Impact of Legislative and Regulatory Reform Webinar for Financial Institution Directors Presented by: Christine Edwards Jerry Loeser June 18, 2018
What We Will Cover • New Regulatory Reform Legislation • Recent Federal Reserve Speeches • Comptroller of the Currency Developments • Community Reinvestment • Recent Noteworthy Actions of the New York Department of Financial Services • New Beneficial Ownership Rule • What Might Be Expected from New Chair of FDIC 2
Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) • Signed by the President May 24, 2018 • Contents • Tailoring Regulation for Certain Bank Holding Companies • Regulatory Relief • Capital Formation • Mortgage Credit • New Consumer Protections • Student Loans 3
Tailoring Regulation of Bank Holding Companies • Enhanced Prudential Supervision • Raises threshold from $50 billion to $250 billion • Requires tailoring of supervision • Raises the threshold for requiring a risk committee from $10 billion in assets to $50 billion in assets • Requires that FRB and company stress tests only include severely adverse, and not merely adverse, scenarios 4
Tailoring Regulation of Bank Holding Companies • Eliminates the requirement that company stress tests be conducted either semi-annually or annually and, instead, provides that they shall be conducted “periodically” • Raises the threshold for the limit of a 15 to 1 debt to equity ratio from $50 billion in assets to $250 billion • Effective immediately as to BHCs under $100 billion in assets; otherwise effective November 24, 2019 • This does not affect FRB treatment of foreign banks with more than $100 billion in assets or the requirement that they establish intermediate holding companies 5
Tailoring Regulation of Bank Holding Companies • Supplementary Leverage Ratio for Custodial Banks • Funds deposited by a custodial bank in a government’s central bank shall not be taken into account when calculating the custodial bank’s supplemental leverage ratio. • Only funds “linked to” fiduciary, custodial, and safekeeping accounts. • Q: Does this put custody departments of non-custodial banks at a competitive disadvantage? 6
Tailoring Regulation of Bank Holding Companies • Treatment of Certain Municipal Obligations • For purposes of liquidity coverage ratio rules, bank regulators are to treat municipal obligations that are liquid, readily marketable, and of investment grade as “high-quality liquid assets.” • Characterized by some as, for capital markets, the most significant change in the legislation 7
Board Perspective on These Changes • Directors should consider asking the CFO whether the company intends to change its investment perspective on municipal bonds. • Directors may also ask whether this legislation will have an impact on municipal bond markets generally and, if so, how that may impact the company. 8
Regulatory Relief • Capital Simplification for Community Banks (Assets of Less than $10 billion) • Bank regulators are to adopt rules providing for a “Community Bank Leverage Ratio” of not less than 8 percent and not more than 10 percent. • Meeting that standard shall be deemed to satisfy all community bank capital requirements. • Including Prompt Corrective Action requirements 9
Additional Regulatory Relief • Reciprocal deposits in a bank that places deposits through a reciprocal deposit placement network of banks in amounts that are less than or equal to the amount of FDIC insurance (e.g. CDAR participants) will not be considered brokered deposits so long as the amount does not exceed the lesser of $5 billion or 20 percent of liabilities of the bank. • Exemption from the Volcker Rule for firms in banking organizations with less than $10 billion in assets • Loosening of name restriction in investment adviser client exception in Volcker Rule • Simplifying call reports for banks holding less than $5 billion in assets • Option for federal savings associations to elect rights and duties of national banks • Q: Effect on parent holding companies? 10
Additional Regulatory Relief • Increase applicability of FRB’s Small BHC and SLHC Policy Statement (permitting acquisition debt) from firms with $1 billion in assets to firms with $3 billion in assets • For banks with $3 billion in assets or less, examination cycle is lengthened from every 12 months to every 18 months (previously 18-month cycle was only for banks with assets under $1 billion) • Requires Treasury, FRB, and the Director of the Federal Insurance Office to support increased transparency at global insurance standard-setting forums • Limiting higher capital requirements for certain high-volatility commercial real estate (“HVCRE”) loans for acquisition, development, or construction loans secured by real estate 11
Board Perspective on These Changes • Potential Board Inquiry: Has management considered whether the exemption of community banks from the Volcker Rule: • Creates a competitive challenge for the company by having an increasing number of competitors not subject to the same rules; or • Presents a business opportunity for the company to provide the proprietary trading and investment needs of community banks? 12
Capital Formation • Requires the SEC to assess, and disclose actions it intends to take promptly on, recommendations of its annual government-business forum on capital formation • Venture capital funds with less than $10 million in capital may have up to 250 investors without being deemed an “investment company” • Requires the SEC to increase from $5 million to $10 million the aggregate sales price, as part of an offering under an employee benefit plan, in excess of which an issuer must deliver additional disclosure • Requires the SEC to expand the exemption for small offerings to include such offerings by publicly held companies • Requires the SEC to adopt rules permitting closed-end investment companies to use securities offering and proxy rules available to publicly held firms, including provisions available to “well-known seasoned issuers” 13
Board Perspective on These Changes • Potential Board Inquiry: What impact will these changes have on the capital markets generally and will these changes enhance access to capital, or have the potential for crowding out capital transactions? 14
Mortgage Credit • Creates a safe harbor under the “ability to repay” requirement for certain loans originated and retained by banks that are part of organizations with less than $10 billion in assets if the loan • Is not resold, • Does not penalize prepayment, • Does not have negative amortization, • Is based on consideration of debt, income, and financial resources of the consumer. 15
Mortgage Credit • Eliminates the appraisal requirement for loans secured by rural real property where a bank has contacted at least three appraisers and none are available in five business days, if the transaction value is less than $400,000 • Limitations on sale of such loans 16
Mortgage Credit • Exempts from certain, but by no means all, of the reporting requirements in the Home Mortgage Disclosure Act (“HMDA”) banks that originate fewer than 500 closed-end mortgage loans or 500 open-end lines of credit if such banks have a satisfactory or better Community Reinvestment Act (“CRA”) rating. 17
Mortgage Credit • Requires the BCFP to exempt from the requirement that an escrow account be established, first-lien loans by a bank on principal dwellings if: • The bank has assets of $10 billion or less, • The prior calendar year, the bank originated 1,000 or fewer such loans, • The first lien is on property in a rural or underserved area, • The bank and its affiliates normally do not maintain such escrow accounts, and • The loan is not a “higher-priced mortgage loan.” 18
Board Perspective on These Changes • Potential Board Inquiry: Should management of larger banks consider curtailing residential mortgage loans in geographic areas served by community banks—particularly when they have the cost advantage of being exempted from consumer protection regulations? • Potential Board Inquiry: Should larger banks aggressively advertise the fact that they provide consumer protections that smaller banks will not offer? 19
New Consumer Protections • The legislation is not an unalloyed blessing. • The regulatory relief bill, besides relieving banks of some regulatory burdens, contains a title that imposes a number of new regulatory burdens. • Title III (“Protections for Veterans, Consumers, and Homeowners”) imposes a number of new legal obligations on banks and other regulated firms. 20
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