July 27, 2018 Vol. XXXV, No. 16 S. 2155 DODD-FRANK ACT REVISIONS REGULATORY RELIEF I. INTRODUCTION President Trump recently signed Senate Bill 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act, into law. The Act reflects the first meaningful revisions to certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Set forth below is a brief description of key provisions of the act of interest to financial institutions. II. IMPROVING CONSUMER ACCESS TO MORTGAGE CREDIT (KEY PROVISIONS OF S 2155) A. Title I 1. Section 101 Minimum Standards for Access to Mortgage Credit The Act adds new language to the Truth in Lending Act to expand the definition of a Qualified Mortgage to also include any residential mortgage kept in a portfolio originated by a bank with less than $10B in total consolidated assets (covered institutions) that satisfies the following standards: a) Complies with the limitations on prepayment penalties for a QM limited to 3% in the first year, 2% in the second year and 1% in the third year, with an option available to the borrower to accept a loan without a prepayment penalty; b) Total points and fees do not exceed 3% of the loan amount; c) No negative amortization or interest only loan features; and d) The financial institution considers and documents the debt, income and financial resources of the consumer based on a fully amortizing payment schedule taking into account all taxes, insurance and assessments. This safe harbor from the ability to repay requirements does not apply to a residential mortgage loan that is sold, assigned, or transferred unless the transfer is as a result of the bankruptcy of the covered institution, made to another covered institution, or pursuant to a merger.
2. Section 103 Exemptions from appraisals of real estate located in rural areas The Act creates an exemption from appraisal requirements under the Truth in Lending Act for loans that are under $400,000 and that are secured by real property located in certain rural areas, provided that not later than three (3) days after the date on which the Closing Disclosure Form, made in accordance with TRID is given to the customer: a) the mortgage loan originator or its agent has, directly or indirectly, contacted at least three state certified or licensed appraisers from the mortgage originator s approved appraiser list in the market area; and b) none of the appraisers was available within 5 business days beyond customary and reasonable fee and timeliness standards for comparable appraisals assignments. For purposes of this exemption, a rural area refers to: a) A county that is neither in a metropolitan statistical area nor a micropolitan statistical area that is adjacent to a metropolitan statistical area; or b) A census block that is not in an urban area, as defined by the U.S. Census Bureau. The mortgage loan originator must document the lack of available appraisers and loans made under this exemption (without an appraisal) generally must be retained in portfolio. In addition, there are changes to sale, assignment and transfer requirements that also revolve around the appraisal exemptions. The additional amendments state that a mortgage loan originator that makes a loan without an appraisal under the exceptions shall not sell, assign, or otherwise transfer legal title to the loan unless: The loan is sold, assigned, or otherwise transferred to another person by reason of the bankruptcy or failure of the mortgage originator; The loan is sold, assigned, or otherwise transferred to another person regulated by a federal financial institutions regulatory agency, so long as the loan is retained in portfolio by the person; The sale, assignment, or transfer is pursuant to a merger of the mortgage originator with another person or the acquisition of the mortgage originator by another person or of another person by the mortgage originator; or The sale, loan, or transfer is to a wholly owned subsidiary of the mortgage originator, provided that, after the sale, assignment, or transfer, the loan is considered to be an asset of the mortgage originator for regulatory accounting purposes. 2
Note that the exception to the appraisal requirement does not apply when the loan is considered to be a high-cost mortgage under TILA, or when the appraisal is required separately by a federal financial institutions regulator. 3. Section 104 HMDA Adjustment and Study The Act exempts banks that have originated less than 500 closed-end mortgage loans or less than 500 open-end lines of credit in each of the two preceding calendar years, from having to report the new HMDA data points from 2018 on the LAR for closed-end loans. However, banks that have received a needs to improve CRA rating during each of the last two most recent exams or a substantial non-compliance rating on the most recent exam must still comply with the additional HMDA disclosures. The Act also provides for a study to be conducted of the effects of this change two years after its enactment. (NOTE: The Act does not eliminate all HMDA reporting requirements, only the requirements for additional information that went into effect on January 1, 2018.) 