NOTEWORTHY

Background: S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act was introduced by Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo on November 16, 2017. It has 25 cosponsors: 12 Republicans, 12 Democrats, and one independent. The legislation was favorably reported out of the Banking Committee by a vote of 16-7.

Amendment 2151, an amendment in the nature of a substitute, to S. 2155 was offered by Chairman Crapo and four Democratic senators on March 7, 2018.

Floor Situation: On March 8, 2018, Majority Leader Mitch McConnell filed cloture on amendment 2151. The Senate is expected to vote to invoke cloture on amendment 2151 on March 12.

Executive Summary: The underlying legislation offers much-needed reforms to help ensure that financial regulators can focus on the financial institutions that pose the greatest systemic risk to the economy. It reduces unnecessary burdens on small, midsized, and regional banks and credit unions so they can use more of their capital to serve customers, rather than to comply with federal regulations. It also adds protections for veterans, seniors, and other consumers against fraud and identity theft.

The substitute amendment adds to the committee-passed bill new provisions to reduce identity fraud, protect veterans against predatory lending, and further expand lending to small businesses. It incorporates a number of bills that passed the Senate with unanimous consent.

OVERVIEW OF THE ISSUE

The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010, in response to the financial crisis. The massive 849-page bill spawned almost 400 separate rulemakings by a wide variety of regulators and led to more than 27,000 new federal mandates on American businesses. It increased regulations on almost every participant in the financial sector, including those that had little to do with the financial crisis.

The new regulations have hit small, midsized, and regional banks and credit unions particularly hard. These institutions play a key role in the economy, particularly for small business and in rural and underserved areas. Dodd-Frank imposed disproportionate compliance costs on small, midsized, and regional banks and credit unions, especially given the improbability that any one smaller financial institution poses much risk to the safety and soundness of the financial system. Industry groups have pointed to these compliance costs as a significant reason for consolidation and closures among smaller banks, leading to fewer financial options for Americans.

In June 2017, the Treasury Department reported that regulatory burdens caused by Dodd-Frank have reduced economic growth. It said that these regulations “have undermined the ability of banks to deliver attractively priced credit in sufficient quantity to meet the needs of the economy.”

S. 2155 is a bipartisan effort to reduce unnecessary burdens on small, midsized, and regional banks and credit unions so they can focus their resources on families and businesses, not bureaucrats. Reducing the reporting and compliance requirements on smaller, financially sound businesses will also allow regulators to concentrate on the financial institutions that pose the greatest systemic risk to the economy.

The bill includes a number of provisions recommended by the Treasury Department. One such provision simplifies capital requirements for community banks with ample capital. The complicated capital requirements make little sense for highly capitalized smaller banks that engage only in straightforward banking activities and pose little risk to the financial system.

As passed by the Banking Committee, the legislation also increases the monetary thresholds that trigger more extensive and frequent reports and examinations for small banks. It exempts them from complex rules restricting their investments that are a poor fit for small banks in most cases. Another provision makes it easier for small banks and credit unions to originate residential mortgages to qualified borrowers.

It also tailors the Dodd-Frank enhanced prudential standards so that they apply only to the largest and most systemically important banks for which they were originally intended. The legislation fixes problems with rules that have disproportionately affected banks predominantly engaged in custody, safekeeping, and asset servicing activities.

The committee-passed legislation improves protections for victims of identity theft and fraud. It requires credit bureaus to allow consumers to freeze and unfreeze their credit report an unlimited number of times each year. It also limits credit bureaus from adding negative information to veterans’ credit reports based on debt stemming from medical treatment under the Veterans Choice Program. It removes liability for financial services institutions and professionals reporting suspected fraud of senior citizens to the authorities.

The substitute amendment adds to the committee-passed bill new provisions to reduce synthetic identity fraud, protect veterans against predatory lending, and further expand lending to small businesses. It incorporates a number of bills that passed the Senate with unanimous consent, including legislation to protect investors in U.S. territories and a proposal to reduce the burdens on companies offering shares to their employees.

NOTABLE BILL PROVISIONS

Title I – Improving Consumer Access to Mortgage Credit

Section 101 – Minimum standards for residential mortgage loans

Treats certain mortgages originated and retained by banks or credit unions with less than $10 billion in total assets as “qualified mortgages.” Financial institutions face reduced regulatory and liability burdens when issuing qualified mortgages. This adds loans that are held in eligible financial institutions’ portfolio and meet certain underwriting and structural requirements to the definition of qualified mortgage.

This section generally comprises H.R. 2226, which passed the House on March 6, 2018, by voice vote.

Section 102 – Safeguarding access to Habitat for Humanity homes

Clarifies that appraisal services donated voluntarily by an appraiser to charities will be considered “customary and reasonable” for the purposes of compliance with Dodd-Frank appraisal rules. Charities such as Habitat for Humanity have raised concerns that donated appraisals could conflict with Dodd-Frank rules requiring that appraisers charge customary and reasonable fees.

Section 103 – Exemption from appraisals of real property located in rural areas

Exempts from appraisal requirements certain loans for homes costing less than $400,000 in rural areas if the mortgage originator is unable to find a qualified appraiser.

Section 104 – Home Mortgage Disclosure Act adjustment and study

Reduces reporting requirements under the Home Mortgage Disclosure Act for small depository institutions that have originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit in each of the two preceding years.

The substitute amendment modifies this section so that the exemption applies only to depository institutions in full compliance with the Community Reinvestment Act.

Section 105 – Credit union residential loans

Provides that loans from credit unions to members for non-owner-occupied one- to four-family residences are not considered member business loans under the Federal Credit Union Act, which limits member business loans.

Section 106 – Eliminating barriers to jobs for loan originators

Allows mortgage loan originators to work temporarily in a new state or for a new financial institution while their applications for new licenses are pending.

The substitute amendment expands the restrictions on people with criminal records receiving temporary licenses and extends liability protection to government officials making good-faith errors regarding the collection, furnishing, or dissemination of information for the Nationwide Multistate Licensing System and Registry.

Section 107 – Protecting access to manufactured homes

Clarifies that manufactured- or modular-home retailers and their employees are not “mortgage originators” subject to licensure and other regulation if they are not compensated for taking residential mortgage loan applications and do not directly negotiate loan terms.

Section 108 – Escrow requirements relating to certain consumer credit transactions

Exempts qualified loans made by banks and credit unions with less than $10 billion in total assets that had originated 1,000 or fewer mortgages from certain escrow requirements.

Section 109 – No wait for lower mortgage rates

Allows a lender to offer a lower rate to a borrower without triggering a three-day waiting period for mortgage disclosures.

Title II – Regulatory Relief and Protecting Consumer Access to Credit

Section 201 – Capital simplification for qualifying community banks

Simplifies capital requirements for banks with less than $10 billion in total assets that meet certain capital standards. The Philadelphia Fed and the Treasury Department have identified intricate rules on the makeup of capital as a particularly expensive compliance issue for small banks and as ill-suited for institutions that tend not to engage in complex financial activity.

Section 202 – Limited exception for reciprocal deposits

Provides that a limited amount of funds deposited by one bank into another bank are not subject to restrictions on funds deposited by deposit brokers. A deposit broker is a person that places deposits in various banks for another person. Banks that do not meet certain capital requirements are restricted from taking brokered deposits.

Section 203 – Community bank relief

Exempts banks with $10 billion or less in total assets and with less than 5 percent of their assets comprising trading assets and liabilities from the Volcker Rule, which restricts proprietary trading and ownership of investment funds by banks. In its June 2017 report, the Treasury Department recommended instituting this exemption It noted that the “relatively small risk that these institutions pose to the financial system does not justify the compliance burden of the rule, and the risk posed by the limited amount of trading that banks of this size could engage in can easily be addressed through existing prudential regulation and supervision.”

