The Dodd-Frank Act has been characterized as the financial industry’s version of the PATRIOT Act – drafted in a time of trauma. Now the nation’s financial sector is out of the ICU and into recovery and the next step will be to discharge it back home. But what, exactly, constitutes “home?”
Several financial-reform discharge plans, both general and specific, have been released in recent weeks. There’s the U.S. Treasury’s report, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” issued June 12, which had input from dozens of interested parties, including 18 government agencies, 13 academic contributors and several hundred trade groups and commercial entities. And there’s the Republican-sponsored bill, H.R.10, Financial CHOICE Act of 2017, sponsored by U.S. Rep. Jeb Hensarling (R-Texas), on April 26.
The Treasury report covers both 25 items that could be changed without Congressional approval and 11 items that would need such approval.
The Financial CHOICE Act has to go up against a U.S. Senate version, which, at press time, had yet to be proposed. It amends Dodd-Frank to repeal Volcker Rule restrictions on certain speculative investments by banks; eliminate the Federal Deposit Insurance Corporation’s orderly liquidation authority and establish new provisions regarding financial institution bankruptcy; and repeals the Durbin Amendment limitations on fees that may be charged to retailers for debit card processing.
Banking On It
Dorothy Savarese is chairman, president and CEO of Cape Cod Five Mutual Holding Co., the sole shareholder of the Harwich-based Cape Cod Five Cents Savings Bank, with $3.1 billion in assets. She’s also this year’s chairman of the American Banking Association – the second woman in the ABA’s 142-year history to hold that post. In June 8 testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs, she forcefully maintained that despite post-recession bank consolidation, “banks could be lending more if regulations were rationalized.” She advocated for adjustment of mortgage lending criteria which now, she said, “keep too many creditworthy families out of homes they can readily afford.”
In an interview with Banker & Tradesman, she said several ABA recommendations correspond with the Treasury’s recommendations, primarily those supporting tailored recommendations according to size, specialty and risk. As for the Financial CHOICE Act, she said it “allows regulators to use their professionalism to evaluate risk profile and the complexity of businesses. We think it’s sensible in freeing them up to use professionalism to accomplish results.”
As for the CFPB, the ABA supports the need for consumer protection, but says it’s now time to evaluate what works, and what doesn’t, in regulatory reform going forward. Savarese said the ABA is in favor of a bipartisan committee to oversee the CFPB, and the issue “certainly could be discussed as it moves to the Senate.”
The June 8 testimony had a constructive dialogue, she said, noting that Sen. Elizabeth Warren (D-Massachusetts) “had great questions.” But as for progress on reform, Savarese said, any progress made this year will be up to Congress to facilitate.
Proposed Rules Don’t Fit Everyone
Paul Gentile is CEO of the Cooperative Credit Union Association (CCUA), which serves credit unions in Delaware, Massachusetts, New Hampshire and Rhode Island. He told Banker & Tradesman that the CCUA advocated for key points in the Treasury’s proposal, but doesn’t agree with all of its points – for example, the risk-based capital rule, which he doesn’t think should apply to credit unions. They are “inherently much less risky,” he said. The credit union average of 11 percent capital across the credit union system is a healthy number, he said.
Another sticking point, he said, is the extension of the threshold of the Home Mortgage Disclosure Act (HMDA) and home equity lines of credit. HMDA was established as a way to combat redlining – which credit unions have never done.
“Lawmakers told us, ‘these rules make you look better,’” but they don’t comprehend the resources it takes to fulfill reporting requirements. Additionally, the HMDA requires financial institutions to report home equity lines of credit (HELOCs) on the same basis as mortgages.
“There’s no way [a HELOC] acts like a mortgage,” he said, because the product’s various uses go far beyond financing a home.
He also said credit unions, by their cooperative, community-driven nature, do not need to be under the purview of the CFPB. “We support consumer protection. We don’t need regulation from the CFPB to treat our members well.” That said, he approves of the Treasury’s proposal to keep the CFPB, and the provision for the CFPB to have a five-person board.
The ABA has issued a general proposal, Blueprint for Growth, which advocated for targeted regulations and a shared goal of economic growth and job creation. Savarese said that any progress made on these goals would be positive, “but it’s really up to Congress.”
Comparison Of Dodd-Frank, Treasury And Financial CHOICE Act Highlights
Basel Cap/Basel Liquidity; 10 Percent Leverage Ratio Regarding Transactions And M&A
Dodd-Frank: Basel III significantly raised capital requirements, and included liquidity requirements, for larger banks. Its rules complement Dodd-Frank and include a leverage ratio and three risk-based ratios and became the expectation for all banks (1).
