What an Act for Economic Growth, Regulatory Relief and Consumer Protection Means for Your Institution

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What an Act for Economic Growth, Regulatory Relief and Consumer Protection Means for Your Institution

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). The relatively partisan Act passed as a bill in the U.S. Senate on March 14, 2018, and the exact same version was approved by the U.S. House of Representatives on May 22, 2018. Although the Act stops far short of representing a “repeal of Dodd-Frank,” in spite of what some of its advocates are claiming, it provides meaningful relief for selected segments of the financial services industry. There are also a few less-visible wins for consumer advocates.

With the relief offered by the Act, it is clear that some financial institutions (e.g., small depository institutions and credit unions with consolidated total assets of less than $10 billion) have more flexibility to determine what is appropriate for them and their operations. But at the same time, bank management should consider whether some of the requirements that have now been lifted may still make good business or risk management sense to continue. This is a general question that every bank needs to decide for themselves.

The Act primarily amends several other laws, including the:

  • Truth in Lending Act (TILA);
  • Federal Credit Union Act;
  • Federal Deposit Insurance Act;
  • Fair Credit Reporting Act (FCRA); and
  • Securities Act of 1933.

The amendments in the Act are set forth in the following six titles:

Title I:      Improving Consumer Access to Mortgage Credit

Title II:     Regulatory Relief and Protecting Consumer Access to Credit

Title III:    Protections to Veterans, Consumers and Homeowners

Title IV:   Tailoring Regulations for Certain Bank Holding Companies

Title V:    Encouraging Capital Formation

Title VI:   Protections for Student Borrowers

In this Flash Report, we highlight the major changes that will result from key provisions of the Act as well as some of the risk management implications of those changes. The text of Act is available here.

Background

During his campaign, Donald Trump said he would repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and replace it with a version of the now-defunct Glass-Steagall Act. During the first 100 days of his administration, he issued several executive orders on the regulatory front, one of which directed the Treasury Department to review the U.S. financial system in light of the administration’s core principles focused on fostering economic growth and vibrant financial markets, making regulation efficient and appropriately tailored, and enabling American competitiveness and advancing American interests in global markets.[1]

Notwithstanding these authorized reviews, financial regulatory reform took a back seat to healthcare reform and tax reform during the first 18 months of the administration. In June 2017, the House of Representatives passed its version of financial regulatory reform – The Financial CHOICE Act of 2017 – intended to comprehensively reform Dodd-Frank. However, the major overhaul represented by CHOICE did not garner the support needed in the Senate. Last week’s legislation did and it was approved by the House without further amendment.

Title I: Improving Consumer Access to Mortgage Credit

Mortgage Lending Requirements Relief: To facilitate consumer access to mortgage credit, the Act makes it easier for mortgages originated by small banks and credit unions to receive qualified mortgage status by creating a “safe harbor” for certain financial institutions. A residential mortgage originated by an insured bank/credit union with less than $10 billion in total consolidated assets will now be deemed a “qualified mortgage” under TILA, as long as the asset is held in portfolio and the loans meet certain requirements.

While all lenders have underwriting processes to determine, at some level, an applicant’s ability to repay (ATR) a mortgage, the Consumer Financial Protection Bureau (CFPB) implemented its Ability to Repay and Qualified Mortgage Standards in 2014, setting forth certain minimum requirements for creditors making ATR determinations. Qualified mortgages, however, are deemed compliant with the ATR requirements and afford the lender certain protections, including a presumption that the creditor making the loan satisfied the ATR requirements.

However, the full relief offered by the Act will actually not be realized until the earlier of the date the government-sponsored enterprises (GSEs) exit federal conservatorship or receivership, or January 10, 2021 (referred to as “the Transitional Period”). This is because the Ability to Repay Rule extends qualified mortgage status to certain loans that are originated during the Transitional Period if they are eligible for purchase or guarantee by Fannie Mae or Freddie Mac or for insurance or guarantee by certain federal agencies. Hence, until the Transitional Period ends and given the dominance of GSE-backed loans within the current mortgage marketplace, very few loans are currently subject to the qualified mortgage test.

