Group of moderate Democrats agrees to vote against all amendments beyond a manager's amendment; Committee sends Powell's Fed nomination to Floor, 22-1

After a markup session that lasted the entire day, the Senate Banking Committee on December 5, 2017, approved S. 2155, a bipartisan package of regulatory relief proposals called the "Economic Growth, Regulatory Relief and Consumer Protection Act," by a vote of 16-7. The final vote came after the committee spent the day methodically debating and defeating dozens of amendments offered by Democrats, with a group of four moderate Democrats who had negotiated the bill with Chairman Mike Crapo (R-ID) holding together by agreement to oppose all amendments. At the request of the chairman, Republicans on the committee did not offer any amendments, though the committee approved a manager's amendment from Chairman Crapo by a vote of 16-7. The results proved frustrating to Ranking Member Sherrod Brown (D-OH), who had tried unsuccessfully to reach his own agreement with Crapo on regulatory relief before the chairman began negotiating with the group of moderates instead. But Brown expressed gratitude for Crapo's bipartisan approach to the bill and for allowing a freewheeling debate during the markup.

Materials related to the markup are posted here. PDFs of the manager's amendment (68 pages), the original text of S. 2155 as introduced, and a section-by-section summary of the bill released last month are attached with this Alert.

A floor vote on the bill is expected sometime early in 2018, and sponsors have already secured enough support from Democrats and an independent (Angus King of Maine) to defeat a filibuster — presuming all Republicans support the measure on the floor. Before the markup, the committee favorably reported out the nomination of Fed Governor Jerome Powell to be chairman of the Federal Reserve Board by a vote of 22-1, with Elizabeth Warren (D-MA) the only vote against.

In an opening statement, Chairman Crapo said the bill was the product of a long process of committee hearings, public submissions and meetings with senators on how to ease various financial regulations promulgated under the 2010 Dodd-Frank Act and other laws. Summarizing some of the bill's provisions, Crapo said that for community banks and credit unions, the bill would "extend QM [qualified mortgage] safe harbor status to loans held in portfolio by small lenders; provide substantial relief from [Home Mortgage Disclosure Act] reporting requirements; simplify the capital regime for highly capitalized community banks; and exempt banks with less than $10 billion in total assets from the Volcker rule." For mid-size and regional banks, Crapo said the bill would "tailor regulations and prudential standards of banking organizations by changing the $50 billion 'SIFI' threshold. Banks with less than $100 billion in assets, which do not pose the same risks as globally systemic banks, are exempt from enhanced prudential standards." The bill also has a key provision in which bank holding companies with assets between $100 billion and $250 billion would be exempt from the Fed's enhanced supervision 18 months after enactment; the current Dodd-Frank asset threshold is $50 billion. But the Fed would have the authority to apply enhanced prudential standards to such banks after the effective date, and would be required to conduct a "periodic" supervisory stress test after the effective date.

Crapo noted that last week, testifying before the Joint Economic Committee, Fed Chair Janet Yellen had said that under the bill, "the Fed would still be able to impose enhanced prudential standards on firms, if necessary, and that the bill is 'a move in a direction that would be good in enabling [the Fed] to appropriately tailor [its] supervision.'"

Ranking Member Brown, Sen. Warren and other Democrats warned that it was a mistake to raise the SIFI asset threshold for enhanced supervision to $250 billion, saying the financial crisis saw turmoil at several mid-size banks and financial firms with fewer assets than that. Toward the end of the markup, Brown said, "We have tried time and time again to improve this bill by offering protections for senior citizens, students, service members and others, but none of our improvements have been accepted — not one." Brown expressed particular concern about a provision that would reduce from three to two the number of Fed-supervised stress tests for banks, while company-run stress tests "go from annual to 'periodic.' " Democrats also criticized a provision that would exempt dozens of the largest U.S. banks from being required to prepare "living will" resolution plans.

S. 2155 would also:

— Ease the current liquidity and leverage rules, directing regulators to treat qualifying investment-grade, liquid and readily marketable municipal securities as level 2B liquid assets under the liquidity coverage ratio (LCR). The bill also specifies that funds of a custodial bank that are deposited with the Fed should not be taken into account when calculating the supplementary leverage ratio (SLR).

