Transcript Slide 1

Dodd-Frank Wall Street Reform
and Consumer Protection Act:
IMPACT ON
COMMUNITY BANKS
August 4, 2010
Jim Sheriff
Patrick Murphy
Tom Homberg
John Reichert
Pete Wilder
Order of Presentation
Introduction/Overview [Slides 3-4] ...............................................................
Jim Sheriff
Jim Sheriff
Residential Mortgage Reform [5-6] ...............................................................
FDIC Insurance [7]; Examination/Enforcement of Non-bank
Subsidiaries [8]...............................................................................................
John Reichert
Consumer Financial Protection Bureau, TILA Changes
and UDAP [9-10] ..........................................................................................
Pete Wilder
Elimination of OTS [11-12]; De Novo Interstate
Branching [13]; Federal Preemption [14] .....................................................
Tom Homberg
Minimum Leverage/Risk Based Capital [15]; Executive
Compensation at Financial Institutions [16]; Accredited
Investor Standard [17]; Small Public Companies [18-19] ............................
Patrick Murphy
Interchange Fees [20] .....................................................................................
Jim Sheriff
Conclusion [21] ..............................................................................................
Jim Sheriff
AUDIENCE Q&A..........................................................................................
ALL
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Introduction
The Dodd-Frank Wall Street Reform
and Consumer Protection Act was signed
into law by President Obama on July 21,
2010. Dodd-Frank will impact the
financial services industry more
extensively than any banking legislation
since the 1930s.
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Overview
• Act calls for more than 250 new regulations and 65 “studies.”
• Act establishes a major new federal bank regulatory agency,
the Consumer Financial Protection Bureau, with an annual
budget of over $500 million and more than 1,000 employees.
• Dodd-Frank will impact community banks’ loan and deposittaking activities, FDIC insurance premiums, capital
requirements and corporate governance matters.
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Residential Mortgage Reform
• “Duty of care” – originators may not steer a customer to a loan
product for which they lack the ability to repay, or that has
“predatory characteristics or effects.”
• CFPB regulations to be issued over the next few years will
require lenders to make a “reasonable and good faith
determination” that consumer is able to repay the loan
according to its terms.
• No more “no-doc” or “low-doc” loans.
• Penalties for failure to follow these minimum standards,
include a new defense for borrowers in foreclosure actions.
• Ban on “yield spread premiums” and other incentive payment
formulas for mortgage brokers.
• New limitations on prepayment penalties.
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Residential Mortgage Reform (continued)
• Safe harbor presumption with respect to certain “qualified
mortgages.”
• “Qualified mortgages” –
– No negative amortization;
– Payment schedule must fully amortize the loan during the
loan term (generally excludes “balloon” mortgages);
– Consumer may not have the right to defer principal
payments;
– Total points and fees may not exceed 3 percent;
– Term generally may not exceed 30 years.
6
FDIC Insurance
• Change in FDIC assessment base from deposit base to average
consolidated total assets minus average tangible equity.
• Permanent increase in SMDIA to $250,000 as of July 21, 2010.
• No limit on insurance on noninterest-bearing transaction accounts
from December 31, 2010 through January 1, 2013.
• Interest-bearing transaction accounts permitted beginning
July 21, 2011.
• Deposit Insurance Fund:
– Reserve no longer capped at 1.5 percent;
– No longer required to refund excess amounts in the DIF;
– Minimum reserve ratio of 1.35 percent to be achieved by
September 30, 2020.
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Examination/Enforcement of
Non-bank Subsidiaries
• All non-bank subsidiaries not currently regulated by a state or
federal agency now subject to examination by the Federal Reserve
– same manner/frequency as if activities conducted by lead bank.
• Fed’s examination authority will be subject to the CFPB’s
authority with regard to activities under CFPB’s jurisdiction.
• Fed is permitted to conduct examinations of non-bank subsidiaries in a joint or alternating manner with state regulators.
