In the early evening of May 22, 2018, the U.S. House of Representatives approved the Economic Growth, Regulatory Relief and Consumer Protection Act (the Act), paving the way for certain signature by the President. The House passed the exact version of a bill that was earlier approved in March 2018 by the Senate (Senate bill 2155). Each house passed the bill on a relatively bipartisan basis: in the Senate by a vote of 67-31, and the House by a vote of 258-159 (with 10 members not voting).
Despite some press reports to the contrary, the Act should not be construed as a widespread repeal of the Dodd-Frank Act. Notably, Rep. Jeb Hensarling, Chairman of the House Financial Services Committee, did not get everything he wanted, including complete repeal of the Volcker Rule, and has pledged to introduce additional regulatory relief before year-end. Such additional reform is unlikely, as Senator Mark Warner (who voted for Senate passage) opined that Senate Democrats collectively went as far as they could with this version.
The Act is divided into six titles, which aim to: improve consumer access to mortgage credit (Title I); provide regulatory relief and protect consumer access to credit (Title II); protect the credit information of consumers, including veterans and servicemembers (Title III); tailor regulations for certain Bank Holding Companies, including raising the threshold levels for exemption from certain prudential standards and stress testing (Title IV); encourage capital formation by reforming certain Securities and Exchange Commission (SEC) regulations (Title V); and protect student borrowers (Title VI).
While the Act covers a wide-range of financial activities, there are a number of elements likely of consequence to our North Carolina clients:
Access to Residential Mortgage Credit
- Residential mortgages originated by an insured bank or credit union having less than $10 billion in total consolidated assets will be deemed a “qualified mortgage” under the Truth in Lending Act (TILA), so long as the originating lender holds the loans in portfolio.
- Small depository institutions originating fewer than 500 closed-end residential mortgage loans or 500 open-end lines of credit (measured separately) in each of the preceding two calendar years will be exempted from reporting the new Home Mortgage Disclosure Act (HMDA) data elements that were added in the 2015 Final Rule that went into effect January 1, 2018, provided that the institution received certain qualifying Community Reinvestment Act ratings in the recent past. According to industry estimates, this exemption will allow 85% of depository institutions to avoid reporting of the new data elements (even though capture of such elements still will be required). We have previously reported on the redlining implications of HMDA reporting [here] and [here].
- Residential mortgage loan originators may receive temporary, transitional licensure when moving from employment with a depository institution to a non-depository institution, such as a mortgage broker or mortgage lender, or when moving across state lines.
- Insured banks and credit unions with total consolidated assets of less than $10 billion will be exempted from mandatory escrow requirements for certain higher-priced residential mortgage loans.
- The present three-day waiting period under the TRID rules is lifted when a creditor provides a consumer with a second offer of credit having a lower Annual Percentage Rate. (However, a careful reading of the Act raises questions as to whether the intended TILA section was properly referenced in the bill.)
Community Bank Regulatory Relief and Enhanced Consumer Access to Credit
- Community banks with less than $10 billion in total consolidated assets will be deemed to be in compliance with capital and leverage requirements even when they maintain tangible equity in an amount that causes their community bank leverage ratio¹ to exceed 10%.
- Banking entities will be exempted from compliance with the Bank Holding Company Act Section 13 prohibition on proprietary trading or interest in or sponsorship of a hedge fund or a private equity fund if consolidated assets total less than $10 billion and total trading assets and trading liabilities are not more than five percent of total consolidated assets.
- The total consolidated asset threshold for required compliance with the Federal Reserve’s Small Business Holding Company Policy Statement is raised from $1 billion to $3 billion.
- Certain depository institutions with total consolidated assets of less than $5 billion will now be subject to reduced call reporting requirements.
- The consolidated asset threshold for qualification for an 18-month examination cycle by prudential regulators is raised from $1 billion to $3 billion for “well-managed, well-capitalized” banks.
- The process for verifying the personal identification of a consumer applying on-line for a financial service or product will be simplified.
