financial services webinar series overview of dodd · pdf filefinancial services webinar...
TRANSCRIPT
1
Financial Services Webinar Series
Overview of Dodd-Frank Act
Robert D. KlinglerAttorney, Bryan Cave LLP
Don HutsonNational Industry Partner, BKD
Sean KulczyckiPartner, BKD
Overview of Dodd-Frank Act
• Comprehensive financial reform bill signed July 21, 2010• More than 2300 pages in length
• Significant impact on financial services industry
• Originally designed to addressed issues related to financial meltdown
• Its reach extends well beyond original purpose
• Real impact is unknown since much is still to be determined
• More than 60 studies to be performed
• More than 50 committees to be formed
• More than 5000 pages of regulation still to be written
2
Overview of Dodd-Frank Act
• Our goal is to evaluate various provisions & its impact on financial services industry
• Key provisions covered today include- Capital Requirements –“Collins Amendment”- Deposit Insurance Reforms- Bureau of Consumer Financial Protection - Significant Compliance Changes - Other Dodd-Frank Reforms
Overview of Dodd-Frank Act
• Tools to keep you up-to-date – Consumer Protection Act Webinar – October 6, 2010– BKD Financial Reform Page @ bkd.com– BKD Alerts & Insights
3
Capital Requirements
Sec. 171 – “Collins Amendment”
• Requires holding companies & nonbank financial companies supervised by Federal Reserve to comply with leverage & risk-based capital requirements imposed on depository institutions
• No Tier 1 Treatment for Trust Preferred Securities
• Exclusions– Federal Home Loan Banks– TARP CPP Preferred Stock
4
Effective Dates/Exceptions
• Securities issued on or after May 19, 2010 –effective as of July 21, 2010
• Securities issued before May 19, 2010 – Large Institutions (>$15 billion as of December 31, 2009)
- Three-year incremental phase-in starting January 1, 2013
– Other institutions ($15 billion or less & mutuals)- Permanent Tier 1 Treatment
• Section does not apply to any BHC subject to Small Bank Holding Company Policy Statement
Small Bank Holding Companies• Policy statement found at 12 CFR Part 225, App. C• Consolidated assets of less than $500 million• Not engaged in significant nonbanking activities• Does not conduct significant off-balance sheet
activities (including securitization & asset management or administration)
• Does not have a “material amount” of securities registered with SEC
• Not excluded by Federal Reserve Board for supervisory purposes
5
Benefits of Being Small
• Consolidated leverage & risk-based capital requirements do not apply
• Subsidiary bank(s) capital measured on standalone basis
• Non-tier 1 funding sources can be downstreamed into Bank(s) as Tier 1 capital
• Debt-to-equity ratio of up to 1:1 acceptable with plan to reduce to 0.3:1 within 12 years of issuance of debt
Other Capital Changes
• Sec. 171(b)(6) – Study small institutions’ access to capital
• Sec. 171(b)(7) – Risks related to institutions’ activities to affect required capital ratios
• Sec. 174(a) – Study regarding hybrid capital instruments
• Sec. 616(a), (b) & (c) – Counter-cyclical capital requirements
• Sec. 616(d) – Source of strength
6
Deposit Insurance Reforms
Sec. 331 – Change in Assessment Base
• Eliminates separate risk-based assessment systems for large & small members of Deposit Insurance Fund
• Requires FDIC to amend regulations to define assessment base as an amount equal to
Average Consolidated Assets – Average Tangible Equity
• Adjustments “as appropriate” for custodial & bankers’ banks
7
Sec. 332 & 334 – Increase in Reserves
• Increases minimum reserve ratio from 1.15% of estimated insured deposits to 1.35%
• FDIC required to reach by September 30, 2020
• FDIC required to offset increase in assessments required to reach 1.35% for banks with consolidated assets of less than $10 billion
• FDIC has authority to build up reserves in excess of 1.50%
Sec. 335 – $250,000
• Permanent increase in FDIC insurance from $100,000 to $250,000(had been set to expire on December 31, 2013)
• Effective January 1, 2008
8
Sec. 343 – Noninterest Bearing Accounts
• Two years of unlimited insurance for noninterest bearing transaction accounts
• December 31, 2010 through December 31, 2012
• Similar to TLGP’s Transaction Account Guarantee– Set to expire on December 31, 2010– All institutions – no voluntary opt-out– No additional specific assessments– No coverage for IOLTA accounts or NOW accounts paying
de minimis interest
Sec. 627 – Interest Business Checking
• Prohibition on paying interest on demand transaction accounts repealed
• Effective July 21, 2011
• Not eligible for unlimited insurance
9
Bureau of Consumer Financial Protection
Bureau of Consumer Financial Protection
• Purpose – To regulate offering & provision of consumer financial products or services under “Federal consumer financial laws”
• Significant functions – Supervising covered persons & issuing rules, orders & guidance implementing federal consumer financial law
• Examination authority – Based on asset size
– CFPB total assets over $10 billion– Primary federal regulator total assets under $10 billion
10
Bureau Transfer Dates