Section 204 – Removing naming restrictions

Allows certain hedge or private equity funds to share names with their bank-affiliated investment adviser under certain circumstances.

Section 205 – Short form call reports

Directs financial regulators to streamline reporting requirements for banks with less than $5 billion in total assets.

Section 206 – Option for federal savings associations to operate as covered savings associations   

Permits federal savings associations with less than $20 billion in total assets to choose to be regulated like national banks without changing their charter. Although both organizations are regulated by the Office of the Comptroller of the Currency, different restrictions, including limits on commercial and consumer loans, apply to the activities of federal savings associations than do to the activities of national banks.

The committee-passed bill offered this option to federal savings associations with up to $15 billion in total assets; the substitute amendment raises the threshold to $20 billion.

Section 207 – Small bank holding company policy statement

Allows otherwise qualified banks with up to $3 billion in total assets to be eligible for the increased balance-sheet flexibility to make acquisitions under the Federal Reserve’s Small Bank Holding Company Policy Statement. Currently, the policy statement applies only to banks with up to $1 billion in total assets.      

Section 208 – Application of the Expedited Funds Availability Act

Applies the Expedited Funds Availability Act, which governs the availability of bank deposits, to American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands.

The committee-passed bill expanded the application of the act only to American Samoa and the Commonwealth of the Northern Mariana Islands.

Section 209 – Small public housing agencies

Reduces regulatory burdens on, and increases flexibility for, small public housing agencies in rural areas.

Section 210 – Examination cycle

Allows well-managed and highly capitalized banks with up to $3 billion in assets to have full-scope, on-site examinations every 18 months, rather than every 12 months. Under current law, only banks with up to $1 billion in assets may qualify for the 18-month examination cycle.

Section 211 – International insurance capital standards accountability

Establishes an international insurance advisory committee at the Federal Reserve Board and requires financial regulators and officials to report on international insurance matters.

Section 212 – Budget transparency for the NCUA

Directs the National Credit Union Association to publish and hold a public hearing on its budget every year.

Section 213 – Making online banking initiation legal and easy

Allows banks and credit unions to use customers’ driver’s licenses or personal identification cards for opening accounts or providing services. The provision preempts state laws that prohibit making copies of driver’s licenses.

Section 214 – Promoting construction and development on Main Street

Clarifies how certain commercial real estate loans are classified by banks for the purpose of risk-weighting. Regulations implementing the Basel III financial accords imposed new rules on how banks treat their exposure to “high volatility commercial real estate.” The section streamlines those rules.  

This section, which was added by the substitute amendment, comprises H.R. 2148, which was passed by the House by voice vote on November 7, 2017.

Section 215 – Reducing identity fraud

Requires the Social Security commissioner to create a database containing people’s dates of birth, Social Security number, and name for use in responding to identity-verification queries by users and directs the commissioner to accept electronic signatures as consumer consent.

This section was added by the substitute amendment.

Section 216 – Treasury report on risks of cyber threats

Requires the Treasury Department to report on risks of cyber threats to U.S. financial institutions and capital markets.

Section 217 – Discretionary surplus funds

Reduces the cap on surplus funds at the Federal Reserve Banks.

This section was added by the substitute amendment.

Title III – Protections for Veterans, Consumers, and Homeowners 

Section 301 – Protecting consumers’ credit

Directs credit bureaus to keep fraud alerts in credit reports for at least a year when a consumer informs them that he or she may be a victim of identity theft or fraud. Current law requires that such fraud alerts be included in credit reports for 90 days.

Requires that credit bureaus allow consumers to institute an unlimited number of security freezes and unfreezes on their credit report each year and provide additional protections to minors and incapacitated people for whom guardians or conservators have been appointed.

The substitute amendment clarifies that security freezes apply beyond requests for credit reports for the extension of credit. It adds the option for temporary removals of security freezes. It specifies that the mandatory consumer freezes do not apply to people “using the information for assessing, verifying, or authenticating a consumer’s identity for purposes other than the granting of credit,” including “for investigating or preventing actual or potential fraud.” It also applies consumer credit protections for minors to incapacitated people for whom guardians or conservators have been appointed.

