From Regulation to Relief
A Community Bank Perspective on The Economic Growth, Regulatory Relief, and Consumer Protection Act – (Senate Bill 2155)
Angelo N. Spaneas, Audit Senior Manager
The 10th anniversary of the Great Recession is approaching in a few months and no other industry has been impacted by the aftermath as much as the banking industry. Since 2008, we have seen bail-outs, Treasury department-assisted and mandated acquisitions of troubled institutions like Washington Mutual and Countrywide by JP Morgan/Chase and Bank of America, and the market for sub-prime, Alt-A and private label mortgage-backed securities disappeared virtually overnight. Further, out of the Dodd-Frank Act came the Consumer Financial Protection Bureau which was intended to protect consumers from predatory lending but was not very well received by many in the banking sector. A lot has changed since then – the economy has recovered, financial institutions have resumed lending, the housing market has rebounded, and unemployment is nearly at an all-time low.
On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law. The Act, which is the first significant bank legislation since Dodd-Frank, is intended in part to provide relief from certain rules and regulations for community banks and to also raise certain thresholds for much larger banks. Because many of the provisions of this law apply to institutions with total assets exceeding $10 billion, this article will focus only on the changes most relevant to, and which are expected to have the biggest impact on, true community banks and credit unions.
Economic Growth – These provisions of the bill are expected to have a significant impact on institutions’ ability to grow:
Section 105 of the Act amends the Federal Credit Union Act to essentially eliminate 1-4 family non-owner occupied dwellings from being classified as member business loans. For credit unions, where business lending has been restricted, many will find themselves able to take advantage of opportunities to increase their lending to local businesses now that they are no longer at their business lending limit.
The Act amends the Federal Deposit Insurance Act to change the treatment and classification of reciprocal deposits such as CDARS. These were formerly considered and included with brokered deposits and therefore limited the bank’s ability to access funding because of regulatory limitations on the amount of brokered deposits held by an institution. In today’s fiercely competitive environment, community banks are finding it increasingly difficult to attract and retain low-cost core deposits and in many cases this is limiting the institutions’ ability to write new loans. With the definition of brokered deposits narrowed, this allows “well-capitalized” banks to increase the use of reciprocal deposits to fund growth, replace higher-cost funding sources, and pursue more municipal deposits without the need to collateralize them as many government entities require. I should say the law does impose a maximum limit on this treatment of reciprocal deposits, such that amounts that exceed the lesser of $5 billion or 20% of total liabilities will be treated as traditional brokered deposits and subject to applicable FDIC limitations.
The law also provides for changes to and loosening of Qualified Mortgage requirements, appraisal guidelines for rural lenders as well as changes to HMDA disclosures, certain escrow requirements, and a few others. These few changes could collectively save money on compliance costs.
Regulatory Relief – These provisions of the bill are expected to reduce regulatory reporting requirements, simplify capital calculations, and increase the interval between regulatory exams for certain institutions:
The Act changes the Fed’s Small Bank Holding Company threshold from $1 billion to $3 billion and allows well-capitalized banks up to $3 billion to qualify for an 18-month exam cycle, thus reducing the burden on the institutions’ resources.
Community banks under $10 billion will be subject to a tangible equity-to-average assets leverage ratio set by regulators at not less than 8% and no more than 10%. Institutions exceeding this ratio will be considered to meet all risk-based capital requirements and deemed “well capitalized.”
Provisions in the Act relax the call reporting burden for banks with less than $5 billion in assets such that calendar year institutions which meet certain criteria will use short-form Call Reports for the quarters ending March 31 and September 30.
For many institutions, an increasing number of transactions are being conducted through online banking platforms versus customers visiting a branch. Until now, one obstacle for complete online banking was the initial account opening because it required bank personnel to verify the identity of the applicant or depositor in person. Language in the Act will authorize the use of scanned government-issued identification for identity verification, thereby paving the way for new accounts to be opened and transactions to be conducted entirely online.
Other provisions in the Act reduce or loosen significant additional regulatory requirements primarily affecting institutions larger than $10 billion. Banks with total assets of $50 billion up to $250 billion, among other things, will be exempt from certain provisions of the Dodd-Frank Act, particularly the easing of stress testing requirements. Additionally, the Act increases the threshold at which banks are identified as “systemically important financial institutions” commonly referred to as “too big to fail” from $50 billion to $250 billion.
Consumer Protections – These provisions of the bill were included so as to provide some additional consumer protections while keeping with the spirit of the law to reduce overall regulation over the banking industry:
Under Section 303 of the Act, bank employees who report suspected elder financial abuse will be provided certain whistleblower protections and immunity from suit, provided they have received appropriate training and have acted in good faith in reporting exploitation of a senior citizen to law enforcement. This provision will require institutions to incorporate such training in their employee training and compliance programs.
Other provisions of the law afford new protections or update existing protections such as protecting veterans from predatory lending, providing foreclosure relief for service members, changing the criteria for when a student loan is determined to be in default, and many others including increasing the rights of tenants occupying properties in foreclosure, and initiatives relating to cyber security, identity theft, and credit bureau reporting.
These consumer protections will add some new additional burdens (and costs) for community banks, but so far these appear to be outweighed by the mortgage and consumer lending relief the law offers to smaller community banks.
Although this law did not substantially overhaul Dodd-Frank or fundamentally change any of the regulations put into place in the aftermath of the Great Recession, it is clear that for community banks and credit unions, the pendulum has swung from regulation to relief.
For more information on the key provisions of this legislation, please contact Angelo Spaneas or your BNN advisor at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.