President Trump says he’s eager to sign the Dodd-Frank reform bill, just approved by Congress. The House finalized the Economic Growth, Regulatory Relief, and Consumer Protection Act and sent it to the President’s desk on May 22nd. The changes have been a long-time coming since President Trump’s promise, many months ago, to “do a very heavy haircut on Dodd Frank.”
The reform legislation dismantles parts of the original Dodd-Frank Wall Street Reform and Consumer Protect Act that was signed into law in 2010. It was meant to prevent another financial collapse like the one in 2008, but many people feel it went too far, especially for smaller banks and credit unions that were subjected to the same strict rules as their larger Wall Street counterparts. And it’s the small banks that will benefit from this reform legislation.
The reform bill was authored by Republican Senator Mike Crapo who said of the passage, “This is a moment years in the making, and I thank my colleagues in the Senate and the House of Representatives for their partnership and contributions to this effort over the years.” He says, “This step toward right-sizing regulation will allow local banks and credit unions to focus more on lending.” That would, in turn, support economic growth and job creation.
Lenders, Realtors Embrace Reform
President of the Mortgage Bankers Association, David Stevens, is among the bill’s supporters. He said in a statement, “I want to commend the House of Representatives for joining the senate and passing this bill which will protect consumers and provide greater access to mortgage credit.” The Senate passed the bill in March, and sent it back to the House where it passed on Tuesday May 22nd.
The National Association of Realtors also expressed it’s approval. NAR President Elizabeth Mendenhall said, “This bill provides appropriate consumer protections while going a long way toward removing undue regulatory burdens on small lenders, which will help keep them strong, so they can help keep communities strong.” (1)
SIFI Threshold Raised to $250 Billion
One of the most significant changes is a provision that eases regulations on small to medium-size banks by raising the amount of assets they have to be considered a “systemically important financial institutions” or “SIFI’s.” You’ve also heard them called “too big to fail.” By re-categorizing them as banks that are less likely to harm the financial system if they fail, they will be exempt from some of the heavy-handed regulations that bigger banks must abide by. (2)
The previous threshold had been set at $50 billion and was raised to $250 billion by this reform legislation. Banks with assets of $100 billion and higher won’t be subjected to automatic regulations, but they will be subject to review, by regulators who will determine if they should be included in the “too big to fail” group, and whether more oversight is needed.
Banks that are “too big to fail” are subject to tougher capital and liquidity rules. That means they must have a larger cash reserve to protect them from a potential run on the bank. They must also have a risk management plan in place, and undergo periodic stress testing.
Advocates of the reform bill say that smaller banks have been needlessly subjected to these rules, making it difficult for them to make loans. They say the changes will increase the amount of capital smaller banks have to provide loans, which will help the business environment.
Other Changes in the Reform Bill
The bill also directs the Federal Housing Finance Authority to consider credit-scoring alternatives for home sales backed by Fannie Mae and Freddie Mac. The current standard is the FICO scoring model, but critics say it’s more conservative than other models and is not well-suited to many borrowers — especially those who don’t have a credit history, but are working, and paying their rent and other bills on time. Lenders say that by opening the market up to alternative scoring methods, a greater number of potential borrowers could be approved for home loans.
There’s also relief from the Volcker Rule for institutions with less than $10 billion in assets. The Volcker rule prohibits risky transactions, which smaller banks might not participate in anyway. Critics of the change in this reform bill are concerned that the exemption might be expanded to larger banks at some point in the future.
Mortgage reporting requirements have also been lifted for most small banks and credit unions that provide less than 500 mortgages per year. Critics feel the exemption is too broad because it will apply to 85% of banks and credit unions, according to American Banker. And without those reporting requirements, there’s concern that lenders might easily engage in discriminatory lending.
Those same institutions will also receive an automatic “qualified mortgage” status for their loans, so long as they agree to hold on to them for a specific length of time. Dodd-Frank had previously required that lenders conform to certain underwriting standards, to make sure loans were safe. The apparent safety net in the reform bill is that banks agree to hold those loans and not sell them off.
The bill needed bipartisan support in the Senate, so the changes are not as far-reaching as they may have been. Former Representative Barney Frank who co-authored the original legislation said in an NPR blog that the new bill will leave the most important provisions intact. Although he says he would’ve voted against it, he understand why other lawmakers are voting for it.
Among the changes he supports are the Volker rule exemption for smaller banks and a higher asset threshold for systemic-risk-related regulations. He feels the threshold should have been increased to just $100 billion however, saying that if two or three banks in that category failed, it would present a risk to our financial system. Republicans were the ones pushing for the new $250 billion threshold. But again, regulators do have the freedom to impose additional rules on banks with assets of $100 billion or more. (3)
As the refinance business dries up due to rising interest rates, banks may look to more creative ways of providing loans. Will they ever get back to stated income, negative amortization, SISA or NINA loans? We will have to stay tuned – but if it does happen, it might be a good time to sell real estate in “bubble” markets.
As of the recording of this podcast, it’s not clear when President Trump plans to sign the bill.
(3) NPR Article
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