On May 12, 2015, U.S. Senator Richard Shelby (R-Ala.), Chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs, released the text of draft legislation intended to reform the regulatory framework for financial institutions, and a formal markup of the bill has been set for May 21, 2015. The legislation is styled as a discussion draft and is titled “The Financial Regulatory Improvement Act of 2015.” The bill seeks to toughen oversight of financial regulators and ease the regulatory burden on many financial institutions across the nation. According to Chairman Shelby, the bill is a “working document” intended to initiate a conversation about improving access to credit and reducing risk in the financial system.
Multiple sectors of the financial services industry have expressed support for the bill because it addresses many of the industry’s chief complaints with the current regulatory environment. For example, the bill reforms the designation process for systemically important or “too big to fail” financial institutions and broadens the eligibility for qualified mortgages. It also proposes significant reforms to the Federal Reserve and the Financial Stability Oversight Council (FSOC). There are a few potential reform measures that are not included in the bill. For example, the bill does not address how the Consumer Financial Protection Bureau (CFPB) is funded or managed, nor does it address the conservatorship of Fannie Mae and Freddie Mac.
Below is a summary of some of the bill’s key provisions:
Mortgage Industry Provisions
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Qualified Mortgage Safe Harbor Eligibility . The bill would allow banks of any size to have a safe harbor from federal “qualified mortgage” rules so long as they hold the loans in their portfolio and meet certain criteria.
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No Wait for Lower Mortgage Rates. The bill would remove the new three-day wait period required for the combined Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) mortgage disclosure if the only change from the prior disclosure is a reduction in the consumer’s interest rate, and the bill would provide lenders with a safe harbor from liability until the CFPB certifies that use of the forms does not conflict with state law.
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Prohibition on Use of Guarantee Fees to Offset Other Government Spending. The bill would prohibit the use of increases in a guarantee fee charged by Fannie Mae and Freddie Mac to offset outlays or reductions in revenues for any purpose other than enterprise business functions or housing finance reform as passed by Congress in the future.
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Consumer Access to Mortgage Credit. The bill would amend the TILAto exclude any escrow for future payment of insurance from the computation of points and fees and would require the GAO to study the impact of Dodd-Frank mortgage rules on the availability of mortgage credit, including the impact on affiliated lenders.
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Relief for Manufactured Home Market. The bill would amend TILA to exclude from the definition of “mortgage originator” any employee of a retailer of manufactured homes who does not take residential mortgage loan applications for compensation, and to revise the definition of “high-cost mortgage” as it applies to manufactured housing.
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Study on the Privacy Risks of Government Publication of Personal Financial Data. The bill would require the GAO to study the privacy risks of the new Home Mortgage Disclosure Act (HMDA) reporting requirements added by Dodd-Frank.
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Study of Mortgage Servicing Assets. The bill would require the federal banking agencies to perform a study of the impact of the recent changes in the regulatory treatment of mortgage servicing assets.
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Prohibition on Sale of Preferred Stock. The bill would prohibit the sale, or other disposition, of preferred stock in Fannie Mae or Freddie Mac by the U.S. Treasury, unless it is directed to do so by Congress.
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Secondary Market Advisory Committee. The bill instructs the Director of the Federal Housing Finance Agency (FHFA) to establish a committee comprised of mortgage market participants and advise on decisions pertaining to the development of market infrastructure.
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Common Securitization Platform. The bill would direct the FHFA Director to: (1) report to Congress annually on the development of the Common Securitization Platform (CSP); (2) establish a board of directors of CSP to advise on the development and transition of the CSP and gradually increase the number of CSP board members who do not work for Fannie Mae or Freddie Mac; and (3) after five years, transition the CSP to a nonprofit entity available to approved issuers other than Fannie Mae and Freddie Mac.
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Mandatory Risk Sharing for GSEs. The bill would require Fannie Mae and Freddie Mac to meet minimum levels of risk sharing.
Banking Industry Provisions
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“Too Big to Fail” Threshold. The bill would increase the asset threshold for automatic designation as a systemically important financial institution (SIFI) from $50 billion to $500 billion. The Federal Reserve and the FSOC would be required to follow specific criteria to evaluate and determine whether banks with more than $50 billion and less than $500 billion in total assets should be designated as a SIFI.
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Reporting Relief for Community Banks. The bill would allow highly-rated community banks to submit a short-form call report in the first and third quarters of each year.
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Clarification of the Volcker Rule. The bill would exempt banks with $10 billion or less in total assets from the Volcker Rule.
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Streamlining Bank Exams. The bill would amend the Federal Deposit Insurance Act to increase the number of small, insured depository institutions that qualify for the 18-month on-site exam cycle by increasing the current asset threshold of $500 million to $1 billion.
