Economic Growth, Regulatory Relief, and Consumer Protection Act - S.2155 (House)

This bill amends the Truth in Lending Act to allow institutions with less than $10 billion in assets to waive ability-to-repay requirements for certain residential-mortgage loans. Other mortgage-lending provisions related to appraisals, mortgage data, employment of loan originators, manufactured homes, and transaction waiting periods are also modified.

The bill amends the Bank Holding Company Act of 1956 to exempt banks with assets valued at less than $10 billion from the "Volcker Rule," which prohibits banking agencies from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. Certain banks are also exempted by the bill from specified capital and leverage ratios, with federal banking agencies directed to promulgate new requirements.

The bill amends the United States Housing Act of 1937 to reduce inspection requirements and environmental-review requirements for certain smaller, rural public-housing agencies.

Provisions relating to enhanced prudential regulation for financial institutions are modified, including those related to stress testing, leverage requirements, and the use of municipal bonds for purposes of meeting liquidity requirements.

The bill requires credit reporting agencies to provide credit-freeze alerts and includes consumer-credit provisions related to senior citizens, minors, and veterans.

Summary

S. 2155 would modify provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) and other laws governing regulation of the financial industry. The bill would change the regulatory framework for small depository institutions with assets under $10 billion (community banks) and for large banks with assets over $50 billion. The bill also would make changes to consumer mortgage and credit-reporting regulations and to the authorities of the agencies that regulate the financial industry. Specifically, the bill includes the following changes:

Modified Process for Designating Systemically Important Financial Institutions--The bill would change which bank holding companies would be designated as Systemically Important Financial Institutions (SIFIs). The Dodd-Frank Act attempted to designate institutions that could have a systemically adverse effect on the economy if they failed to additional, enhanced prudential regulation.  Under current law, all banks with consolidated assets exceeding $50 billion are automatically designated as SIFIs and are required by the financial regulators to undergo special stress tests, develop resolution plans, and maintain certain levels of liquidity and financial capacity to absorb losses.

S. 2155 would change the automatic SIFI designation for banks with assets of less than $250 billion.  Banks that have been designated as global systemically important banks (G-SIBs) and banks with more than $250 billion in assets would remain subject to enhanced regulation. Banks with assets between $50 billion and $100 billion would be automatically exempted from enhanced regulation, except for risk committee requirements.  Banks with between $100 billion and $250 billion in assets would be subject only to supervisory stress tests, and the Federal Reserve (Fed) would retain discretion to apply other enhanced prudential provisions to these banks if it would promote financial stability or the institutions' safety and soundness.

Mortgage Lending Rule Modifications—The bill modifies and provides exemptions to certain mortgage lending rules. Specifically, it provides exemptions from certain mortgage origination rules (the ability-to-repay requirement) for banks with less than $10 billion that keep loans in its portfolio.

The ability-to-repay (ATR) requirement to address problematic market practices and policy failures that some policymakers believe fueled the housing bubble that precipitated the financial crisis. The Bureau of Consumer Financial Protection (Bureau) issued regulations in January 2013 implementing the ATR requirement. A lender can comply with the ATR requirement in different ways, one of which is by originating a “Qualified Mortgage” (QM). When a lender originates a QM, it is presumed to have complied with the ATR requirement, which consequently reduces the lender's potential legal liability for its residential mortgage lending activities. The definition of a QM, therefore, is important to a lender seeking to minimize the legal risk of its residential mortgage lending activities, specifically its compliance with the statutory ATR requirement.

Lenders have added incentive to consider whether the borrower will be able to repay the loan if they keep it in their portfolio and do not sell the mortgage on the secondary market. This retained risk could encourage small creditors to provide additional scrutiny during the underwriting process, even in the absence of a legal requirement to do so.

Community Bank Leverage Ratio (CBLR)—The bill provides an exemption for certain banks with less than $10 billion in assets from leverage and risk-based capital requirements if they maintain a leverage ratio of between 8% and 10% capital to unweighted assets. Banking regulators may determine that an individual bank with under $10 billion in assets is not eligible to be exempt from existing capital requirements based on its risk profile. CBO assumed in its analysis that roughly 70% of community banks would opt in to the new leverage regime.

