House Passes Bill to Ease Banking Regulations

By a vote of 258-159, the House of Representatives passed the “Economic Growth, Regulatory Relief, and Consumer Protection Act.” The bill would make changes to banking regulations implemented following the financial crisis of 2008. In March, the Senate voted 67 to 31 in favor of the bill. The legislation, which awaits President Trump’s signature, is the first major rollback of the Dodd-Frank Act.

The legislation provides relief to roughly two dozen regional banks and other institutions. It raises the threshold for enhanced prudential standards under Section 165 of Dodd-Frank from $50 billion to $250 billion. Currently, bank holding companies with total consolidated assets of $50 billion or more are subject to requirements addressing capital, liquidity management, resolution planning, credit exposure and other areas. In addition, the legislation raises the trigger point for having a risk committee and conducting company-run stress testing from $10 billion to $50 billion and $250 billion, respectively.

Relief for smaller banking organizations is a significant focus of the legislation. It provides capital-related relief for “qualifying community banks” that have less than $10 billion in assets and also meet a new leverage ratio to be designed by the federal banking regulators. The legislation also provides a limited exemption from the Volcker Rule for insured depository institutions that have less than $10 billion in assets and little or no trading book activity.

In addition, the legislation makes changes in a miscellaneous set of areas. It modifies the capital treatment of certain real estate loans by introducing a new, more limited concept known as an HVCRE ADC loan. It also requires the CFPB to promulgate ability-to-repay rules applicable to Property Assessed Clean Energy (PACE) transactions. Further, the legislation offers relief relating to certain mortgage products, including those relating to veterans as well as private student loans.
President Trump is expected to sign the legislation.

FRB Vice Chair Urges Reconsideration of Capital and Liquidity Requirements for Foreign Banks Operating in U.S.

Board of Governors of the Federal Reserve System Vice Chair for Supervision Randal K. Quarles encouraged regulators to reconsider the capital and liquidity requirements for foreign banks operating in the United States. He also proposed a return to the pre-financial crisis regulatory goal of maximizing the flow of capital worldwide.

In an address at Harvard Law School, Mr. Quarles stated that the current U.S. approach to foreign banks, which prioritizes increasing the resiliency of their U.S. operations, should be reconsidered. He argued that the events of the last financial crisis, when foreign banks recovered through the combined efforts of the United States and their home country governments, created the current U.S. approach, which prioritizes ensuring that the United States has sufficient resources to address another such event. He stated that while most regulators seem to believe that intermediate holding company (“IHC”) and attendant requirements are appropriate, the regulation of the IHC could be modified without harming financial stability. He suggested that if the United States recalibrated its requirements, other jurisdictions would, too. This outcome, he argued, would increase the flow of capital, which should be the goal of regulators.

CFPB Reviews Spring 2018 Rulemaking Agenda

The Consumer Financial Protection Bureau (“CFPB”) listed “the regulatory matters that the Bureau reasonably anticipates having under consideration during the period from May 1, 2018, to April 30, 2019.” This agenda is part of the Spring 2018 Unified Agenda of Federal Regulatory and Deregulatory Actions. The notice outlined Acting CFPB Director Mick Mulvaney’s leadership priorities.

In a blog post, the CFPB explained that it intends to reopen rulemaking regarding two prior regulations: (i) the implementation of the Home Mortgage Disclosure Act, regarding, among other aspects, the “institutional and transactional coverage tests and the rule’s discretionary data points” and (ii) the Payday, Vehicle Title, and Certain High-Cost Installment Loans rule before their compliance dates in August 2019. The CFPB plans to maintain certain other rulemakings that were previously implemented.

The CFPB also set out its agenda for proposed rules and guidance. Among other things, the agency noted that it would attempt to reduce any “unwarranted regulatory burden.” The CFPB intends to:

  • propose a rule to improve communication practices and consumer disclosures of collectors under the Fair Debt Collection Practices Act;
  • require financial institutions “to collect, report and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses”; and
  • open rulemaking to address mortgage requirement issues under the Dodd-Frank Act.

