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Nutter Bank Report, November 2017
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- Bipartisan Regulatory Relief Bill for Smaller Financial Institutions Introduced in Senate
- Regulatory Relief Bill Would Create New Safe Harbor for Qualified Mortgages
- CFPB Considering New Disclosure Requirements for Overdraft Protection Programs
- Capital Rule Transition Provisions Extended for Smaller Institutions
- Other Developments: Board Responsibilities and Arbitration
1. Bipartisan Regulatory Relief Bill for Smaller Financial Institutions Introduced in Senate
Bipartisan legislation has been introduced in the U.S. Senate, aimed at reducing regulatory burden on community banks, providing new protections to consumers, and promoting economic growth, according to its sponsors. The bill, designated S. 2155 and titled the “Economic Growth, Regulatory Relief and Consumer Protection Act,” would, for example, raise the consolidated asset threshold for well managed and well capitalized banks to qualify for an 18-month examination cycle from $1 billion to $3 billion. Under the bill, a creditor would be permitted to offer a second, lower annual percentage rate to a consumer for a residential mortgage loan without waiting three business days after providing the disclosure required by the Truth in Lending Act (“TILA”) for the new rate before closing the loan as would otherwise be required under TILA. The bill would exempt from the Volcker Rule banking organizations that have less than $10 billion in total consolidated assets, and total trading assets and trading liabilities that are not more than 5% of total consolidated assets. The bill would also direct the CFPB to provide an exemption from TILA escrow requirements under Regulation Z for certain higher-priced mortgage loans. Click here for a copy of the bill.
Nutter Notes: The bill would significantly simplify regulatory capital requirements for banking organizations with less than $10 billion in total consolidated assets. The bill would direct the federal banking agencies to establish a new regulatory capital ratio, the “community bank leverage ratio,” of tangible equity to average consolidated assets of not less than 8% and not more than 10%. Banks with less than $10 billion in total consolidated assets that maintain tangible equity in an amount that exceeds the community bank leverage ratio will be deemed to be in compliance with the generally applicable leverage capital requirements and the generally applicable risk-based capital requirements, the capital ratio requirements that are required in order to be considered well capitalized under the prompt corrective action rules, and any other capital or leverage requirements to which the qualifying community bank is subject. The bill would also require the Federal Reserve to raise the consolidated asset threshold for its Small Bank Holding Company Policy Statement from $1 billion to $3 billion. The Small Bank Holding Company Policy Statement, which is Appendix C to Part 225 of the Federal Reserve's rules and regulations, currently allows bank holding companies with less than $1 billion of consolidated assets that are not engaged in any nonbanking activities involving significant leverage and that do not have a significant amount of outstanding debt held by the general public to follow less-stringent regulatory standards when acquiring other financial institutions.
2. Regulatory Relief Bill Would Create New Safe Harbor for Qualified Mortgages
In addition to the changes noted above, the proposed Economic Growth, Regulatory Relief and Consumer Protection Act would create a safe harbor from the ability-to-repay requirements under TILA for certain residential mortgages held in portfolio by smaller banks. Specifically, section 101 of the bill would amend TILA to provide that certain mortgage loans that are originated and retained in portfolio by an insured depository institution with less than $10 billion in total consolidated assets will be deemed to be qualified mortgages. Such mortgage loans would be required to satisfy certain limitations on prepayment penalties and would not be permitted to have negative amortization or interest-only features. The bank would also be required to consider and document the borrower’s debt, income, and financial resources. However, the new safe harbor for smaller banks’ qualified mortgages would be a simplified version of the existing definition of a qualified mortgage under TILA and the CFPB’s ability-to-repay rule. For example, residential mortgage loans would not be subject to the limitations on balloon features that otherwise apply to qualified mortgages under TILA or the limitations on total points and fees and debt to income ratio requirements under the CFPB’s ability-to-repay rule.
Nutter Notes: The CFPB’s ability-to-repay rule implements Section 129C of TILA, added by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires lenders to make reasonable, good faith determinations that consumers have the ability to repay mortgage loans before extending such loans. The ability-to-repay rule provides a lender with a presumption of compliance with the rule for each loan that meets the regulatory definition of a qualified mortgage, which expands on the statutory definition of a qualified mortgage under Section 129C of TILA. Under the CFPB’s ability-to-repay rule, a qualified mortgage may not have certain features, such as negative amortization, interest-only payments, or certain balloon features, and must meet limits on points and fees and other underwriting requirements. The new safe harbor available under the regulatory relief bill for qualified mortgages made by smaller banks generally would not apply if the mortgage is sold, assigned, or otherwise transferred unless the transferee is also an insured depository institution with less than $10 billion in total consolidated assets and retains the loan in portfolio or unless the mortgage is transferred in connection with a merger with another such covered institution.