Volcker Rule Exemption— The bill would create an exemption from prohibitions on propriety trading[5] (The Volcker Rule regulates propriety trading) and relationships with certain investment funds for banks with (1) less than $10 billion in assets, and (2) trading assets and trading liabilities less than 5% of total assets. Currently all banks are subject to these prohibitions pursuant to Section 619 of the Dodd-Frank Act, often referred to as the "Volcker Rule." In addition, the bill eases certain Volcker Rule restrictions on all bank entities, regardless of size, for simply sharing a name with hedge funds and private equity funds they organize.

Consumer Protection Enhancements – The bill includes various provisions to address consumer protection challenges facing the credit reporting industry and borrowers in certain credit markets, specifically active duty servicemembers, veterans, and student loan borrowers. Specifically, the bill would subject credit reporting agencies (CRAs) to additional requirements, including requirements to generally provide fraud alerts for consumer files for at least a year and to allow consumers to place security freezes on their credit reports.

The bill would also allow consumer to request that information related to a default on a qualified private student loan be removed from a credit report if the borrower satisfies the requirements of a loan rehabilitation program offered by a private lender. The bill also prohibits lenders from declaring automatic default in the case of death or bankruptcy of the co-signer of a student loan and requires lenders to release cosigners from obligations related to a student loan in the event of the death of the student borrower.

In addition, CRAs would be required to exclude certain medical debt from veterans' credit reports. Recent reports indicate that the Department of Veterans Affairs (VA) Choice Program, which provides veterans with the ability to receive medical care in a non-VA facility, has been slow in processing payments for medical bills, which has adversely impacted the credit scores of patients.

Securities Regulation Relief—The bill contains nine provisions in a capital formation title.  The bill  would provide regulatory relief to certain securities exchanges and investment pools to encourage capital formation. For example, more securities exchanges would be exempt from state securities regulation and certain investment pools would be subject to fewer registration and disclosure requirements. The bill would also expand certain exemptions under Regulation A+ small- to medium-sized companies in an attempt to increase capital access.[9] The legislation also modernizes a 1940 provision to improve the regulation and oversight of mutual funds,   The legislation also requires the Securities and Exchange Commission (SEC) to publicly respond to the recommendations it receives at its annual small business capital formation forum. 

Custody Banks and the Supplementary Leverage Ratio—The bill includes provisions to exempt custody banks[10] from holding capital against funds deposited at certain central banks to meet the Supplementary Leverage Ratio (SLR).[11] The SLR is the ratio of a banking organization’s tier 1 capital to its total leverage exposure, which includes all on-balance-sheet assets and many off-balance-sheet exposures. 

Municipal Bonds and Liquidity Coverage Ratio—The bill requires the banking regulators to treat certain investment grade municipal securities as level 2B High Quality Liquid Assets (HQLA) for purposes of liquidity coverage ratio (LCR). The LCR rule aims to require banks to hold enough High Quality Liquid Assets (HQLA) to match net cash outflows for 30 days during a hypothetical scenario of market stress where creditors are withdrawing funds. An asset can qualify as a HQLA if it has low risk, has a high likelihood of remaining liquid during a crisis, is actively traded in secondary markets, is not subject to excessive price volatility, can be easily valued, and is accepted by the Federal Reserve as collateral for loans. HQLAs are given risk-weights depending on their risk-profile which determine what percentage of the asset (based on market pricing) is allowed to be counted toward the LCR (2A, 2B etc).

The final LCR rule excluded municipal securities from HQLA treatment.  According to investors, many municipal securities are considered to be among the safest available investments, as state and local governments are generally not at risk of default.  By excluding municipal securities from qualifying as HQLAs, some state and local governments and other municipal issuers have faced increased borrowing costs for infrastructure construction and maintenance projects. This change is expected to increase demand for certain municipal securities, thereby driving down the cost of borrowing for domestic municipalities.

Miscellaneous Provisions—The bill also includes numerous other provisions that are narrowly tailored to provide specific relief to various entities. This includes provisions relating to mortgage disclosures for small banks and credit unions, technical changes to mortgage loan originator licensing and registration, requirements for manufactured home retailers, escrow account requirements for higher-priced mortgages, reciprocal deposit rules, provisions aimed at reducing identify theft, servicemembers foreclosure relief, apply certain securities regulations to U.S. territories and various other provisions.[15] For details about these miscellaneous provisions or any other background information relating to provisions in the bill, please see CRS Report: Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) and Selected Policy Issues.