• If largest bank subsidiary is a state nonmember bank, the FDIC or
the OCC, as applicable, may exercise “back-up authority” to
examine activities of non-bank subsidiaries on Fed’s behalf.
• Examinations will consider whether activities engaged in by nonbank subsidiary pose a material threat to the safety and soundness
of its insured depository institution affiliates.
• Fed may take (or the “back-up” agency can recommend)
enforcement action against non-bank subsidiaries.
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Consumer Financial Protection Bureau,
TILA Changes and UDAP
• Consumer Financial Protection Bureau
– New independent executive agency within the Federal Reserve
System.
– Created to take over most of the consumer protection functions
under TILA, RESPA, HMDA, the Fair Debt Collection
Practices Act and the Fair Credit Reporting Act, among others.
– Broad rulemaking authority over federal consumer protection
laws includes identifying unlawful, unfair, deceptive or abusive
acts and practices.
– Authority over persons engaged in offering or providing a
consumer financial product or service.
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CFPB, TILA, UDAP (continued)
– CFPB will have exclusive examination authority and
primary enforcement authority over institutions with more
than $10 billion in assets; lesser authority over smaller
banks.
• Most consumer provisions of the Act will become effective on
the date that authority over consumer financial regulation is
transferred to the CFPB.
• CFPB may prohibit or limit mandatory predispute arbitration
provisions, but only after conducting a study.
• Civil penalties for violation of CFPB.
• TILA exemption threshold increased from $25,000 to $50,000.
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Elimination of the OTS
• Office of Thrift Supervision is currently the primary federal
regulator for over 750 federal and 400 state-chartered thrifts.
• OTS will be abolished within 90 days after the transfer of
powers to the other banking agencies, which must occur within
one year after enactment of the Act (this can be extended by an
additional six months by the Secretary of Treasury).
• Although OTS will be abolished, the Act does not eliminate
thrift charter itself.
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Elimination of the OTS (continued)
• OTS will be merged into the OCC and its powers divided
among existing banking agencies:
– FDIC: Supervisory authority over state thrifts.
– OCC: Supervisory authority over federal thrifts and
rulemaking authority for federal and state thrifts,
except in areas delegated to the Fed.
– Federal Reserve: Supervisory and rulemaking
authority for savings and loan holding companies and
rulemaking authority for federal and state thrifts with
respect to affiliate transactions, loans to insiders and
anti-tying prohibitions.
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De Novo Interstate Branching
• Removal of the restrictions on interstate branching in the 1994
Riegle-Neal Act.
• Until Dodd-Frank, banks generally have been limited in their
ability to establish branches outside of their home state without
acquiring a whole institution, and could only do so in states
that had “reciprocity” with their state.
• Under the Act, national banks and state banks may branch in
any state if, under the laws of the state in which the branch is
to be located, a state bank chartered by that state would be
permitted to establish the branch.
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Federal Preemption
• The Act has halted the expansion of federal preemption for national banks
and federal thrifts.
• OCC and the courts may only preempt “state consumer financial law” if:
– application of law would discriminate against national banks,
– state law “prevents or significantly interferes” with exercise of the
national bank’s powers, or
– state law is preempted by other federal law.
• Restrictions:
– preemption determinations must be made on a case-by-case basis;
– OCC must periodically review each preemption determination and
publish its decision to continue or rescind the determination; and
– OCC must publish a quarterly list of all preemption determinations.
• New standard of legal review encourages greater judicial scrutiny of
OCC preemption determinations.
• Eliminates preemption for subsidiaries of federally chartered banks.
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Minimum Leverage and
Risk-Based Capital Standards
• “Collins Amendment.”
• Requires bank regulators to
establish new minimum leverage
and risk-based capital requirements
on holding companies by January
2012.
• Eliminates “hybrid capital”
instruments, such as TruPS, in
Tier 1 capital by certain institutions
(however, debt and equity
instruments issued to the Treasury
Department under the TARP
program are permanently
includable in Tier 1 capital).