2018 Loan/Application Registers (LARs) Formatting and Submission For all institutions filing HMDA data collected in 2018, the Act will not affect the format of the LARs: LARs will be formatted according to the previously released Filing Instructions Guide for HMDA Data Collected in 2018 (2018 FIG). If an institution does not report information for a certain data field due to the Act s partial exemptions, the institution will enter an exemption code for the field specified in a revised 2018 FIG that the CFPB expects to release later this summer. All LARs will be submitted to the same HMDA platform. A beta version of the HMDA platform for submission of data collected in 2018 will be available later this year for filers to test. As announced in December 2017, the OCC does not intend to require data resubmission for HMDA data collected in 2018 and reported in 2019, unless data errors are material. Furthermore, the OCC does not intend to assess penalties with respect to errors in data collected in 2018 and reported in 2019. Collection and submission of the 2018 HMDA data will provide banks with an opportunity to identify any gaps in their implementation of the amended Regulation C and make improvements in their HMDA compliance management systems for future years. Any examinations of 2018 HMDA data will be diagnostic to help banks identify compliance weaknesses, and the OCC will credit good-faith compliance efforts. 4. Section 106 Eliminating Barriers to Jobs for Loan Originators The Act also provides that an individual will be deemed to have temporary authority to act as a loan originator for 120 days under the S.A.F.E. Mortgage Licensing Act of 2008 if such person is (1) a registered loan originator who becomes employed by a state-licensed mortgage company or (2) a state-licensed loan originator who becomes employed by a state-licensed mortgage company in 3
a different state. To qualify for the temporary authority, the loan originator (a) must not have had an application for a loan originator license denied, or a loan originator license which was revoked or suspended; (b) must not have been subject to a cease and desist order; (c) must not have been convicted of a misdemeanor or felony which would preclude licensure under the law of the state in which the new license is sought; and (d) must have been registered in the NMLS as a loan originator during the one-year period preceding the application. (NOTE: The temporary authority granted by the Act terminates either (a) when the new license application is approved or denied, or (b) 120-days after the new license application is filed.) This revision is effective 18 months after the effective date of the Act. 5. Section 108 Escrow Requirements Relating to Certain Consumer Credit Transactions The Act provides an exemption from TILA Escrow requirements for banks with less than $10 billion in assets, and that have originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year, provided the bank makes loans in rural or underserved areas; and the bank does not otherwise establish and maintain escrows for such loans. 6. Section 109 No Wait for Lower Mortgage Rates The Act removes the three-day wait period required for the combined TILA/RESPA mortgage disclosure if a creditor extends to a consumer a second offer of credit with a lower annual percentage rate. The disclosure must still be made in such a case, but they do not need to be made three business days before consummating the transaction. The exemption will not be effective until the CFPB adopts regulations for its implementation. These provisions of the Act also express the sense of Congress that the CFPB should endeavor to provide clearer, authoritative guidance with respect to (a) the applicability of the TRID rule to mortgage assumption transactions; (b) the applicability of the TRID rule to construction-to-permanent home loans, and the conditions under which those loans can be properly originated; and (c) 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 rule forms published by the CFPB. B. Title II Regulatory Relief and Protecting Consumer Access to Credit 1. Section 201 Capital Simplification for Qualifying Community Banks The Act requires that the federal banking agencies establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than eight percent and not more than 10 percent. Banks with less than $10 billion in total consolidated assets that maintain tangible equity in an amount that exceeds the community bank leverage ratio will be deemed to be in compliance with the 4
capital and leverage requirements. The federal banking agencies are also required to establish procedures for banks with a community bank leverage ratio that falls below these requirements. The community bank leverage ratio will not go into effect until the federal banking agencies adopt regulations for its implementation. 2. Section 202 Limited Exception for Reciprocal Deposits The Act provides that certain reciprocal deposits will not be considered to be funds obtained, directly or indirectly, by or through a deposit broker under the Federal Deposit Insurance Act. A well-capitalized bank with a CAMELS rating of 1 or 2 will be permitted to hold reciprocal deposits up to the lesser of 20 percent of its total liabilities or $5 billion without those deposits being treated as brokered (reciprocal deposits at a bank above these amounts are permitted but remain brokered.) Section 29 of the Federal Deposit Insurance Act, as implemented by the FDIC s regulations, places restrictions on the acceptance by insured depository institutions of deposits obtained through deposit brokers, which are deemed to be brokered deposits." Section 202 amends Section 29 by excluding reciprocal deposits from the definition of brokered and permitting banks that have dropped from well-capitalized to adequately-capitalized to continue accepting reciprocal deposits without obtaining a waiver from the FDIC, as long as it does not accept an amount that would cause it s total reciprocal deposits to exceed a previous four-quarter average. 3. Section 203-204 Community Bank Relief Removing Naming Restrictions Volcker Rule The Act amends the Bank Holding Company Act to exempt certain banks from the Volcker Rule s prohibition on certain speculative investments (i.e., proprietary trading ). The new exemption applies to banks with (a) $10 billion or less in total consolidates assets; and (b) total trading assets and liabilities comprising not more than five percent of total consolidated assets. Additionally, the act also reduces Volcker Rule restrictions on banking entity names being used for hedge funds or private-equity funds. 4. Section 205 Short Form Call Reports The Act requires the federal banking agencies to reduce reporting requirements for depository institutions with less than $5 billion in total consolidated assets that satisfy other criteria the federal banking agencies deem appropriate. The revisions would allow for streamlined first- and third-quarter call reports for such banks. 5
