Yesterday evening, the Senate passed its bill on financial reform, S. 3217, the “Restoring American Financial Stability Act of 2010.” The next step will be reconciliation with the House of Representatives bill, H.R. 4173; the reconciliation process has yet to be determined.
We will be releasing a side-by-side comparison of the major provisions of the Senate and House bills shortly. In the meantime, this advisory completes our survey of the amendments to the managers’ amendment to S. 3217 that the full Senate has approved. An earlier advisory reviewed the amendments through May 7.1 This advisory reviews the 24 amendments that have passed since May 10 through yesterday’s cloture vote. These amendments affect many of the titles to the bill, with an extensive series of amendments relating to consumer protection. Important elements of the amendments, in the order of the titles of S. 3217 in which they appear, are as follows:
Title I—Financial Stability
Nonbank financial company. The scope of this term is narrowed by the Vitter Amendment (no. 4003) to cover only those companies that derive at least 85 percent of their consolidated revenues from financial activities. The previous language required only “substantial” engagement in financial activities, leaving a more specific definition up to the Federal Reserve.
Capital requirements. The Collins Amendment explicitly provides that minimum leverage and risk-based capital standards be required as part of the heightened prudential standards for the banking and nonbanking institutions that pose a potential threat to financial stability and are subject to Federal Reserve supervision. The floor for these standards would be the leverage (four percent) and risk-based capital requirements (eight percent) now in effect for banks generally. In developing the requirements, the Federal Reserve would have to consider the risks that the activities of such institutions pose to other public and private stakeholders.
Title III—Transfer of Regulatory Powers
Federal Reserve authority. Two different limitations on the Board’s activities in the original S. 3217 would be eliminated:
- Jurisdiction. Supervisory authority over state member banks is restored to the Federal Reserve by the Hutchison Modified Amendment (No. 3759). The Federal Reserve also would gain jurisdiction over savings and loan holding companies. S. 3217 originally assigned all state banks to the FDIC and divided thrift holding company supervision between OCC and the FDIC.
- Audit. Proposed audits of the Federal Reserve were narrowed to a single audit of the lending facilities established in response to the financial crisis. The amendment, the Sanders/Dodd Modified Amendment (No. 3738), also requires the Federal Reserve to disclose the identities of participants in the facilities.
Title VII—Derivatives and Swaps
Derivatives—exemption. Agricultural lenders would be added to the end-user clearing exemption for swaps transactions, per the Snowe-Landrieu Amendment (No. 3918). The Senate rejected the Chambliss Amendment, which would have made several substantive changes to the existing language.
Energy-related transactions. The Bingaman Amendment (no. 3892) protects FERC jurisdiction from potential incursions by the CFTC and authorizes the CFTC to exempt transactions entered into pursuant to a FERCor state-approved tariff or rate schedule from the Commodity Exchange Act.
Title IX—Investor Protection and Securities Regulation
Securitizations—credit risk retention. The credit risk retention rules are changed in two respects. Under the Landrieu Amendment (no. 3956), qualified residential mortgages would be exempt from the credit risk retention requirements, while, under the Crapo Modified Amendment (no. 3992), the requirements would encompass commercial mortgages.
SEC accredited investor and Reg D standards. The Bond Amendment (no. 4056) amends both the “accredited investor” standard and the Regulation D prohibition for convicted criminals previously included in S. 3217 by adding additional parameters around the SEC’s authority. While both the original and amended version of this provision direct the SEC to issue rules to adjust the “accredited investor” standard, the original version in S. 3217 set forth both income and asset thresholds, while the Bond Amendment imposes only a net worth threshold (which is required to exceed $1 million for both individuals and joint investors at the time of purchase).
Credit rating agencies. Two amendments address these agencies:
- A Credit Rating Agency Board, a new self-regulatory organization, would be established by the SEC under the Franken Amendment (no. 3991). The new SRO would be required to review applications to select qualified nationally recognized statistical rating organizations, assign such organizations to provide initial credit ratings, conduct a study of the securitization and ratings process and provide recommendations to the SEC. The new SRO also may issue regulations.
- The LeMieux Amendment (no. 3774) does away with statutory references to credit rating agencies. The concept of “investment grade” would be replaced by standards of credit-worthiness established by the FDIC and the SEC as appropriate.
Inspectors General. A Council of Inspectors General on Financial Oversight that consists of the IGs of HUD, Treasury and the federal financial regulatory agencies is created by the Grassley Amendment (no. 4072).
The Council is to report annually on each of the departments and agencies represented on the Council. The amendment also strengthens the powers of IGs elsewhere in the federal government.
Title X—Consumer Issues2
State enforcement and federal preemption. This complex amendment, the Carper Amendment (no. 4071), addresses two related issues relating to state consumer protection laws.
- Enforcement. The amendment confirms that state AGs may bring civil actions to enforce federal consumer protection laws against state-chartered institutions and provides that they also may file suit to enforce consumer protection rules against national banks. This provision does not include authority to initiate litigation to enforce general consumer protection provisions of Title X. For such litigation, an AG must notify the CFPB, and the CFPB would have the authority to intervene in any action.