Protiviti Commentary: Notwithstanding the above relief, prudent insured banks and credit unions with less than $10 billion in consolidated assets understand that they mitigate their exposure to the credit risk from non-performing mortgage loans by diligently assessing a borrower’s ability to repay during the loan origination process. Moreover, it is important to note that higher-priced qualified mortgages only merit a rebuttable presumption that they comply with the ATR requirements. As such, they are subject to rebuttal by consumers of that presumption in the event, for example, of a foreclosure action brought by the lender.

HMDA Disclosure Reporting Relief: Small depository institutions and credit unions (under the Act, these institutions have less than $10 billion in total consolidated assets) originating fewer than 500 closed-end mortgages or 500 open-end lines of credit (counted separately) will be exempt from reporting the “new” Home Mortgage Disclosure Act (HMDA) data elements – provided these institutions receive certain qualifying CRA ratings of that are to be determined.

  • Updated and expanded HMDA data element reporting requirements went into effect in January 2018, and required adjustments to how existing fields are reported. These adjustments required a more granular approach to reporting demographic information to help ensure that homebuyers are not unfairly denied or overcharged during the mortgage origination process.
  • Despite the Act exempting small depository institutions from reporting the additional data elements required under HMDA, such institutions are still required to submit the “old” data elements.

Protiviti Commentary: The HMDA changes cannot be considered in a vacuum because the CFPB has signaled its intent to revisit certain data field requirements under its control, apart from the Act, and likely roll back its additional HMDA data fields. While reporting of the expanded data elements is not required, prudent small lenders with robust fair lending compliance programs will collect, monitor and evaluate the data points to ensure they proactively assess their ability and success in providing capital to minorities and their communities.

Mandatory Escrow Services Relief: Small depository institutions and credit unions that originated fewer than 1,000 first lien mortgages in the prior calendar year will be exempted from mandatory escrow requirements for certain higher-priced mortgage loans.

Protiviti Commentary: In the past, these institutions were required to establish, and maintain for a minimum of five years, an escrow account for the payment of taxes and hazard insurance, and, if applicable, flood insurance, mortgage insurance, ground rents, and any other required periodic payments or premiums with respect to the property or the loan terms. Aside from establishing such accounts, the administrative burden of servicing such accounts has proven difficult for many, including complying with the associated disclosure requirements.

Escrow accounts benefit both the borrower and the lender. Escrow is an essential borrower protection, an arrangement that prominently identifies the full cost of a mortgage loan for a prospective homebuyer and reduces the likelihood of losing a home due to an unpaid tax lien or subjection to expensive force-placed insurance. For higher-priced mortgage lending, it may be prudent for small lenders to consider continuing to require, or at least encouraging, escrow accounts, even though they are no longer required to do so.

Closing Disclosure Rule Change: The three-day waiting period under TRID[2] is lifted when a creditor provides a consumer with a second offer of credit with a lower APR.

  • TRID requires a mortgage lender to provide a consumer, at least three days prior to consummation of the loan, with a Closing Disclosure which contains, among other details regarding the contractual obligation, the annual percentage rate (APR) of the loan to be consummated. If the APR becomes inaccurate, a new Closing Disclosure must be provided to the borrower, and the loan cannot be consummated until three days after the new Closing Disclosure was provided.
  • Under the Act, if the APR decreases due to a creditor offering a consumer a second offer of credit with a lower APR, the transaction may be consummated without the three-day “cooling off” period with respect to the second offer.
  • While the Act only addresses decreases to the APR, it will almost always produce a different finance charge and often a new schedule of payments, and all of these changes must still be disclosed.

Protiviti Commentary: Given TRID’s mantra, “Know Before You Owe,” it is a best practice for a lender offering a lower APR with other changed terms to provide an updated Closing Disclosure, highlighting or disclosing the new terms to consumers sufficiently far in advance of consummation so that consumers have the opportunity to make an informed decision regarding the changes.

Title II: Regulatory Relief and Protecting Consumer Access to Credit

Risk-Based Capital Requirements Exemption: Each small depository institution and credit union constitutes a “qualifying community bank” under the Act. This designation will exempt the institution from generally applicable capital and leverage requirements as long as the institution maintains a “community bank leverage ratio” (defined as tangible equity capital to average total consolidated assets) of at least 8-10 percent, effectively providing relief from the nuanced complexities of the U.S. risk-based capital rules imposed under Basel III. The Act tasks the federal banking regulators with developing the leverage ratio and capital requirements and developing procedures for qualifying community banks that later fall below the ratio. Further, the Act empowers federal banking regulators to determine, at their discretion, that the risk profile of a depository institution or depository institution holding company prevents it from receiving a designation as a qualifying community bank.

