CUNA Short Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173; Public Law Number 111-203) August 2, 2010 Here is a short summary highlighting the provisions of the Dodd-Frank regulatory reform bill that are of greatest interest to credit unions. CUNA has also produced a longer, comprehensive summary, which provides detailed information on these and other provisions in the bill, as well as a summary on the law’s interchange regulation provisions (http://www.cuna.org/member/download/07_2010_interchangelawsumm.doc). This summary addresses issues we felt were the most notable for credit unions, including: (1) the Consumer Financial Protection Bureau and credit unions; (2) miscellaneous Dodd-Frank provisions applicable to credit unions; (3) amendments to the Truth in Lending Act regarding residential mortgages; and (4) other notable provisions of Dodd-Frank which apply to banks and other non-CUs.
1. Consumer Financial Protection Bureau — Title X Summary Interchange Regulation (Dodd-Frank § 1075) •
The Fed will regulate debit card interchange rates; the CUNA summary of the interchange provisions is available here: http://www.cuna.org/member/download/07_2010_interchangelawsumm.doc
Issuers, including credit unions, with less than $10 billion in assets are (at least nominally) exempt.
Consumer Financial Protection Bureau (CFPB) •
FICUs with Less Than $10 Billion in Assets: NCUA and the state regulators will generally retain supervision and examination authority over federally-insured credit unions (FICUs) with $10 billion or less in assets, and will have “exclusive” enforcement authority over those institutions. CFPB has limited authorities for smaller institutions, including: (1) authority to accompany NCUA examiners “on a sampling basis;” (2) authority to require reports; and (3) authority to refer suspected violations to NCUA.
Other CUs: The CFPB will have supervision, examination and enforcement authority for FICUs with more than $10 billion in assets, as well as likely for privately-insured credit unions.
CFPB Jurisdiction: The CFPB is an independent body established within and funded by proceeds from the Federal Reserve System, which will be responsible for the following laws: o
Alternative Mortgage Transaction Parity Act of 1982;
Consumer Leasing Act of 1976;
Electronic Fund Transfer Act (except with respect to Interchange regulation);
Equal Credit Opportunity Act;
Fair Credit Billing Act;
Fair Credit Reporting Act;
Home Owners Protection Act of 1998;
Fair Debt Collection Practices Act;
Federal Deposit Insurance Act (§§ 43(b)–(f));
Gramm-Leach-Bliley Act (§§ 502–509);
Home Mortgage Disclosure Act of 1975;
Home Ownership and Equity Protection Act of 1994;
Real Estate Settlement Procedures Act of 1974;
S.A.F.E. Mortgage Licensing Act of 2008;
Truth in Lending Act;
Truth in Savings Act;
Omnibus Appropriations Act (§ 626) (involving mortgage regulation); and the
Interstate Land Sales Full Disclosure Act.
Rulemaking: Rulemaking authority for the above-listed consumer financial protection statutes will be transferred to CFPB from the Fed, NCUA, and other federal financial agencies.
CFPB Leadership: CFPB will have a single Director as the agency head. The President will appoint and the Senate will confirm the Director of the CFPB for a five-year term.
Financial Stability Oversight Council Veto Power: A vote by 2/3rds of the member agencies of the Financial Stability Oversight Council (of which NCUA is a member) can nullify any CFPB regulation.
Regulation of International “Remittance Transfers” •
CUs Partially Exempt: International electronic fund transfers initiated from deposit accounts at federally insured credit unions (FICUs) will be partially exempt from Title X’s “remittance transfer” requirements, but will need to provide new disclosures and comply to some degree with CFPB rules on “remittance transfers.” Privately-insured credit unions and FICUs will likely fall under a separate partial exemption for wire and ACH transfers.
Disclosures, Generally: Each “remittance transfer provider,” such as Western Union or a credit union, has to provide the sender with disclosures that include information about the amount of currency that will be received, date of delivery, error resolution, and the contact information for both the transfer provider and recipient.
Liability, Generally: “Remittance transfer providers” can generally be held liable for misdirected “remittance transfers” and other errors, for undisclosed fees, etc., but credit unions will largely be protected from liability.
