Since the election, House Financial Services Committee Chairman Jeb Hensarling (R-TX) has reiterated that he views the CHOICE Act as a “blueprint” for financial regulatory reform in a Trump administration and indicated that financial regulatory reform is “going to happen in the first year” of the Trump administration. Further, Financial Institutions Subcommittee Chairman Blaine Luetkemeyer (R-MO) has indicated that the full committee is planning a mid-February mark-up of the CHOICE Act in order to push financial regulatory reform forward. It therefore seems likely that the CHOICE Act will provide a useful guide for future proposals from the new Congress and administration. Among other things, the CHOICE Act would have restructured the Consumer Financial Protection Bureau (the CFPB) and modified or repealed certain aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Although it is impossible, at this time, to anticipate the full scope of possible reforms, we believe that the CHOICE Act is the best place to start. This client alert summarizes certain key provisions of the CHOICE Act intended to provide regulatory relief to financial institutions from certain bank regulatory and consumer financial protection requirements. The legislation also contains a number of provisions proposing capital markets reforms and provisions intended to promote capital raising that are not summarized here.
While not part of the CHOICE Act, President-elect Trump has also called for a “temporary moratorium on new agency regulations that are not compelled by Congress or public safety in order to give our American companies the certainty they need to reinvest in our community, get cash off of the sidelines, start hiring again, and expanding businesses.” As part of this moratorium, Mr. Trump has called for a systematic review of federal regulation, whereby he would ask “every federal agency to prepare a list of all of the regulations they impose on Americans which are not necessary.” A moratorium and systematic review of financial regulations would mean not only a lack of new regulations but also that pending rules, in areas such as arbitration, would be unlikely to go into effect soon or at all.
Consumer Financial Protection Bureau
The CHOICE Act did not provide for the elimination of the CFPB. However, it would have altered the CFPB’s structure to a five-person, bipartisan commission renamed the “Consumer Financial Opportunity Commission” (the Commission). Other key proposals to reform the CFPB included in the CHOICE Act were the following:
- Subjecting the new Commission to the Congressional appropriations process and oversight;
- Increasing the current threshold for banks, thrifts and credit unions to be subject to the Commission’s supervisory authority from $10 billion in assets to $50 billion;
- Establishing a dual mission for the Commission consisting of both enforcing consumer protection laws and strengthening participation in markets to increase competition and enhance consumer choice;
- Creating an Office of Economic Analysis within the Commission to perform cost-benefit analyses on all of the Commission’s proposed rules and regulations;
- Establishing an independent Senate-confirmed Inspector General for the Commission;
- Repealing the Commission’s authority to regulate consumer arbitration clauses and “abusive” conduct;
- Repealing the Commission’s prior indirect auto-lending guidance;
- Permitting individuals and institutions to seek relief from civil investigative demands in federal court;
- Providing defendants the right to remove enforcement actions to federal court;
- Forming a mechanism for interested parties to request and receive advisory opinions; and
- Requiring the Commission to verify information in its complaint database before releasing it to the general public.
The CHOICE Act would have provided regulatory relief to parties engaged in residential mortgage lending and related activities by incorporating the following reforms:
- Clarifying that a retailer of a manufactured home is not a “mortgage originator” for purposes of the Truth in Lending Act unless such person receives compensation or gain for assisting the customer in obtaining a residential mortgage loan;
- Amending the definition of a “high cost” mortgage under the Home Ownership and Equity Protection Act (HOEPA) to modify the interest rate and points and fees cap in order to preserve access to mortgage credit for low and moderate-income consumers who are seeking to buy a manufactured home;
- Changing the way points and fees are calculated under the Ability-to-Repay/Qualified Mortgage rule by excluding fees paid for affiliated title charges and escrow charges for insurance and taxes;
- Creating a legal safe harbor from ability-to-repay requirements for mortgage loans that are kept on a depository institution’s balance sheet (automatic QM status);
- Creating a legal safe harbor from escrow requirements for residential mortgage loans held in portfolio for three years for banks with less than $10 billion in assets and exempting small firms that annually service 20,000 or fewer mortgage loans from certain escrow requirements;
- Requiring GAO to study whether the additional Home Mortgage Disclosure Act data required to be collected and reported by CFPB rule exposes consumers to identity theft or the loss of sensitive personal financial information; and
- Exempting a depository institution that has originated 100 or fewer closed-end mortgage loans for each of the past two years from the Home Mortgage Disclosure Act’s (HMDA’s) reporting and recordkeeping requirements on closed-end mortgages and exempting a depository institution that has originated 200 or fewer open-end mortgage loans for each of the past two years from HMDA’s reporting and recordkeeping requirements on open-end mortgages.
