Targeted bipartisan financial regulatory reform legislation announced last month has been approved by the Senate Banking Committee after a markup session on December 5. The “Economic Growth, Regulatory Relief and Consumer Protection Act” (S. 2155) is sponsored by Senate Banking Committee Chair Mike Crapo (R-ID) and has 19 co-sponsors (nine Democrats, nine Republicans, and one Independent who caucuses with the Democrats), and makes some significant changes to parts of the Dodd-Frank Act. The markup session resulted in technical and other less significant, mutually agreed-upon changes to the bill.

S. 2155 would make targeted changes to Dodd-Frank Act requirements that are applicable to banks, mortgage companies, and other providers of consumer financial services, and that are primarily intended to ease regulatory burdens on regional and community banking organizations. Some of the more notable changes include the following:

• Raising the consolidated asset threshold for a bank to be treated as “systemically important” from $50 billion to $250 billion. Banking organizations with total assets between $50 billion and $100 billion would become exempt from Dodd-Frank’s enhanced supervision requirements upon the bill’s enactment, whereas banking organizations with assets between $100 billion and $250 billion would generally become exempt 18 months after the bill’s enactment. For banking organizations with assets of less than $250 billion, the Federal Reserve Board would retain the authority to apply enhanced prudential standards on a case-by-case basis, if appropriate.
• Requiring the banking agencies to create a “community bank leverage ratio” of not less than 8% and not more than 10% that would be applicable to depository institutions with total consolidated assets of less than $10 billion. A community bank that meets the community bank leverage ratio would be deemed to have met generally applicable leverage capital and risk-based capital requirements and be considered well capitalized under the Federal Deposit Insurance Act.
• Raising the asset threshold for required company-run stress tests by banking organizations from $10 billion to $250 billion, and requiring such stress tests to be on a “periodic” instead of an annual basis.
• Exempting from the Volcker Rule’s proprietary trading and covered fund prohibitions any banking organization that has (i) less than $10 billion in total consolidated assets, and (ii) total trading assets and trading liabilities that are not more than 5% of total consolidated assets.
• Treating as “qualified mortgages” under the Truth in Lending Act certain mortgage loans that are originated and retained in portfolio by an insured bank or credit union with less than $10 billion in total consolidated assets, thus removing these loans from the general coverage of the Consumer Financial Protection Bureau’s “ability to repay” mortgage origination rules.

S. 2155 also would address diverse matters not specifically relating to the Dodd-Frank Act, including requiring short-form call reports for smaller community banks; adding additional credit protections for homeowners, veterans, and seniors; facilitating consumer access to online banking services; and calling for studies and reports on the risks of cyber threats to capital markets and financial institutions in the United States, the effects of algorithmic trading in equity and debt markets, and the structure and activities of consumer reporting agencies.

Takeaways

The Senate bill is not by any stretch “comprehensive” Dodd-Frank Act reform legislation. Instead, the bill addresses targeted subjects—including the asset thresholds at which systemic regulation kicks in under the Dodd-Frank Act, and exempting small banking organizations from the Volcker Rule—that are primarily designed to provide regulatory relief to community and regional banks, and on which there is bipartisan agreement. For that reason, the December 5 markup session reportedly avoided more controversial topics that might have jeopardized the compromises reflected in S. 2155.  

While the Senate Banking Committee’s action is a significant step forward—not the least because S. 2155 has meaningful bipartisan support—the path to final passage and enactment into law is not clear. Among other things, S. 2155 does not have the support of the ranking member of the Senate Banking Committee, Senator Sherrod Brown, or others who object to the weakening of stress tests, the lowering of capital requirements, and other changes proposed by the bill. Further, any legislation passed by the Senate presumably will have to be reconciled with the Financial CHOICE Act passed by the House last summer, unless the House elects to pass a separate and more limited reform bill, which at this point in time does not seem very likely. The CHOICE Act is a much broader and materially more ambitious attempt to reform the Dodd-Frank Act, and it is not clear how any House–Senate conference would approach the reconciliation of the CHOICE Act with S. 2155, given the significantly different approaches taken by the House and Senate bills on Dodd-Frank Act–related matters. Further, there are major matters pending in Congress, including tax reform and the federal budget, that could divert congressional attention from financial reform matters. And, regardless of timing issues created by other congressional activities at this point, definitive action on S. 2155 probably will have to wait until well into 2018.

The bottom line: When we reported on the Senate’s bipartisan proposal last month, we expressed cautious optimism on the prospects for limited (not comprehensive) Dodd-Frank Act reform. Our outlook remains essentially the same, although the process certainly has taken an important step forward with the Senate Banking Committee’s approval.