Background

In response to problems raised by the 2007-2009 financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) was enacted on July 21, 2010. The Dodd-Frank Act mandated the promulgation of more than 400 rules, created a new regulatory umbrella group chaired by the Treasury Secretary—the Financial Stability Oversight Council (FSOC)—with authority to designate certain financial firms as systemically important and subjecting them and all banks with more than $50 billion in assets to heightened prudential regulation. Financial firms were also subjected to a special resolution process (called "Orderly Liquidation Authority") similar to that used in the past to address failing depository institutions following a finding that their failure would pose systemic risk.

The Dodd-Frank Act made other changes to the regulatory structure. It created the Office of Financial Research to support FSOC. The Act consolidated consumer protection responsibilities in a new Bureau of Consumer Financial Protection (CFPB). It consolidated bank regulation by reassigning the Office of Thrift Supervision's (OTS's) responsibilities to the Office of the Comptroller of the Currency. A federal office was created to monitor insurance. The Federal Reserve's emergency authority was amended, and some of its activities were subjected to greater public disclosure and oversight by the GAO.

Other aspects of the Dodd-Frank Act addressed particular sectors of the financial system or selected classes of market participants. The Dodd-Frank Act required more derivatives to at central counterparties and registered and traded on regulated exchanges overseen by the SEC and CFTC, reporting for derivatives that remain in the over-the-counter market, and registration with appropriate regulators for certain derivatives dealers and large traders. Advisers to private funds and private equity funds were subject to new reporting and registration requirements. Credit rating agencies were subject to greater government controls, disclosure and legal liability provisions, and references to credit ratings were required to be removed from federal statute and regulation. Executive compensation, corporate governance mandates for all public companies, and securitization reforms attempted to reduce incentives to take excessive risks. Securitizers were subject to risk retention requirements, popularly called "skin in the game." It made changes to bank regulation to make bank failures less likely in the future, including prohibitions on certain forms of bank and bank affiliate trading (known as the "Volcker Rule"). It created new mortgage standards in response to practices that caused problems in the foreclosure crisis.  Dodd-Frank also required the SEC to issue rules to require new and burdensome disclosure requirements for all public companies on conflict minerals, resource extraction payments and mine safety violations.

S. 2155 includes numerous provisions that have passed the House as standalone legislation or as part of larger legislative packages. Various changes, in some instances, have been made to the language of the House-passed provisions. Below is a list of bills that relate to provisions included in S. 2155.

• H.R.10, Financial CHOICE Act of 2017 | Passed the House on June 8, 2017 (Roll Call 299: 233-186) The bill includes numerous provisions, including text from certain other bills below.
• H.R.385, To amend the Expedited Funds Availability Act to clarify the application of that Act to American Samoa and the Northern Mariana Islands.        
• H.R.389, Credit Union Residential Loan Parity Act 
• H.R.898, Credit Score Competition Act of 2017      
• H.R.915, Permanently Protecting Tenants at Foreclosure Act of 2017
• H.R.1219, Supporting America's Innovators Act of 2017 | Passed the House on April 6, 2017 (Roll Call 221: 417-3)
• H.R.1257, Securities and Exchange Commission Overpayment Credit Act | Ordered reported by the House Financial Services Committee on March 9, 2017 by a vote of 59-0)
• H.R.1343, Encouraging Employee Ownership Act of 2017 | Passed the House on April 4, 2017 (Roll Call 216: 331-87)
• H.R.1366, U.S. Territories Investor Protection Act of 2017 | Passed the House by voice vote on May 1, 2017.
• H.R.1426, Federal Savings Association Charter Flexibility Act of 2017 | Passed the House by voice vote on January 29, 2018.
• H.R.1457, MOBILE Act of 2017 | Passed the House on January 29, 2018 (Roll Call 46: 397-8)
• H.R.1624, Municipal Finance Support Act of 2017 | Passed the House by voice vote on October 3, 2017.
• H.R.2148, Clarifying Commercial Real Estate Loans | Passed the House by voice vote on November 7, 2017.
• H.R.2226, Portfolio Lending and Mortgage Access Act      | Passed the House by voice vote on March 6, 2018.
• H.R.2255, HOME Act | Passed the House by voice vote on January 29, 2018.
• H.R.2403, Keeping Capital Local for Underserved Communities Act of 2017
• H.R.2864, Improving Access to Capital Act | Passed the House on September 5, 2018 (Roll Call 440: 403-3)
• H.R.2948, To amend the S.A.F.E. Mortgage Licensing Act of 2008 to provide a temporary license for loan originators transitioning between employers, and for other purposes.
• H.R.2954, Home Mortgage Disclosure Adjustment Act      | Passed the House on January 18, 2018 (Roll Call 32: 243-184)
• H.R.3093, Investor Clarity and Bank Parity Act        | Passed the House by voice vote on December 11, 2017.
• H.R.3758, Senior Safe Act of 2017 | Passed the House as part of H.R. 2255, which was passed by voice vote on January 29, 2018.
• H.R.4258, Family Self-Sufficiency Act | Passed the House on January 17, 2018 (Roll Call 22: 412-5
• H.R.4279, Expanding Investment Opportunities Act | Passed the House on January 17, 2018 (Roll Call 25: 418-2)
• H.R.4546, National Securities Exchange Regulatory Parity Act | Ordered reported by the House Financial Services Committee on December 13, 2017 by a vote of 46-14.
• H.R.4607, Comprehensive Regulatory Review Act | Passed the House on March 6, 2018 (Roll Call 95: 264-143)
• H.R.4725, Community Bank Reporting Relief Act | Passed the House by voice vote on March 6, 2018.
• H.R.4771, Small Bank Holding Company Relief Act of 2018 | Passed the House on February 8, 2018 (Roll Call 66: 280-139)
• H,R, 4790, Volcker Rule Regulatory Harmonization Act | Passed the House on April 13, 2018 (Roll Call 139: 300-104)
• H.R.5076, Small Bank Exam Cycle Improvement Act of 2018      | Ordered reported by the House Financial Services Committee on March 31, 2018 by a vote of 60-0.
• H.R.5192, Protecting Children from Identity Theft Act | Passed the House on April 17, 2018 (Roll Call 142: 420-1)
• H.R.5277, Financial Literacy College Education Act          
• H.R.5659, Volcker Rule Relief Act of 2018

  Cost

The Congressional Budget Office (CBO) estimates that enacting S. 2155 would increase deficits by $271 million over the 2018-2022 period and by $671 million over the 2019-2027 period. “CBO’s estimate of the bill’s budgetary effect is subject to considerable uncertainty, in part because it depends on the probability in any year that a systemically important financial institution (SIFI) will fail or that there will be a financial crisis. CBO estimates that the probability is small under current law and would be slightly greater under the legislation.”  The legislation contains a provision, Section 217, to pay for the costs of the legislation as estimated by the CBO.

House Democratic Whip Steny Hoyer:

Senate passed on March 14, 67-31, with 16 Democrats and 1 Independent supporting, proposes to relax or provide exemptions to numerous provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) and other laws governing regulation of the financial industry.

Although S. 2155 supporters are emphasizing the bill’s provisions giving regulatory relief to community banks – an objective Democrats share – in actual fact S. 2155 proposes to rollback and weaken the regulatory framework for all banks, both small depository institutions with assets under $10 billion (community banks) and large banks with assets over $50 billion and up to as much as $2.5 trillion.  Moreover, S. 2155 would make changes to consumer mortgage and credit-reporting regulations and to the authorities of the agencies that regulate the financial industry.

No one can deny that the financial crisis of 2007-2009 revealed that excessive risk had built up in the financial system, or that systemic weaknesses in federal regulation contributed to that buildup.  The result was the worst global financial crisis since 1929.  Among the key protections enacted by law or adopted through regulation in the wake of the 2008 financial crisis that S. 2155 would roll back are:

Home Mortgage Disclosure Act: The 1975 Home Mortgage and Disclosure Act (HMDA), as amended by Dodd-Frank, requires most financial institutions to maintain, report, and publicly disclose information about mortgages they originate to ensure they are not engaged in discriminatory lending practices, among other purposes. This HMDA data—which is information that banks already collect as part of the mortgage underwriting process—is especially important in helping detect and combat redlining in communities across the country, even in communities where banks pass their Community Reinvestment Act (CRA) exams. S. 2155 would exempt depository institutions who originate less than 500 mortgages or home equity lines of credit, 85% of all depository institutions, from the enhanced HMDA reporting requirements that are essential for shedding light on the kinds of discriminatory lending that might otherwise fly under the radar.  This change will make it harder to combat redlining and to detect fair lending violations, as HMDA data are routinely used by the Department of Justice, the Consumer Bureau, and others to identify and bring cases against institutions for discrimination.

