Bank regulatory relief legislation appears poised to be enacted. The U.S. Senate passed S.2155 with substantial bipartisan support and sent the Bill to the House of Representatives for consideration. While S.2155 contains several significant regulatory burden reduction provisions, many in the House of Representatives wanted additional burden reduction measures added.
The Senate was clear that any attempts to expand on S.2155 would result in a loss of bipartisan support and defeat of any amended bill.
As of this writing, the House appears willing to pass S.2155 in its original form, thus securing at least some legislative relief for banks of all sizes. So, what are the most significant areas of regulatory burden reduction?
Ability to repay
Banks of all sizes – but smaller banks in particular – have cited the provisions of the Truth in Lending Act and Regulation Z referred to as the “Ability to Repay Rule” as an impediment to the making of residential mortgage loans. Senate Bill 2155 creates a “safe harbor” in the form of a “qualified mortgage” available to banks with less than $10 billion in total consolidated assets. To avail itself of that safe harbor, an eligible bank must originate and retain the mortgage loan in its portfolio, or only transfer the loan to another bank that will hold the loan in portfolio. These loans must comply with limitations on prepayment penalties and cannot provide for negative amortization or interest only features. Points and fees limits still apply, and the bank still must document the consumer’s debt, income and financial resources. The underwriting process still must be based on a payment schedule that fully amortizes the loan over the term, taking into account all applicable taxes, insurance and assessments.
To take advantage of this relief provision, a bank must consider how much appetite it has for amortized residential loans in its portfolio. Relationships with upstream correspondent banks will also be a factor. When all is said and done, the bank must still determine that the consumer has the ability to repay the loan, albeit without having to look to the guidance in Appendix Q of Regulation Z in order to do that. If a bank is larger than $10 billion in total assets, or exhausts its appetite for portfolio mortgage loans, these new provisions will not apply.
Home Mortgage Disclosure Act adjustments.
A second potentially beneficial provision in S.2155 involves an exemption available to banks that originate fewer than 500 closed-end mortgage loans and fewer than 500 open-end lines of credit in each of the preceding two calendar years. These banks that qualify by virtue of the 500 loan limit for each category are exempt from the recently expanded data collection requirements imposed by the CFPB. The prior Home Mortgage Disclosure Act (HMDA) reporting requirements still apply, so there will still be a HMDA LAR to document, scrub and report. The regulators will still have HMDA data to review.
In an ironic twist, S.2155 is touted as increasing the availability of credit, but may have the counterintuitive effect of seeing certain banks limit the number of closed-end and/or open-end loans they make to avoid triggering enhanced HMDA reporting requirements in future years.
Exemptions from appraisal requirements
Appraisal requirements, particularly appraisals of property in rural settings, have frequently been cited as an impediment to mortgage loan origination. A provision of S.2155 seeks to address this problem. If the property is located in a “rural area,” as defined by federal regulations, and the transaction is less than $400,000, a lender supervised by a federal financial institution’s regulatory agency can make the loan without obtaining an appraisal, provided the mortgage originator has contacted at least three state-certified appraisers within three days of providing the TRID-related Closing Disclosure Form – and has documented that no state-certified appraiser was available within five business days beyond customary fee and timeliness standards for appraisal assignments. The resulting loan must be held in the bank’s loan portfolio or transferred to another lender that will hold the loan in portfolio. The bank must still perform its own evaluation of the property value.
This regulatory relief provision seems problematical. First, is it ever wise to make a loan without an appraisal? Second, how much complication will be added when a lender has to contact three appraisers and document their response that says they can’t perform the engagement? And then, similar to the exemption to the Ability to Repay Rule discussed above, the lender or its transferee must be willing to hold the loan in portfolio. The steps necessary to avail itself of this relief may prove more difficult for a bank and riskier as well, than simply waiting to get an appraisal.
Years ago, Congress would occasionally pass “Christmas Tree” legislation at the end of a congressional term that contained a wide array of “ornaments,” some related to banks and banking. S.2155 has something of that flavor. A succinct way to look at the Bill’s additional provisions is to approach it based on asset size of the bank.
For the appraisal waiver provision and HMDA exemptions discussed above, there is no asset restriction. These measures are available to banks of all sizes.
For banks of $3 billion or less, S.2155 raises from $1 billion to $3 billion the applicability of the Federal Reserve Board’s small bank holding company policy statement. Well-managed, well-capitalized banks in this asset range will also be eligible for an 18-month exam cycle, an increase from the present $1 billion threshold.
Banks under $5 billion in assets will be allowed to file first and third quarter reports to their regulators using a shortened format. Second and fourth quarter reports must follow the present guidelines.
Banks under $10 billion in assets receive the qualified mortgage relief under the ability to repay rule and also receive and exemption from escrow requirements under the truth in lending act if they make no more than 1,000 first lien mortgages annually secured by principal dwellings. Banks in this category will be subject to a tangible equity leverage ratio of 8 percent – 10 percent which, when achieved, will constitute the bank “well-capitalized.” Also, banks that have trading assets and liabilities that do not exceed 5 percent of total assets would be exempt from the so-called “Volker Rule.”
Banks with assets between $10 billion and $50 billion will no longer have to engage in stress testing mandated by the Dodd-Frank Act and will not have to have a separate Risk Committee of the Board of Directors.
Finally, S.2155 contains a hodge-podge of provisions that have limited applicability to the broad scope of a bank’s compliance program. Certain of these issues are listed below with a very brief explanation:
» Credit Freezes – Must be available to consumers free of charge.
» Elder Abuse – Provides protections when bank employees report to a regulator or to law enforcement the suspected abuse of an elderly person.
» Identity Fraud – Allows the Social Security Administration to accept electronic consent when verifying a customer’s identity.
» Veteran’s Medical Debts – Will be excluded from reporting under the Fair Credit Regulatory Act.
» Service Member Foreclosures – Foreclosure relief for service members is made permanent.
» SAFE Act – Temporary authority is granted licensed/registered Mortgage Loan Originators to originate loans after changing employers.
» Student Loans – Private lenders are prohibited from accelerating student loan debt upon death or bankruptcy of a co-signer, and co-signers are released from their obligation upon the death of a student.
Obviously, everyone could have hoped for more, but S.2155 was deemed the most feasible form of regulatory relief that can be passed by Congress and signed by President Trump now. There is talk of a second round of legislation that might add further regulatory burden reduction measures, but those chances seem very small.
If there is a bright spot to the limited burden reduction available in S.2155, it is that with this legislation the pendulum doesn’t swing so far towards deregulation that it invites a drastic swing in the opposite direction (think Dodd-Frank Act) when the present administration changes and/or a new time of financial stress comes along.
Those who represent banks of all sizes in the halls of Congress will continue to look for ways to reduce regulatory burdens. In all, S.2155 represents a good start.
» Edward A. Wilmesherr is an attorney at Butler Snow’s Ridgeland office whose practice focuses on banking and bank regulatory matters. He is the founder of the Mississippi Regulatory Compliance Group and the Mid-South Regulatory Compliance Group.
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