The CFPB also listed its potential long-term actions (beyond the next 12-month period) and reclassified certain rulemakings as “inactive.” Regulation Z subparts B and G, which concern the extension of credit under the Truth in Lending Act, will be moved to the long-term actions list.

Lofchie Comment: Mr. Mulvaney’s rethinking of Mr. Cordray’s policies illustrates the potential benefits of reconstituting the CFPB from being a bureau led by a single partisan individual to a commission with representatives of both major political parties. With a five-person commission, if the chair of the commission attempts to obtain unanimous votes on new rules, it is far more likely that those rules will reflect a consensus that is likely to survive elections.

Treasury Reports on Successful Deregulation Efforts

The U.S. Treasury Department (“Treasury”) issued a report listing its regulatory reform accomplishments. In the report, Treasury outlined the steps it had taken to execute Treasury-specific orders issued by President Trump, which include Executive Order 13777 (“Enforcing the Regulatory Reform Agenda”) and Executive Order 13771 (“Reducing Regulation and Controlling Regulatory Costs”). Since the release of E.O. 13777, Treasury:

  • reduced regulatory costs by (i) withdrawing 62 items from its Regulatory Agenda and (ii) moving 50 rules from active to long-term status;
  • proposed rulemakings to remove 298 duplicative, obsolete or unnecessarily burdensome tax regulations;
  • recommended the “reform or withdrawal of recent significant IRS regulations” in an October 2017 report;
  • urged the U.S. financial regulatory system (in a series of reports) to make the regulation of banks and credit unions, capital markets, and asset management and insurance more effective and precise;
  • pushed for the Financial Stability Oversight Council to implement reforms to prior designated non-bank financial companies as systemically significant; and
  • published a “critical evaluation” of the ban by the Consumer Financial Protection Bureau on arbitration clauses in financial contracts, which would have cost businesses and consumers billions before it was nullified by a Congressional Review Act resolution.

Lofchie Comment: Leaving aside the quality or benefit of individual regulations issued during the prior administration – an issue that can be fiercely debated – the sheer volume of new requirements was simply overwhelming to the markets. Keeping up with rulemaking became a major business; often more important than doing business. Respite is welcome.

FRB Governor Advocates for Cyclical Protections in Event of Economic Downturn

Board of Governors of the Federal Reserve System (“FRB”) Governor Lael Brainard urged the FRB and banking institutions to “safeguard” capital and liquidity protections as cyclical pressures increase.

In remarks at the Global Finance Forum in Washington D.C., Ms. Brainard stated that despite the overall strength of the banking system, there are areas of financial vulnerability. She stated that measures should be implemented to ensure that the system can withstand negative shocks. According to Ms. Brainard, areas of financial vulnerability include asset valuation and business leverage (in the non-financial business sector), that are high in comparison to “historic norms.”

Ms. Brainard summarized the FRB’s next regulatory steps. She reported that the FRB is close to (i) completing the net stable funding ratio to ensure that large banking firms maintain a stable funding profile past a one-year projection, and (ii) implementing Dodd-Frank Act limits on large counterparty exposures, which will reduce the ripple effect of financial distress. Ms. Brainard additionally advocated for efforts to improve the Volcker Rule so it can better serve its underlying purpose of prohibiting banking firms from certain speculative activities. She expressed her support for market-wide “minimum haircuts for securities financing transactions,” and for recalibrating the regulatory framework to reduce the burden on smaller banking firms.

President Trump Names FRB, CFTC Nominees

President Donald J. Trump nominated Dan Berkovitz to serve as a CFTC Commissioner and Michelle Bowman and Richard Clarida to serve on the Board of Governors of the Federal Reserve System.

