Burdens Lifted: President Trump Signs Regulatory Relief Bill for Financial Institutions into Law Improving Consumer Access to Mortgage Credit

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1 Burdens Lifted: President Trump Signs Regulatory Relief Bill for Financial Institutions into Law Ever since its enactment in 2010, there has been a push to reform the Dodd-Frank Act to alleviate some of its unintended consequences and burdensome regulatory requirements on community banks and credit unions. Several bills have been debated and passed by either the House or the Senate, but none have successfully completed the legislative process until now. On May 24, 2018, President Donald J. Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act. The goal is that the reduction of regulatory burdens faced by financial institutions, especially community banks and credit unions, will lead to increased lending and the providing of better services to the surrounding community. The Act amends several laws including the Truth in Lending Act (TILA), Fair Credit Reporting Act, Home Mortgage Disclosure Act (HMDA) and The Bank Holding Company Act. Below is an outline of some of the key compliance provisions affecting financial institutions. Improving Consumer Access to Mortgage Credit A. Qualified Mortgages/Ability to Repay Requirements The TILA was amended to allow depository institutions or credit unions below $10 billion to attain Qualified Mortgage (QM) status for residential mortgage loans while forgoing several ability-to-repay (ATR) requirements regarding residential mortgage loans for a loan to be considered a Qualified Mortgage. To make an ATR determination, a creditor must consider factors such as current or reasonably expected income or assets, current employment status, monthly mortgage payment, and current debt obligations. The amendment waives these requirements if the loan: 1) is originated by and retained by the institution, 2) complies with requirements regarding prepayment penalties and points and fees, 3) complies with monthly debit to income rations, and 4) does not have negative amortization or interestonly terms. The institution must still verify the consumer s debt, income, and financial resources, but it does not have to complete a full ATR analysis. The waiver also applies to loans that are transferred: 1) due to bankruptcy or failure of originating institution, 2) due to a merger, 3) to a covered institution so long as the loan remains with that institution, or 4) to a wholly owned subsidiary of the institution. B. Appraisal Changes The Financial Institutions Reform, Recovery and Enforcement Act of 1989 was amended to exempt the appraisal requirements for certain federally related, rural real-estate transactions valued at less than $400,000 if there is no certified appraiser available. No later than three days after the date the Closing Disclosure is provided to the consumer, the institution or its agent must have contacted no less than three State certified or licensed appraisers on the originator s approved appraiser list and documented that no appraiser was available within five business days beyond customary and reasonable fee and timeliness standards. An appraisal will still be required if: 1) the institution s prudential regulator believes there are safety and soundness concerns and 2) if it is a high-cost mortgage. The law places restrictions on the sale, assignment or transfer of the loan, and an originator is not able to complete any such actions without an appraisal unless it is: 1) due to bankruptcy or failure of the originator, 2) to another entity regulated by a financial regulatory agency and loan is retained in portfolio, 3) pursuant to a merger or acquisition, or 4) to a wholly owned subsidiary of the original and the loan is still considered an asset of the originator for regulatory purposes. The law also states that any appraisal services donated by a fee appraiser to an organization that receives tax-deductible donations are considered to be customary and reasonable under TILA.

2 C. Home Mortgage Disclosure Act Adjustment and Study HMDA, which just recently underwent a significant revision, was also addressed in this law. Institutions that originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit in each of the two preceding calendar years are not required to report certain enhanced information related to loan terms such as points and fees, prepayment penalties, application channels and various other areas. Reporting on other HMDA loan data information such as loan purpose, occupancy, census tract, income level, racial characteristics, age, gender and other information is still required. Institutions that received a needs to improve CRA rating during each of the last two most recent exams or a substantial non-compliance rating on their most recent exam must comply with all the HMDA disclosures. The Comptroller General of the United States will be requiring a study of the impact of these amendments and will submit a report to the Senate Banking, Housing and Urban Affairs Committee and House Committee on Financial Services. D. SAFE Mortgage Licensing Act With the goal of eliminating job barriers for loan originators, the SAFE Act was amended to temporarily allow loan originators that meet certain requirements, such as never having a license denied or revoked, to continue to originate loans after moving from one state to another or from a depository institution to a non-depository institution. The time period that a mortgage loan originator can act in a temporary capacity will begin on the date he or she submits an application for licensure and end on the earliest date of: 1) when the person withdraws the application, 2) the State denies or issues a notice of intent to deny or 3) the date the State grants the application, or 4) is 120 days after the submission of the application and is listed on the NMLSR as incomplete. The effective date for this change is November 25, E. Escrow Requirements A new exemption for escrow accounts was added to TILA. An institution is no longer required to establish an escrow account for higher priced mortgages if it meets the following criteria: 1) less than $10 billion in assets 2) originated 1,000 or fewer first lien principal dwelling mortgage loans during the preceding calendar year, and 3) the transaction or institution satisfies the following criteria: a) is located in a rural or underserved area, b) does not maintain escrow accounts other than ones for higher-priced mortgages or as an accommodation to distressed consumers to assist in avoiding default or foreclosure, or c) is a mortgage loan that will be transferred or sold to a purchaser pursuant to an agreement made at or before the time the loan is consummated. F. Lower Mortgage Rates and TRID Guidance from the CFPB If a creditor extends a consumer a second offer of credit with a lower annual percentage rate, the transaction may be consummated without waiting three business days after the required TRID disclosure is given to the consumer. Congress also called upon the Consumer Financial Protection Bureau (CFPB) to provide clearer, authoritative guidance on: 1) the applicability of TRID to mortgage assumption transactions, 2) the applicability of TRID on construction-to-permanent home loans, and the conditions under which those loans can be properly originated, and 3) the extent to which lenders can rely on model disclosures published by the CFPB without liability if recent changes to regulations are not reflected in the sample TRID forms. Congress did not provide a date was to when the guidance should be released by the CFPB.