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Gramm-Leach-Bliley Act Relief. The bill would amend the Gramm-Leach-Bliley Act to exempt from its annual written privacy policy notice requirement any financial institution that: (1) shares nonpublic personal information only in accordance with specified requirements, (2) has not changed its policies and practices with respect to disclosing nonpublic personal information from those disclosed in the most recent disclosure sent to consumers, and (3) otherwise provides customers access to the most recent disclosure in electronic or other form permitted by specified regulations.
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Budget Transparency for the NCUA. The bill would require the National Credit Union Administration (NCUA) to hold public hearings and receive comments from the public on its budget.
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Interest Rates on Balances Maintained at a Federal Reserve Bank by Depository Institutions. The bill would shift the authority for setting the rate of interest on banks’ reserves held at the Federal Reserve from the Federal Reserve Board to the Federal Open Market Committee (FOMC).
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Examination Ombudsman. The bill would establish an ombudsman within the Federal Financial Institutions Examination Council and would charge the ombudsman with receiving and investigating complaints about bank regulators.
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Rural Area Designations. The bill would direct the CFPB to establish an application process for rural parts of the country to be designated a “rural area” for the purposes of consumer protection rules.
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Comprehensive Regulatory Review of Dodd-Frank. The bill would require banking regulators to consider the Dodd-Frank law as they review outdated or unnecessary regulations.
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GAO Study on Supervision to Reduce Systemic Risk and Prevent Regulatory Capture. The bill would require the GAO to undertake a study addressing the regulation of SIFIs by the Federal Reserve Banks in order to best address systemic risk and prevent regulatory capture.
Insurance Industry Provisions
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Preference for State Regulation. The bill would reaffirm the Sense of Congress that the McCarran-Ferguson Act, i.e. state regulation, remains the best approach to regulating the business of insurance.
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International Insurance Capital Standards Accountability. The bill would express the Sense of Congress that the Federal Reserve, Federal Insurance Office, and state insurance regulators develop consensus positions as they negotiate insurance-company capital rules with other countries, and would require officials to report to Congress about the global discussions.
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The Policyholder Protection Act of 2015. The bill would establish parity between bank holding companies (BHCs) and savings and loan holding companies (SLHCs) by prohibiting the FDIC from capturing funds or assets of an SLHC that is also an insurance company if the state insurance regulator determines that such an action would have a materially adverse effect on the SLHC’s financial condition.
Financial Stability Oversight Council Reform Provisions
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Access to FSOC Meetings. The bill would permit members of the governing bodies of: the Federal Reserve Board of Governors, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and the NCUA to attend FSOC meetings and meetings of representatives of FSOC members, and provides such members with access to the same information and materials as the heads of those agencies. Currently only the heads of certain governmental agencies (e.g., Chairman of the Federal Reserve Board, but not other governors) are voting members of FSOC and can participate at FSOC meetings.
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Nonbank Determinations. The bill would reform the FSOC designation process for nonbank financial companies by requiring the FSOC to provide notices and detailed explanations of its analysis throughout the designation process. It would also require the FSOC to provide opportunities for nonbank financial companies to meet and confer with the FSOC—and have a hearing—regarding a potential designation and a remedial plan. It would also change the reevaluation process and create more opportunities for a company’s designation to be rescinded.
Federal Reserve Reform Provisions
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Increased Reporting to Congress. The bill would require the FOMC to write the Federal Reserve’s semiannual monetary-policy report to Congress (the Report), instead of the Federal Reserve’s seven-member board of governors. The Report would also be required on a quarterly basis instead of a semiannual basis. The bill would require the FOMC to disclose in the Report any monetary policy rules that were either used or considered by officials in their interest-rate–making decisions.
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Required Testimony before Congress. The bill would require the Federal Reserve Chairman to fulfill the twice-yearly testimony requirement of the Vice Chairman for Supervision whenever there is a vacancy in that role. (The Dodd-Frank Act created the position of Vice Chairman for Supervision at the Federal Reserve to formally oversee its enhanced regulatory powers, and the President has never nominated anyone to fill that role.)
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Study on Nonbank Supervision. The bill would require the Federal Reserve to conduct a study and prepare a report to Congress every two years—with a sunset after ten years—on its plan to regulate and supervise nonbank institutions.
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Federal Reserve Bank Governance. The bill would require the President of the New York Federal Reserve Bank to be appointed by the President of the United States and confirmed by the Senate due to the unique role of the Federal Reserve Bank of New York in the Federal Reserve System.
Consumer Financial Protection Bureau Reform Provisions
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Applies the Federal Advisory Committee Act to the CFPB. The bill would apply Federal Advisory Committee Act to the CFPB to ensure that advice by the various advisory committees is objective and accessible to the public.
