Why it matters

Five years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, efforts on Capitol Hill seek to continue to turn back many of its regulatory restrictions. Sen. Richard Shelby (R-Ala.), Chairman of the Senate Banking Committee, in June introduced Senate Bill 1484, or the Financial Regulatory Improvement Act of 2015, which would provide a safe harbor for banks under the qualified mortgage rules and increase scrutiny of the Federal Reserve Board of Governors. The legislation would also impact small and medium banks by changing some of the rules established under Dodd-Frank, such as extending the period between examinations, providing an exemption from the Volcker Rule's trading restriction for banks with less than $10 billion in assets, and potentially allowing banks under the $500 billion mark to avoid heightened regulation including stress tests. As an indication of his efforts to get the plan passed, however possible, Sen. Shelby also included the proposal in the 2016 Financial Services Appropriations Bill, which was approved by the Senate Appropriations Committee in late July. "We will have two trains running here," Sen. Shelby said. "We're open to discussions with the Democrats … and I hope this will show we're serious about this." However, Democrats have objected to the plan, which they say will return to the pre-Dodd-Frank days of lax oversight, and the White House has warned President Barack Obama would veto the law if it were passed. Given the partisan problems, the chance of passage looks unlikely. To avoid a filibuster in the Senate, Sen. Shelby would need a significant increase in Democratic support that does not appear to exist.

Detailed discussion

In June, Sen. Richard Shelby (R-Ala.) introduced the Financial Regulatory Improvement Act of 2015, proposing multiple changes to the existing regime. Among the changes:

  • Increased supervision of the Federal Reserve. Pursuant to the legislation, the Federal Open Market Committee (FOMC) would be required to send Congress a quarterly report with details of the agency's data and analysis that form the basis of the Fed's policy decisions. Currently, the agency only provides reports twice a year. The chairperson of the Fed would still appear before Congress on a bi-annual basis and would fill the currently empty position of vice chairman of supervision. The FOMC would also take over the power to set the interest rate paid to banks on reserves in the central banks from the Federal Reserve Board. In addition, the head of the New York Fed would need Senate confirmation.
  • Safe harbor under the qualified mortgage rules. As long as a bank assumes the risk of the home loans by holding them in its own portfolio, the bill would grant a safe harbor from the qualified mortgage rules promulgated by the Consumer Financial Protection Bureau.
  • Regulatory changes for small and medium banks. Small banks would be subject to decreased oversight under S.B. 1484, with fewer quarterly reporting requirements and an exemption from the Volcker Rule's trading restrictions for banks with less than $10 billion in assets. Small insured depository institutions would face less frequent regulatory exams by raising the asset threshold of $500 million to $1 billion, qualifying more banks for the 18-month on-site exam cycle. The proposed law would bump up the threshold established by Dodd-Frank to subject banks to stricter requirements, such as stress tests from $50 billion to more than $500 billion assets. For those banks that fall between the $50 billion and $500 billion mark, regulators would have the discretion to decide whether or not to impose heightened regulations, guided by factors such as the size of the bank, the institution's international reach, and its overall complexity.
  • Privacy notice exception. The bill would amend the Gramm-Leach-Bliley Act's requirement to provide annual written notice of a financial institution's privacy policy. A bank would be exempt from the requirement if it shares nonpublic personal information only in accordance with specified requirements, has not changed its policies and practices with respect to disclosing nonpublic personal information since the most recent disclosure was provided, and otherwise provides customers access to the most recent disclosure in electronic or other form.
  • Nonbank financial institutions. Nonbank entities are currently designated "systemically important" by the Financial Stability Oversight Council (FSOC), earning them heightened regulatory scrutiny. Sen. Shelby's proposal would create additional steps in the process before the label could be applied, allowing the entity to submit a "remedial plan" to address the concerns of the FSOC. If a company is labeled as systemically important, the FSOC must vote to renew the designation after five years or the label would be removed.

To read the Financial Regulatory Improvement Act of 2015, click here.