Section 302 – Protecting veterans’ credit

Restricts credit bureaus from adding negative information to veterans’ credit reports based on debt stemming from medical treatment under the Veterans Choice Program.

The substitute amendment adds a requirement that credit bureaus provide free credit monitoring to active-duty military service members and specifies that there is no private right of action for violations of the requirement.

Section 303 – Immunity from suit for disclosure of financial exploitation of senior citizens

Provides immunity from liability to financial services professionals who and institutions that alert law enforcement or a regulatory agency to the suspected financial exploitation of a senior.

Section 304 – Restoration of the Protecting Tenants at Foreclosure Act of 2009

Reinstates the Protecting Tenants at Foreclosure Act, which expired at the end of 2014. The act restricted the eviction of tenants due to the foreclosure of properties that they occupied. 

Section 305 – Remediating lead and asbestos hazards

Authorizes the Treasury Department to assist homeowners in remediating lead and asbestos hazards.

Section 306 – Family self-sufficiency program

Improves the administration of the Department of Housing and Urban Development Family Self-Sufficiency Program by combining the public housing and housing choice voucher programs, which are currently separate. It also expands the services that can be provided to participants and allows tenants who receive assistance while living in privately owned properties to participate in the program.

Section 307 – Property Assessed Clean Energy financing

Directs the Consumer Financial Protection Bureau to establish regulations on underwriting standards for Property Assessed Clean Energy home renovation loans for making energy improvements.

Section 308 – GAO report on consumer reporting agencies

Directs the GAO to study the consumer credit reporting industry.

Section 309 – Protecting veterans from predatory lending

Sets new timing, fee and disclosure requirements for refinancing home loans guaranteed by the Department of Veterans Affairs. This section, which was added by the substitute amendment, is intended to combat a practice known as “churning,” which involves the repeated refinancing of home loans by predatory lenders.

Section 310 – Credit score competition

Directs Fannie Mae and Freddie Mac to set up a process to use alternative credit-scoring models in determining whether to purchase a residential mortgage. Currently, Fannie and Freddie use classic FICO scores for their mortgage purchases.

This section was added by the substitute amendment.

Section 311 – GAO report on Puerto Rico foreclosures

Requires GAO to report on foreclosures in Puerto Rico.

This section was added by the substitute amendment.

Section 312 – Report on children’s lead-based paint hazard prevention and abatement

Requires the Department of Housing and Urban Development to report on lead paint.

This section was added by the substitute amendment.

Section 313 – Foreclosure relief and extension for service members

Makes permanent legislation extending the required stay of debt-related proceedings to one year after returning from military service under the Service members Civil Relief Act.

This section was added by the substitute amendment.

Title IV – Tailoring Regulations for Certain Bank Holding Companies 

Section 401 – Enhanced prudential standards for certain bank holding companies

Raises the asset threshold for automatic application of Dodd-Frank enhanced prudential standards from $50 billion to $250 billion and gives the Federal Reserve the authority to tailor regulations to a bank’s business model and risk profile. The Federal Reserve would also be required to conduct periodic supervisory stress tests on banks with between $100 billion and $250 billion in total assets. Raises the threshold for required annual company-run stress tests for midsized banks from $10 billion to $250 billion and adjusts other stress-testing requirements. Maintains the Federal Reserve’s authority to apply any enhanced prudential standard to any bank with total assets of more than $100 billion as necessary to mitigate risks to financial stability or promote safety and soundness. The substitute amendment clarifies that the changes to the Dodd-Frank enhanced prudential standards should not be construed to affect the legal effect of the final rule on foreign bank organizations or limit certain Federal Reserve authorities regarding foreign banks.

