Financial Regulatory Reform in the Trump Administration and the Future of Dodd-Frank Buying Legal Council

Financial Regulatory Reform in the Trump Administration and the Future of Dodd-Frank Buying Legal Council Matthew Dyckman March 31, 2017

Introduction The Trump Administration has described its primary policy agenda as four points on a compass. Health Care Reform Infrastructure Spending Tax Reform Regulatory Reform 2

Introduction All four points on the compass are designed to improve growth and create jobs. The Trump Administration views financial regulatory reform from an economic, and not ideological, perspective. Financial regulatory reform is necessary to make sure banks can lend so that companies can create jobs and improve economic growth. Regulatory reform (including financial regulatory reform) is a priority for the Trump Administration. 3

Tools/Instruments of Financial Regulatory Reform Legislation Executive Orders Regulatory Review/Repeal Congressional Review Act Appointments Litigation 4

Dismantling Dodd-Frank During his campaign, President Trump consistently emphasized that financial regulatory reform is a critical component of his plan to increase economic growth and create jobs. The President has expressly stated that his team would be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation. Similarly, Treasury Secretary Mnuchin has said that the new administration wants to strip back part of Dodd-Frank and that such a rollback would be the Administration s number one priority on the regulatory side. 5

The Financial CHOICE Act The Financial CHOICE Act (the CHOICE Act ) passed the House Financial Services Committee on September 13, 2016 and was amended on December 20, 2016. House Financial Services Committee Chairman Jeb Hensarling (R-TX) has said that he views the CHOICE Act as a blueprint for financial regulatory reform in a Trump Administration. The CHOICE Act would modify or repeal certain aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ). 6

Consumer Financial Protection Bureau The CHOICE Act would: Alter the CFPB s structure to a five-person, bi-partisan commission renamed the Consumer Financial Opportunity Commission (the Commission ); Subject the new Commission to the Congressional appropriations process and oversight; Increase the current threshold for banks, thrifts and credit unions to be subject to the Commission s supervisory authority from $10 billion in assets to $50 billion; Establish a dual mission for the Commission consisting of both enforcing consumer protection laws and strengthening participation in markets to increase competition and enhance consumer choice; Create an Office of Economic Analysis within the Commission to perform cost-benefit analyses on all of the Commission s proposed rules and regulations; Establish an independent Senate-confirmed Inspector General for the Commission; and Repeal the Commission s authority to regulate consumer arbitration clauses and abusive conduct. 7

Mortgage Regulation The CHOICE Act would provide regulatory relief to parties engaged in residential mortgage lending and related activities by incorporating the following reforms: Clarifying that a retailer of a manufactured home is not a mortgage originator for purposes of the Truth in Lending Act unless such person receives compensation or gain for assisting the customer in obtaining a residential mortgage loan; Amending the definition of a high cost mortgage under the Home Ownership and Equity Protection Act (HOEPA) to modify the interest rate and points and fees cap in order to preserve access to mortgage credit for low and moderate-income consumers who are seeking to buy a manufactured home; Changing the way points and fees are calculated under the Ability-to-Repay/Qualified Mortgage rule by excluding fees paid for affiliated title charges and escrow charges for insurance and taxes; Creating a legal safe harbor from ability-to-repay requirements for mortgage loans that are kept on a depository institution s balance sheet (automatic QM status); and Creating a legal safe harbor from escrow requirements for residential mortgage loans held in portfolio for three years for banks with less than $10 billion in assets and exempting small firms that annually service 20,000 or fewer mortgage loans from certain escrow requirements. 8

Repealing Certain Controversial Banking Laws The CHOICE Act would: Repeal the Volcker Rule restrictions on proprietary trading and ownership of covered funds Repeal the Durbin Amendment price controls on debit interchange transactions 9

The Qualifying Capital Election The CHOICE Act would establish a Qualifying Capital Election, which would offer all banks, regardless of size, regulatory relief in exchange for maintaining higher capital ratios. 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 remain subject to stress testing, but stress test results could not be used to limit capital distributions. 10

The Qualifying Capital Election (continued) 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. 11

