Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Act) is very broad and complex legislation that puts in place a sweeping new financial services regime that will have significant regulatory and legal consequences for banks now and for years to come. In partnership with the American Bankers Association (ABA), we have provided a detailed summary of the provisions of this legislation that are of most importance to bankers. The following are highlights of the key provisions of the Act.
A New Risk-Based Approach to Financial Services Regulation
The Federal bank regulatory agencies, and in particular, the Board of Governors of the Federal Reserve (Fed), are given extensive new authorities to:
- Monitor the systemic safety of the financial system and to take proactive steps to reduce or eliminate such threats.
- Impose strict controls on large bank holding companies with total consolidated assets equal to or in excess of $50 billion (Large BHCs) and systemically significant nonbank financial companies supervised by the Fed (Significant Nonbanks) to limit the risk they might pose for the economy and to other large interconnected companies.
- Take direct control of troubled financial companies that are considered systemically significant.
New Regulation of Systemically Risky Institutions
The Act puts in place several new entities and a statutory liquidation process to deal with systemically risky institutions:
- A new Financial Stability Oversight Council is created to monitor systemic financial risks. The Council will have significant authority to identify potential systemic threats and to direct the regulatory agencies to take action to address those risks. [Title I]
- The Fed is given new authority to impose heightened prudential requirements on Large BHC-and Significant Nonbanks, including heightened capital and liquidity requirements and other requirements such as a self-designed resolution plan. [Title I]
- A new process is established for Federal authorities to place bank holding companies and significant nonbanks into a FDIC-operated receivership structure similar to the one in place for banks under the Federal Deposit Insurance Act. This is intended to give Federal authorities the power to act quickly to respond to potential liquidity or other crises of confidence involving non-depository institutions. [Title II]
Increased Bank Supervision
The Act restructures the supervision of holding companies and depository institutions in several respects. It:
- Establishes the equivalent of a prompt corrective action program for large bank holding companies. [Title I]
- Requires (subject to certain exceptions) that capital requirements for holding companies be at least as strict as capital requirements for depository institutions. This is the so-called Collins amendment that, among other things, grandfathers existing issues of trust preferred securities but eliminates them as regulatory capital for larger holding companies five and a half years after enactment. Holding companies with less than $15 billion in consolidated assets are not subject to this new restriction, but new issuances of trust preferred securities do not count as tier 1 regulatory capital. [Title I]
- Directs Federal bank regulators to develop specific capital requirements for holding companies and depository institutions that address activities that pose risk to the financial system, such as significant activities in higher risk areas, or concentrations in assets whose reported values are based on models. [Title I]
- Enhances the authority of the Fed to examine non-bank subsidiaries, such as mortgage affiliates, and also gives other bank regulators the opportunity to examine and take enforcement action against such entities. [Title VI]
- Eliminates the Office of Thrift Supervision and reallocates savings and loan holding company supervision to the Fed; Federal savings institution supervision to the OCC; and State savings institution supervision to FDIC. However, the thrift charter is preserved and new charters may be issued by the OCC. [Title III]
- Establishes a statutory source of strength requirement for both bank and savings and loan holding companies. [Title VI]
Heightened Focus on Consumer Protection
The Act establishes a new independent Federal regulatory body for consumer protection known as the Bureau of Consumer Financial Protection (the "Bureau"). The Bureau will be an independent entity within the Federal Reserve System that will assume responsibility for most consumer protection laws (except the CRA). It will issue rules for Federal consumer protection laws, and the authorities given to the Bureau itself by the Act, for all banks and non-banks engaged in financial services (with several exceptions). [Title X]
- Although the Bureau will be required to consider the potential benefits and costs for financial institutions and consumers of a proposed regulation and to consider and address any objections from other Federal regulators, the Oversight Council will have authority to set aside a Bureau regulation in only very limited circumstances.