Protiviti Commentary: Relaxed capital and leverage requirements are favorable to depository institutions as they allow institutions to put more of their capital to work and may even provide consumers with more access to credit. Regardless of the perceived benefit of relief in bank capital and leverage requirements, the liquidity rules are still an important framework for reducing the risk of insolvency during economic stress. The well-managed qualifying community bank will continue to employ a two-tiered approach – meeting the requirements of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) – to manage the risk of short- and longer-term stress scenarios. Maintaining a capital cushion capable of absorbing potential losses is not only prudent but also will continue to be a regulator’s expectation.

SIFI Threshold Relief: The threshold for systemically important financial institutions (SIFIs) increases to $250 billion from $50 billion. In effect, bank holding companies with less than $250 billion of consolidated assets are no longer designated SIFIs, and are therefore not subject to the enhanced prudential standards of Section 165 of Dodd-Frank. By most counts, this relief from the increased SIFI threshold is expected to apply to 25 of the 38 largest banks in the United States.

However, when it deems appropriate, the Federal Reserve may still apply the standards to any such financial institution with greater than $100 billion in consolidated assets. This regulatory discretion in effect creates two tiers – “under $100 billion” and “from $100 billion to $250 billion” – in which the regulator has the option to apply the enhanced prudential standards to banks falling into the latter tier to assess the resiliency of their operations from a liquidity, risk management and capital adequacy standpoint. Additionally, federal banking agencies retain their supervisory, regulatory and enforcement authority to further the safe and sound operation of institutions under their purview, regardless of the asset size.

Protiviti Commentary: While this relief provision is certainly favorable on its face, it could create uncertainty for banks in the $100 to $250 billion asset tier as turnover occurs in administrations, regulatory agency leadership and related priorities, and even individual examination teams. For that reason, it will be interesting to observe the extent to which regulatory authorities exercise discretion with respect to those banks falling within this range over the next 18 months as they monitor them to ascertain whether any should be considered SIFIs.

As noted earlier, qualifying banks now have more flexibility to determine what is appropriate for them and their operations. In this case, management must decide how much SIFI infrastructure to keep in place, even if in a streamlined form, from a business and risk management standpoint. Furthermore, it would be wise to have a contingency plan in place to reinstate the remaining infrastructure relatively quickly in the event the bank is redesignated.

One additional comment: The question arises as to whether the new legislation affects the Fed's Comprehensive Capital Analysis and Review (CCAR) process. With Congress exempting banks with under $100 billion in assets from stress testing requirements, the Fed may align its CCAR testing requirements with Congress' new thresholds, e.g., banks with over $250 billion in assets would still be subject to CCAR; however, banks between $100 billion and $250 billion in assets would be subject to periodic rather than annual stress testing requirements. This remains to be seen.

Treasury Report on Cyber Threats: The Act directs the Secretary of the Treasury to issue a report assessing the threat of cyber attacks on U.S. financial institutions, evaluating current efforts to address such risks, and recommending additional legal authorities or resources for financial regulatory agencies. Treasury has a one-year deadline to deliver this report.

Title III: Protections to Veterans, Consumers and Homeowners

Credit Reporting Responsibilities: Credit reporting bureaus have increased responsibilities to consumers, including:

  • Timely responding to consumer requests for placement and removal of security freezes[3] and providing required confirmations and information. Note: In some instances, timeliness is as soon as one hour following a request.
  • Establishing a webpage that allows a consumer to: request a security freeze; request an initial fraud alert; request an extended fraud alert; request an active duty fraud alert; and opt-out of the use of information in a consumer report to send the consumer a solicitation of credit or insurance.
  • Establishing protections for the credit records of “protected consumers” who are defined as minors under the age of 16 and incapacitated persons.
  • Providing protections to veterans with covered veteran medical debt through amendments to the FCRA which include provisions for the reporting and handling of delinquent debts, covered debts, veteran medical debts and disputes.

Protiviti Commentary: In a bill focused almost exclusively on lifting the regulatory burden on smaller financial institutions, the few provisions that stand in favor of consumers are notable as suggestions of areas that could see bipartisan support for future legislation and rulemaking. With the severity of the Equifax breach, there are still segments of the industry where recent bad press has led, or is leading, to tougher standards.