The CHOICE Act would have provided regulatory relief to certain banks and credit unions as follows:
Repeal of the Volcker Rule and Durbin Amendment. The CHOICE Act would have repealed the Volcker Rule and repealed the “Durbin Amendment” price controls on debit interchange transactions.
The Qualifying Capital Election. The CHOICE Act offered banks significant regulatory relief in exchange for maintaining higher capital than is required by current law and regulation. Specifically, the CHOICE Act offered all depository institutions, regardless of size, making a “qualifying capital election” an “off-ramp” from certain requirements of Dodd-Frank. Institutions that maintain a leverage ratio of at least 10% and have a composite CAMELS rating of 1 or 2, would be permitted to elect to be exempted from a number of regulatory requirements, including the Basel III capital and liquidity standards and the “heightened prudential standards” applicable to larger institutions under Section 165 of Dodd-Frank. Banks that make the qualifying capital election would also be exempt from any limitations on mergers, consolidations or acquisitions that relate to capital, liquidity or concentration of assets or deposits (including the 10% deposit concentration limit and 10% total liabilities limit). Qualifying banking organizations would be subject to stress testing, but stress test results could not be used to limit capital distributions. Any bank that fails to maintain the specified, non-risk weighted leverage ratio will face restrictions on distributions and be required to submit a capital restoration plan. If the bank does not restore its leverage ratio within one year, it will lose its status as a qualifying banking organization and lose the regulatory relief provided by the election.
According to the House Financial Services Committee’s comprehensive summary of the bill, the eight largest U.S. banks currently have an estimated average leverage ratio of approximately 6.6% and would be required to raise significant additional capital in order to receive the regulatory relief contemplated by the “qualifying capital election.” On the other hand, such regulatory relief “would be well within reach” for many community banks.
Amendments to Title II of Dodd-Frank. The CHOICE Act was based on the premise that Dodd-Frank did not end “too big to fail” due to the explicit or implicit federal guarantees of financial system liabilities and Dodd-Frank’s Orderly Liquidation Authority. In order to end “too big to fail” and prevent future taxpayer bailouts of financial firms, the CHOICE Act would have implemented the following policy changes:
- Repealing Title II’s Orderly Liquidation Authority and replacing it with a new chapter of the federal bankruptcy code designed to accommodate the failure of a large, complex financial institution;
- Imposing new limitations on the Federal Reserve’s emergency lending authority under Section 13(3) of the Federal Reserve Act;
- Further limiting the Federal Reserve’s emergency lending by:
- permitting the Federal Reserve to invoke its emergency lending powers only upon a finding that “unusual and exigent circumstances exist that pose a threat to the financial stability of the United States”;
- requiring that that five of seven Federal Reserve Board Governors and nine of the 12 district Federal Reserve Bank Presidents approve the Section 13(3) facility;
- limiting eligible recipients of Section13(3) assistance to financial institutions as opposed to commercial entities (defined as those entities that derive 85% or more of their annual gross revenues from activities that are “financial in nature”); and
- restricting the use of Section13(3) facilities to solvent borrowers, against good collateral, and at penalty rates.
- Prohibiting the future use of the Treasury Department’s Exchange Stabilization Fund to bail out a financial firm or its creditors;
- Repealing the FDIC’s authority to establish a widely available program to guarantee obligations of banks during times of severe economic stress;
- Repealing certain authority vested in the Financial Stability Oversight Council (FSOC) by Titles I and VIII of Dodd-Frank, including the authority of the FSOC to:
- designate nonbank financial companies as SIFIs (and retroactively repealing the FSOC’s previous designations of certain nonbank financial companies as SIFI’s);
- designate particular financial activities for heightened prudential standards or safeguards, which include the power to mandate that an activity be conducted in a certain way or be prohibited altogether; and
- break up a large financial institution if the Federal Reserve finds that the firm “poses a grave threat to the financial stability of the United States.”
The CHOICE Act also would have repealed Title VIII of Dodd-Frank, which empowers the FSOC to designate so-called “financial market utilities” as “systemically important,” and provide those organizations access to the Federal Reserve discount window.
