Since the election, House Financial Services Committee Chairman Jeb Hensarling (R-TX) has reiterated that he views the CHOICE Act as a “blueprint” for financial regulatory reform in a Trump administration and indicated that financial regulatory reform is “going to happen in the first year” of the Trump administration. Further, Financial Institutions Subcommittee Chairman Blaine Luetkemeyer (R-MO) has indicated that the full committee is planning a mid-February mark-up of the CHOICE Act in order to push financial regulatory reform forward. It therefore seems likely that the CHOICE Act will provide a useful guide for future proposals from the new Congress and administration. Among other things, the CHOICE Act would have restructured the Consumer Financial Protection Bureau (the CFPB) and modified or repealed certain aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Although it is impossible, at this time, to anticipate the full scope of possible reforms, we believe that the CHOICE Act is the best place to start. This client alert summarizes certain key provisions of the CHOICE Act intended to provide regulatory relief to financial institutions from certain bank regulatory and consumer financial protection requirements. The legislation also contains a number of provisions proposing capital markets reforms and provisions intended to promote capital raising that are not summarized here.
While not part of the CHOICE Act, President-elect Trump has also called for a “temporary moratorium on new agency regulations that are not compelled by Congress or public safety in order to give our American companies the certainty they need to reinvest in our community, get cash off of the sidelines, start hiring again, and expanding businesses.” As part of this moratorium, Mr. Trump has called for a systematic review of federal regulation, whereby he would ask “every federal agency to prepare a list of all of the regulations they impose on Americans which are not necessary.” A moratorium and systematic review of financial regulations would mean not only a lack of new regulations but also that pending rules, in areas such as arbitration, would be unlikely to go into effect soon or at all.
Consumer Financial Protection Bureau
The CHOICE Act did not provide for the elimination of the CFPB. However, it would have altered the CFPB’s structure to a five-person, bipartisan commission renamed the “Consumer Financial Opportunity Commission” (the Commission). Other key proposals to reform the CFPB included in the CHOICE Act were the following:
The CHOICE Act would have provided regulatory relief to parties engaged in residential mortgage lending and related activities by incorporating the following reforms:
The CHOICE Act would have provided regulatory relief to certain banks and credit unions as follows:
Repeal of the Volcker Rule and Durbin Amendment. The CHOICE Act would have repealed the Volcker Rule and repealed the “Durbin Amendment” price controls on debit interchange transactions.
The Qualifying Capital Election. The CHOICE Act offered banks significant regulatory relief in exchange for maintaining higher capital than is required by current law and regulation. Specifically, the CHOICE Act offered all depository institutions, regardless of size, making a “qualifying capital election” an “off-ramp” from certain requirements of Dodd-Frank. Institutions that maintain a leverage ratio of at least 10% and have a composite CAMELS rating of 1 or 2, would be permitted to elect to be exempted from a number of regulatory requirements, including the Basel III capital and liquidity standards and the “heightened prudential standards” applicable to larger institutions under Section 165 of Dodd-Frank. Banks that make the qualifying capital election would also be exempt from any limitations on mergers, consolidations or acquisitions that relate to capital, liquidity or concentration of assets or deposits (including the 10% deposit concentration limit and 10% total liabilities limit). Qualifying banking organizations would be subject to stress testing, but stress test results could not be used to limit capital distributions. Any bank that fails to maintain the specified, non-risk weighted leverage ratio will face restrictions on distributions and be required to submit a capital restoration plan. If the bank does not restore its leverage ratio within one year, it will lose its status as a qualifying banking organization and lose the regulatory relief provided by the election.
According to the House Financial Services Committee’s comprehensive summary of the bill, the eight largest U.S. banks currently have an estimated average leverage ratio of approximately 6.6% and would be required to raise significant additional capital in order to receive the regulatory relief contemplated by the “qualifying capital election.” On the other hand, such regulatory relief “would be well within reach” for many community banks.
Amendments to Title II of Dodd-Frank. The CHOICE Act was based on the premise that Dodd-Frank did not end “too big to fail” due to the explicit or implicit federal guarantees of financial system liabilities and Dodd-Frank’s Orderly Liquidation Authority. In order to end “too big to fail” and prevent future taxpayer bailouts of financial firms, the CHOICE Act would have implemented the following policy changes:
The CHOICE Act also would have repealed Title VIII of Dodd-Frank, which empowers the FSOC to designate so-called “financial market utilities” as “systemically important,” and provide those organizations access to the Federal Reserve discount window.
Community Bank Regulatory Relief. The CHOICE Act was based, in part, on the premise that Dodd-Frank disproportionately burdens community financial institutions. Many provisions of the CHOICE Act reflect the concern that regulations promulgated under Dodd-Frank will result in more rapid industry consolidation, fewer smaller banks, and further growth of large banks. In addition, increasing regulatory costs are often passed on to customers in the form of higher prices and diminished credit availability. In order to address these problems, the CHOICE Act included the following regulatory relief for community banks, although a number of the regulatory relief provisions would benefit institutions of all sizes:
Credit Union Regulatory Relief. The CHOICE Act also would have provided credit unions with significant regulatory relief. In addition to benefiting from many of the same reforms applicable to community banks (described above), credit unions would have been afforded relief unique to their charters, including but not limited to the following reforms:
Federal Reserve Reform. The Federal Reserve provisions of the CHOICE Act were designed to (1) scale back the Federal Reserve’s regulatory and supervisory powers and subject them to greater congressional oversight and accountability and (2) promote a more predictable, rules-based monetary policy, which the authors believe provides a stronger foundation for economic growth. Specifically, the CHOICE Act would require banking organizations that currently submit living wills to continue to submit “living wills” until they make an effective capital election and would permit the banking agencies to conduct stress tests (but not limit capital distributions) of a banking organization that has made a qualifying capital election. For banking organizations that do not make a qualifying capital election and continue to submit living wills, the CHOICE Act would have:
Making Agencies Accountable to Congress
The authors of the CHOICE Act believed that Dodd-Frank’s new regulatory authorities have largely immunized regulatory agencies from accountability to Congress, the president, and the courts. To address this problem, the CHOICE Act would have: