This article is part of a series of Mazars USA articles regarding banking regulations. Refer to the June 2017 Mazars USA financial services trends article on the Financial CHOICE Act and implications for community banks, and the August 2017 financial trends article on systemically important financial institutions.
S.1255 the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Senate Banking Bill”) was passed on March 14, 2018 after a strongly bipartisan 67-31 vote. Introducing a number of important changes that banks and other financial companies need to be aware of, it is now being reviewed by the House.
Modifications to the Dodd-Frank Act
Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) set a statutory asset threshold for automatic designation of nonbank financial companies and bank holding companies as systemically important. This asset threshold is currently set at a static $50 billion. The Senate Banking Bill would increase this threshold to $250 billion, significantly reducing the number of banks that are deemed to be systemically important and, therefore, subject to enhanced supervision and regulation.
The new bill allows for the Board of Governors to apply the prudential standards established for systemically important financial institutions for any bank holding company with total assets equal to or greater than $100 billion if: (a) it determines that it is necessary to prevent or mitigate risks to the financial stability of the United States or (b) to promote the safety and soundness of that institution.
The Senate Banking Bill would also:
- Increase the threshold for a mandatory risk committee for bank holding companies from consolidated assets of $10 billion to $50 billion.
- Remove the requirement for semi-annual stress tests for certain nonbank financial companies and bank holding companies, and state that such tests would be done on a “periodic” basis.
- Increase the threshold for stress tests for financial companies regulated by a primary Federal financial regulatory agency from $10 billion of consolidated assets to $250 billion, and remove the requirement for annual stress tests, replacing it with “periodic” tests.
- Reduce the conditions for stress tests from three to two – the “baseline” and the “severely adverse.”
- Allow institutions with less than $10 billion in assets and total trading assets and trading liabilities that are less than 5% of total consolidated assets to be exempt from the “Volcker Rule.” The exemption from this rule would allow the applicable institutions to (a) engage in proprietary trading, and (b) acquire, retain interest in, or sponsor hedge funds or private equity funds.
Modifications to leverage ratios for custodial banks
Custodial banks (defined as any “depository institution holding company predominantly engaged in custody, safekeeping, and asset servicing activities, including any insured depository institution subsidiary of such a holding company”) will have their supplementary leverage ratios (“SLRs”) relaxed under the Senate Banking Bill. Specifically, funds that are deposited with certain qualifying central banks (i.e. the Federal Reserve or the European Central Bank) shall not be taken into account when calculating the SLR as applied to the custodial bank. Any amount deposited with central banks that exceeds the total value of the deposits of the custodial bank that are linked to fiduciary/custodial/safekeeping accounts shall be taken into account when calculating the SLR.
Changes to real estate lending
The Senate Banking Bill also provides for:
- Exemption from appraisals of real estate located in rural areas as long as the transaction value is below $400,000 and the loan is kept on the books of the originating financial institution.
- Exemption from collection of loan data under the Home Mortgage Disclosure Act of 1975 if the institution originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit in the preceding two calendar years.
- Exemption from escrow requirements for mortgages for financial institutions with less than $10 billion in consolidated assets, as long as the financial institution originated 1,000 or fewer loans with a first lien on a principal dwelling in the preceding calendar year.
Modifications to credit reporting agency responsibilities
Under this bill, the credit reporting agencies would be required to provide security freezes to consumers at no cost. Consumers can select between a security freeze or a fraud alert. If the consumer is a victim of identity theft, they would become entitled to an extended fraud alert which lasts 7 years.
The bill also has provisions for the protection of veterans’ credit related to the reporting of medical debt on a veteran’s credit report due to delayed payments for hospital care or medical services.
- Now that the Senate Banking Bill has been submitted to the House of Representatives, the House will have an opportunity consider the bill (as well as any reconciliation they might try to do against the Financial CHOICE Act).
- Although this bill did pass the Senate, there appears to be a division in the Democratic party regarding this regulatory reform. If the House considers further roll-backs to the Dodd-Frank Act (as contemplated by the Financial CHOICE Act), the likelihood of regulatory reform will decrease significantly.
Stay tuned for future updates on the status of the Senate Banking Bill, any changes or amendments made, and the potential effects it will have on financial institutions. For more information contact Mazars USA’s banking practice at [email protected].