Credit Union Exemptions and Safe Harbors: FICUs and FDIC-insured institutions will be exempt from most aspects of the “amount of currency” and fee disclosure requirements for at least 5 years. A second, permanent exemption will likely extend the same protections to most credit union international wire and ACH transfers. CFPB will write regulations creating safe harbors from the law’s liability provisions for “errors,” etc.
Revised Home Mortgage Disclosure Act (HMDA) Disclosure and Reporting Requirements •
Credit unions will have to comply with revised HMDA disclosure and reporting requirements. The new requirements are subject to rules written by CFPB in consultation with NCUA and other regulators.
State Law Preemption for National Banks and Federal Thrifts •
National banks and federal thrifts will be subject to provisions that limit OCC’s ability to preempt state laws. These provisions do not apply to federal credit unions.
2. Miscellaneous Provisions — Credit Unions Disclosure of Executive Compensation to NCUA (§ 956) •
Credit unions with more than $1 billion in assets must report “executive compensation information” to NCUA to allow the Agency to determine if the compensation arrangement is “excessive” or could cause a material loss.
Same Standards as Bankers: Credit union executives are likely to be held to the same compensation standards as bankers and other for-profit financial industry executives because the reporting requirements will be promulgated through a joint rulemaking by NCUA, the Fed, OCC, FDIC, SEC, and FHFA.
Financial Stability Oversight Council (Title I) •
NCUA Chairman is a FSOC Member: The responsibilities of the Financial Stability Oversight Council (FSOC) are to identify risks for the financial market stability of large U.S. market participants and non-financial companies, promote market discipline, and respond to any emerging threats to financial market stability. The FSOC Chairperson is the Treasury Secretary and the other members are the heads of the Federal Reserve Board of Governors (Fed), OCC, CFPB, SEC, FDIC, CFTC, FHFA, and the Chairman of NCUA as well as an independent insurance expert appointed by the President for a 6-year term.
“Systemically-Important” Oversight: FSOC may place a nonbank financial company under Fed supervision if such company poses a threat to financial stability to the U.S.; this will not likely apply to credit unions in practice even though credit unions meet the definition of “nonbank financial company.”
NCUA Inspector General Material Loss Reviews & Semi-Annual Review (Title IX) •
Increased Material Loss Review Threshold: Title IX raises one of the two prongs for the “material loss review” threshold under the Federal Credit Union Act, from $10 million to $25 million. If a NCUSIF loss is “material,” the NCUA inspector general (IG) must perform a “material loss review” and submit it to the NCUA Board. The definition of a material loss is: (1) more than $25 million; and (2) more than 10% of the credit union’s total assets at the time NCUA initiated emergency Federal Credit Union Act § 208 assistance or was appointed liquidating agency.
Semi-Annual Review: There is a new requirement that the NCUA IG has to review any losses (material or non-material) to the NCUSIF and issue a semi-annual report to Congress and GAO. In addition, the GAO must review the IG report for any such losses and make recommendations to improve the supervision of insured credit unions.
Similar FDIC Amendments: Title IX makes similar amendments to the Federal Deposit Insurance Act.
Securitization (Title IX) •
5% Retention Requirement: Securitizers and originators, including credit unions, have to retain at least 5% of the credit risk of any asset that is transferred through an asset-backed security, subject to exceptions for certain types of mortgages.
Exceptions for Many Types of Mortgages Made by CUs: Exceptions to this credit risk retention requirement would likely apply to FHA-insured loans, VA-insured loans, as well as certain “qualified residential mortgages”—generally meaning relatively low-interest mortgages—as defined by DoddFrank Title XIV. It is likely that most credit union mortgages will fall within one or more exceptions to the 5% retention requirement.
Permanent Increase in NCUSIF Share Insurance to $250k (Title III) •
Credit union NCUSIF insurance will also be permanently increased to $250,000. The NCUSIF deposit insurance level increase will not receive any retroactive application (i.e. none prior to the October 3, 2008 “temporary” increase to $250,000 which has now been made permanent).