Currently, banks with $50 billion or more in assets are automatically subject to heightened standards for liquidity, risk management, and capital as systemically important financial institutions. Experts, including bank regulators, have suggested that the $50 billion threshold is set too low. The June 2017 report by the Treasury Department also recommended that the threshold for enhanced prudential standards be modified.

Section 402 – Supplementary leverage ratio for custodial banks

Tailors capital requirements for banks predominantly engaged in custody, safekeeping, and asset servicing activities by exempting their low-risk deposits held at central banks from their leverage ratios. Due to their holdings of cash and low-risk securities, these banks have found it particularly difficult to comply with new rules setting out maximum absolute leverage ratios without regard to risk.

Section 403 – Treatment of certain municipal obligations

Directs banking regulators to treat qualifying investment-grade, liquid, and readily-marketable municipal securities as level 2B liquid assets under the Liquidity Coverage Ratio rules.

Title V – Studies

Section 501 – National securities exchange parity

Clarifies that issuers are exempt from state regulation of securities when they offer securities on any “national securities exchange.” Current law lists specific securities exchanges.

Section 502 – SEC study on algorithmic trading

Requires the Securities and Exchange Commission to report on the effects of algorithmic trading.

Section 503 – Annual review of government-business forum on capital formation

Requires the SEC to review and report on findings and recommendations of the “annual Government-business forum to review the current status of problems and programs relating to small business capital formation.”

This section was added by the substitute amendment.

Section 504 – Supporting America’s innovators

Expands the exemption from “investment company” under the Investment Company Act of 1940 to include venture capital funds whose outstanding securities are owned by 250 people or fewer. This section, which was added by the substitute amendment, comprises S. 444, which passed the Senate by unanimous consent on September 11, 2017.

Section 505 – SEC overpayment credit

Directs the SEC to credit securities exchanges for overpayments of certain fees. This section, which was added by the substitute amendment, comprises S. 462, which passed the Senate by unanimous consent on September 11, 2017.

Section 506 – U.S. territories investor protection

Terminates the exemption under the Investment Company Act of 1940 for companies located in Puerto Rico, Guam, and other U.S. territories. This section, which was added by the substitute amendment, comprises S. 484, which passed the Senate by unanimous consent on September 11, 2017.

Section 507 – Encouraging employee ownership

Directs the SEC to increase from $5 million to $10 million the threshold for securities sold triggering certain disclosure requirements. This section, which was added by the substitute amendment, comprises S. 488, which passed the Senate by unanimous consent on September 11, 2017.

Section 508 – Improving access to capital

Directs the SEC to allow fully reporting issuers to be eligible for Regulation A+ offerings. The regulation, which was reworked pursuant to the JOBS Act, allows smaller companies to issue securities under a reduced regulatory burden. This section, which was added by the substitute amendment, comprises H.R. 2864, which passed the House by a vote of 403 – 3 on September 5, 2017.

Section 509 – Parity for closed-end companies regarding offering and proxy rules

Directs the SEC to allow closed-end funds to use the securities offering and proxy rules available to other reporting issuers. This section, which was added by the substitute amendment, comprises H.R. 4279, the Expanding Investment Opportunities Act, which passed the House by a vote of 418 – 2 on January 17, 2018.

Title VI – Protections for Student Borrowers

Section 601 – Protections in the event of death or bankruptcy

Prohibits lenders from declaring a student loan in default or accelerating the loan solely because a co-signer died or declared bankruptcy. It requires the holder of a student loan to release a co-signer from the obligation if the student borrower dies.

This section was added by the substitute amendment.

Section 602 – Rehabilitation of qualified education loans

Allows people who defaulted on a qualified student loan to request that the default be removed from their credit report if they successfully participate in a rehabilitation program offered by the lender.

Section 603 – Best practices for higher education financial literacy

Directs the Financial Literacy and Education Commission to establish best practices for institutions of higher learning to teach financial literacy skills.

This section was added by the substitute amendment.

ADMINISTRATION POSITION

On March 6, 2018, the administration released a statement of administration policy in support of the committee-passed version of S. 2155.