• Rules depend on size and type of
company.
BHC: Assets > $15B
BHC: Assets $500M –
$15B
hybrid capital
instruments included
in Tier 1 capital
minimum leverage/
risk-based capital
requirements
effective:
phased out
between 1/1/2013
and 1/1/2016
upon issuance of
regulations
grandfathered if
issued before
5/19/10
BHC: Assets < $500M
exempt
Thrift holding company:
Assets > $15B
phased out
between 1/1/2013
and 1/1/2016
Thrift holding company:
Assets < $15B
exempt
Mutual holding
companies
grandfathered if
issued before
5/19/10
July 2015
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Executive Compensation at
Financial Institutions
• By April 2011, Federal regulators (including the Fed, the OCC and
the FDIC) must jointly issue regulations or guidelines
– prohibiting incentive-based compensation arrangements that
encourage inappropriate risks that could lead to material
financial loss; and
– requiring covered financial institutions to disclose the structure
of their incentive compensation arrangements to their regulators.
• Regulations or guidelines must be “comparable to” existing
standards under Section 39(c) of the Federal Deposit Insurance Act.
• Does not apply to banks with less than $1 billion in assets –
“covered financial institution” is defined as a bank or bank holding
company, thrift or thrift holding company, credit union or broker
dealer with assets over $1 billion.
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Accredited Investor Standard
• Important for small bank holding companies seeking to raise
capital.
• “Accredited investor”
– No change in income standard ($200,000 in annual income,
or $300,000 in joint annual income with their spouse); but
– effective immediately, the $1 million net worth standard
will exclude the investor’s primary residence.
• Any company currently conducting a securities offering that
relies on some or all of its investors being “accredited” will
have to take immediate steps (including revising the
subscription agreement) to implement the new definition.
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Small Public Companies
Executive Compensation
• All SEC-registered companies:
– “Say on Pay”– nonbinding shareholder vote on executive comp
beginning January 21, 2011.
– “Say on Golden Parachutes” – merger vote after January 21, 2011.
– Broker discretionary voting eliminated.
– Pay and performance disclosure and internal pay equity disclosure
– subject to further SEC rulemaking.
• Listed companies (not “OTCBB” or “Pink Sheets”):
– Independence of compensation committee members.
– Standards for hiring compensation committee advisers.
– Incentive compensation clawback following a restatement arising
from material noncompliance with financial reporting
requirements.
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Small Public Companies (continued)
Corporate governance
• SEC may issue rules permitting shareholders to use company’s
proxy solicitation materials to nominate director candidates.
• SEC must issue rules requiring companies to disclose why they
have separated, or combined, positions of chairman and CEO.
• Risk committee:
– publicly-traded BHC with assets of $10 billion.
– Federal Reserve may apply to smaller publicly traded BHCs.
Sarbanes-Oxley Item 404 exemption
• Issuer with a public float of less than $75 million is exempt
from Sarbanes-Oxley §404(b) attestation-of-internal-control.
• SEC must study how to reduce burden of complying with
Section 404(b) for companies with market cap $75M – $250M.
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Interchange Fees
• Federal Reserve must set interchange rates in electronic debitcard transactions involving issuers with more than $10 billion
in assets.
• Federal Reserve is directed to regulate the “reasonableness” of
the fees and issue rules by March 2011.
• Merchants may discriminate based on payment type (debit vs.
credit) and may set minimum payment amounts to accept
cards.
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Conclusion
• Dodd-Frank ultimately establishes a new regulatory
framework for the entire financial institutions industry.
• The Act will significantly affect larger institutions with which
community banks do business.
• All financial institutions will be subject to heightened
regulatory scrutiny and oversight.
• Many of the requirements imposed by Dodd-Frank on larger
organizations may eventually become “best practices” for
institutions of all sizes.
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