• Date of enactment– 07/21/2010
• Designation of transfer date– Must be designated within 60 days of enactment (09/19/2010)
• Transfer date parameters– Between 180 days (01/17/2011) & 12 months (07/21/11) after
enactment
– Extension to 18 months (01/21/12) permissible upon notice to congress
Supervision of Savings Associations
• Transfer of supervision – Supervision of savings associations to be transferred– Federal Savings Associations OCC– State Savings Associations FDIC– Savings & loan holding companies Fed
• Effective date – Transfers to be effective one year after enactment but may be extended to 18 months
• OTS – OTS to be abolished 90 days after transfer of supervision
11
Significant Compliance Changes
Changes Affecting Mortgage Originators
Duty of care – Section 1402 modifies Truth in Lending Act (TILA) to subject “mortgage originators” to a “duty of care” standard to be qualified, registered & licensed, as required
Loan originator compensation – Section 1403 modifies TILA to prohibit compensation based on terms of loan, other than amount of principal & to restrict sources of payments
Regulations to be established – Regulation must be prescribed to prohibit steering of consumers to inappropriate or less advantageous mortgage products
Personal liability – Section 1404 modifies TILA to provide “cause of action” & make mortgage originators personally liable for violations ofabove provisions
12
Final Rule on Compensation Issued
Final Rule Issued Based on Existing Authority– Effective 04/01/2011, payments to “loan originators” related to
a transaction’s terms or conditions are prohibited
– Compensation may be based on loan amount provided it is based on a fixed percentage of amount
– If loan originator receives compensation directly from a consumer, they may not receive compensation from any other person
Minimum Standards for Residential Loans
Ability to repay – Section 1411 modifies TILA to prohibit making of a “residential mortgage loan” unless creditor “makes a reasonable & good-faith determination…that consumer has a reasonable ability to repay….”
Exception for qualified mortgages – Loans meeting definition of a “qualified mortgage” under Section 1412 are presumed to comply with repayment ability requirements
Defense to foreclosure – In a foreclosure action, Sec. 1413 provides that violations of repayment ability requirements may be asserted as defense by recoupment or set off without regard to time limit
13
Qualified MortgageDefinition – Sec. 1412 defines a qualified mortgage as a residential mortgage that meets the following criteria
• Does not allow negative amortization or interest deferral
• No balloon payment (unless provided for by regulation)
• Income & assets are verified & documented
• For fixed rate loans, underwriting is based on fully amortizing payment & accounts for taxes & insurance
• For ARM loans, underwriting is based on maximum rate during first five years & accounts for taxes & insurance
• Complies with any guidelines or regulations on debt-to-income ratios or similar standards
• Total points & fees do not exceed 3% of total loan amount
• Term of loan does not exceed 30 years
Property Appraisal Requirements• Appraisals required – Section 1471 modifies TILA to require
written appraisals on residential mortgage loans secured by a principal dwelling that are not “qualified mortgage loans” & whose APRs exceed the following– Loans of $417,000 or less: 1.5 percentage points over APOR– Loans over $417,000: 2.5 percentage points over APOR– Subordinate lien loans: 3.5 percentage points over APOR
• Two appraisals required – Requires two appraisals if– Loan is to finance acquisition from person who acquired less than 180
days earlier & property was acquired by that person for less than current sale price
– Cost of second appraisal may not be charged to applicant
14
Other Property Appraisal Requirements
• Property visit – Appraiser must be a certified or licensed appraiser who conducts a physical property visit of interior of mortgaged property
• Free copy – Creditor shall provide one copy of each appraisal to applicant without charge at least three days prior to closing
• Consumer notification – Applicant must be provided with a statement that any appraisal prepared is for sole use of creditor & applicant may choose to have a separate appraisal conducted at own expense
• Appraiser independence – Sec. 1472 adds appraisal independence requirements to TILA & requires interim final regulations within 90 days of enactment (10-19-10)
Other TILA Modifications
• Increase of Nonreal estate threshold– Sec. 1100E increases TILA threshold for loans not secured by
real property or dwelling from $25,000 to $50,000 effective on transfer date
– Maximum amount for coverage of consumer leases also increased to $50,000
• Integrated disclosure document– Sec.1098 & Sec. 1100A require Bureau to “publish a single,
integrated disclosure for mortgage loan transactions” which address requirements of RESPA & Truth in Lending
– Proposed rule & model form required one year after transfer date
15
Other TILA Modifications
