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.
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.
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.
A number of provisions in the Act will have a favorable impact on smaller community banks. These are briefly referenced below.
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.
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.
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.
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.
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.
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.
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.
For more information or questions about how the Economic Growth, Regulatory Relief and Consumer Protection Act could impact your company specifically, contact Holland & Knight Partners Norman Antin, Jeffrey Haas, Kevin Houlihan, Shawn Turner, Mark Goldschmidt or William Levay.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.
Please note that email communications to the firm through this website do not create an attorney-client relationship between you and the firm. Do not send any privileged or confidential information to the firm through this website. Click "accept" below to confirm that you have read and understand this notice.