For more than two decades, each and every Congress has considered and adopted wide-ranging financial services legislation that has significantly altered the legal and regulatory landscape governing financial institutions in the United States. Beginning with passage of the Competitive Equality Banking Act of 1987 through subsequent enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the U.S. Congress has produced major banking legislation about every other year.
Indeed, the decade immediately preceding Dodd-Frank saw the passage and enactment of Gramm-Leach-Bliley in 1999, the International Money Laundering Abatement and Financial Anti-Terrorism Act (Title III of the USA PATRIOT Act) in 2001, the Sarbanes-Oxley Act in 2002, the Fair and Accurate Credit Transactions Act (2003), the Federal Deposit Insurance Reform Act (2005), the Financial Services Regulatory Relief Act (2006), the Housing and Economic Recovery Act (2008), and the Helping Families Save Their Homes Act (2009), among other measures.
Then, in an unprecedented delegation of authority, Congress passed Dodd-Frank and largely abdicated its policymaking responsibilities to the myriad federal financial regulators, including the Federal Reserve and the newly-created Consumer Financial Protection Bureau (CFPB). Since 2010, no major financial services legislation has been passed, much less considered, by Congress.
Fortunately, that is about to change. Senate Banking Committee Chairman Richard Shelby (R-AL) earlier this month released a discussion draft of the Financial Regulatory Improvement Act of 2015 intended to provide regulatory relief for banks and insurance companies, tailor the regulatory regime for systemically important financial institutions (SIFIs), and address structural changes within the Federal Reserve System and at Fannie Mae and Freddie Mac.
Among its numerous regulatory relief provisions, the Shelby draft would allow mortgages held in portfolio to receive the Qualified Mortgage safe harbor, establish an independent exam ombudsman, reduce the burden of unnecessary privacy notice paperwork, help rural customers receive CFPB mortgage exemptions, extend the exam cycle for more institutions, require a study of Basel III's treatment of mortgage servicing assets, permit short-form Call Reports for highly rated community banks, and exempt banks with less than $10 billion in assets from the Volcker Rule.
Weighing in at more than 200 pages, the draft legislation represents the most ambitious attempt to revamp the financial regulatory regime since passage of Dodd-Frank, while seeking to avoid the most deeply divisive issues surrounding that law. Many of the bill's provisions were drawn directly from House and Senate bills passed in the last Congress that garnered bipartisan support and, in some cases, were written by Democrats on the Senate Banking panel. At the same time, the draft also includes some provisions that are likely to prompt opposition, or at least concern, from Democrats whose support will be needed to move a bill through the Senate.
Among the flash points are provisions aimed at easing federal mortgage-underwriting standards and changing the process for declaring which large financial firms ought to be subject to stricter Fed oversight. In addition, the Shelby bill includes several provisions related to mortgage-finance companies Fannie Mae and Freddie Mac. Committee Ranking Member Sherrod Brown (D-OH) referred to the discussion draft as an "industry wish list" and is arguing for a smaller, more targeted approach.
The draft legislation also targets the Financial Stability Oversight Council's process for designating nonbank firms as "systemically important" and thus subject to stricter oversight by the Fed. Under the proposal, a financial institution would have the opportunity to submit a "remedial plan" addressing regulators' concerns before receiving a SIFI designation.
Under Dodd-Frank today, all banks above $50 billion in assets are treated as potential threats to the financial system and subject to stress tests and other stricter requirements. The Chairman's draft would retain those requirements for banks with greater than $500 billion in assets, but allow regulators to decide—guided by criteria such as size, international reach and complexity—whether banks with between $50 billion and $500 billion in assets should face the tougher rules.
Other provisions specifically address the concerns of smaller banks, giving them less frequent regulatory exams, fewer quarterly reporting requirements and an exemption from the Volcker Rule's trading restrictions for any bank with less than $10 billion in assets.
The Senate Banking Committee considered the Shelby draft, and amendments thereto, on Thursday, May 21, where the bill was approved. The committee markup represented one of the first opportunities to re-shape the future of banking regulation since passage and enactment of Dodd-Frank nearly a half a decade ago.
Summary Highlights of The Financial Regulatory Improvement Act of 2015
- Banks of any size would have a safe harbor from federal "qualified mortgage" rules so long as they hold the loans in portfolio and meet certain criteria.
- The bill designates the Federal Financial Institutions Examination Council as an ombudsman charged with receiving and investigating complaints about bank examiners.
- The bill directs the Consumer Financial Protection Bureau to establish a process for rural parts of the country to apply to be designated a "rural area" for the purposes of consumer rules.
- The bill allows certain privately insured credit unions to be members of a federal home loan bank.
- The bill requires the National Credit Union Administration to hold public hearings on its budget.
- Banks with between $500 million and $1 billion in assets would have 18 months between regulatory exams.
- Banks with $10 billion or less in assets would be exempt from the Volcker rule.
- Regulators would have to study the impact of regulatory capital rules on mortgage servicing assets.
- Highly-rated community banks would be able to file shortened regulatory reports for two quarters of the year.
- Banking regulators would be required to consider the Dodd-Frank law as they review outdated or unnecessary regulations.
- The bill would push the Federal Reserve, Federal Insurance Office, and state insurance regulators to develop consensus positions as they negotiate insurance-company capital rules with other countries, and require officials to report to Congress about the global talks.
- It establishes an insurance advisory committee at the Fed.
Mortgage Finance provisions:
- The government would be prohibited from selling stock in Fannie Mae and Freddie Mac unless directed to do so by Congress.
- The government would be prohibited from using increased guarantee fees charged by Fannie and Freddie for purposes outside housing finance.
- The bill would require Fannie and Freddie to meet minimum levels of risk sharing.