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Regulatory Relief Is Coming … Eventually

  • by Keith Monson
  • Aug 09, 2018

3 Things to Know and 3 Things to Do about S.2155

When President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law on May 24, our industry cheered. Smaller institutions were particularly excited about Senate Bill 2155 (S.2155) as it promises to reduce some of the burden imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

While S.2155 is ultimately a victory for smaller institutions, its total relief comes in 56 sections, many without specified effective dates. This creates an ongoing S.2155 implementation cycle for the foreseeable future for your institution. Let’s make sure your institution is ready.

3 Things to Know about S.2155

As American Banker notes, the bill is mostly geared toward institutions with less than $10 billion in assets. Here are some of the most important aspects of the law:

1. The Sponsorship and Structure

The bill was originally introduced by Sen. Mike Crapo, R-ID, the chairman of the Senate Banking Committee. However, according to GovTrack’s Summary, this bill enjoyed rare bipartisan support, as 12 Democrats joined 12 Republicans and one independent in ultimately sponsoring the bill. It passed the Senate on March 14 by a vote of 67-31, and the House voted 258-159 on May 22. Support for the bill from both sides of the aisle hopefully bodes well for its long-term viability.

As for the law’s structure, it is divided into six sections:

  • Title I: Improving Consumer Access to Mortgage Credit
  • Title II: Regulatory Relief and Protecting Consumer Access to Credit
  • Title III: Protections for Veterans, Consumers and Homeowners
  • Title IV: Tailoring Regulations for Certain Bank Holding Companies
  • Title V: Encouraging Capital Formation
  • Title VI: Protections for Student Borrowers

2. Title I Holds Significant Relief

Title I contains much of the bill’s most highly anticipated relief opportunities for institutions with less than $10 billion in assets. These will eventually provide significant relief to such institutions, but it must be noted that none of the big-ticket items in Title I will occur immediately and, most likely, not for some time and not all at once.

As the American Bankers Association (ABA) explains in its summary of S.2155’s effective dates, for each of the following relief items, the appropriate federal banking regulator will need to conduct the standard rule-making process. This is typically a timely process, especially when an effective date is not specified under the corresponding law.

  • Section 101 – Qualified Mortgages: This expands the safe harbor afforded by the Consumer Financial Protection Bureau’s (CFPB) Ability to Repay Final Rule that went into effect on Jan. 10, 2014. Once S.2155’s safe harbor expansion is implemented through additional written guidance from the CFPB, the definition of a qualified mortgage will include residential loans originated by—and retained at—depository institutions and credit unions with less than $10 billion in total assets, as long as the loans do not include negative amortization or interest-only features.

    As noted by the ABA’s Bill Highlights and Testimonials, the relief that will be provided by this section has been lauded by many community banks, especially those in small towns and rural areas where self-employed, agricultural-related and low-income borrowers make up a significant portion of their customer base.

  • Section 103 – Appraisal Exemptions: This increases the mortgage amount for loans that can be exempt from getting an appraisal from $250,000 to $400,000, as long as the real property is located in a rural area and the institution has contacted three state-certified appraisers and none are available within five business days. The Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Bank (Fed) will each need to write guidance for the institutions they supervise before this goes into effect. Hopefully, they will streamline the process by producing interagency guidance, rather than individual rules.

  • Section 104 – HMDA Exemptions: This amends the institutional coverage test for the Home Mortgage Disclosure Act’s (HMDA) Final Rule for the third time. The original exemption was for institutions that originated less than 25 closed-end mortgages and/or less than 100 open-end lines of credit in each of the preceding two calendar years; they did not have to report the expanded data fields.

    A month prior to the rule’s effective date of Jan. 1, 2018, the CFPB expanded the open-end line of credit test to less than 500 in the last two years. Once the CFPB re-writes the rule to account for S.2155, the threshold for exemption will become less than 500 for both closed-end mortgages and open-end lines of credit, if the institution has a proven Community Reinvestment Act (CRA) track record.

    Note, however, that institutions that meet the new exemption thresholds once they go into effect will still be responsible for reporting previous HMDA data. A prolonged waiting period on this particular aspect of the bill could cause the greatest confusion and present the greatest compliance risk for institutions.

  • Section 108 – TILA Escrow: Institutions with less than $10 billion in assets that have originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year will be exempt from the Truth in Lending Act’s (TILA) current escrow requirements once the CFPB rewrites the regulation.

  • Section 109 – TILA Waiting Period: As the ABA explains, this section “Removes the 3-day waiting period requirement in TILA/RESPA mortgage disclosures if the consumer receives a second offer of credit from the same lender with a lower rate.” This, too, will go into effect once the CFPB provides new guidance.

3. Capitalize on Title II’s Additional Relief

Section 203 of the law enacts the long-awaited change to the Volcker Rule exempting banks with less than $10 billion in assets. It is effective immediately, but the prudential regulators will need to update current regulations as a matter of housekeeping. The same is true for Section 210, which raises the threshold for institutions qualifying for an 18-month examination cycle from $1 billion to $3 billion in assets.

As for Section 201, it simplifies the capital calculation for smaller institutions by calling for the creation of a community bank leverage ratio of 8 to 10 percent. While this will be a welcome change, it is yet unclear how, if at all, this will affect the upcoming Current Expected Credit Loss (CECL) implementation. As for Section 205, it will make institutions with $5 billion or less in assets (versus $1 billion) eligible to use the short-form call reports. Neither of these sections provides a specified effective date; they await action by prudential regulators.

3 Things to Do About S.2155

Even though we know that regulatory relief is only in partial sight, don’t get disheartened or complacent. For its part, the ABA says it will “work closely with regulators as they implement the provisions,” and it will “also encourage Congress to pass additional reforms to ensure banks can provide what their customers and communities need to grow.”

There are also things that your institution can and should do while it waits:

1. Designate a Point Person: In light of S.2155’s wide scope and uncertain implementation dates, every institution should identify a point person to monitor its ongoing progression. A key part of this job is keeping the board of directors and senior management updated on S.2155. Another is reminding applicable parties and departments to continue to comply with existing regulations until new ones go into effect. This should help avoid any consequential lapses in compliance.

2. Use a Change Management Process: As the various sections of S.2155 begin to take effect, they will require system and/or process changes, as well as training and communication. The best way to ensure that all of the moving parts fall into place at the right time and in the right way is to use a change management process.

If your institution has a dedicated project management division, your designated point person should work through it. Otherwise, the point person should create a project team specifically for S.2155 that includes representation from audit, compliance, corporate communications, affected business lines, information security and technology, legal, marketing, risk management and training. A centralized and dedicated team will ensure that your institution remains compliant with existing regulations while it readies itself for the regulatory relief to come.

3. Take Advantage of CSI’s Quarterly Compliance Update: There will be a lot to keep up with over the next few years in regard to S.2155. Your designated point person likely has other full-time responsibilities, which will make doing the task alone nearly impossible. Tune in every quarter to CSI’s Compliance Update webinars, where you will receive relevant insight and timely updates into what is happening with this regulatory relief law.

S.2155 will eventually be a good thing for smaller institutions; it just follows a familiar adage—good things come to those who wait.

Keith Monson serves as CSI’s chief risk officer. In this role, Monson maintains an enterprisewide compliance framework for risk assessment and reporting, as well as other key components of CSI’s corporate compliance program. With nearly 25 years of banking experience, he has a wide range of expertise in the compliance arena, having served as chief compliance officer for both large and small financial institutions.