- The Bureau will have broad authority to curb practices it finds to be unfair, deceptive and abusive. What constitutes "abusive" behavior may be very broadly defined and is very likely to create an environment conducive to increased litigation. This is likely to be exacerbated by the fact that State Attorneys General are authorized to enforce Federal consumer laws transferred to the Bureau and any rules issued by the Bureau as well.
- The Bureau will have authority to supervise, examine, and take enforcement action with respect to (i) depository institutions with more than $10 billion in assets and (ii) nonbank mortgage industry participants and other Bureau designated nonbank providers of consumer financial services.
- The Bureau will write and issue new consumer protection rules but the prudential regulatory agencies have primary examination and enforcement authority for depository institutions with $10 billion or less in assets. However, the Bureau has the right to include its examiners on a "sampling" basis in examinations conducted by the prudential regulators and is authorized to give those agencies input and recommendations with respect to consumer protection laws and to require reports and other examination documents.
- The Act also undermines current Federal preemption standards for national banks and Federal thrifts. Specifically, it increases the potential for State intervention in the operations of Federally chartered depository institutions by creating new procedural hurdles to preemption determinations while also potentially narrowing the circumstances in which preemption would apply. Moreover, the Act provides statutory authority for State law enforcement authorities with respect to Federally chartered depository institutions.
Limits on Bank Investment and Related Activities
The Act places certain limitations on investment and other activities by depository institutions, holding companies and their affiliates. The following are some of the key restrictions and requirements.
- The Volcker Rule prohibits banks and their affiliates from engaging in proprietary trading, subject to exceptions for certain types of assets and certain categories of transactions. Under the Volcker Rule, banks and their affiliates face strict limits on investment in, and sponsoring of, hedge funds and private equity funds. Sponsorship and investment in such funds will be subject to certain conditions and with ultimate investment limited to 3 percent of any single fund and an aggregate investment in all funds not to exceed 3 percent of the entity's Tier 1 capital. Existing relationships with funds that are not in conformance with Volcker Rule requirements will be have to be divested. [Title VI]
- Banks that receive Federal assistance (a broadly defined term) will be required to push out certain swaps activities to affiliates. [Title VII]
- The coverage of Section 23A of the Federal Reserve Act is expanded to take account of the credit exposure related to additional transactions, including derivatives transactions, along with other additional restrictions under Section 23A. [Title VI]
- The Act places new restrictions on acquisitions that would result in a financial company controlling more than 10 percent of the consolidated aggregate liabilities of all financial companies. [Title VI]
Heightened Regulation of Mortgages
The Act significantly increases the regulation of mortgage lending and servicing by banks and nonbanks. In particular, the Act:
- Requires mortgage originators to act in the best interests of a consumer and seeks to ensure that a consumer will have the capacity to repay a loan that the consumer enters into. [Title XIV]
- Mandates comprehensive additional residential mortgage loan related disclosures. [Title XIV]
- Requires mortgage loan securitizers to retain a certain amount of risk (as established by the regulatory agencies). However, mortgages that conform to the new regulatory standards as "qualified residential mortgages" will not be subject to risk retention requirements. [Title IX]
New Rulemaking and Multiple Effective Dates
Implementation of the Act will require literally dozens of new mandatory and discretionary rulemakings by numerous Federal regulatory agencies over the next several years. As a result, bankers are likely to be faced with thousands of new pages of regulations not to mention increased litigation risk. In addition, while most of the provisions contained in the Act are effective essentially immediately upon enactment, many have delayed effective dates. We have provided detailed appendices showing the various rulemaking requirements and effective dates along with our detailed summary to assist bankers in understanding and complying with the complex, confusing and sometimes conflicting demands of this legislation.
We hope the summary and accompanying materials will be helpful to you.
Thomas P. Vartanian (202) 261-3439 firstname.lastname@example.org
Robert H. Ledig (202) 261-3454 email@example.com
David L. Ansell (202) 261-3433 firstname.lastname@example.org
July 14, 2010