- Federal preemption. The amendment also provides that state consumer protection laws are preempted with respect to national banks where either (i) the state law discriminates against national banks; (ii) the state law is preempted by federal law outside Title XI; or (iii) the OCC, applying the rule of the Barnett case, determines on a case-by-case basis that the law is preempted. The amendment also states explicitly that the OCC may not preempt state law on the basis of an “occupation of the field” theory. There are extensive guidelines for judicial review. With respect to other recent Supreme Court decisions, the amendment repeals Watters and confirms Cuomo. The amendment does not affect the existing law on exportation of interest rates.
Bureau of Consumer Protection vs. Federal Trade Commission. The Rockefeller/Hutchison Amendment (no. 3758) maintains and (unlike the House bill) does not expand the powers and authority of the FTC. The FTC would retain jurisdiction over the laws it currently enforces with the exception of the consumer law jurisdiction transferred to the Bureau of Consumer Financial Protection.
- Enforcement. As to persons subject to FTC jurisdiction (including companies not regulated by a federal functional regulator, such as merchants, retailers, non-bank lenders and other non-bank users of credit reports), the FTC will retain enforcement authority over rules issued by the Bureau regarding unfair, deceptive or abusive acts or practices (including those governing mortgage lending). Conversely, for persons subject to the Bureau’s jurisdiction, the Bureau will have enforcement authority over rules issued by the FTC regarding unfair or deceptive acts or practices.
- Credit Reporting. The Bureau would gain rulemaking authority under the Fair Credit Reporting Act. However, for persons within its jurisdiction, the FTC will retain authority regarding the red flag and disposal of records provisions of the Fair Credit Reporting Act.
TILA—residential mortgages. The Merkley Amendment (No. 3962) creates an explicit new duty for mortgage originators: the originator would be required to verify that the borrower has a “reasonable ability” to repay the mortgage loan, according to its terms, and all applicable taxes, insurance and assessments. Additionally, certain payments to originators would be prohibited, and origination fees would be capped.
Service members. Under the Reed Amendment (No. 3943), an Office of Service Member Affairs would be established within the Consumer Finance Protection Board to act as a liaison for service members and their families.
Fannie/Freddie. The future of these two GSEs remains open after votes on two amendments. The Dodd Amendment (no. 3938) requires Treasury to conduct a study on ending the conservatorships of the two GSEs and on reforming the housing finance system. The Senate voted down a more stringent measure, the McCain Amendment (no. 3839), that would have required that, after three years, each GSE either be placed in receivership, liquidated, fully privatized or fully nationalized.
Interchange fees. These fees would come under the supervision of the Federal Reserve, which would be required to issue rules that interchange fees be “reasonable and proportional” to the actual cost incurred by the issuer or payment card network. This amendment, the Durbin Modified Amendment, also would bar certain anti-competitive practices in payment card systems.
Credit scores. The Udall Amendment (no. 4016) amends the Fair Credit Reporting Act to require that consumers be provided with numerical credit scores in certain situations, including adverse action on a loan application. Existing law on consumer access to credit reports does not mandate disclosure of specific scores.
Retailers, merchants and sellers. Merchants, retailers and sellers of non-financial goods or services that regularly extend credit subject to a finance charge are, pursuant to the Ensign Amendment (no. 4146), exempt from the authority of the CFPB over extensions of credit, regardless of the number of installment payments that may be required. The original language required five or more installment payments in order to be eligible for the exemption.
Small business. As part of the regulatory flexibility analysis required in any CFPB rule (regulatory flexibility is required in the vast majority of federal regulations), the CFPB must describe any projected increase in the cost of credit for small business and any less costly alternatives associated with the regulation. This amendment, the Pryor Amendment (no. 3883), imposes the same requirement on EPA and OSHA.
New Title XIII
The “Pay It Back Act.” The Bennett Amendment (no. 3828) creates a new title with essentially two substantive provisions:
- TARP authorization reduction. The title reduces the TARP authorization to Treasury from $700 billion to $550 billion and, more importantly, repeals the roll-over provision in the original authorization. In place of the roll-over repeal, Treasury is authorized to use repaid TARP funds to purchase additional troubled assets, after certain determinations and transmittal of those determinations to Congress. This power ends after the day of enactment.
- Deficit Redution. The new title requires that funds received by Treasury from the sale of obligations and/or securities of Fannie Mae, Freddie Mac and the Federal Home Loan Banks be applied to deficit reduction.
U.S. participation in IMF loans. In response to international efforts to support the economy of Greece and financing from the International Monetary Fund, the Cornyn Amendment (No. 3986) adds a provision to a new Title XIII that requires the President to direct the U.S. Executive Director of the IMF to evaluate proposed loans to foreign governments to determine both if the amount of the public debt of the country exceeds the gross domestic product of the country and the likelihood of the loan being repaid. If the Executive Director determines that the loan will not be repaid, the President is required to instruct the Executive Director to oppose the proposed loan. (Because of the voting rules at the IMF, the United States acting alone could not block a loan to a foreign government.)
Minerals from the Democratic Republic of the Congo. The Brownback Amendment (no. 3997) attempts to restrict trading in certain minerals originating in this country.