Bill would eventually raise threshold for enhanced supervision of banks to $250 billion; President is expected to sign measure, which the Senate passed in March

The House on May 22, 2018, passed, by a vote of 258-159, a bipartisan package of financial regulatory relief measures (S. 2155) sponsored by Senate Banking Committee Chairman Mike Crapo (R-ID), who drafted the bill in collaboration with a group of moderate Democrats in the Senate. The House's action clears the bill for the President's signature. Among other provisions primarily aimed at providing relief for smaller banks and credit unions, the Economic Growth, Regulatory Relief and Consumer Protection Act would raise the 2010 Dodd-Frank Act's asset threshold — above which banks are considered "SIFIs" and are subject to an "enhanced supervision" regime of capital, leverage and liquidity rules supervised by the Federal Reserve — from $50 billion to $100 billion. That threshold would increase further to $250 billion 18 months after the bill's enactment. The Senate passed the bill on March 14 by a vote of 67-31, with 16 Democrats and independent Angus King (ME) supporting the measure.

Thirty-three Democrats supported the bill in the House, while one Republican (Walter Jones of North Carolina) voted against it. The House did not consider any amendments to the bill.

Attached with this Alert please find PDFs of the text of S. 2155, as well as a Congressional Research Service (CRS) report discussing the bill's provisions in detail (55 pages) and summaries of S. 2155 prepared by the Senate Republican Policy Committee and the American Bankers Association.

Separate Package of House Provisions Will Be Considered. House Financial Services Committee Chairman Jeb Hensarling (R-TX) initially had insisted that the Senate side agree to negotiate expanding the bill to include a group of House provisions that have bipartisan support. In the weeks after Senate passage, however, the Senate Democrats who had supported the bill refused to reopen the legislation and vote again. Ultimately Hensarling relented after securing a commitment from the Senate's GOP leadership to vote on a separate package of House provisions. Exactly what those measures are, and when the Senate will consider them, hasn't yet been determined, though Hensarling last week said they would include "familiar" bills easing regulations in the capital markets — what he called "JOBS Act 3.0."

Urging a vote for the bill on the House floor today, Hensarling said, "The Main Street banks and credit unions that … people depend on, they've been suffering, they've been suffering for years under the weight, the load, the volume, the complexity and cost of heavy Washington bureaucratic red tape." Meanwhile, Maxine Waters (D-CA), the ranking member on the Financial Services Committee, sent a letter to Democrats with House Minority Leader Nancy Pelosi (D-CA) that focused on the bill's language easing reporting requirements for certain banks under the Home Mortgage Disclosure Act (HDMA). They said the bill "would enable 85% of the depository institutions in the U.S. … to not report mortgage data they already collect," and warned of "the grave potential for this measure to enable redlining and discrimination."

Selected provisions of S. 2155

'SIFI' asset threshold for banks raised to $250 billion. The bill's key feature would raise the "SIFI" asset threshold for enhanced supervision of a bank by the Federal Reserve from $50 billion to $100 billion, and later (18 months after enactment) to $250 billion, which would benefit a group of about 25 regional and "midsize" banks. But the Fed would retain the authority to apply enhanced prudential standards to any bank with more than $100 billion in assets after the effective date, if the Fed judges that is necessary, and would be required to conduct a "periodic" supervisory stress test of those banks. A change adopted on the Senate side clarified that nothing in this section would affect the Fed's ability to impose enhanced supervision on foreign banking organizations with total consolidated assets of $100 billion or more. The same Senate amendment stipulated that banks with at least $100 billion in assets would still have to pay fees charged by the Fed, even if the Fed is no longer their chief regulator under the bill's changes. The Fed would have to modify its assessment to reflect any changes in supervisory duties brought by the fact that banks with assets between $100 billion and $250 billion would no longer be considered "SIFIs."

QM rule, HMDA reporting. The bill would extend safe harbor status under the Consumer Financial Protection Bureau's Qualified Mortgage rule (QM) to mortgage loans held in portfolio by small lenders. It would also provide substantial relief to smaller banks from HMDA's loan-data reporting requirements. A change made to the bill's HMDA language on the Senate floor in March would ensure that FDIC-regulated lenders with poor Community Reinvestment Act (CRA) ratings would not be able to use the exemption.

Volcker rule. The bill would simplify the capital regime for highly capitalized community banks and exempt banks with less than $10 billion in total assets from the Volcker rule, which prohibits banks from engaging in proprietary trading for their own accounts or owning private funds. 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.

Muni bonds, custody banks. The bill would 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). Section 402 of 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).

Among other provisions affecting smaller banks, the bill would:

— ?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. It would also 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. The bill 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.

