9 controversial provisions in Dodd-Frank reform bill
March 13, 2018 10:00 PM
It's official — progressives and consumer groups have declared war on the Senate regulatory relief bill.
Though it falls well short of the far-reaching changes envisioned by the House version, which passed last year along party lines, critics argue the legislation by Senate Banking Committee Chairman Mike Crapo increases the chances of a government bailout during the next crisis and weakens consumer protections.
While privately some bankers acknowledge the bill is not all they'd hoped, the chances of it getting stronger and still making it across the finish line are not good. The Senate is expected to pass the bill this week without major changes, and efforts by House Republicans to add provisions are likely to fail given the need for Democratic support in the Senate. Many moderate Democrats are taking a beating in the press and among the base of the party for supporting the legislation in the first place and if substantial changes are made, they could abandon it altogether.
The most controversial topics in the Dodd-Frank debate are not touched by the Senate bill. It doesn't, for example, change the Consumer Financial Protection Bureau by putting it on congressional appropriations or upend its leadership structure. Nor does it provide much benefit to the largest institutions.
But critics have focused on provisions that will help regional and custodial banks, along with measures designed to exempt community institutions from what they see as burdensome record-keeping requirements related to the Home Mortgage Disclosure Act and compliance with the Volcker Rule.
Following is a look at the most contentious provisions still in the bill:
Though it falls well short of the far-reaching changes envisioned by the House version, which passed last year along party lines, critics argue the legislation by Senate Banking Committee Chairman Mike Crapo increases the chances of a government bailout during the next crisis and weakens consumer protections.
While privately some bankers acknowledge the bill is not all they'd hoped, the chances of it getting stronger and still making it across the finish line are not good. The Senate is expected to pass the bill this week without major changes, and efforts by House Republicans to add provisions are likely to fail given the need for Democratic support in the Senate. Many moderate Democrats are taking a beating in the press and among the base of the party for supporting the legislation in the first place and if substantial changes are made, they could abandon it altogether.
The most controversial topics in the Dodd-Frank debate are not touched by the Senate bill. It doesn't, for example, change the Consumer Financial Protection Bureau by putting it on congressional appropriations or upend its leadership structure. Nor does it provide much benefit to the largest institutions.
But critics have focused on provisions that will help regional and custodial banks, along with measures designed to exempt community institutions from what they see as burdensome record-keeping requirements related to the Home Mortgage Disclosure Act and compliance with the Volcker Rule.
Following is a look at the most contentious provisions still in the bill:
Kelvin Ma/Bloomberg
Changing the SIFI threshold
By far the biggest point of contention is a provision that would raise the asset threshold for a systemically important financial institution to $250 billion from $50 billion, helping large regional banks like Citizens Financial and Regions Bank.
What makes this surprising was that there is fairly wide agreement that the $50 billion level is too low. Former Rep. Barney Frank, D-Mass., has acknowledged as much multiple times, and even regulatory hawks like former Federal Reserve Board Gov. Daniel Tarullo suggested raising it.
But critics of the bill argue it goes too far in extending the level to $250 billion, carving out 25 of the 38 largest banks in the country. Importantly, however, the bill doesn't automatically raise the threshold. Instead, it immediately carves out banks with less than $100 billion of assets and gives regulators 18 months to determine if banks with assets of $100 billion to $250 billion pose a systemic risk. Under the bill, regulators would still have the power to determine that some of those banks are SIFIs, and therefore subject to greater capital and leverage restrictions.
What makes this surprising was that there is fairly wide agreement that the $50 billion level is too low. Former Rep. Barney Frank, D-Mass., has acknowledged as much multiple times, and even regulatory hawks like former Federal Reserve Board Gov. Daniel Tarullo suggested raising it.
But critics of the bill argue it goes too far in extending the level to $250 billion, carving out 25 of the 38 largest banks in the country. Importantly, however, the bill doesn't automatically raise the threshold. Instead, it immediately carves out banks with less than $100 billion of assets and gives regulators 18 months to determine if banks with assets of $100 billion to $250 billion pose a systemic risk. Under the bill, regulators would still have the power to determine that some of those banks are SIFIs, and therefore subject to greater capital and leverage restrictions.
A carve out for extra HMDA data
Critics are also angry about a provision that would raise the threshold for reporting extra Home Mortgage Disclosure Act data to 500 mortgages per year. As a result, most small banks and credit unions — the measure doesn't cover nonbanks — would be exempt from the added reporting requirements in the Dodd-Frank Act.
Critics argue this exemption is too broad because it would cover roughly 85% of banks and credit unions, most of which make relatively few mortgages. They say it will make it easier for small lenders to engage in discriminatory practices. (To be clear, the bill does not exempt institutions from the original HMDA reporting requirements, just the 25 data sets added by the CFPB after Dodd-Frank.)
For a deeper look at how this provision would impact mortgage lending,click here.
Critics argue this exemption is too broad because it would cover roughly 85% of banks and credit unions, most of which make relatively few mortgages. They say it will make it easier for small lenders to engage in discriminatory practices. (To be clear, the bill does not exempt institutions from the original HMDA reporting requirements, just the 25 data sets added by the CFPB after Dodd-Frank.)
For a deeper look at how this provision would impact mortgage lending,
Tailoring rules for smaller institutions
A single word change is also alarming critics of the bill.
Under the Senate reg relief bill, the law would be changed so that instead of encouraging regulators to tailor their rules for institutions of various sizes, they "must" do so. Supporters of the bill argue that regulators are making good on repeated pledges to take size into account when writing regulations. Critics, meanwhile, say the provision would enable Wall Street banks to pressure the Fed and others to reduce regulations on all but the very largest institutions.