5. Section 206 - Option for Federal Savings Associations to Operate as Covered Savings Associations. This Act permits federal savings associations with less than $20 billion in total consolidated assets to elect to operate with the same powers and duties as national banks without being required to convert their charters. 6. Section 207 - Small Bank Holding Company Policy Statement The Act raises the consolidated asset threshold of the Federal Reserve s Small Bank Holding Company Policy Statement from $1 billion to $3 billion. The change will go into effect when the Federal Reserve amends the Policy Statement, with the Federal Reserve being required to act within 180-days. 7. Section 210 Examination Cycle The Act raises the consolidated asset threshold from $1 billion to $3 billion for well-managed and well-capitalized banks to qualify for an 18-month examination cycle. 8. Section 213 Making Online Banking Initiation Legal and Easy The Act provides that when an individual initiates a request through an online service to open an account with, or obtain a product or service from, a financial institution, the financial institution is authorized to record personal information from a scan of the person s driver s license or other state-issued identification, and store that information to: (a) verify the authenticity of the driver s license or personal information card; (b) verify the identity of the individual; and (c) comply with a legal requirement to record, retain, or transmit personal information in connection with opening an account or obtaining a financial product or service. A financial institution can retain the scan, copy or image in furtherance of its AML obligations, but must delete it after those obligations have been fulfilled. The law will preempt any existing state laws that prohibit making scans, copies or images of driver s licenses or state-issued identification cards. Financial institutions should consider Equal Credit Opportunity Act (Regulation B) issues in connection with establishing policies for the retention, access and use of customer identification cards, because the card scan, copy or image could indicate whether the customer is in a protected class by reflecting race, color, sex, etc. 9. Section 214 Promoting Construction and Development on Mainstreet The Act creates a narrower definition applicable to acquisition, development, and construction (ADC) loans characterized as high volatility commercial real estate (HVCRE) exposures under Regulatory Capital Rules. Under existing rules, ADC loans considered HVCRE exposures must be risk weighted at 150 percent, as opposed to the 100 percent for other commercial loans. The Act provides that for 6
an HVCRE ADC loan to trigger higher capital requirements, it must meet both the definition of an HVCRE exposure and an HVCRE ADC loan. An HVCRE exposure is defined as a credit facility that, prior to conversion to permanent financing, finances, or has financed the acquisition, development, or construction of real property. The Act defines an HVCRE ADC loan as a real estate secured credit that (a) primarily finances, has financed, or refinanced the ADC of real property; (b) has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and (c) is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facilities. These provisions will take effect upon adoption of regulations for its implementation. The federal banking agencies have clarified that when reporting HVCRE exposures on Schedule RC-R, Part II of the Consolidated Reports of Condition and Income (Call Report), depository institutions may use available information to reasonably estimate and report only HVCRE ADC Loans. Depository institutions may refine these estimates in good faith as they obtain additional information but will not be required to amend previously filed regulatory reports as these estimates are adjusted. Alternatively, a depository institution may also continue to report and risk-weight HVCRE exposures in a manner consistent with the current instructions to the Call Report, until the agencies take further action. Furthermore, to avoid the regulatory burden associated with different definitions for HVCRE exposures within a single organization, the Board will not take action to require a BHC, savings and loan holding company, or intermediate holding company of a foreign bank to estimate and report HVCRE on Schedule HC-R, Part II of the FR Y-9C consistent with the existing regulatory requirements and reporting form instructions if the holding company reports HVCRE in a manner consistent with its subsidiary depository institution(s). A holding company may also continue to report and risk-weight HVCRE exposures in a manner consistent with the current instructions to Schedule HC-R, Part II of the FR Y-9C. C. Title III Protections for Veterans, Consumers and Homeowners 1. Section 301 Protecting Consumers Credit The Act amends the Fair Credit Reporting Act (FCRA) to increase the required period for a fraud alert to remain on a credit report from 90 days to one year, and to provide for a national security freeze. The Act also requires a consumer reporting agency to provide a consumer with free credit freezes and to notify a consumer of their availability. 2. Section 302 Protecting Veterans Credit The Act amends the FCRA to exclude from consumer report information: (a) certain medical debt incurred by a veteran if the hospital care or medical services relating to the debt predates the credit report by less than one year; and (b) a fully paid or settled veteran's medical debt that had been characterized as delinquent, 7