— 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 also changes how the FDIC treats reciprocal deposits, no longer requiring banks to request a waiver if these assets fall from "well capitalized" to "adequately capitalized." The bill also would allow an institution or mortgage originator to sell, assign, loan or transfer a residential loan to a wholly owned subsidiary, if the loan is considered an asset of the covered institution.

Appraisals. The bill would exempt some real estate transactions from an appraisal requirement if the transaction is less than $400,000, the property is rural and the originator can't find an appraiser in a reasonable time. The bill specifies that the exemption applies only if the lender cannot find an appraiser within five business days of "customary and reasonable fee and timeliness standards for comparable appraisal assignments."

Consumer protections. The bill requires the three credit reporting agencies to offer consumers an unlimited number of free credit freezes and unfreezes each year. This provision was billed as a response to the massive data breach at Equifax last year. Veterans' credit reports would have to exclude their medical debt. A senate amendment added a number of provisions intended to protect military service members and student borrowers. That amendment adjusted language requiring the three credit reporting agencies (Equifax, Experian and TransUnion) to provide free credit monitoring for active-duty military members, narrowing the extent to which those agencies can be subjected to class action lawsuits. The Federal Trade Commission would be responsible for enforcing the credit monitoring requirement, and state attorneys general would still be able to sue the credit reporting firms.

— During Senate consideration in March, the credit reporting agencies won a provision requiring Fannie Mae and Freddie Mac to consider allowing the use of consumer credit scoring models beyond the widely used scores provided by FICO. Equifax, Experian and TransUnion have backed an alternative system called VantageScore. The bill sets timelines for the GSEs to consider applications for alternative credit scoring systems.

— Another provision would require lenders to demonstrate a "net tangible benefit" for a refinanced mortgage loan that is guaranteed by the Department of Veterans Affairs, with specific protections related to fees, adjustable-rate loans, discount points and cash-out refinancings. Another would permanently extend, from nine months to one year, the period after a service member's military service during which he or she is protected from a property foreclosure or seizure. Currently, that protection is temporary under a 2012 law.

— Another provision would prohibit lenders from declaring that a private student loan is in default only because a cosigner on the loan has died. Lenders would also have to release cosigners from their obligations if the student borrower dies. The substitute also requires the Financial Literacy Education Commission (FLEC) to establish best practices for colleges to teach financial literacy skills and help students make decisions about borrowing.

— The bill also targets "synthetic identity fraud" — in which fraudsters take out loans in the names of made-up identities — by requiring the Social Security Administration to operate a database allowing banks and credit unions to verify whether a name, Social Security number or birthdate are tied to an actual person.

Capital formation. The bill includes five House-passed bills aimed at easing regulations for raising capital in the securities markets, plus a sixth (HR 1257) that is pending a floor vote but was passed unanimously by the House Financial Services Committee:

— HR 1219, increasing from 100 to 250 the number of people who can invest in a venture capital fund before the fund would have to register with the SEC.

— HR 1343, increasing from $5 million to $10 million the amount of stock that companies can sell to their employees each year without having to provide additional information to investors about compensation packages.

— HR 2864, allowing companies that file annual, periodic and other reports under the SEC Act to qualify for the Regulation A+ exemption, which allows issuers to sell securities to the public with limited registration and disclosure requirements.

— HR 4279, allowing closed-end funds to qualify for the streamlined securities registration process and other benefits available to issuers that file reports under section 13 or section 15(d) of the Securities Exchange Act.

— HR 1312, requiring the SEC to review and respond to recommendations from government and industry stakeholders on small-business capital formation; and HR 1257, authorizing the SEC to reduce fees collected from stock exchanges if they previously overpaid the fees, within a 10-year time horizon.

Puerto Rico. The bill includes language drawn from HR 1366, a bill offered by Nydia Velazquez (D-NY) closing a "loophole" that allows financial firms operating in Puerto Rico to both underwrite and sell municipal bonds. Critics have said the exemption allowed UBS Group AG to sell funds to island residents who later suffered heavy losses. The Government Accountability Office (GAO) would also have to conduct a study on housing in Puerto Rico after 2017's Hurricane Maria, including the rate at which federally insured mortgages defaulted because of last year's storms.

Commercial real estate lending. The bill would direct regulators to impose higher capital requirements on "high-volatility commercial real-estate" (HVCRE) exposure only under certain conditions. The language is drawn from a bill (HR 2148) that passed the House by voice vote last year.

———————————————

———————————————
ATTACHMENTS

CRS Report

S 2155 ABA Summary

S 2155 RPC Summary