United States: Dodd Frank Rollback Law Provides Regulatory Relief For Community Banks – Part 3: Miscellaneous Regulatory Relief Provisions

In May, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Act"). The Act will make a variety of changes aimed at reducing the regulatory burden on small and mid-sized banks.

This post covers provisions in the Act that could impact community banks by providing relief related to:

  • exam cycles;
  • customer identification requirements under anti-money laundering ("AML") law;
  • new federal savings association powers; and
  • "brokered deposit" exemptions.

Check the Bank Check blog for additional posts with analysis of other aspects of the Act that could impact community banks.

Extended exam cycles for banks under $3B in assets

The standard full-scope examination cycle for banks under federal law is every 12 months.

Prior to the Act, banks with less than $1 billion in total assets could qualify for an extended exam cycle period of once every 18 months, as long as those banks were well-capitalized, well-managed and highly rated. The Act provides that this extended 18-month exam cycle is now available to banks with under $3 billion in total assets that meet the well-capitalized, well-managed and highly rated tests. (See Section 210 of the Act.)

The exam cycle periods applicable to a bank can be subject to other limitations under certain circumstances, such as when the bank is subject to an enforcement action or has recently been acquired.

Customer identification – authority to use driver's license image

Under the Act, when a customer initiates a request through an online service to open an account with, or to obtain a financial product from, a financial institution, that financial institution can record and retain a scan, copy or other image of the customer's driver's license (or other state-issued identification card) to fulfill the institution's customer identification AML requirements regarding that customer, including record retention requirements. (See Section 213 of the Act.)

For purposes of this section of the Act:

  • a "financial institution" includes any insured depository institution or credit union, as well as any affiliate of such an entity, and
  • the types of "online services" covered by the Act include Internet websites and mobile applications.

The bank can retain the scan, copy or image in furtherance of those AML obligations, but must delete it after those obligations have been fulfilled. This law will preempt any existing state laws that prohibit making scans, copies or images of driver's licenses or state-issued identification cards.

This provision only applies if the customer initiates a request through an online service to open an account with a financial institution or to obtain a financial product from a financial institution.

Banks should consider Equal Credit Opportunity Act (Regulation B) issues in connection with establishing policies for the retention, access and use of customer identification cards, because the card scan, copy or image could indicate whether the customer is in a protected class by indicating race, color, sex, etc.

Option for federal savings associations to hold national bank powers

The Act provides an option for community banking institutions that are chartered as federal savings associations ("FSAs," also referred to as federal savings banks) to elect to have the same powers as national banks. (See Section 206 of the Act.)

Election for national bank powers. The powers of FSAs are governed by federal law that does not apply to national banks. However, the Act allows qualifying FSAs to elect to hold the same rights and privileges as a national bank (and to be subject to the same duties, restrictions, liabilities and other conditions applicable to national banks). The election for national bank powers is to be filed with the Office of the Comptroller of the Currency.

Qualifying institutions. To be eligible for the election to acquire national bank powers, an FSA must have had total assets of no more than $20 billion on December 31, 2017. If a qualifying FSA's assets later exceed this threshold, the FSA will continue to be eligible to elect to have national bank powers.

"Brokered deposit" exemption for "reciprocal deposits"

"Brokered deposits" are regulated more heavily than traditional "core deposits," and they can subject the bank holding the brokered deposits to higher FDIC insurance assessments. In certain scenarios, brokered deposits can be subject to interest rate limits, and the depository bank can be subject to restrictions on acceptance of additional brokered deposits.

Deposit brokers. Brokered deposits are defined as deposits that a bank acquires through a "deposit broker." A deposit broker includes any entity that is in the business of placing, or facilitating placement of, deposits of third parties with banks. Some deposit brokers operate "deposit placement networks."

Deposit placement networks and reciprocal deposits. "Deposit placement networks" link banks together so that each participating bank can provide deposit funds to become brokered deposits for other participating banks and also to accept brokered deposits from the other participating banks. Commonly, deposit amounts exceeding the FDIC-insured threshold amount are offered by these network banks to become brokered deposits at other banks so that the amount of FDIC insurance coverage for those funds can be increased. Generally, a "reciprocal deposit" is a deposit received by a bank through a deposit placement network to offset a deposit amount provided by that same bank to be a brokered deposit for another bank or banks through the network.

Exemption for reciprocal deposits. The new Act provides an exemption from the brokered deposit definition for reciprocal deposits obtained through a deposit placement network. (See Section 202 of the Act.)To qualify for the exemption, the bank and the deposit must meet certain requirements.

  • Bank requirements. To qualify, the bank holding the reciprocal deposit must:
  • place a deposit through the deposit placement network in an amount less than or equal to the FDIC's "standard maximum deposit insurance amount" (currently $250,000); provided that such deposit does not consist of funds obtained from a deposit broker before submission through the network,
  • have obtained a CAMELS composite rating of 1 or 2 in its most recent exam, and
  • be "well capitalized."

However, banks may be able to obtain a waiver of these requirements from the FDIC if they are adequately capitalized. Also, a bank that has been receiving reciprocal deposits and is later found not to meet either the CAMELS requirement or the capital requirement, continues to be eligible for the exemption as long as the bank does not receive more than the average amount of reciprocal deposits it held at the end of each of the last four calendar quarters that preceded the date of such finding.

  • Reciprocal deposit requirements.  Qualifying reciprocal deposits must have the same maturity (if any) and be in the same aggregate amount as the total deposits placed by the bank in other participating banks through the deposit placement network (excluding deposits consisting of funds obtained from a deposit broker before submission through the network).

Limit on amount of reciprocal deposits eligible for exemption. The exemption is limited to reciprocal deposits in an amount that does not exceed 20 percent of the bank's total liabilities or $5 billion, whichever is less.

Interest rate limit for banks not well capitalized. Banks that are not well capitalized but qualify for the reciprocal deposit exemption as described above are subject to limitations on the interest rates they can pay on reciprocal deposits.

More analysis

For information about the other areas affected by the Dodd Frank rollback, read the other posts in this series. Part one covers capital requirements, financial reporting and the Volcker Rule; part two covers the changes impacting residential mortgage lending.

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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