Systematically Important Financial Institutions: To protect taxpayers from having to come to the rescue of a large bank whose failure could cascade through the U.S. and global financial system, as happened in 2008, Dodd-Frank mandates that banks with assets over $50 billion be automatically designated as Systemically Important Financial Institutions (SIFIs) subject to enhanced prudential regulation by federal financial regulators. The purpose of the automatic SIFI designation is to prevent the failure of any institution from threatening the US economy. Under Dodd-Frank, the Federal Reserve is automatically required to apply several safety and soundness requirements (e.g. higher capital, liquidity, living wills, etc.), known as “enhanced prudential standards,” to the largest banks that are more stringent than those applied to smaller banks.  S. 2155 proposes to dramatically raise the threshold for automatic SIFI designation from $50 billion to $250 billion in assets. The effect of the bill's changes would be to reduce from 38 to only 13 the number of large banks automatically subject to enhanced prudential regulation, increasing the risk that U.S. banks with total assets between $50 billion and $250 billion and even larger foreign banks that operate in the U.S. will engage in risky practices that come to light only after it is too late to take corrective action and another crisis threatens the economy.  

Stress Testing of Large Banks: S. 2155 proposes to curtail mandatory company-run and supervisory stress testing for the largest banks, a central pillar of Dodd-Frank, by sharply increasing the asset thresholds for mandatory company-run stress tests from $10 billion to $250 billion and giving regulators the discretion to reduce the frequency of company-run stress tests and supervisory stress tests for banks with $100 billion to $250 billion, reducing the frequency of supervisory stress tests for banks between $100 billion and $250 billion, and even reducing the frequency of company-run stress tests and supervisory stress test scenarios for $2 trillion banks.  Bank stress tests are a common sense, transparent and critical tool intended to estimate a large bank’s ability to withstand an economic crisis and identify for banking regulators and bank executives weaknesses in a large bank’s balance sheet that can be corrected before they become a threat to the bank or the financial system.

Bank Capital requirements. A central lesson of the 2007-08 financial crisis was that seemingly well-run and well-capitalized financial institutions underestimated the risk of their assets and therefore the amount of capital they needed to have on hand to absorb losses when the financial crisis deepened.  Dodd Frank created a capital regime to ensure that banks of all sizes maintain sufficient capital to withstand steep losses.  S. 2155 proposes to change how certain banks calculate the amount of capital they must have on hand, the effect of which will be to reduce the amount of capital they must have and increasing the failure and bailout risk of many of large banks.  The bill’s changes are on top of the Federal Reserve and OCC’s recent proposal to reduce capital requirements for the largest banks by more than $120 billion, according to the FDIC.

S. 2155 is a solution in search of a problem. Bank profits and lending are both at all-time highs.  Indeed, the banking industry broke records by making annual profits of more than $163 billion in each of the last three years, compared to $87 billion made in 2010.  Bank lending to businesses has increased 80% since Dodd-Frank became law, and only 2% of small businesses identified borrowing as a key concern. 

If enacted, S. 2155 could make the U.S. financial system more vulnerable to another financial crisis, potentially forcing taxpayers to bail out banks, as they did during the 2008 Great Recession. The failure of several of these banks during a period of significant stress in the financial sector could threaten financial stability and starve the economy of the credit and financial intermediation it needs to thrive.

House Democrats stand ready to work with House Republicans to enact sensible and targeted changes to Dodd-Frank that would help make community banks more nimble and impose fewer regulatory requirements on them, including less frequent exams, fewer reporting obligations, and exemption of mortgages they originate and hold on portfolio from mortgage rules adopted by the Consumer Financial Protection Bureau in 2013.  Unfortunately, S. 2155 proposes changes far beyond what is needed to help community banks.