• Periodic statements for closed-end mortgages– Sec. 1420 requires periodic statement on residential mortgages– For fixed rate mortgages, coupon book may be provided instead
• Six-month reset notice on ARMs – Sec.1418 requires a notification to borrowers six months prior to initial interest rate adjustment on ARM loans
• Escrow waiver disclosure – Sec. 1462 modifies TILA to requires a notification to consumers if an escrow account is notestablished or is closed by consumer
HMDA Reporting Requirements
Additional data collection – Sec. 1094 modifies Home Mortgage Disclosure Act (HMDA) to require collection of the following additional information
– Age– Total points & fees– Difference between APR & a
benchmark– Term in months of any prepayment
penalty– Value of real property pledged– Term of introductory rate period– Presence of any non-fully
amortizing payments
– Term in months– Channel through which
application was made– Loan originator identifier– Universal loan identifier– Parcel number of real property
pledged– Credit score of applicants
16
Small Business Data Collection
• Data collection requirement – Sec. 1071 amends ECOA to require collection of data on applications for credit from– Women-owned businesses– Minority-owned businesses– Small businesses
• Other data requirements– Data collected through applicant inquiry– Applicant may refuse to provide data– Underwriters may not have access to
information– If underwriter gains access, applicant must
be notified
Other Dodd-Frank Reforms
17
Affiliate Transactions
• Sec. 608 – Expansion of “covered transaction”definition
• Sec. 609 – Eliminates 23A exception for financial subsidiaries
• Sec. 615 – Implements statutory requirements for asset transactions with insiders– Market terms– Prior approval by noninterested directors, if transaction
represents more than 10% of bank’s capital stock & surplus
Inclusion of Derivatives in Lending Limits
• Sec. 610 – Expands “extension of credit” to include credit exposure arising from derivative transactions & repurchase agreements
• Sec. 611 – Requires states to include credit exposure in derivative transactions in lending limits
• Sec. 614 – Includes derivative transactions & repurchase agreements for Reg O purposes
18
Sec. 612 – Troubled Bank Conversions
• Prohibits troubled bank charter conversions
• Based on existence of enforcement action
• Limited exception if accompanied by (& conditioned on) plan of corrective action approved by all appropriate banking regulators
• Notice of pending enforcement actions
Sec. 613 – De Novo Branching
• Permits national & insured state banks to branch across state lines if, under laws of state where branch is to be located, a state bank chartered in that state would have been permitted to establish a branch
• Effective July 22, 2010
19
Regulation D Private Offering
• Common securities offering exemption
• No general solicitation
• Unlimited number of “accredited investors”
• Up to 35 unaccredited investors
Sec. 413 – Accredited Investor Standard• Existing standards for natural persons
– Individual income of $200,000 annually
– Joint income with spouse of $300,000 annually or
– Individual or joint net worth of $1 million
• Modifies net worth standard to exclude value of primary residence
• SEC has clarified to also permit exclusion of related mortgages (but not to extent under water)
• Effective July 21, 2010
• SEC to review all thresholds at least every four years
20
Public Company Compensation
• Nonbinding “say-on-pay” for all public companies
• Nonbinding shareholder vote on “golden parachutes”– SEC authorized to exempt class of issuers
• Compensation committee reforms
• Expanded clawback requirements
• Disclosure of pay vs. performance
• Disclosure of CEO vs. average employee compensation
Financial Institution Compensation• $1 billion in total assets or more
• Regulations by April 21, 2011
• Disclose structures of all incentive-based compensation
• Regulators to assess whether compensation structure– Provides excessive compensation, fees or benefits; or
– Could lead to a material financial loss
• No disclosure of actual individual compensation
• Regulators to prohibit any arrangements or features deemed to cause inappropriate risk
21
Sec. 987 – Material Loss Reviews
• Existing material loss standard– $25 million or
– 2% of total assets
• New standard– $200 million for 2010 & 2011
– $150 million for 2012 & 2013
– $50 million for 2014 & beyond
– $75 million if IG certifies there will be 30 or more failures
• Six-month aggregate reviews of nonmaterial losses
Sec. 989G – SOX 404(b) Exemption• Existing requirements
– SOX 404(a) requires management assessment on internal controls over financial reporting
– SOX 404(b) requires attestation by external auditor
– SEC has repeatedly delayed implementation of SOX 404(b) for nonaccelerated filers
• Dodd-Frank permanently exempts nonaccelerated filers from 404(b) requirements
• SEC to study on reducing burden of companies with market caps of $75-$200 million
• GAO to study effect of Dodd-Frank exemption
22
BankBryanCave
• Dodd-Frank Act Analysis• TARP Updates• Commentary on new regulations
• Free• Sign up for email updates • www.bankbryancave.com
Contact Information
Sean [email protected]