The Congressional conference committee on financial regulatory reform released its 2,315 page conference report reconciling the Wall Street Reform and Consumer Protection Act of 2009 that was passed by the U.S. House of Representatives on December 11, 2009 with the Restoring American Financial Stability Act of 2010 that was passed by the U.S. Senate on May 20, 2010. The final legislation, which was renamed by the conference committee the Dodd-Frank Wall Street Reform and Consumer Protection Act, would comprehensively reform the regulation of financial products and services by providing for, among other things, the establishment of a Financial Stability Oversight Council to monitor systemic risk, a new resolution process for systemically important financial institutions, a new Consumer Financial Protection Bureau, the registration of private fund advisers and the regulation of derivatives. The Act still must be passed by both chambers of Congress, and signed by the President, to become effective. The Senate has suspended legislative debate in honor of the death of Senator Byrd. As a result, the Act is not expected to pass before the week of July 12th. Upon passage, the Act requires numerous studies and rulemaking by Federal banking and securities regulators, a process that can be expected to last for several years. The following are some of the highlights of the Act:
- The OTS would be eliminated but the thrift charter would be preserved. Thrifts would be supervised by the OCC and savings and loan holding companies would be supervised by the FRB.
- Financial institutions with greater than $50 billion in assets and hedge funds with greater than $10 billion in assets would be subject to a risk-based special assessment levied by the FDIC to pay for the cost of the Act. The FDIC would be required to collect $19 billion from such financial companies from September 2012 through September 2015, which would be put into a fund at the Treasury Department that may be used for no other purpose for 25 years and then may be used to pay down the national debt.
- Interest would be permitted on business demand deposit accounts.
- The Consumer Financial Protection Bureau would be established as an independent bureau within the FRB rather than as a free-standing agency. The Bureau would prescribe rules applicable to all providers of consumer financial products and services and would have examination powers over depository institutions with total assets of more than $10 billion and certain nondepository providers of consumer financial products and services, such as mortgage brokers and money services businesses. Auto dealers were granted a controversial exemption from the Bureau’s jurisdiction.
- On the petition of a member agency of the Financial Stability Oversight Council, the Council would be authorized to set aside a final regulation prescribed by the Consumer Financial Protection Bureau, or a provision of such a regulation, if the Council decides that the regulation or provision would put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk.
- The OCC would only be allowed to preempt a state law that “prevents or significantly interferes” with the business of banking.
- New minimum mortgage underwriting standards would be required for residential mortgage loans. Lenders would be required to obtain “verified and documented information” that the consumer has a “reasonable ability to repay.” Compensation paid to mortgage loan originators that varies based on the terms of loans (other than the amount of principal of the loan) would be prohibited. Regulators would establish a class of qualified mortgage loans that would be protected from legal liability, such as the borrower's right to rescind the loan and seek damages. Certain loan features such as negative amortization, prepayment penalties and balloon payments would bar loans from meeting the qualified mortgage loan safe harbor. Qualified mortgage loans would still have to have a net tangible benefit to borrowers. Lenders packaging qualified mortgage loans into securities would be exempt from a 5% risk retention provision.
- The Federal financial regulators would be required to impose enhanced disclosure and reporting of compensation arrangements at regulated financial institutions.
- The Act would create within the Treasury the Federal Office of Insurance, which would monitor the insurance industry and be required to complete a study within 18 months on how to modernize and improve the system of insurance regulation in the United States.