3 G. Credit Union Residential Loans The Federal Credit Union Act was amended so a one-to-four family dwelling that is not the primary residence of a credit union member will not be considered a member business loan. A member business loan is defined as a loan, line of credit or letter of credit where the proceeds are used for a commercial, corporate or other business investment property or venture or agricultural purposes. Previously, if a credit union extended a loan for the purchase of a one-to-four non-owner occupied residential property, it was classified as a member business loan and subject to a statutory member business lending cap. With the removal of this restriction, the same loan is classified as a real estate loan and not subject to the same caps. Regulatory Relief and Protecting Consumer Access to Credit A. Community Bank Relief The Bank Holding Company Act was amended to exempt from the Volcker Rule banks with total assets valued at less than $10 billion and that have total trading assets and trading liabilities not more than 5% of their total assets. The Volcker Rule prohibits banking agencies from engaging in proprietary trading or entering into relationships with hedge funds and private equity funds. B. Short Form Call Reports Institutions with less than $5 billion in total assets are allowed to file a reduced Report of Condition and Income (Call Report). C. Expedited Funds Availability Act (Regulation CC) Regulation CC was expanded to include the territories of American Samoa and Guam and the Commonwealth of the Northern Mariana Islands. The effective date is of this change is June 25, D. Examination Cycle The Federal Deposit Insurance Act was amended to increase the asset size of institutions eligible for eighteen-month exam cycles (instead of twelve months) from $1 billion to $3 billion. The institution will still need to meet the other requirements of the act in order to be eligible including: 1) that it be well capitalized, 2) its last examination composite condition was found to be outstanding, 3) not subject to a formal enforcement proceeding, and 4) no person acquired control of the institution during the twelvemonth period that an exam would otherwise be required. An outstanding institution is generally considered one that has a CAMELS score of one or two. The increase in the number of banks that qualify for a longer exam cycle will reduce the burden of yearly exams. E. Opening Accounts Online The regulatory form bill includes a newly enacted law, Making Online Banking Initiation Legal and Easy. Under this law, depository institutions and credit unions or their affiliates may record personal information from a scan, copy or image of an individual s driver s license or personal identification card when they initiate an online request to open an account or obtain a financial product. The information can be stored electronically for the purpose of verifying the authenticity of license or identification card, identifying the individual and to comply with legal requirements. The institution must delete any copy or image of the driver s license or personal identification card after use.

4 F. Reducing Identity Fraud The Social Security Administration (SSA) will have additional responsibilities to help financial institutions reduce synthetic identify fraud under the new regulation. The SSA is tasked with establishing a database to facilitate verification of consumer information upon request from a financial institution. Verification will only occur with the consent of the consumer and in connection with a credit transaction. G. Treasury Report on Risks of Cyber Threats The Department of Treasury is required to submit a report no later than May 24, 2019, to the Senate Banking, Housing and Urban Affairs Committee and the House the Financial Services Committee on the risks of cyber threats to financial institutions and capital markets. In addition to assessing the impact and effects of cyber threats, the Department will report on how well federal banking agencies and the Securities and Exchange (SEC) are addressing these threats, how these agencies are assessing the cyber vulnerabilities, and preparedness of institutions they regulate and areas for improvement. Protections for Veterans, Consumer and Homeowners A. Protecting Consumer Credit The Fair Credit Reporting Act was amended to increase the length of time a consumer reporting agency (CRA) must include a fraud alert in a consumer s file for from ninety days to one year. The amendment also requires the CRA to place a credit freeze upon request from the consumer at no cost, and establishes procedures on placement and removal of the credit freeze and creates requirements on protecting credit record of minor under the age of sixteen or incapacitated persons for whom a guardian or conservator has been appointed. The effective date is September 21, B. Immunity from Suit for Disclosure of Financial Exploitation of Senior Citizens Elder abuse is a popular topic, especially at the state level. Under this law, the federal government extends immunity to individuals serving in a supervisor or in a compliance or legal function (including a Bank Secrecy Act Officer) with a financial institution, who in good faith and with reasonable care disclose the suspected exploitation of a senior citizen to a regulatory or law-enforcement agency. The financial institution that employs the covered individual will also be exempt from suit. Training may be provided to the supervisors or compliance/legal employees that come into contact with a senior citizen at a regulatory part of their job duties or review or approve documents in connection with a financial service provided to the senior citizens. C. Restoration of the Protecting Tenants at Foreclosure Act of 2009 The Protecting of Tenants at Foreclosure Act was repealed on December 31, 2014, but is now revived under the new law. The act provides several protections for tenants in foreclosed properties against eviction. When a mortgage is foreclosed upon and an institution acquires the property at an auction sale, the tenant can remain until the end of the lease. For those on a month-to-month lease, the tenants are entitled to ninety days notice before having to move out of the property. The effective date is June 25, D. Property Assessed Clean Energy (PACE) Financing TILA was amended to direct the CFPB to promulgate regulations to extend the ability-to-repay rules to PACE properties for the financing of energy efficiency upgrades or renewal energy installations.