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 implement the following policy changes: Repeal Title II s Orderly Liquidation Authority and replacing it with a new chapter of the federal bankruptcy code designed to accommodate the failure of a large, complex financial institution; Impose new limitations on the Federal Reserve s emergency lending authority under Section 13(3) of the Federal Reserve Act; Prohibit the future use of the Treasury Department s Exchange Stabilization Fund to bail out a financial firm or its creditors; and Repeal the FDIC s authority to establish a widely available program to guarantee obligations of banks during times of severe economic stress. 12

Financial Stability Oversight Council The CHOICE Act would repeal certain authority vested in the Financial Stability Oversight Council (FSOC) by Titles I and VIII of the Dodd-Frank Act, including the authority of the FSOC to: designate non-bank financial companies as SIFIs (and retroactively repealing the FSOC s previous designations of certain non-bank financial companies as SIFI s); designate particular financial activities for heightened prudential standards or safeguards, which includes the power to mandate that an activity be conducted in a certain way or be prohibited altogether; and break up a large financial institution if the Federal Reserve finds that the firm poses a grave threat to the financial stability of the United States. The CHOICE Act also would repeal Title VIII of the Dodd-Frank Act, 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. 13

Community Bank Regulatory Relief The CHOICE Act was based, in part, on the premise that Dodd-Frank disproportionately burdens community financial institutions and therefore included the following regulatory relief for community banks (although a number of the regulatory relief provisions would benefit institutions of all sizes): Requiring financial regulatory agencies to appropriately tailor regulations to fit an institution s business model and risk profile, thereby reducing compliance costs and allowing banks to devote more of their operating budgets to meeting customer needs; Reducing reporting burdens for highly-rated and well-managed institutions, such as by eliminating redundancies in the data collection demands made by different regulators and allowing well-capitalized community banks to file short-form call reports in the first and third quarters of each year; Providing greater procedural due process protections for institutions and individuals and an enhanced ability to challenge arbitrary supervisory or enforcement actions; 14

Community Bank Regulatory Relief (continued) Reforming the examination process by requiring agencies to make examination reports available for a depository institution s review on a timely basis, and affording the institution a right to appeal material supervisory determinations to an independent arbiter; Repealing the small business data collection requirements of Section 1071 of Dodd-Frank; Exempting banks with assets of $1 billion or less from the reporting and attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; Raising the threshold for the Federal Reserve s Small Bank Holding Company Policy Statement from $1 billion to $5 billion in consolidated assets, thereby expanding the institutions covered by the policy statement that can temporarily use debt to finance acquisitions; Permitting thrifts to elect to be regulated as Covered Savings Associations with the authority to exercise the full range of national bank powers; and Prohibiting a federal banking agency from formally or informally suggesting, requesting or ordering a depository institution to terminate specific customer accounts (anti-choke Point provision). The CHOICE Act also would have provided Credit Unions with significant regulatory relief. 15

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: Require all financial regulators to conduct a meaningful cost-benefit analysis before issuing rules or regulations; Require all major regulations (defined as those that produce $100 million or more in impacts on the U.S. economy, spur major increases in costs or prices on consumers or have certain other significant adverse effects on the economy) to be approved by Congress and signed by the President in order to become effective; Fund all financial regulators through the Congressional appropriations process (the Federal Reserve s independence in conducting monetary policy would be protected by leaving this function off budget); Convert each financial regulatory agency currently headed by a single director (the CFPB, the Federal Housing Finance Agency and the Office of the Comptroller of the Currency) into a Commission; and Statutorily repeal the Chevron Doctrine, which requires courts to give deference to an agency s interpretation of the law unless such interpretation is arbitrary or manifestly contrary to a statute. 16

Prospects for Passage Some variation of the CHOICE Act stands a good chance to pass the House. A revised version of the bill is expected to be released soon and voted on over the summer. The bill s prospects for passing the Senate are much dimmer, where 60 votes are necessary to overcome a filibuster. Senate Banking Committee Chair Crapo has called the political environment in the Senate poisonous. Ranking Minority Member Brown told the ABA Governmental Affairs Conference that a wholesale rollback of Dodd-Frank is not going to happen. Failure to pass Health Care Reform bill casts doubt on the ability to pass major Dodd-Frank reforms over Democratic opposition. Limited ability to use budget reconciliation process to advance financial regulatory reforms. 17

