commercial real estate loans – "high-volatility acquisition, development or construction" (HVADC) exposures – with a lower risk weight of 130 percent. The most significant difference between the Act and the agencies' HVADC proposal arises from the Act's preservation of the exemption for projects where the borrower has contributed at least 15 percent of the real property's appraised "as completed" value.

Mortgage Lending Rule Modification

The Act provides that for certain IDIs and insured credit unions with less than $10 billion in total consolidated assets, mortgage loans that are originated and retained in portfolio will automatically be deemed to satisfy the "ability to repay" requirement under the Truth in Lending Act. In order to qualify, the insured depository institutions and credit unions must meet conditions relating to prepayment penalties, points and fees, negative amortization, interest-only features and documentation.

The Act directs federal banking agencies to issue regulations exempting certain IDIs and insured credit unions with assets of $10 billion or less from the requirement to establish escrow accounts in connection with certain residential mortgage loans.

IDIs and insured credit unions that originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit in each of the two preceding years are exempt from a subset of disclosure requirements – recently imposed by the Consumer Financial Protection Bureau (CFPB) – under the Home Mortgage Disclosure Act (HMDA), provided they have received certain minimum Community Reinvestment Act ratings in their most recent examinations.

The Act also directs the Comptroller to conduct a study assessing the effect of the exemption described above on the amount of HMDA data available at the national and local level.

Volcker Rule Exemption

The Act creates an exemption from prohibitions on propriety trading, which is the owning and trading of securities for a bank's own portfolio with the aim of profiting from price changes, and relationships with certain investment funds for banking entities with 1) less than $10 billion in total consolidated assets, and 2) trading assets and trading liabilities of less than 5 percent of its total consolidated assets. Currently, all banks are subject to these prohibitions pursuant to the Dodd-Frank Act. Any insured depository institution that is controlled by a company that itself exceeds these $10 billion and 5 percent thresholds would not qualify for the exemption. In addition, the Act eases certain Volcker Rule restrictions on all bank entities, regardless of size, for simply sharing a name with hedge funds and private equity funds they organize.

Consumer Protection Enhancements

The Act includes various provisions to address consumer protection challenges facing the credit reporting industry and borrowers in certain credit markets, specifically active-duty service members, veterans and student loan borrowers. The Act subjects credit reporting agencies (CRAs) to additional requirements, including requirements to generally provide fraud alerts for consumer files for at least one year and to allow consumers to place security freezes on their credit reports.

The Act also allows consumers to request that information related to a default on a qualified private student loan be removed from a credit report if the borrower satisfies the requirements of a loan rehabilitation program offered by a private lender. The Act prohibits lenders from declaring automatic default in the case of death or bankruptcy of the co-signer of a student loan and requires lenders to release co-signers from obligations related to a student loan in the event of the death of the student borrower. In addition, CRAs will be required to exclude certain medical debt from veterans' credit reports.

Securities Regulation Relief

The Act contains nine provisions in a capital formation title. The Act applies the exemption from state regulation of a securities offering to securities that are designated as qualified for trading in the national market system, or that are listed or authorized for listing on any national securities exchange. The Act provides regulatory relief to qualifying venture capital funds to encourage capital formation. The Act expands certain exemptions under Regulation A+ for small to medium-sized companies in an attempt to increase capital access. The legislation also is intended to improve the regulation and oversight of mutual funds.

Custody Banks and the Supplementary Leverage Ratio

The Act requires the federal banking agencies to amend their rules addressing the supplementary leverage ratio (SLR) to exclude funds of a "custodial bank" that are deposited with a central bank, such as the Federal Reserve, from the calculation of total leverage exposure. Custodial banks are banks that are predominantly engaged in custody, safekeeping and asset servicing activities. The SLR is the ratio of a banking organization's tier 1 capital to its total leverage exposure, which includes all on-balance-sheet assets and many off-balance-sheet exposures.

Miscellaneous Provisions

The Act also includes numerous other provisions that are narrowly tailored to provide specific relief to various entities. This includes provisions relating to mortgage disclosures for small banks and credit unions, technical changes to mortgage loan originator licensing and registration, requirements for manufactured home retailers, escrow account requirements for higher-priced mortgages, provisions aimed at reducing identify theft, service members foreclosure relief, and various other provisions.

Considerations

Holland & Knight's Financial Services Team assists community banks throughout the country with M&A, capital raising initiatives as well as general bank regulatory, securities and corporate matters.

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.

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
Shearman & Sterling LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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