U.S. Treasury: Would exempt community banks with less than $10 billion in asset value from risk-based capital regime of Basel III requirements; would raise the $50 billion asset size threshold but does not specify by how much; would give regulatory relief to well-capitalized banks.
CHOICE Act: Exempts banking organizations that maintain a leverage ratio of at least 10 percent; the insured depository institution must have a composite CAMELS rating of a 1 or a 2 at the time the banking organization makes the election to seek exemption. Affects transactions, M&A and ability to make capital distributions to shareholders.
‘Too Big To Fail’ And The Financial Stability Oversight Council (FSOC)
Dodd-Frank: Established the FSOC for the oversight of systemic risks. Among other responsibilities and authorities, the FSOC can designate nonbank financial companies for Federal Reserve supervision, and can designate financial market utilities as systemically important.
U.S. Treasury: Recommends that Congress expand FSOC’s authority to play a larger role in the coordination and direction of regulatory and supervisory policies. This can include giving it the authority to appoint a lead regulator on any issue on which multiple agencies may have conflicting and overlapping regulatory jurisdiction.
CHOICE Act: Repeal FSOC authority to determine SIFI status; repeal FSOC authority to impose heightened prudential standards; FSOC would continue to serve as an inter-agency forum for: 1) monitoring market developments; 2) facilitating information-sharing and regulatory coordination; and 3) reporting to Congress on potential threats to financial stability.
Stress Tests And Living Wills
Dodd-Frank: Dodd-Frank Section 165 requires financial institutions with total consolidated assets of more than $10 billion to conduct annual stress tests and to disclose the results.
U.S. Treasury: Raises stress test threshold from $10 billion to $50 billion asset size for banks and for federally-insured credit unions, with some exemptions for banks with more than $50 billion. Recommends that NCUA should revise risk-based capital requirements to only apply to credit unions with total assets of more than $10 billion or eliminate altogether risk-based capital requirements for CUs satisfying a 10 percent simple leverage (net worth) test. Opens exams to formal notice-and-comment process; fewer banks would take exam and less often.
CHOICE Act: Regulations for testing under Section 165 must provide for baseline, adverse, and severely adverse conditions; provide copies of regulations to GAO and CBO before publishing; publish summary of stress test results, overhaul “living will” regime under Section 165 by limiting regulators’ requests for it once every two years; must provide feedback to banking organizations within six months of submission; and must publicly disclose assessment framework.
Dodd-Frank: Established the Consumer Financial Protection Bureau as the primary regulator of consumer financial products and services, in a given year, limited only by an annual funding cap. The director is appointed by the president for a five-year term and serves as a voting member of the FSOC.
U.S. Treasury: Would strip CFPB of the authority to continuously examine financial firms and prohibit it from setting its own budget, making it subject to congressional appropriations. CFPB director could be removable for cause or replaced by a bipartisan commission.
CHOICE Act: Raise threshold for CFPB bank supervision from $10 billion to $50 billion asset size. Reestablish CFPB as an independent agency outside of the Federal Reserve led by a bipartisan, five-member “Consumer Financial Opportunity Commission,” and fund it through congressional appropriations.
Dodd-Frank: Established product feature prerequisites and affordability underwriting requirements for QMs and vests discretion to the CFPB to decide whether additional underwriting or other requirements should apply. Prohibits loans with negative amortization, ‘no-doc’ loans, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. Also, points and fees paid by the consumer must stay below three percent of the total loan amount, with some exemptions. (2)
U.S. Treasury: Gives small banks more leeway in making mortgage loans by raising the threshold for small-creditor QMs. Gives CFPB power to align QM standard with GSE eligibility requirements, eliminating underwriting requirements that deny mortgages to qualified borrowers; modifying ability-to-repay calculation to help banks serve self-employed and non-traditional borrowers. But Treasury notes that any regulatory changes prioritize consumer protection.
CHOICE Act: Advocates for the adoption of HR 685, the Mortgage Choice Act, which changes the way points and fees are calculated for purposes of complying with the Ability-to-Repay/Qualified Mortgage rule by excluding fees paid for affiliated title charges and escrow charges for insurance and taxes.
Dodd-Frank: Oversight by five regulatory agencies, all of which have seats on the FSOC.
U.S. Treasury: Exempts banks with less than $10 billion in assets unless they exceed threshold for trading assets and liabilities; recommends that Congress grant FSOC power to assign a “lead” regulator for Volcker oversight.
CHOICE Act: Would repeal Volcker Rule.
Sources: U.S. Treasury, Morningconsult.com, Federal Register, Lexis Practice Advisor
(1) Lexis Practice Advisor (2) Federal Register, 1/30/2013