- Certain High Volatility Commercial Real Estate (HVCRE) credit facilities will no longer be subject to heightened risk weighting under risk-based capital rules. See further analysis of this issue [here].
- The Social Security Administration must accept an electronic signature as consumer consent for verification of customer identity by a financial institution.
Protection of Consumer Information
- In light of the recent Experian data breach, credit reporting bureaus must now provide to consumers, under certain circumstances, fraud alerts and unlimited, free security freezes and freeze releases.
- The Fair Credit Reporting Act will be amended to exclude from consumer reporting information certain medical debts incurred by veterans and also establish a new dispute process with respect to such medical debt.
- The Protecting Tenants at Foreclosure Act of 2009, which had sunset as of December 31, 2014, is now permanently restored.
- Veterans are now protected from certain predatory lending practices when refinancing a VA-insured residential mortgage loan.
- Fannie Mae and Freddie Mac must establish a process for validating and approving new, alternative credit scoring models for use in underwriting residential mortgage loans under standards and criteria to be established by the Federal Housing Finance Agency (FHFA). FHFA is currently studying this issue on a voluntary basis, based on an earlier industry request that FHFA consider an alternative credit scoring model created by the primary competitor to FICO, which competitor is under the financial control of the three major credit reporting bureaus.
Tailored Regulations for Certain Bank Holding Companies
- The requirement for compliance with certain prudential standards will be lifted immediately for bank holding companies (BHCs) having between $50 billion (the previous floor threshold for compliance) and $100 billion in total consolidated assets, and similar relief for BHCs with assets of between $100 and $250 billion will become effective 18 months from the enactment date of the Act. As to this latter category, the Federal Reserve must conduct periodic supervisory stress testing and will have the authority to apply prudential standards as appropriate.
- The threshold for required periodic performance of internal stress testing by BHCs will be raised from $50 billion in total consolidated assets to $250 billion.
- For purposes of the Liquidity Coverage Ratio final rule, the federal prudential regulators must classify qualifying investment-grade, liquid, readily marketable municipal securities as level 2B liquid assets.
Encouraging Capital Formation
- The limitation on the number of individuals allowed to invest in certain venture capital funds without registration with the SEC as “investment companies” is increased from 100 to 250 investors in the fund.
- The 12-month sales threshold for provision to investors of certain disclosures related to compensatory benefit plans is increased from $5 million to $10 million, to be indexed every five years based on the Consumer Price Index, rounded to the nearest $1 million in sales.
- The SEC must expand its Regulation A+ rules (currently exempting from registration certain securities offerings by smaller issuers) to include companies that are “fully reporting” companies under the Securities and Exchange Act of 1934.
- SEC registration rules must be revised to allow a closed-end company selling a limited number of shares to investors in an initial public offering to use offering and proxy rules currently available to other issuers of securities, thereby reducing the filing requirements and restrictions on investor communications in certain circumstances.
Protections for Student Borrowers
- Private student lenders are prohibited from declaring a default or accelerating the debt of a student borrower solely on the basis of the bankruptcy filing or death of a co-signer. Co-signers of private student loans will also be released from obligation on the debt following the death of the student borrower.
The Act reduces a number of prior regulatory requirements for banks of all sizes; however, the changes it contains are often technical and need to be carefully reviewed and implemented. As is the case with any change in the regulatory environment, whether it be imposition of new compliance requirements or relaxation of former constraints, consultation with experienced legal counsel is highly recommended.
¹ The Act mandates that federal prudential regulators require their regulated institutions to maintain a “community bank leverage ratio,” calculated as tangible equity to average total consolidated assets, of between eight and ten percent. This capital requirement will be eliminated for smaller community banks.
Martha Svoboda advises banks and other financial institutions on all aspects of consumer financial regulatory compliance. She also provides training to clients on fair lending and new regulatory issues, helps clients prepare for regulatory examinations, assists clients with state licensure matters and drafts and negotiates related contracts and agreements. Martha can be reached at 919.783.2840 or at email@example.com.