— Establish a "Community Bank Leverage Ratio" (tangible equity to consolidated assets) of between 8% and 10% for depository institutions with less than $10 billion of assets.

— Provide a range of relief from mortgage regulations for institutions with less than $10 billion in assets, including easing Dodd-Frank "risk retention" rules that require banks to retain a portion of mortgages on their own balance sheet in order to have "skin in the game." The bill would classify those loans as Qualified Mortgages (QM) under Dodd-Frank. The bill also removes a three-day waiting period for new integrated mortgage disclosures if a creditor extends to a consumer a second offer with a better interest rate.

— In addition to relief from Dodd-Frank's Volcker rule, which bans proprietary trading, for banks with less than $10 billion in assets, a bank would also be exempt from the Volcker rule if its total trading assets and liabilities are less than 5% of its total assets.

— Allow banks with less than $5 billion in assets to file short-form call reports; raise the asset threshold for the small-bank holding company policy statement from $1 billion to $3 billion; and extend the exam cycle for well-managed banks with less than $3 billion in assets to 18 months. The bill would also change how the FDIC treats reciprocal deposits, no longer requiring banks to request a waiver for them if they fall from "well capitalized" to "adequately capitalized."

— Require the three credit reporting agencies to allow consumers to freeze and unfreeze their credit at least once a year. Veterans' credit reports would have to exclude their medical debt.

Manager's amendment. The committee approved a manager's amendment that incorporated a number of changes senators had requested since the package's introduction last month. Among other changes, the amendment would:

— Allow an institution or mortgage originator to sell, assign, loan or transfer a residential mortgage loan to a wholly owned subsidiary, if the loan is considered an asset of the covered institution.

— Require federal banking agencies to consult with state bank supervisors before implementing the bill's changes to community bank capital rules.

— Require federal banking regulators to notify applicable state bank supervisors of qualifying community banks that exceed the Community Bank Leverage Ratio.

— Strike a provision related to mutual holding company dividend waivers.

— Make technical and conforming changes, such as clarifying that the exemption to the Volcker rule for smaller banks applies only to financial institutions with less than $10 billion in total assets. (The original language could have exempted much larger institutions as well.)

— Require the three credit reporting agencies to offer consumers an unlimited number of free credit freezes and unfreezes; the original bill permitted only one such "freeze or unfreeze" each year. That change was billed as a response to the massive data breach at Equifax earlier this year.

Other amendments

The committee rejected 36 amendments offered by Democrats, usually by votes of 7-16 in which Sens. Joe Donnelly (D-IN), Heidi Heitkamp (D-ND), Jon Tester (D-MT) and Mark Warner (D-VA) voted with Republicans. Tester said the bill as amended by the chairman's mark had essentially been finished, and the Democrats who negotiated with Chairman Crapo had agreed not to support any further changes in committee, no matter how reasonable-sounding. "We have been at this for five or six years and … this is the final product," Tester said. Among the amendments offered by Democrats were measures that would require the Federal Financial Institutions Examination Council (FFIEC) to determine a suitable alternative method for valuing properties that the bill exempts from appraisals; further restrict regulatory relief for institutions that have violated laws such as the Servicemembers Civil Relief Act; block credit reporting bureaus from selling consumer data when a person's account is frozen; and reinstate the CFPB's recently overturned rules on mandatory arbitration clauses in financial contracts.

Other amendments voted down would have: prohibited relief under the bill's Title IV for any banks with $50 billion in assets that use sales goals or quotas as a compensation metric; required banks to offer workout options for reverse mortgages that go into default; increased the personal staffs of members of the Fed's Board of Governors; and prohibited private student lenders from automatically declaring that a loan is in default because of the death or disability of the co-signer. In response to several amendments intended to ease student debt, Chairman Crapo said the Senate HELP Committee is in the process of developing legislation related to student loans and should be allowed to take the lead on the issue.

If you have questions, or need additional information, please feel free to contact Will Heyniger or Bob Schellhas at Washington Council Ernst & Young at (202) 293-7474.

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ATTACHMENTS

Economic Growth Bill by Section

S. 2155 Managers Amendment

S. 2155 Original Text