The House of Representatives has passed a bill that will loosen many of the post-recession restrictions that were imposed on the financial services industry by the Dodd-Frank Act. S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, is intended principally to assist community banks, but significant provisions will change which bank holding companies are subject to enhanced prudential standards, benefiting only much larger banks. The bill also includes some consumer protection provisions. The bill passed by a vote of 258 to 159, with 33 Democrats voting for passage. S. 2155 now will be transmitted to President Donald Trump for his expected signature.
Despite initial Republican leadership threats not to move the bill unless provisions of bills passed earlier by the House were incorporated, S. 2155 was passed with no amendments to the version passed by the Senate, with bipartisan support, on March 14. A Trump administration policy statement has said that the bill will be signed into law.
The main provisions of the bill address:
- community bank capital and leverage;
- mortgage lending;
- consumer protection;
- financial stability; and
- securities laws.
Capital and leverage. S. 2155 provisions that affect community bank capital and leverage requirements and restrictions may have the most effect on the profitability of these smaller banks. The bill responds to complaints that Dodd-Frank unfairly, and perhaps disproportionately, applies financial stability-related rules to banks that are too small to pose a threat to the financial system.
Section 201 directs the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation to set a tangible equity to average total consolidated asset ratio of between 8 percent and 10 percent for banks with less than $10 billion in consolidated assets. A bank that remains below that threshold will be deemed to meet capital and leverage requirements if it satisfied the ratio.
Section 403 permits community banks to count investment-grade, liquid, and readily marketable municipal securities as assets that satisfy the liquidity coverage ratio rule.
Also, Sec. 402 says that a custodial bank’s deposits with a Federal Reserve Bank or other qualifying central bank will be excluded when the bank’s supplementary leverage ratio is calculated. This will mainly benefit large, internationally active banking organizations, and it is expected to exempt them from SLR requirements.
Mortgage lending. One of the ways that S. 2155 is intended to help community banks is by easing the path for mortgage lending, specifically by broadening what is considered to be a qualified mortgage that satisfies ability-to-repay standards. Section 101creates a lower threshold for loans by banks with less than $10 billion in assets that the lending bank keeps in its portfolio. These loans will be considered qualified mortgages if:
- there are no prohibited prepayment penalties;
- the points and fees do not exceed 3 percent of the loan amount;
- there are no negative amortization or interest-only payment options; and
- fixed-rate loans meet specified underwriting standards.
Also, Secs. 102 and 103 reduce appraisal requirements; Sec. 108 creates an exception from escrow account requirements; and Sec. 104 reduces Home Mortgage Disclosure Act data collection duties for very small banks and credit unions that make a small number of mortgage loans and have adequate Community Reinvestment Act ratings.
Consumer protection. Consumer protection improvements in S. 2155 include a requirement in Sec. 301 that consumer reporting agencies place and remove security freezes on consumer files free of charge. Also, there are four statutory amendments that will benefit servicemembers and their families. These include:
- a restriction on the ability of consumer reporting agencies to report unpaid medical debt (Sec. 302);
- a requirement that they provide free credit monitoring services to all active duty servicemembers (Sec. 302);
- a permanent extension to one year after the end of active duty in how long a mortgage creditor must wait before foreclosing on a mortgage (Sec. 313); and
- a restriction on the ability of the Veterans Administration to guarantee refinanced mortgages, in order to ensure that refinancing benefits the servicemember (Sec. 309).
Financial stability. One of the more controversial provisions of S. 2155 changes the asset threshold for the automatic application of enhanced prudential standards. Currently, banks with more than $50 billion in assets are covered, but Sec. 401 increases the threshold to $250 billion. However, the Fed retains the ability to apply enhanced prudential standards to banks with assets of more than $100 billion if doing so is deemed necessary. In any case, the Fed will have the authority to tailor its requirements to each bank’s business model and risk profile.
There will be fewer stress tests performed. Company-performed stress tests will be required only of institutions with more than $250 billion in assets, as opposed to the current $10 billion. Other than for institutions that exceed the $250 billion asset threshold, stress test frequency is changed from "annual" to "periodic."
Also, stress tests will be simplified by the removal of the "adverse" scenario. Only two scenarios will be called for—"baseline" and "severely adverse."
Another change, made by Sec. 270, will change the Fed’s Small Bank Holding Company Policy Statement to allow higher debt levels for BHCs with up to $3 billion in assets, up from the current $1 billion.
Securities-related provisions. Two parts of S. 2155 will affect the Volcker Rule directly. The Volcker Rule restricts banks’ ability to engage in some proprietary trading or investment fund activities. Section 203 fully exempts from the Volcker Rule banks that have less than $10 billion in total consolidated assets and total trading assets and liabilities of no more than 5 percent of those consolidated assets. Section 204 eliminates a Dodd-Frank ban so that some hedge and private equity funds will be able to share the name of a bank-affiliated investment advisor.
White paper. S. 2155 is analyzed in detail in the Wolters Kluwer white paper "Is Senate reg relief a scalpel or hatchet to Dodd-Frank?"
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