Under the Senate reg relief bill, the law would be changed so that instead of encouraging regulators to tailor their rules for institutions of various sizes, they "must" do so. Supporters of the bill argue that regulators are making good on repeated pledges to take size into account when writing regulations. Critics, meanwhile, say the provision would enable Wall Street banks to pressure the Fed and others to reduce regulations on all but the very largest institutions.
Andrew Harrer/Bloomberg
Granting "QM" status to loans in portfolio
One of the most consequential provisions of Dodd-Frank was a requirement that the Consumer Financial Protection Bureau write rules designating "qualified mortgages," which face less legal liability for lenders if they conform to certain underwriting standards. The idea was to ensure that lenders were making only safe loans to borrowers.
This provision of the Crapo bill would say that banks and credit unions with less than $10 billion of assets can win QM status for their mortgages automatically if they agree to keep them in portfolio — not sell them off — for a set number of years. Critics argue this is areturn to making bad loans, though Frank himself has disputed that idea.
"Nothing in this bill in any way weakens the prohibition about making shaky loans to people with weak credit and then packing them into a security," Franktold the radio station WBUR i n Boston on Monday. "Frankly, I think there is less here than meets the eye."
This provision of the Crapo bill would say that banks and credit unions with less than $10 billion of assets can win QM status for their mortgages automatically if they agree to keep them in portfolio — not sell them off — for a set number of years. Critics argue this is a
"Nothing in this bill in any way weakens the prohibition about making shaky loans to people with weak credit and then packing them into a security," Frank
Custodial bank capital ratios
On Tuesday, Sen. Bob Corker, R-Tenn., introduced an amendment designed to scrap a provision of the Crapo bill that would allow funds held at a custodial bank like State Street and Bank of New York Mellon and deposited at a central bank to be discounted for capital purposes.
The provision has drawn the ire of progressive Democrats since it would help some of the biggest banks in the country, making it easier for them to comply with the supplementary leverage ratio. Interestingly, JPMorgan Chase and Citigrouphave reportedly privately grumbled that they, too, should be able to take advantage of such an exception.
Critics argue that no large institution, even a custody bank, should get a break on capital rules.
The provision has drawn the ire of progressive Democrats since it would help some of the biggest banks in the country, making it easier for them to comply with the supplementary leverage ratio. Interestingly, JPMorgan Chase and Citigroup
Critics argue that no large institution, even a custody bank, should get a break on capital rules.
Krisztian Bocsi/Bloomberg
Easing regulation on foreign banks
Supporters of the bill have taken steps to try and blunt criticism that the bill unintentionally would help U.S.-based subsidiaries of foreign banks.
The issue relates back to the provision raising the SIFI threshold to $250 billion. Critics of the Crapo bill argue that even though foreign banks like Deutsche Bank are well above that limit, they could still benefit because their U.S. holdings are below that level. As a result, they would no longer be treated as SIFIs and subject to higher standards.
But Crapo and moderate Democrats attempted to fix this issue in the latest version of the bill,which clarifies that foreign subsidiaries should not see their regulation eased. Critics, however, contend it is isn't enough.
The issue relates back to the provision raising the SIFI threshold to $250 billion. Critics of the Crapo bill argue that even though foreign banks like Deutsche Bank are well above that limit, they could still benefit because their U.S. holdings are below that level. As a result, they would no longer be treated as SIFIs and subject to higher standards.
But Crapo and moderate Democrats attempted to fix this issue in the latest version of the bill,
Alternative credit scoring
A late addition to the bill would direct the Federal Housing Finance Agency to review credit-scoring alternatives for Fannie Mae and Freddie Mac mortgage purchases. The FHFA currently relies on FICO’s classic scoring model.
Some argue that the measure, pushed by Sens. Tim Scott, R-S.C., and Mark Warner, D-Va., is redundant, because the FHFA is already seeking comment on alternative credit scoring models.
But others say it would speed up the FHFA's review and could effectively force its hand. Ultimately, if the measure is adopted, it's seen as a win for VantageScore, which is owned by the three main credit bureaus, in its battle against FICO.
Some argue that the measure, pushed by Sens. Tim Scott, R-S.C., and Mark Warner, D-Va., is redundant, because
But others say it would speed up the FHFA's review and could effectively force its hand. Ultimately, if the measure is adopted, it's seen as a win for VantageScore, which is owned by the three main credit bureaus, in its battle against FICO.
Allie Brown/Bloomberg News
Manufactured housing
Consumer groups worry that a provision to give manufactured housing retailers more ability to make financing recommendations could lead to lending abuses.
Under the Truth in Lending Act, employees of retailers are generally banned from giving advice on loan terms unless they are licensed mortgage originators. But a measure in the Crapo bill would effectively end that prohibition.
Consumer groupscharge it could let retailers steer borrowers into higher-priced loans, while the industry says it levels the playing field with real estate agents and homebuilders, which generally do not face such restrictions.
Under the Truth in Lending Act, employees of retailers are generally banned from giving advice on loan terms unless they are licensed mortgage originators. But a measure in the Crapo bill would effectively end that prohibition.
Consumer groups
Joshua Roberts/Bloomberg
Volcker Rule relief
Critics are also worried about a measure that would exempt institutions with less than $10 billion of assets from the Volcker Rule, which bans proprietary trading and restricts investments in hedge and equity funds by banks.
The objection to the provision is less about what it does now — most community banks didn't engage in proprietary trading anyway, even before the rule was in effect — and more that it could be used as a Trojan horse. They fear the exemption could be gradually expanded to include institutions that would engage in such behavior.
The objection to the provision is less about what it does now — most community banks didn't engage in proprietary trading anyway, even before the rule was in effect — and more that it could be used as a Trojan horse. They fear the exemption could be gradually expanded to include institutions that would engage in such behavior.
