Regulatory Reform Bill Alleviating Burden on Banks and Credit Unions Progresses Through Congress

The United States Senate passed bill S. 2155 – Economic Growth, Regulatory Relief and Consumer Protection Act – a bipartisan reform bill that removes a long list of regulatory requirements on financial services organizations. It now goes to the House where it is expected to pass and ultimately be signed into law by President Trump.

The bill is considered by proponents to be a needed retraction of many of the regulatory requirements that resulted from the financial crisis of 2007-2009. During this period, concerns resulting from liquidity and capital concerns in the financial system were prevalent and many pundits in the business and government sectors believed that regulatory leniency significantly contributed to the instability. In response, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). It is estimated that the Dodd-Frank Act resulted in nearly 12,000 pages of new or expanded regulations.  In addition, regulators expanded the scope of existing laws and regulations, such as implementing new regulations with respect to the Basel III Accord. Following this broad expansion of regulations, financial institutions argued that the changes were an over-correction and certain regulations were unduly burdensome, especially for smaller banks and credit unions that lacked sufficient resources to comply with new requirements.

Acknowledging these concerns, bill S. 2155 is intended to provide regulatory relief from many of the Dodd-Frank requirements placed on banks and credit unions, especially those with assets under $10 billion thereby reducing administrative and compliance costs. Three key areas addressed in the bill are mortgage lending rules, regulatory relief to financial institutions and consumer protections related to credit reporting. The bill aims to foster economic growth and eliminate many of the administrative hardships placed on institutions, which is expected to enable them to offer more loans to qualified customers and be positioned to best serve their communities.

Key features from the bill include:

• Changing Qualified Mortgages Requirements: The bill, if it becomes law, will expand the designation of “qualified mortgages” for insured depository institutions and insured credit unions with less than $10 billion in assets and amends the Truth in Lending Act (TILA) requirements for these institutions to waive the ability-to-repay requirements. This gives a greater number of borrowers access to qualified mortgages (based on the rules defined by the Consumer Financial Protection Bureau), which lowers their borrowing costs compared to a non-qualified loan. This is important for borrowers with sufficient assets and other sources of funds that may not have consistent year-to-year income to meet the qualified mortgage requirements, thus forcing them to acquire a higher-cost qualified mortgage. A loan that satisfies the revised qualified mortgage requirements would also comply with the ability-to-repay requirements of the Truth in Lending Act (TILA). To qualify, the loan cannot have an interest-only or negative amortization feature and must comply with prepayment penalty limitations under the TILA ability-to-repay requirements.
• Raising the Threshold for Systematically Important Financial Institutions: The bill raises the threshold for designating an institution as “systemically important” from $50 billion in total assets to $250 billion in total assets, thereby reducing the number of institutions subject to the enhanced standards for capital planning, liquidity and regulatory reporting requirements. The bill also decreases, from three to two, the number of scenarios that must be included in the Federal Reserve-conducted and company-conducted stress tests;
• Raising Limits on Financial Institutions Required to Perform Stress Testing:  The bill ends stress testing requirements for all financial institutions under $100 billion in assets (previously $50 billion), internal stress tests for financial institutions under $250 billion in assets, and allows federal regulators to design tailored supervisory stress tests for financial institutions between $100 billion and $250 billion rather than a one size fits all approach. These changes will result in significant compliance cost reductions for many large financial institutions;
• Capital Simplifications for Qualifying Community Banks: The bill simplifies the treatment of assets subject to Basel III capital framework requirements. Financial institutions that meet the definition of a Qualified Community Bank, which is any insured depository institution or depository institution holding company with total consolidated assets of less than $10 billion, would be exempt from existing risk-based capital ratio and leverage ratio requirements. Instead, these banks would be required to establish a Community Bank Leverage Ratio (the tangible equity capital as a percentage of the average total consolidated assets) of not less than 8 % and not more than 10 %. A Qualifying Community Bank that meets the new Community Bank Leverage Ratio would also be considered to have met generally applicable leverage capital requirements, thereby exempting it from having to comply with the complexities of the Basel III capital framework requirements;
• Appraisal Exemptions for Loans in Rural Areas: The bill provides relief from appraisal requirements for mortgages of properties in rural areas under $400,000 in estimated value where appraisers are scarce, allowing for a timely and cost-effective loan approval process. The loan must remain in the mortgage originator’s loan portfolio. In addition, not later than three days after the Closing Disclosure is given to the consumer, the mortgage originator or its agent must have contacted at least three state-certified appraisers and documented that no such appraiser was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments.
• Extend Examination Cycles: The bill raises the threshold for small institutions eligible for 18-month examinations from $1 billion to $3 billion of total consolidated assets, thereby providing smaller institutions more time and resources to support economic growth within their communities rather than constant focus on supporting regulator review requests. Previously, these institutions were on a 12-month on-site examination cycle;
• HMDA Reporting Exemptions: The bill exempts financial institutions from the expanded set of Home Mortgage Disclosure Act (HMDA) data reporting requirements for those institutions that originate 500 or fewer mortgages or Home Equity Lines of Credit combined in the preceding two calendar years and have not received a rating of “needs to improve record of meeting community credit needs” in each of its two most recent Community Reinvestment Act (CRA) examinations nor “substantial non-compliance in meeting community credit needs” on its most recent CRA examination. This exemption should greatly reduce the time and effort required by qualifying institutions to capture and report HMDA data;
• Community Bank Relief on Volcker Rule Requirements: The bill amends the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the “Volcker Rule,” which prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private equity funds. These banks are also exempted from specified federal banking agencies’ capital and leverage ratio requirements. A bank will be exempt as long as the trading assets and trading liabilities of the bank and any company that controls the bank are less than 5 % of total consolidated assets;
• Charters for Federal Thrifts: The bill provides charter flexibility for federal thrifts with less than $20 billion in assets to operate with the same powers and duties as national banks without being required to convert charters, thereby allowing them to offer commercial loans to qualified customers that they otherwise would be restricted from making based on existing rules restrictions;
• Credit Reporting Freeze Alerts: The bill amends the Fair Credit Reporting Act (FCRA) to require credit reporting agencies (e.g., Equifax, Experian and TransUnion) to increase consumer protections and improve the accuracy of credit reporting. Credit reporting agencies will be required to provide fraud alerts for consumer files for at least one year, provide consumers with one free credit-freeze alert and one free unfreeze alert per year, and permit a consumer to place or remove a freeze on the consumer’s credit report at no cost.

This bill, in summary, is intended to redefine systemically important financial institutions, reduce compliance requirements and associated costs on financial institutions and enable them to better serve their customers and communities without impairment to safety and soundness.  

Schneider Downs will continue to monitor progress on this bill and other bills impacting regulatory requirements on financial services organizations. To learn more about how we can help your organization with its regulatory compliance, governance, risk and control solutions, please contact Schneider Downs.