Prospects for Passage Dodd-Frank will not be repealed and wholesale rollback is also unlikely. More targeted financial reforms on which there is bipartisan agreement are possible. Regulatory relief for community banks and credit unions Mortgage regulatory relief Increase in SIFI threshold from $50 billion to a number exceeding $100 billion Possible CFPB Reform (Commission structure and budget oversight) Little chance for elimination of CFPB or significant curtailment of its powers, qualifying capital election, amendments to Title II of Dodd-Frank, or FSOC reform to become law. 18

Executive Actions Taken To Date With material changes to Dodd-Frank likely to die in the Senate, President Trump s executive orders may form the basis of the new administration s regulatory review strategy. Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs (January 30, 2017) Presidential Memorandum on Fiduciary Duty Rule (February 3, 2017) Presidential Executive Order on Core Principles for Regulating the United States Financial System (February 3, 2017) Presidential Executive Order on Enforcing the Regulatory Reform Agenda (February 24, 2017) 19

Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs The 2 for 1 Executive Order Each proposed new regulation must include a proposal to repeal two existing regulations. The costs (or savings from repeal) of the two regulations to be eliminated should equal or exceed the costs of the proposed new regulation. Beginning in 2018, regulatory plans required to be published annually must include costs estimates for the new regulation and savings estimates from regulations to be repealed. Applies to agencies within the executive branch such as FinCEN, HUD, Department of Labor (DOL), etc. Does not apply to independent agencies like SEC, OCC, FDIC, FRB or CFPB. Independent agencies expected to comply with the spirit of the Executive Order. 20

Presidential Memorandum on Fiduciary Duty Rule Requires DOL to reexamine and provide updated legal analysis of the Fiduciary Rule. Reexamination must include three factors: 1. Whether the fiduciary rule is likely to harm investors due to a reduction in access to retirement products and services; 2. Whether the fiduciary rule s anticipated applicability will result in dislocations or disruptions to the retirement services industry that may adversely affect investors or retirees; and 3. Whether the fiduciary rule is likely to cause an increase in litigation or in the prices that investors and retirees must pay to gain access to retirement services. Should the labor secretary find that the fiduciary rule is harmful under any of these three factors, or if he concludes for any other reason that the fiduciary rule is inconsistent with the priorities listed in the memorandum, then he is directed to issue a proposed rule that would rescind or revise the fiduciary rule. The DOL has proposed a rulemaking to delay the fiduciary rule s implementation date by 60 days (to June 10). 21

Presidential Executive Order on Core Principles for Regulating the United States Financial System Directs the Secretary of the Treasury, as Chairman of the Financial Stability Oversight Committee (FSOC), to consult with the nine member agencies of the FSOC and draft a report to the President analyzing current laws and regulations for their consistency with the seven Core Principles of financial regulation. 1. Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth. 2. Prevent taxpayer-funded bailouts. 3. Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry. 4. Enable American companies to be competitive with foreign firms in domestic and foreign markets. 5. Advance American interests in international financial regulatory negotiations and meetings. 6. Make regulation efficient, effective, and appropriately tailored. 7. Restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework. The report is due on June 3, 2017 and is expected to provide a roadmap for further financial reform. 22

Presidential Executive Order on Enforcing the Regulatory Reform Agenda Each regulatory agency is given 60 days to appoint a regulatory reform officer who will: Oversee the implementation of other regulatory reform executive orders; and Chair a newly-formed Regulatory Reform Task Force within each agency. Each Regulatory Reform Task Form will evaluate the agency s existing regulations and make recommendations regarding repeal, replacement or modification of regulations identified as burdensome. Once again, this Executive Order does not apply to independent agencies like the SEC, OCC, FDIC, Federal Reserve or CFPB, but such agencies are expected to comply with the spirit of the Executive Order. 23

Regulatory Review and Repeal President Trump s executive orders may form the basis of the new administration s regulatory review strategy. Make new regulations more difficult to implement 2 for 1 Cost/benefits analysis Identify and repeal burdensome regulations Appointment of regulatory reform officers Regulatory reform task force within each agency Evaluation of existing regulations for consistency with Core Principles But how do you repeal burdensome regulations once identified? 24

