Regulatory Relief for Community Banks
S.2155 Economic Growth, Regulatory Relief, and Consumer Protection Act ("the Act") was signed into law on May 24, 2018 by President Donald Trump. The Act passed overwhelmingly in both houses of Congress and is considered the first significant piece of legislation to amend the Dodd-Frank Act and provide regulatory relief to community banks.
Proponents of the Act argue that Dodd-Frank did not distinguish between financial institutions based on size, risk and complexity. This, in turn, harmed smaller and less complicated financial institutions by requiring them to adhere to the same regulations as larger banks. The Act provides community banks of various sizes relief from what many consider to be burdensome compliance regulations. The Act will allow community banks to invest their time and money into revenue-producing activities such as customer acquisition and retention.
Key sections of the Act include:
Short Form Call Reports (Section 205)
Agencies are now required to reduce reporting requirements on quarterly call report for banks with assets less than $5 billion. The Act would allow banks to complete a shorter call report form in the first and third quarters of each year. This will free up employees and other resources to better serve bank customers and meet the operational needs of the Bank.
The Federal Financial Institutions Examination Council (FFIEC) approved implementation of burden-reducing revisions (as of the date of this article), which have become effective as of June 30, 2018. For more specific information regarding the newly implemented short-form call reports, please see the FBLG article titled "Community Banks Receive Reprieve from Long-Form Call Reports."
Treatment of Reciprocal Deposits (Section 202)
The majority of reciprocal deposits are no longer considered brokered. Reciprocal deposits would include Certificate of Deposit Account Registry Service (CDARS) and Insured Cash Sweeps (ICS), which are offered by the Promontory Interfinancial Network.
The Act will allow a well-capitalized bank with a CAMELS rating of a 1 or 2 to hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered. Reciprocal deposits greater than $5 billion are allowed but must remain treated as brokered.
A bank that drops below well-capitalized is no longer required to obtain a waiver from the FDIC to continue accepting reciprocal deposits. This will allow them to compete with larger institutions for deposits in their community without affecting FDIC premiums. However, banks must not exceed a previous four-quarter average.
Reciprocal deposits reporting changes were implemented on the second quarter 2018 call report.
Commercial real estate loans, formally classified as high volatility commercial real estate (HVCRE), will not be subject to heightened risk weights if they do not meet the narrower definition of a "HVCRE ADC (acquisition, development, and construction) loan."
HVCRE changes were implemented on the second quarter 2018 call report.
Exemption from Risk-Based Capital Requirements (Section 201)
Regulators will develop a "Community Bank Leverage Ratio" to determine exemptions from risk-based capital requirements. The Act requires the tangible equity capital to the average total consolidated assets ratio to be no less than 8% and no more than 10%.
A "Qualified Community Bank" has less than $10 billion in assets and has an acceptable risk profile as determined by its primary federal regulator.If a "Qualifying Community Bank" meets the new "Community Bank Leverage Ratio" then that bank is considered to have met leverage capital requirements, risk-based capital requirements, and any other capital or leverage requirement to which the bank is subject.
This new legislation will relieve many community banks from the complexities of the Basel III framework. Most of Schedule RC-R – Regulatory Capital of the call report will not apply to a "Qualifying Community Bank."
HMDA Exemptions (Section 104)
Financial institutions will be exempt from Home Mortgage Disclosure Act (HMDA) reporting requirements implemented by Dodd-Frank if they have a “satisfactory” community reinvestment act (CRA) rating and originate less than 500 closed-end mortgage loans or less than 500 open-end credit lines in the last two years.
This will free up employee time and bank resources. The Act will not affect the format of the Loan/Application Registers. An exemption code will be provided for data fields to which an exemption applies.
TRID Three-Day Waiting Period (Section 109)
Before the passing of the Act, a borrower had to receive the TRID disclosures at least three days before closing a mortgage. In some cases, borrowers would be offered new mortgage terms by their lender, which would require new disclosures and another three day wait period. Section 109 of the Act waives the three-day waiting period if a consumer receives a lower interest than was previously offered.
Appraisals in Rural Areas Exemption (Section 103)
Community banks in rural areas have reported shortages of qualified appraisers. The Act will waive the requirement for independent home appraisals in rural areas for mortgage loans of less than $400,000. However, a lender must show proof that they have contacted at least three state-licensed or state-certified appraisers who could not complete an appraisal in a "reasonable amount of time."
Exemption from the Volcker Rule (Sections 203 & 204)
The Volcker Rule essentially prohibits banks from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds. Under the Act, a bank with less than $10 billion in assets and with total trading assets and liabilities of less than 5% of total assets are exempt from the Volcker Rule. Few community banks engaged in Volcker prohibited activities prior to its passing. However, the exemption still benefits community banks by removing Volcker Rule compliance programs.