Breaking Down Deregulation Based On Asset Size

September 5th, 2018

deregulation-9-5-18.pngIn May, President Donald Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act into law, clearing the last hurdle for an expansive roll-back of U.S. banking regulations. The bill will relieve many of the nation’s banks from compliance and regulatory obligations imposed by the 2010 Dodd-Frank Act, adopted in the aftermath of the 2008 financial crisis.

The legislation benefitted from significant support from the banking industry, and in particular from the Independent Community Bankers of America and other representatives of community banks. Proponents of the bill assert that the oversight and compliance obligations imposed by Dodd-Frank disproportionately burdened community banks with the costs and organizational challenges associated with compliance, even though these institutions do not pose the same level of risk to the domestic or global financial systems as their larger national bank counterparts.

To address these concerns, the new law adjusts existing regulatory requirements to create a more tiered regulatory framework based on institution asset size, primarily by (i) removing certain compliance obligations to which community banks are subject, and (ii) increasing the threshold triggering application of some of the most stringent oversight and compliance requirements.

The most significant regulatory changes for community and regional banks resulting from the law include:

Under $3 Billion:
Raises the qualification threshold from $1 billion in assets to $3 billion in assets for: (i) an 18-month exam cycle for well-managed, well-capitalized banks, and (ii) the Federal Reserve’s Small Bank Holding Company Policy Statement.

Under $10 Billion:
No longer subject to the Volcker Rule enacted as part of Dodd-Frank. The Volker Rule restricts proprietary trading by FDIC-insured institutions, and imposes related reporting and compliance obligations on these institutions as a result. These reporting and compliance obligations reflected regulators’ belief that proprietary trading poses high systemic risk. But because it is typically only large national institutions that engage in proprietary trading, the community banking industry argued that smaller banks should not be subject to the Volcker Rule.

Deems certain mortgages originated and retained in portfolio as Qualified Mortgages if: (i) they comply with requirements regarding prepayment penalties, (ii) they do not have negative amortization or interest-only features, and (iii) the financial institution considers and documents the debt, income and financial resources of the customer. Qualified Mortgages are legally presumed to comply with Dodd-Frank’s Ability to Repay requirements.

Truth In Lending Act escrow requirement exemption for depository institutions that originated no more than 1,000 first lien mortgages on principal dwellings in the previous year.

Directs federal banking regulators to develop a Community Bank Leverage Ratio (equity capital to consolidated assets) between 8 and 10 percent. Banks exceeding this ratio will be deemed well capitalized and in compliance with risk-based capital and leverage requirements. Federal banking agencies may consider a bank’s risk profile when evaluating whether it qualifies as a community bank for purposes of the ratio requirement.

$10 Billion - $50 Billion:
No longer subject to mandatory stress testing or required to maintain risk management committees.

$50 Billion - $250 Billion:
No longer designated as “Systemically Important Financial Institutions” under Dodd-Frank. This designation triggers application of “enhanced prudential standards” under existing law, such as stress-testing and maintenance of risk management committees.

Institutions holding between $50 billion and $100 billion in assets will are exempt as of May 24, 2018, and institutions holding between $100 billion and $250 billion in assets will become exempt as of November 24, 2019.

Under $250 Billion:
Changes the application of High Volatility Commercial Real Estate (HVCRE) rules, which will now only apply to the 12 largest domestic institutions. Existing HVCRE rules apply broadly to loans made for the acquisition or construction of commercial real estate, unless one of a few exemptions applies. Loans categorized as HVCRE receive a higher risk-weighting under capital adequacy regulations, requiring the bank to hold more capital than for non-HVCRE loans. The banking industry argued the HVCRE definition was unnecessarily broad and the related guidance was redundant.

All Banks:
Exempts certain rural real estate transactions of less than $400,000 from appraisal requirements if no certified appraiser is available. Community banks argued that finding appraisers in rural areas can be difficult or expensive.

Depository institutions that originate fewer than 500 closed-end mortgages or open-end lines of credit will be exempt from certain disclosures under the Home Mortgage Disclosure Act.

The expansiveness of these reforms means a significant easing of U.S. bank regulations applicable to community and regional banks. Legislators have indicated that the Act may soon be followed by further regulatory changes. Regardless of future congressional action, the newly modified regulatory landscape will be new and very different for many banking institutions, especially those far from Wall Street and doing business on Main Street.

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Adam Maier is a partner and co-chair of the banking and financial services practice at Stinson Leonard Street LLP. He focuses his practice on the business interests and growth strategies of financial institutions and their owners. 

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Lara Page is a partner at Stinson Leonard Street LLP. She represents commercial and institutional lenders in a wide variety of financing transactions, with a focus on secured lending and structured financing.