3. CFPB Considering New Disclosure Requirements for Overdraft Protection Programs
The CFPB is planning to conduct online testing of new consumer disclosures under the Electronic Fund Transfer Act for ATM and debit card overdrafts. The CFPB on November 8 requested approval from the Office of Management and Budget (“OMB”) to conduct its testing of ATM and debit card overdraft disclosures with 8,000 individuals, though the forms of the new disclosures were not included in the request for OMB approval. The CFPB announced in August 2017 that it had designed four new prototype disclosure forms to be used when consumers opt in for debit card and ATM overdraft protection for checking accounts. The CFPB stated at that time that it would continue testing and developing the model disclosure forms, although it is not certain whether the online testing announced this month will involve the August 2017 model disclosure forms. According to the CFPB’s request, the testing will explore consumer comprehension and decision-making in response to overdraft disclosure forms, financial product usage, behavioral traits, and other consumer characteristics that may impact a consumer’s experiences with overdraft programs and related disclosures. Click here for a copy of the CFPB’s request to the OMB.
Nutter Notes: The CFPB also released a report this month on consumer experiences with overdraft protection programs that is critical of the costs to consumers of overdraft programs. The report, coupled with the agency’s request to the OMB to test new overdraft disclosures, could signal that the CFPB plans to propose new disclosure or other requirements on consumer overdraft programs. The report released on November 21, titled Consumer Voices on Overdraft Programs, resulted from a qualitative study undertaken by the CFPB to explore consumers’ thoughts, intentions, and expectations about overdraft programs to supplement the agency’s quantitative analyses of overdraft programs and their impacts on consumers. The report includes findings that consumers “commonly reported surprise at the overdraft fees they were charged,” and that “many of the consumers who participated in the study held strictly negative attitudes towards overdraft programs and did not describe any benefits.” The CFPB also reported that while some consumers in the study did recognize several benefits to the availability of overdraft protection, “all participants were concerned about the high cost of overdraft fees.” Click here for a copy of the CFPB’s report on consumer experiences with overdraft programs.
4. Capital Rule Transition Provisions Extended for Smaller Institutions
The federal banking agencies have jointly issued a final rule that will extend for banking organizations not subject to the advanced approaches capital rules the regulatory capital treatment applicable during 2017 under each agency’s regulatory capital rules for certain capital deductions and risk weights and certain other requirements that are subject to multi-year phase-in schedules. Specifically, the final rule published on November 21 extends the current regulatory capital treatment of mortgage servicing assets (“MSAs”), deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks (“temporary difference DTAs”), significant investments in the capital of unconsolidated financial institutions in the form of common stock, non-significant investments in the capital of unconsolidated financial institutions, and significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. The final rule also extends the 2017 transition provisions for common equity tier 1 minority interest, tier 1 minority interest, and total capital minority interest exceeding the regulatory capital rules’ minority interest limitations. The effective date of this final rule is January 1, 2018. Click here for a copy of the final rule.
Nutter Notes: The final rule allows small banking organizations to continue using a 100 percent risk weight for non-deducted MSAs, temporary difference DTAs, and significant investments in the capital of unconsolidated financial institutions rather than the 250 percent risk weight for these items which was scheduled to take effect beginning January 1, 2018. So, for small banking organizations that have significant amounts of MSAs or temporary difference DTAs, the final rule could have a temporary positive impact in their capital ratios during 2018 and thereafter. The banking agencies stated that the extension of the 2017 transition provisions was made partially in response to concerns raised by banking organizations and other members of the public about the regulatory burden, complexity, and costs associated with certain provisions in the capital rules since the issuance of the final rules in 2013, particularly for community banking organizations. Banking organizations subject to the advanced approaches capital rules continue to be subject to the transition provisions established by the capital rules for the above capital items under the final rule. Therefore, advanced approaches banking organizations are required to apply the capital rules’ fully phased-in treatment for these capital items beginning on January 1, 2018.
5. Other Developments: Board Responsibilities and Arbitration
- Fed Again Extends Public Comment Period for Proposal on Board Responsibilities
The Federal Reserve Board on November 17 extended the comment periods for a second time for both its proposed guidance on supervisory expectations for boards of directors and its related proposal to implement a new ratings system for large financial institutions that would be aligned with the agency’s post-crisis supervisory program. The public comment period will now close on February 15, 2018.
Nutter Notes: The proposal to enhance the effectiveness of boards of directors also includes guidance on the ways supervisory findings – such as Matters Requiring Immediate Attention and Matters Requiring Attention – would be communicated to boards of directors. Click here for a copy of the proposal on supervisory expectations for the boards of directors and here for a copy of the proposed new rating system for large financial institutions.
- CFPB Arbitration Rule Repealed
President Trump on November 1 signed a resolution repealing the CFPB’s arbitration rule, which would have prohibited banks and other covered consumer financial service providers from using arbitration clauses in agreements with consumers to prevent consumers from filing or participating in class action lawsuits concerning covered consumer financial products or services. As a result, the CFPB may not issue any substantially similar rule without authorization by Congress.
Nutter Notes: The arbitration rule was repealed under the Congressional Review Act, which authorizes Congress to prevent certain regulations issued by federal agencies from becoming effective by enacting a joint resolution of disapproval within 60 legislative days after Congress receives a regulation. The Senate passed a resolution of disapproval of the arbitration rule last month and the House of Representatives passed the resolution in July.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:
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