Regulatory Review and Repeal Administrative Procedures Act generally requires notice and comment period in order to repeal existing major regulations adopted by agencies. Develop proposal to amend, replace or repeal burdensome regulations Requires interagency coordination Issue proposed rule Analyze comments Issue final rule Time consuming process May also rely on Congressional initiatives under the Congressional Review Act. 25

Congressional Review Act Passed in 1996 as part of Contract with America to provide Congress with oversight over federal regulations Permits Congress to pass joint resolution of disapproval within 60 legislative days of date on which adopting agency submits its report on a new regulation to Congress Cannot be filibustered in the Senate If a resolution of disapproval passes both houses of Congress and is signed by the President, the regulation is overruled and will not become effective. All Obama era regulations approved after June 13, 2016 potentially are subject to repeal. 26

Congressional Review Act Prior to 2017, the Congressional Review Act was used only once to overrule a regulation 2001 OSHA ergonomic rule Three regulations already overturned in 2017 Rule submitted by the Securities and Exchange Commission relating to Disclosure of Payments by Resource Extraction Issuers Rule submitted by the Department of the Interior known as the Stream Protection Rule Rule submitted by the Social Security Administration relating to Implementation of the NICS Improvement Amendments Act of 2007 Seven Resolutions of Disapproval have passed Congress and are awaiting signature by President Trump. Five Resolutions of Disapproval have passed one house of Congress and are pending in the other. The Congressional Review Act is becoming a powerful tool for repeal of regulations. CFPB prepaid card rule in jeopardy Arbitration rule in jeopardy if finalized 27

Appointments Personnel is policy President Trump s broadest impact on financial regulation may come from his appointments to federal agencies. Treasury Secretary Mnuchin has been confirmed. SEC Chair Clayton s confirmation is pending. CFTC Chair Giancarlo nominated last week. Comptroller Curry s term expires in April of 2017. FDIC Chair Gruenberg s term expires in November of 2017. Three Federal Reserve Governor vacancies, including Vice-Chair of Supervision. Terms of Chair Yellen and Vice-Chair Fischer expire in February of 2018. Dodd-Frank delegated significant powers to regulators. Agency leaders and staff have the ability to alter financial regulation significantly through a more relaxed approach to interpretation, implementation and enforcement. 28

Litigation and Enforcement The Trump Administration can also influence financial regulation through changes at the Department of Justice (DOJ) Attorney General and DOJ leadership determine how litigation influences financial regulation PHH Corporation, et al. v. CFPB 29

Conclusion Dodd-Frank will not be repealed and wholesale rollback is also unlikely. More targeted financial reforms on which there is bipartisan agreement are possible. While impact of Executive Orders remains to be seen, financial regulatory reform will be a priority for the Trump Administration. Target on burdensome and costly regulations But could take time to complete Appointment power may be the most significant tool in President Trump s tool box. 30

Biography Matthew Dyckman, Counsel, Goodwin Procter LLP mdyckman@goodwinlaw.com 202-346-4113 Matt Dyckman is a counsel in Goodwin Procter s Financial Institutions Group and a member of the firm s Banking, Consumer Financial Services, and FinTech Practices. Mr. Dyckman has been representing community banks for over 19 years. He has extensive experience in corporate finance and securities, mergers and acquisitions, and banking and financial services. Mr. Dyckman represents banks, investment banks, mortgage companies, mortgage servicers, payment processors and other financial institutions in corporate and securities transactions. He assists issuers, underwriters, placement agents and investors with capital raising transactions, including public and private offerings of equity and debt securities. He also has significant M&A experience, advising on acquisitions of public and private companies, tender offers, spin-offs, asset acquisitions, branch purchases and acquisitions of failed financial institutions and distressed assets. Mr. Dyckman counsels public companies in connection with their periodic securities law filings and advises on securities law compliance matters (including Sarbanes-Oxley and insider trading compliance), and New York Stock Exchange and Nasdaq compliance and listing matters. He advises senior management, boards of directors and board committees on a broad range of corporate governance matters, shareholder relations, shareholder activism, takeover defenses and proxy contests/contested elections and state law fiduciary duty issues. Mr. Dyckman has extensive experience with federal banking laws and regulations and in dealing with federal and state bank regulatory agencies. He helps clients navigate the sweeping changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act and routinely advises banks and other financial institutions on a broad range of regulatory matters. 31