Mr. Berkovitz was nominated to serve the remainder of a five-year term. He is a partner at WilmerHale and vice chair of the American Bar Association Committee on Futures and Derivatives. Mr. Berkovitz previously was CFTC General Counsel and Deputy Representative to the Financial Stability Oversight Council. He also served as a senior staff lawyer for the Senate Permanent Subcommittee on Investigations and Deputy Assistant Secretary in the Department of Energy Office of Environmental Management.

Ms. Bowman was nominated to serve the remainder of a 14-year term set to expire in 2020. She is currently the Kansas State Bank Commissioner and previously was an executive at Farmers and Drovers Bank. Ms. Bowman served in government in several capacities including as a staffer for Senator Bob Dole, Counsel for several House committees, Director of Congressional and Intergovernmental Affairs at the Federal Emergency Management Agency, and Deputy Assistant Secretary and Policy Advisor to Secretary Tom Ridge at the Department of Homeland Security.

Mr. Clarida was nominated to serve a four-year term as Vice Chair of the FRB. Mr. Clarida is currently the Lowell Harriss Professor of Economics at Columbia University. He is also a Global Strategic Advisor for PIMCO and a member of the Council on Foreign Relations. Mr. Clarida previously served as Assistant Secretary for Economic Policy at the U.S. Treasury and was a Senior Staff Economist with President Ronald Reagan’s Council of Economic Advisers.

CFPB Acting Director Calls for Agency Restructuring

In testimony before the Senate Banking Committee, Consumer Financial Protection Bureau (“CFPB”) Acting Director Mick Mulvaney outlined his recommendations for curbing the power and authority of the CFPB. Mr. Mulvaney addressed recent recommendations from the CFPB Semi-Annual Report.

Mr. Mulvaney echoed his request for Congress to (i) require the CFPB to obtain funding through Congressional appropriations, (ii) require legislative approval for major rules, (iii) install an independent Inspector General to oversee operations, and (iv) ensure that the CFPB is accountable to the president. Committee Chair Mike Crapo (R-ID) said that the “fundamental structure” of the CFPB should be altered in order to foster greater transparency and accountability. He called for a “bipartisan commission,” as opposed to the current single-director structure, and expressed support for Mr. Mulvaney’s request for funding dictated by Congressional appropriations rather than drawn from the Federal Reserve.

Committee Ranking Member Sherrod Brown (D-OH) charged that Mr. Mulvaney was appointed illegally, and accused him of waging a “war on working families” while “handing out favors to Wall Street and shady lenders.” Mr. Brown asserted that Mr. Mulvaney has given outsized salaries to his appointees at the CFPB, and condemned his decision not to pursue enforcement actions against payday lenders. Senator Elizabeth Warren (D-MA) denounced Mr. Mulvaney’s plans to “kill” the CFPB, and argued that he is “hurting real people [in order] to score cheap political points.”

In a previous letter to Senator Warren, Mr. Mulvaney said that his recommendations are intended to better align CFPB function with Congressional intent. Mr. Mulvaney said that the CFPB is uniquely insulated from congressional and executive oversight, and argued that changing the structure of the agency is necessary in order to make it “permanently accountable and transparent.”

Lofchie Comment: Mr. Mulvaney argues that the CFPB should be made into an ordinary regulatory agency, accountable to Congress and with leadership composed of members of both political parties. Senator Warren’s argument that Mr. Mulvaney is “killing” the CFPB by suggesting that Congress should have authority over it is very strange, particularly given the conventional wisdom that Democrats will attain a majority in at least one house of Congress in the next election.

Rather than denounce Mr. Mulvaney, Senator Warren and Senator Brown might consider adopting his suggestions, which would give the Democrats institutional representation at the CFPB and continuing non-partisan insight as to its activities. In this way, the Senators would improve the long-term operation of the CFPB by allowing for genuine Congressional control over its budget, activities and leadership; and by assuring that there would be CFPB Commissioners representative of both parties.

