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. On May 22, 2018, the House passed the Senate Banking Bill with 258 yeas (225 Republicans and 33 Democrats) and 159 nays (1 Republican and 158 Democrats). The bill was enacted on May 24, 2018, after being signed by President Trump.
The Senate Banking Bill relaxes regulations on various financial institutions, including smaller community banks. While the Bill continues to maintain the core provisions of the Dodd-Frank Act, it introduces a number of important changes that banks and other financial companies need to be aware of.
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 increases this threshold to $250 billion. This significantly reduces 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 also:
- Increases the threshold for a mandatory risk committee for bank holding companies from consolidated assets of $10 billion to $50 billion.
- Removes 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.
- Increases 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.
- Reduces the conditions for stress tests from three to two – the “baseline” and the “severely adverse.”
- Allows 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 the bill, the credit reporting agencies will 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. This alert 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.
Stay tuned for future updates on the Senate Banking Bill and the potential effects it will have on financial institutions. For more information contact Mazars banking practice.