Written by: Jeff Sullivan
On June 12, 2017 the U.S. Treasury issued a position paper on regulatory reform of the banking industry.
The paper follows Core Principals as have been laid out broadly by President Trump’s administration, focusing on simplification of the regulatory scheme to unlock the economy while preventing harm to the system itself and to consumers within the system. Many of the ideas set forth will only impact the nation’s largest institutions (those with assets over $10 billion) and those competing in the global banking marketplace. However, there are several takeaways for small institutions as well, and there is an overarching tone of trying to help community financial institutions thrive in the future.
Here are a few specifics from the publication:
- An increase in the asset size threshold to qualify as a Small Creditor under QM from $1 billion to $2 billion (though without any corresponding increase in the maximum number of originations, which will remain at 2,000 – note that the allowable number of submissions as a Small Creditor was substantially increased from 500 to 2,000 by the CFPB in early 2016).
- An increase in the threshold to be a Small Holding Company policy from $1 billion to $2 billion in assets – this policy primarily permits small holding companies to carry higher levels of debt (i.e. lower levels of capital) provided that the bank(s) owned by the holding company maintain all capital requirements.
- An exemption from Basel III capital requirements and a potential exemption or change to the so-called “Collins Amendment” of Dodd-Frank which requires explicit minimum capital ratios tied to the Basel III formulae.
- A possible delay in implementation of the HMDA revision.
- Possible revisions to simplify CECL, including perhaps reverting to the tried and true incurred loss theory for loan loss reserves rather than the Expected Loss theory embedded in CECL.
An interesting topic in the paper deals with the future of the CFPB. Treasury’s position is that the CFPB needs to be more accountable within the structure of the federal government, its budget appropriated by Congress, that its director should be hired and fired by the President, and that it might serve the public better if run by a board comprising the other prudential regulators and/or other government officials with purview over consumer protection. It also lays out the possibility for consolidation within one of the other regulators.
The Financial Choice Act
Along with the position paper by Treasury, the House Financial Services Committee has been working up its own banking reform bill, known as the Financial Choice Act, and championed by Rep. Jeb Hensarling. The Financial Choice Act goes further, setting out to limit the CFPB’s role to one of a law enforcement agency (not a rule maker), and limiting its ability to take action for abusive practices. The CFPB has been criticized for outsized UDAAP fines and for establishing precedent via enforcement actions rather than through other types of communication that are promulgated by the prudential regulators, including the frequent use of joint policy statements and guidance.