Regulatory reform bill becomes law

Key Points

• The House of Representatives passed, without amendment, S.2155, the regulatory relief bill passed by the Senate in March. The President signed the bill into law on May 24.
• Highlights of the law include an increase to the SIFI asset threshold for application of EPS to large domestic BHCs to $250 billion, an increase to the asset threshold for the company-run stress-testing requirement to $250 billion, and provisions for community banks with total assets of less than $10 billion that create a “regulatory off-ramp” for capital and liquidity requirements and exemption from the Volcker Rule.
• The Federal Reserve, OCC, and FDIC will need to further clarify how the new law will impact existing regulatory requirements that rely on the Dodd-Frank Act asset thresholds but are not directly addressed by the provisions of the new law, such as CCAR, OCC Heightened Standards, and FDIC resolution planning. 
   

Summary

On May 24, 2018, President Donald Trump signed into law S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends the 2010 Dodd-Frank Act and addresses regulatory tailoring for certain bank holding companies (BHCs), regulatory easing for community banks, and new consumer protections. Regulatory requirements for large BHCs, those with more than $250 billion in assets, are largely unchanged. The new law originated in the Senate and was passed with a bipartisan vote on March 14, 2018; the House of Representatives passed the bill without amendment on May 22, 2018 by a 258-159 margin signaling bipartisan support.

Highlights of the new law (as previously outlined in our March 2018 Regulatory Alert) follow.

Regulatory tailoring for certain BHCs

• Raises the SIFI threshold: The systemically important financial institutions (SIFIs) asset threshold for applying enhanced prudential standards (EPS) to BHCs increases from $50 billion to $250 billion in total consolidated assets; the change is effective upon enactment for BHCs with less than $100 billion in total consolidated assets and 18 months after enactment for those with total assets between $100 billion and $250 billion. The Federal Reserve, however, has discretion to apply any of the EPS to BHCs with at least $100 billion in total consolidated assets to address financial stability or safety and soundness risks.
• Clarifies EPS and FBOs: Section 401(g) clarifies that the EPS rule effectively applies to foreign banking organizations (FBOs) with total global consolidated assets of $100 billion or more, and maintains the Federal Reserve's authority to require FBOs to establish an intermediate holding company (IHC), implement EPS, or tailor the regulation of FBOs with total consolidated assets of $100 billion or more.
• Modifies stress tests: Provisions under Section 401 raise the company-run stress testing asset threshold from $10 billion to $250 billion and require BHCs subject to the requirement to submit such tests only periodically. BHCs with total consolidated assets between $100 billion and $250 billion will be subject to periodic supervisory testing by the Federal Reserve.
• Changes supplementary leverage ratio: Custodial banks are no longer required to include funds deposited at a central bank in the calculation of their supplementary leverage ratio.

Regulatory easing for community banks

• Provides exemptions to the Volcker Rule: Banking entities with less than $10 billion in total consolidated assets, and with trading assets and trading liabilities that are not more than five percent of the total consolidated assets, are exempt from the Volcker Rule.
• Provides capital “simplification” for qualifying banks: Banks and BHCs with total consolidated assets of less than $10 billion will be deemed to satisfy certain capital and leverage requirements if they exceed the Community Bank Leverage Ratio to be established by the Federal banking agencies (through notice and comment, required to be between 8 percent and 10 percent) and have an appropriate risk profile.
• Implements mortgage-related provisions: Community banks with total consolidated assets of $10 billion or less are exempt from mandatory escrow requirements for certain mortgage loans, and certain mortgage loans originated and retained in portfolio by these community banks will be deemed to be “qualified mortgages.”

New consumer protections

The law introduces a variety of new consumer protections, including:

• Permitting consumers to place or remove a “security freeze” on their credit report at no cost when identity theft is suspected.
• Protecting a veteran’s consumer report against certain information related to medical debt.
• Providing immunity for certain individuals and covered financial institutions that disclose suspected financial exploitation of a senior citizen to a covered agency.
• Protecting student loan borrowers when the borrower or cosigner dies.
   

Closing thoughts

The Economic Growth, Regulatory Relief, and Consumer Protection Act brings the first major changes to the banking regulations implementing Dodd-Frank. House Republicans had sought further regulatory reforms and reportedly backed S.2155 only after Senate leaders agreed to consider additional regulatory reform legislation that has been passed in the House. However, with the upcoming mid-term elections and the retirement of House Financial Services Committee Chairman Jeb Hensarling, the timing and chances of such legislation passing are uncertain.

Implementing and clarifying regulations will be required in a number of instances, including to establish the Community Bank Leverage Ratio, clarify application of EPS to domestic BHCs with total assets between $100 billion and $250 billion, and clarify any impact of the change to the SIFI assets threshold on other regulatory requirements such as the Comprehensive Capital Asset Review (CCAR), OCC Heightened Standards, and FDIC resolution recovery. Additionally, there continues to be some uncertainty around how the changes will apply to FBOs. The law does not directly address changes to the asset thresholds applicable to IHCs or the application of EPS based on an FBO’s U.S. non-branch assets. Further, the EPS asset threshold applicable to FBOs is set at $100 billion in total global consolidated assets in contrast to the domestic BHC SIFI threshold of $250 billion.

For additional information, please contact Deborah Bailey, Homer Hill, or Amy Matsuo.