The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), signed into law by the President on May 24, targets partial roll-backs to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Placed an order to prevent a financial crisis similar to that of 2008, Dodd-Frank has suffered several hits from the new financial reform, releasing thousands of small and medium-sized banks from financial regulation.
Banking entities are exempt from the Volcker Rule if they have (and are not controlled by a company that has) less than $10 billion in total consolidated assets and total trading assets and trading liabilities not more than 5% of total consolidated assets. In addition, there is modification to the prohibition on banking entities sharing the same name or a variation of the same name with a covered fund for corporate, marketing, promotional, or other purposes. Covered funds may now share the same name or a variation of the same name as a banking entity that is an investment adviser to such fund, as long as the name does not contain the word “bank”. In addition, the investment adviser cannot be itself, and does not share the same name or a variation of the same name as an insured depository institution, a company that controls an insured depository institution, or a company treated as a bank holding company.
Takeaway: Strictest requirements apply to 18 U.S. banks with at least $10 billion in trading assets and liabilities. Less stringent requirements apply to banks that do less trading. The changes make it easier for banks to comply with the Volcker Rule without sacrificing their safety and soundness.
Relief for Qualifying Community Banks
A qualifying community bank with less than $10 billion in total assets is allowed to be exempt from generally applicable capital and leverage requirements if the bank complies with a leverage ratio between 8-10% (to be determined by the federal banking agencies).
Takeaway: Community banks and credit unions can offer mortgages outside the typical Qualified Mortgage rule so long as they keep the loan in-house. Many lenders believe that this will allow more community lenders to offer mortgages, which would help homebuyers when low mortgage rates are on the rise.
CCAR and Stress Testing
Bank holding companies with total consolidated assets between $10 billion and $250 billion are no longer required to conduct company-run stress tests. Bank holding companies with more than $250 billion in assets and non-bank SIFIs are required to conduct company-run stress tests on a “periodic”, rather than annual or semi-annual, basis; the Federal Reserve retains discretion in setting the maximum intervals between company-run stress tests.
The Federal Reserve is required to conduct periodic tests for bank holding companies with total consolidated assets of $100 billion or more and less than $250 billion. However, bank holding companies with $250 billion or more in total consolidated assets and non-bank SIFIs will continue to be subject to annual Federal Reserve-run stress tests. The number of required stress-test scenarios, both company-run and Federal Reserve-run, was reduced from three to two - “baseline” and “severely adverse”; the “adverse” test scenario was eliminated.
Takeaway: Small and medium-sized banks are not required to undergo “stress tests” to measure their ability to withstand a severe economic downturn.
Increased SIFI Threshold
A Systemically Important Financial Institution (SIFI) is a firm that U.S. federal regulators determine would pose a serious risk to the economy in the event of its collapse. The label reflects the concept of a firm that is “too big to fail” and imposes extra regulatory burdens.
The total asset threshold for bank holding companies to qualify as SIFIs raised from $50 billion to $250 billion. Bank holding companies with total consolidated assets of between $50 billion and $100 billion would be exempt from the Federal Reserve’s enhanced standards. Bank holding companies with total consolidated assets between $100 billion and $250 billion would be exempt from such standards for the next 18 months.
Takeaway: Loosened rules on “small banks,” which include Ally Financial, Barclays, and American Express; these banks are not considered “too big to fail,” and are not subject to stricter oversight. Only the 10 largest U.S. banks must comply with Dodd-Frank.
Pro or Con
Opinions of the new legislation vary - backers say the legislation will lift burdens unnecessarily put on small and medium-sized lenders by the Dodd-Frank and boost economic growth.
Opponents argue that the changes could open taxpayers to more liability if the financial system collapses or increase the chances of discrimination in mortgage lending.
You decide – are the changes to Dodd-Frank good for your business, or is it a further burden?
Note: S. 2155 includes numerous provisions, not all of which are broken down in this article; full details on S. 2155 modifications to Dodd-Frank found at https://bit.ly/2sH5yUG.
Laurie Mentz Nichols, SRA, AI-RRS, is the secretary of the CT Chapter of the Appraisal Institute and is the owner of Enterprise Appraisals, LLC, West Haven, Conn.