Community Bank Regulatory Relief. The CHOICE Act was based, in part, on the premise that Dodd-Frank disproportionately burdens community financial institutions. Many provisions of the CHOICE Act reflect the concern that regulations promulgated under Dodd-Frank will result in more rapid industry consolidation, fewer smaller banks, and further growth of large banks. In addition, increasing regulatory costs are often passed on to customers in the form of higher prices and diminished credit availability. In order to address these problems, the CHOICE Act included the following regulatory relief for community banks, although a number of the regulatory relief provisions would benefit institutions of all sizes:
- Requiring financial regulatory agencies to appropriately tailor regulations to fit an institution’s business model and risk profile, thereby reducing compliance costs and allowing banks to devote more of their operating budgets to meeting customer needs;
- Reducing reporting burdens for highly rated and well-managed institutions, such as by eliminating redundancies in the data collection demands made by different regulators and allowing well-capitalized community banks to file short-form call reports in the first and third quarters of each year;
- Providing greater procedural due process protections for institutions and individuals and an enhanced ability to challenge arbitrary supervisory or enforcement actions;
- Reforming the examination process by requiring agencies to make examination reports available for a depository institution’s review on a timely basis, and affording the institution a right to appeal material supervisory determinations to an independent arbiter;
- Repealing the small business data collection requirements of Section 1071 of Dodd-Frank;
- Exempting banks with assets of $1 billion or less from the reporting and attestation requirements of Section 404(b) of the Sarbanes-Oxley Act;
- Raising the threshold for the Federal Reserve’s “Small Bank Holding Company Policy Statement” from $1 billion to $5 billion in consolidated assets, thereby expanding the institutions covered by the policy statement that can temporarily use debt to finance acquisitions;
- Permitting thrifts to elect to be regulated as “Covered Savings Associations” with the authority to exercise the full range of national bank powers; and
- Prohibiting a federal banking agency from formally or informally suggesting, requesting or ordering a depository institution to terminate specific customer accounts (anti-Choke Point provision).
Credit Union Regulatory Relief. The CHOICE Act also would have provided credit unions with significant regulatory relief. In addition to benefiting from many of the same reforms applicable to community banks (described above), credit unions would have been afforded relief unique to their charters, including but not limited to the following reforms:
- Requiring the National Credit Union Administration (NCUA) to hold annual budget hearings that are open to the public, and to include in each annual budget a report detailing the NCUA’s “overhead transfer rate”;
- Making certain well-managed and well-capitalized credit unions eligible for an examination cycle of 18 months or longer; and
- Establishing a new Credit Union Advisory Council to advise the NCUA Board on the “big picture” of regulatory impact across federal law and regulation.
Federal Reserve Reform. The Federal Reserve provisions of the CHOICE Act were designed to (1) scale back the Federal Reserve’s regulatory and supervisory powers and subject them to greater congressional oversight and accountability and (2) promote a more predictable, rules-based monetary policy, which the authors believe provides a stronger foundation for economic growth. Specifically, the CHOICE Act would require banking organizations that currently submit living wills to continue to submit “living wills” until they make an effective capital election and would permit the banking agencies to conduct stress tests (but not limit capital distributions) of a banking organization that has made a qualifying capital election. For banking organizations that do not make a qualifying capital election and continue to submit living wills, the CHOICE Act would have:
- Provided that living wills can only be requested once every two years;
- Required banking agencies to provide feedback on living wills within six months of their submission; and
- Required banking agencies to publicly disclose their assessment frameworks.
Making Agencies Accountable to Congress
The authors of the CHOICE Act believed that Dodd-Frank’s new regulatory authorities have largely immunized regulatory agencies from accountability to Congress, the president, and the courts. To address this problem, the CHOICE Act would have:
- Required all financial regulators to conduct a meaningful cost-benefit analysis before issuing rules or regulations;
- Required all major regulations (defined as those that produce $100 million or more in impacts on the U.S. economy, spur major increases in costs or prices on consumers or have certain other significant adverse effects on the economy) to be approved by Congress and signed by the president in order to become effective;
- Funded all financial regulators through the congressional appropriations process (the Federal Reserve’s independence in conducting monetary policy would be protected by leaving this function off budget);
- Converted each financial regulatory agency currently headed by a single director (the CFPB, the Federal Housing Finance Agency and the Office of the Comptroller of the Currency) into a commission; and
- Statutorily repealed the Chevron Doctrine, which requires courts to give deference to an agency’s interpretation of the law unless such interpretation is arbitrary or manifestly contrary to a statute.