Dodd-Frank Wall Street Reform and Consumer Protection Act: IMPACT ON COMMUNITY BANKS August 4, 2010 - PowerPoint PPT Presentation

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Dodd-Frank Wall Street Reform and Consumer Protection Act: IMPACT ON COMMUNITY BANKS August 4, 2010


Dodd-Frank Wall Street Reform and Consumer Protection Act: IMPACT ON COMMUNITY BANKS August 4, 2010 Jim Sheriff Tom Homberg Patrick Murphy John Reichert – PowerPoint PPT presentation

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Title: Dodd-Frank Wall Street Reform and Consumer Protection Act: IMPACT ON COMMUNITY BANKS August 4, 2010

Dodd-Frank Wall Street Reformand Consumer
4, 2010
Jim Sheriff Tom Homberg Patrick Murphy John
Reichert Pete Wilder
Order of Presentation
  • 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.

  • 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
    deposit-taking activities, FDIC insurance
    premiums, capital requirements and corporate
    governance matters.

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.

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.

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.

Examination/Enforcement ofNon-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.
  • Feds examination authority will be subject to
    the CFPBs authority with regard to activities
    under CFPBs jurisdiction.
  • Fed is permitted to conduct examinations of
    non-bank sub-sidiaries 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 Feds
  • Examinations will consider whether activities
    engaged in by non-bank 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

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.

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.

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.

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.

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.

Federal Preemption
  • The Act has halted the expansion of federal
    preemption for national banks and federal
  • 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 banks 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 ofOCC preemption
  • Eliminates preemption for subsidiaries of
    federally chartered banks.

Minimum Leverage andRisk-Based Capital Standards
  hybrid capital instruments included in Tier 1 capital minimum leverage/ risk-based capital requirements effective
BHC Assets gt 15B phased out between 1/1/2013 and 1/1/2016 upon issuance of regulations
BHC Assets 500M 15B grandfathered if issued before 5/19/10 upon issuance of regulations
BHC Assets lt 500M exempt exempt
Thrift holding company Assets gt 15B phased out between 1/1/2013 and 1/1/2016 July 2015
Thrift holding company Assets gt 15B
Thrift holding company Assets lt 15B exempt
Thrift holding company Assets lt 15B
Mutual holding companies grandfathered if issued before 5/19/10
  • 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, inTier 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.

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.

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 investors primary
  • 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

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
  • Listed companies (not OTCBB or Pink Sheets)
  • Independence of compensation committee members.
  • Standards for hiring compensation committee
  • Incentive compensation clawback following a
    restatement arising from material noncompliance
    with financial reporting requirements.

Small Public Companies (continued)
  • Corporate governance
  • SEC may issue rules permitting shareholders to
    use companys 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)
  • SEC must study how to reduce burden of complying
    with Section 404(b) for companies with market cap
    75M 250M.

Interchange Fees
  • Federal Reserve must set interchange rates in
    electronic debit-card 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.

  • 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
  • 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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