FRB Governor Reviews Financial Stability Policy

Board of Governors of the Federal Reserve System (“FRB”) Governor Lael Brainard reviewed the current state of prudential financial stability regulation including policies that address “tail risk.” Prudential, macroprudential and countercyclical policies, according to Ms. Brainard, are crucial to minimizing the risks that threaten financial stability.

In remarks at the Stern School of Business at New York University, Ms. Brainard stated that the FRB focuses on correcting vulnerabilities rather than attempting to predict “adverse shocks.” Vulnerable areas that were cited include “asset valuation and risk appetite, borrowing by the nonfinancial sector, liquidity risks and maturity transformation by the financial system and leverage in the financial system.” Noting that overall risk remains moderate, Ms. Brainard emphasized the importance of continuing to monitor existing and emerging vulnerabilities. She reported that the FRB is looking into the extreme volatility demonstrated by some cryptocurrencies due to their highly speculative nature. However, Ms. Brainard said it is unclear if the valuations of cryptocurrencies could be a threat to financial stability.

Ms. Brainard described the necessity of FRB regulations that require banks to hold substantial capital and liquidity buffers. She said that these regulations force banks to internalize the costs of engaging in risky financial behavior.

She also reinforced the importance of supervisory stress tests; however, she cautioned that stress testing has not demonstrated that it is effective in counteracting the financial system’s tendency toward pro-cyclicality. In response, the FRB implemented the countercyclical capital buffer (“CCyB”), which is designed to counteract “elevated risk of above normal losses” for banks. At least once per year, the FRB votes to determine the level of the CCyB, but so far has voted to leave the CCyB at its minimum value of zero.

NY Fed Names New President and CEO

The Federal Reserve Bank of New York named John C. Williams as president and CEO. Mr. Williams will assume the new position on June 18, 2018, upon the retirement of current president William C. Dudley.

Mr. Williams is currently serving as president and CEO of the Federal Reserve Bank of San Francisco. He assumed his current role in 2011, following a period as executive vice president and director of research.

Mr. Williams began his career as an economist at the Board of Governors of the Federal Reserve System. He also served as a senior economist at the White House Council of Economic Advisers.

GAO FinTech Report Calls for Improvements in Customer Protection and Regulatory Oversight

The Government Accountability Office (“GAO”) issued a report evaluating the risks and benefits, customer protections, and regulatory oversight of FinTech products and activities. Among other things, the GAO advised regulators to (i) improve interagency coordination, (ii) address competing concerns on financial account aggregation and (iii) analyze the feasibility of adopting successful foreign regulatory approaches.

The GAO report found that the fragmented regulatory framework, split between state and federal regulators, does not sufficiently address the risks of these products. The GAO advised regulators to protect customers by addressing the unique characteristics of FinTech products, including data security and privacy liabilities. The GAO also found that the regulatory framework presents several challenges to FinTech payment and lending firms, including costly and time-consuming compliance activities.

The GAO report praised innovation taken by regulators in foreign jurisdictions. A “regulatory sandbox” is one such innovation that allows regulators and FinTech firms to collaborate and understand evolving market trends. In practice, it allows FinTech firms to offer products on a limited scale, which enables firms and regulators to get useful feedback on the products and their risks. The GAO advised U.S. regulators to consider similar approaches and be adaptive to market innovations.

Lofchie Comment: According to the summary of the GAO report:

“The U.S. regulatory structure poses challenges to fintech firms. With numerous regulators, fintech firms noted that identifying the applicable laws and how their activities will be regulated can be difficult.”

A great part of the problem is the prevailing Dodd-Frank notion that more rules, more agencies and more overlapping authority means that the market is safer. The reality is that, in many cases, it just means that the system is more cumbersome and that greater authority in ever more governmental agencies provides even less certainty as to what the rules actually are. For a somewhat fuller discussion of the impact of regulatory complexity, here is a 2009 pre-Dodd-Frank article: The Future of Financial Regulation: Meet the New Regulators, Better Than the Old Regulators?