charged off, or in collection. The Act also establishes a dispute process for consumer reporting agencies with respect to such veterans medical debt. 3. Section 303 Immunity From Suit For Disclosure of Financial Exploitation of Senior Citizens The Act extends immunity to employees of a financial institution in any civil or administrative proceeding if the employee discloses a suspected exploitation of a senior citizen, and the individual made the disclosure in good faith and with reasonable care and has completed designated training requirements. 4. Section 304 Restoration of the Protecting Tenants at Foreclosure Act of 2009 The Act permanently restores the Protecting Tenants at Foreclosure Act, which was repealed as a result of a sunset provision that took effect on December 31, 2014. This provision reinstates a requirement for a new owner of foreclosed property to give tenants 90 days notice to allow them time to move. 5. Section 313 Foreclosure Relief and Extension for Servicemembers The Act amends the Honoring Americans Veterans and Caring for Camp Lejeune Families Act of 2012 to make permanent the one-year grace period during which a servicemember is protected from foreclosure after leaving military service. D. Title IV Tailoring Regulations for Certain Bank Holding Companies 1. Section 401 Enhanced Supervision and Prudential Standards for Certain Bank Holding Companies The Act raises the threshold for applying enhanced prudential standards from $50 billion to $250 billion. Bank holding companies with total consolidated assets between $50 billion and $100 billion will be exempt from enhanced prudential standards immediately, and bank holding companies with total consolidated assets between $100 billion and $250 billion will be exempt 18 months after the date of enactment ( effective date ). For bank holding companies with total consolidated assets between $100 billion and $250 billion, the Federal Reserve will (1) have the authority to apply enhanced prudential standards after the effective date, (2) be required to conduct a periodic supervisory stress test after the effective date, and (3) have the authority to exempt firms from enhanced prudential standards prior to the effective date. The Act also increases the Consolidated Asset threshold for bank holding companies required to have mandatory risk committees from $10 billion to $50 billion. The federal banking agencies have also clarified that company-run stress tests are not applicable to banks with less than $100 billion in assets. Banks with less than $250 billion in assets will receive stress test relief under the Act no later than 18 months after its adoption. 8
2. Section 402 Supplementary Leverage Ratio for Custodial Banks The Act requires the federal banking agencies to amend the supplementary leverage ratio final rule (SLR) to specify that funds of a custodial bank that are deposited with a central bank will not be taken into account when calculating the SLR, subject to limitations. 3. Section 403 Treatment of Certain Municipal Obligations The Act directs the federal banking agencies to classify qualifying investmentgrade, liquid and readily-marketable municipal securities as level 2B liquid assets under the agencies Liquidity Coverage Ratio final rule. Municipal bonds were not previously considered as high-quality liquid assets and were thus not eligible for use in the calculation of a bank s Liquidity Coverage Ratio. The reclassification of municipal bonds as high-quality liquid assets should provide additional incentives for banks to invest in municipal bonds. The federal banking agencies are required to amend their liquidity regulations to implement these changes no later than 90 days after the enactment of the Act. Accordingly, the agencies will not take action to require an institution subject to the liquidity regulations to exclude from the definition of high-quality liquid assets municipal obligations that it believes meet the statutory criteria for inclusion in high-quality liquid assets. E. Title VI Protections for Student Borrowers 1. Section 601 - Protections in the event of death or bankruptcy The Act amends TILA to protect student loan borrowers by prohibiting a private education loan creditor from declaring a default or accelerating the debt of a student borrower solely on the basis of a death or bankruptcy of a co-signer. In the event of death of a student borrower, the holder of a private education loan must release any co-signer within a reasonable timeframe after receiving notice of the borrower s death. 2. Section 602 Rehabilitation of Private Education Loans The Act amends the Fair Credit Reporting Act to allow a borrower to request that a financial institution remove a reported default on a private education loan from a consumer credit report if the institution offers and the borrower successfully completes a loan rehabilitation program. The loan rehabilitation program, which must be approved by the institution s federal regulator, must require that the borrower make consecutive on-time monthly payments in a number that, in the institution s assessment, demonstrates a renewed ability and willingness to repay the loan. The foregoing Compliance Update is for informational purposes only and does not constitute legal advice. As a reminder, the NBA general counsel is the attorney for the Nebraska Bankers Association, not its member banks. The general counsel is available to assist members with finding resources to help answer their questions. However, for specific legal advice about specific situations, members must consult and retain their own attorney. 9