Protections to Refinancing Veterans: The Act also offers protections to veterans who refinance. Veterans are now protected from certain predatory lending practices when refinancing a VA-insured residential mortgage loan. In order to have the refinanced loan guaranteed or insured under subchapter I of chapter 37 of title 38, United States Code, the Act requires lenders to:

  • Provide the Secretary of Veterans Affairs with a certification of the recoupment period for fees, closing costs, and any expenses that would be incurred by the borrower in the refinancing of the loan;
  • Perform a Net Tangible Benefit Test; and
  • Allow for the refinanced loan to properly season.

Other Matters: Two other points of interest are included in this section. First, certain tenants who occupy foreclosed properties are now permanently protected from eviction as the Act permanently restores the Protecting Tenants at Foreclosure Act of 2009, which had a sunset date of December 31, 2014). Second, GSE requirements are imposed to validate and approve new, alternative credit scoring models for use in underwriting residential mortgage loans with Federal Housing Finance Agency approval.

Title IV: Tailoring Regulations for Certain Bank Holding Companies

Stress Testing Requirements: The Act reduces both supervisory and company-run stress testing occurrences, as described below:

  • SIFIs are now only required to run internal company-run stress tests on a periodic rather than semi-annual basis. It is not clear how “periodic” will be defined.
  • Bank holding companies with total consolidated assets between $100 billion and $250 billion are exempt 18 months following the Act’s enactment. They remain subject to periodic supervisory stress tests during this 18 month period.
  • Bank holding companies with less than $100 billion in assets are no longer subject to supervisory stress tests.

Protiviti Commentary: Needless to say, raising the stress testing level to $250 billion has been a source of controversy and debate. Critics point out that bank profits are at record levels and question whether their growth has truly been stunted by the existing stress testing regime. As noted earlier, the extent to which regulatory authorities exercise their discretionary authority in supervising those banks falling within the $100 billion to $250 billion asset tier is worth watching.

For the $100 billion to $250 billion bank holding companies, the Federal Reserve will likely decide on the need for supervisory stress tests, taking into consideration their capital structure, riskiness, complexity, financial activities (including those activities of its subsidiaries), size, and any other risk factors the regulator deems relevant. Though they are no longer required to do so, non-SIFIs are well advised to continue to conduct internal stress testing to help manage risk and to influence strategy, risk appetite and capital decisions. Automating key stress testing processes will reduce the impact on the resources of the institution.

Some notable CEOs have asserted that stress tests are good for banks.[4]From a rating agency perspective, stress testing has provided discipline for banks and is an important risk governance practice that is often considered in the rating analysis process. Time will tell whether the elimination or meaningful reduction of stress testing for smaller institutions may have negative ratings implications. Of course, smaller institutions can continue to demonstrate stress testing discipline to avoid deterioration in their debt ratings.

Title V: Encouraging Capital Formation

Investment Company Act Exemption: For qualified investors, the Act increases the number of individuals allowed to invest in certain venture capital funds without requiring the fund to register with the Securities and Exchange Commission as an “investment company.” The investor limit has increased to 250 from 100.

Protiviti Commentary: The more than 100 percent increase in the number of qualified investors in specified venture capital funds required to warrant registration with the SEC reflects a concerted effort to increase the rate of capital formation in the United States. VC-backed companies are playing an increasingly important role in the growth of the U.S. economy and have been a prime driver of economic expansion and employment over the last several years. The impact of this change is to be seen, but it is in concept a sound approach to encouraging the formation of capital.

Title VI: Protections for Student Borrowers

Student Loan Protections: The Act includes several new private education lender prohibitions and provisions:

  • Institutions are prohibited from declaring a default or accelerating the debt of a student borrower solely on the basis of the bankruptcy filing or death of a cosigner.
  • Consigners of private student loans will also be released from obligation on the debt following the death of the student borrower.
  • A holder or servicer of a private education loan, as applicable, must notify any cosigners for the private education loan if a cosigner is released from their obligations as a cosigner for a private education loan.

The above provisions are prospective, applying only to agreements entered into 180 days from the enactment of the Act.