5 E. Protecting Veterans From Predatory Lending The Department of Veterans Affairs (VA) will not guarantee or insure a loan to a veteran unless the institution complies with the fee recoupment, net tangible benefit and mortgage interest test. The minimum time period that must pass before the loan would be guaranteed or insured is the later of the date that is 210 days after the date of the first monthly payment or the date on which the sixth monthly payment is made. These rules do not apply to cash-out refinances, where the amount of the principal for the new loan is larger than the payoff amount of the refinanced loan. The regulation also requires the Government National Mortgage Association (GNMA) and the Department of Housing and Urban Development (HUD) to report on the liquidity of the VA Housing Loan Program. The effective date is May 24, F. Foreclosure Relief and Extension for Servicemembers The Honoring America s Veterans and Caring for Camp Lejeune Families Act of 2012 was amended by making permanent the one-year grace period during which a servicemember is protected from foreclosure after leaving military service. The original law allowed for a ninety-day grace period but was later extended for one-year with a sunset provision that had to be renewed by Congress each year. Tailoring Regulations for Certain Bank Holding Companies A. Enhanced Supervision and Prudential Standards for Certain Bank Holding Companies A provision that received a lot of attention and subject to debate was the increase in asset threshold for systemically important financial institutions at which certain enhanced prudential standards apply from $50 billion to $250 billion. The Federal Reserve Board (FRB) will have some discretion to determine if an institution with assets equal or greater than $100 billion will be subject to the enhanced standards. Company-run stress tests will now be required for institutions with $250 billion in assets, instead of $10 billion. The asset threshold for a mandatory risk committee will now be $50 billion. The effective date for the change is November 25, 2019, except for those institution with less than $100 billion in assets. These institutions see immediate relief with an effective date of May 24, The FRB, in its discretion, may exempt any institution of less than $250 billion in assets from the enhanced standards prior to the November 25, 2019 effective date. Protections for Student Borrowers Student borrowers and their co-signers will receive some additional protection under the Act. TILA was prospectively revised to prohibit a creditor from declaring default or accelerating the debt of a private student loan on the sole basis of the death or bankruptcy of a co-signer to a student loan. It also directs loan holders to release co-signers from any obligation upon death of the student borrower. The Fair Credit Reporting Act was also amended to allow a student borrower to request that an institution remove a previously reported default for a private education loan from a consumer report if the lender chooses to offer a loan-rehabilitation program that requires consecutive on-time monthly payments that demonstrates a willingness and ability to repay the loan and the consumer meets these requirements. The consumer may only request the benefits with respect to rehabilitation of the loan once per loan. What Does this Mean for My Institution? The regulatory relief brought by the new law does not equate with relaxed risk management practices. If anything, it is just as important as ever to maintain a strong risk management program. If you are a community bank that now qualifies for the longer eighteen-month examination cycle instead of twelve

6 months, you may welcome the fact that the expanded time will help you not feel like you are continuously preparing for examiner visits. However, this expanded time may also lead to activity taking place that may fall under the radar if not properly monitored or audited. There is an importance placed on self-identification of risks involved with products and services and testing of control by examiners or auditors. This concept is likely to increase as regulatory burdens are lifted and right-sized for institutions based on their complexity and risk profile. The opportunity for an expanded exam cycle is predicated on the institution receiving an outstanding rating in its most recent exam and continuing to be well capitalized. You do not want to miss this chance by easing your risk management program under the expanded exam cycle due to failing to meet the requirements. As for many of the other changes, it is critical that policies and procedure are updated with new requirements. New changes should be communicated out to the business lines and if necessary, management should schedule training programs to help employees understand how these change may affect their everyday tasks. In addition to notification across business lines, communication with senior management and your Board of Directors about some of these changes is critical. The loosening of asset thresholds may invite expanded opportunities to grow your financial institution that may not have been previously available or financially viable given increase regulatory burden for institutions past a certain asset size. To view a copy of the law, click here. The push for regulatory relief continues. There are several other initiatives still in discussion to reduce the burden faced by financial institutions and pare back some of the requirements of the Dodd-Frank Act, but it is unlikely that anything more will occur before a new Congress is sworn-in in January For further information about our services or if you have any questions, please contact Stephen King, JD, AMLP, Director of Regulatory Compliance Services, at (617) , Cynthia Boehmer, JD, Supervisor, at (617) , Erica Torres, CRCM, Principal, at (617) , or Brian Shea, CRCM, CAMS, Senior Manager, at (617)