Protiviti Commentary: Although prospective in nature and not applicable to existing private education loans, this change in the law does represent meaningful protection to consumers. As indicated earlier, it is noteworthy when a bill focused almost exclusively on giving regulatory relief to smaller financial institutions includes provisions offering protections to consumers. These provisions could be a sign of things to come in the way of future legislation, rulemaking or restrictions. The expanding debt burden facing higher education borrowers, regulatory scrutiny regarding debt associated with for-profit schools, and enforcement actions related to education loan collection efforts collectively could suggest that student lending will remain in the crosshairs for some time to come, even as other segments of the industry benefit from a more historically less burdensome regulatory environment.

FCRA Protections: There are also some FCRA protections to consider:

  • In an effort to mitigate student loan losses, financial institutions may offer a loan rehabilitation program which includes, without limitation, a requirement of the consumer to make consecutive on-time monthly payments in a number that demonstrates, in the assessment of the financial institution offering the loan rehabilitation program, a renewed ability and willingness to repay the loan.
  • If such a program is offered and a borrower successfully completes the program, the financial institution must remove a reported default on a private education loan from a consumer credit report.

Protiviti Commentary: As with the default protections noted above, the addition of FCRA protections for borrowers able to successfully complete lender-specified loan rehabilitation programs is a substantive benefit to consumers. With $1.5 trillion of student loan debt currently outstanding and the probability of default on some portion of this credit, the ability to repair credit following default on a student loan is a significant contribution to the long-term financial health of consumers and the financial institutions that have extended these loans.

Other Implications

The new law is not the sweeping change that conservatives had hoped to see. For the most part, it is an attempt to “right size” certain applicability thresholds under Dodd-Frank. It was passed in the House only after the Republican leadership was promised that additional provisions of the CHOICE Act could be brought forth as one or more separate bills. Therefore, the possibility of further financial regulatory reform remains in play.

The new law leaves intact many other key provisions of Dodd-Frank designed to preserve safety and soundness. For example, it retains provisions adopted in response to the global financial crisis, such as the resolution planning process, the orderly liquidation authority, the Financial Stability Oversight Council’s authority to designate nonbanks as SIFIs, and the power to force troubled bank holding companies to divest certain assets if they pose a significant threat to financial stability. It makes no changes to the CFPB (other than the technical changes mentioned above to consumer protection requirements over which the CFPB has jurisdiction). However, efforts are underway to change other provisions of Dodd-Frank, most notably the Volcker rule.[5]

Concluding Observations

The Act is a relatively straightforward yet measured shift from a post-crisis focus on consumer protection to an idea that economic growth will be stimulated through regulatory relief. In our view, it ushers an era of flexibility into the industry and gives smaller firms the ability to make risk management decisions, whereas previously they faced hard and fast mandates. Certain of the areas impacted by the Act – especially stress testing and enhanced diligence and risk management controls like escrow accounts for high-risk mortgages – have always been sound risk management tools and remain so going forward. Accordingly, financial institutions should carefully consider which elements of their current risk and compliance practices continue to make good business sense, even if no longer formally required.

While living in this moment of reduced regulation, with less pressure and regulatory scrutiny as the pendulum swings toward relief, this is the time to carefully consider how these changes should be implemented within institutions. Focus should remain on best practices that allow financial institutions to continue to build and operate a robust compliance management system that meets the requirements of today as well as tomorrow.

Contacts

Michael Brauneis
Managing Director
+1.312.476.6327
[email protected]
Kimberly Dickerson
Managing Director
+1.571.382.7256
[email protected] 
Shelley Metz-Galloway
Managing Director
+1.571.382.7279
[email protected]
Matthew Moore
Managing Director
+1.704.972.9615
[email protected]
Tom Andreesen
Managing Director
+1.312.476.6318
[email protected]
 
 
[2] “TRID” is the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure Rule.
[3] A security freeze prohibits a consumer reporting agency from disclosing the contents of a consumer report that is subject to such security freeze to any person or entity requesting the consumer report.
[4] BofA CEO Moynihan: Stress Tests Are Good for Banks,” Bloomberg, December 22, 2016; and “Stress Tests, Living Wills Are Good for Industry, Dimon Says,” Andy Peters, American Banker, December 7, 2017.
[5]The US Federal Reserve wants to roll back the Volcker Rule,” Preeti Varathan, Quartz, May 30, 2018.

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Shelley Metz-Galloway
Shelley Metz-Galloway
Managing Director
+1.571.382.7279
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Michael Brauneis, Protiviti Chicago
Michael J. Brauneis
Managing Director
+1.312.476.6327
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