Temporary Unlimited Insurance of Transaction Accounts (Title III) •
Non-interest bearing NCUSIF-insured transaction accounts—e.g., share draft accounts which do not pay dividends—are fully insured no matter how high the account balance is from approximately July 21, 2010 (the date of enactment of Dodd-Frank) to January 1, 2013.
Systemically Important Payments System Institutions (Title VIII) •
Systemically-Risky Payments System Utilities: The Fed must issue rules for enhanced supervision of systemically important payments system providers. These provisions could apply to corporate credit unions.
3. Mortgage Regulation — Title XIV Summary Amendments to Truth In Lending Act for Mortgage Lending •
Dodd-Frank Title XIV makes numerous amendments to the Truth in Lending Act (TILA) with regards to residential mortgages.
These amendments will apply to credit unions as well as other residential mortgage market participants.
Residential Mortgage Loan Origination Standards •
Residential mortgages must be originated using conservative loan underwriting standards.
In addition, new TILA § 129B(c) would prohibit “steering incentives,” meaning that no party to a mortgage origination may be paid “compensation that varies based on the terms of the loan (other than the amount of the principal)” which appear to be intended to prevent the payment of higher commissions and/or origination fees based on the loan having a high interest rate or frequent resets of an adjustable rate, etc. Regulations promulgated on this issue would likely apply to credit unions.
Minimum Underwriting Standards for Mortgages •
TILA § 129C requires mortgage lenders to make “a reasonable and good faith determination, based on verified and documented information” that the consumer has a reasonable ability to repay the loan as well as applicable taxes, insurance (including mortgage guarantee insurance), and assessments.
High-Cost Mortgages •
There is a new definition for a “high cost mortgage” (i.e. a subprime mortgage). “Higher-cost” mortgages may not be a “balloon payment” or a scheduled payment that is more than twice as large as the average of earlier scheduled payments.
In addition, pre-loan counseling, as well as other requirements such as more stringent than usual appraisal standards, will be required before a borrower enters into a high-cost mortgage.
Office of Housing Counseling •
Title XIV establishes the Office of Housing Counseling, which will be headed by a Director who will be appointed by, and shall report to, the Secretary of HUD. HUD certified counselors may offer homeownership counseling as well as rental counseling.
Mortgage Servicing •
A creditor, in connection with the consummation of a consumer credit transaction secured by a first lien on the principal dwelling of the consumer—other than a consumer credit transaction under an
open end credit plan or a reverse mortgage—shall be required to establish an escrow or impound funds for the payment of taxes and hazard insurance. Appraisal Activities •
TILA § 129H prohibits a creditor from making a “higher-risk mortgage” to any consumer without first obtaining a written appraisal of the property involving a physical property visit by a licensed or certified appraiser.
A second appraisal will be required under certain circumstances where the borrower is buying a house that is being resold within 6 months of the seller’s purchase of the residence.
There are numerous other new requirements regarding appraiser independence and licensure.
Mortgage Resolution and Modification •
The Secretary of HUD shall develop a program to ensure the protection of current and future tenants and at-risk multifamily properties. In addition, there are revised guidelines for the HAMP program.
Foreclosure Defense •
TILA § 130(k) provides a defense of “recoupment or setoff” to foreclosures involving mortgages which were made with unlawful steering incentives or without sound underwriting, in violation of other TILA provisions.
Revised Home Mortgage Disclosure Act (HMDA) Requirements •
Credit unions will have to comply with revised HMDA disclosure and reporting requirements (specified in Dodd-Frank § 1094). Most of these changes to the HMDA disclosure reflect new requirements imposed by Title XIV. CFPB will write rules for the revised HMDA new requirements in consultation with NCUA and other agencies.
4. Other Provisions — Other Financial Institutions Orderly Liquidation Authority (Title II) •
Title II sets forth FDIC’s new authority to liquidate systemically-risky financial companies. These provisions are similar in many respects to the liquidation regimes in Title II of the Federal Credit Union Act and in the Federal Deposit Insurance Act. This liquidation authority will not likely apply to credit unions.
Enhanced Bank and Thrift Holding Company Supervision (Title VI) •
The Fed will have authority to regulate functionally regulated subsidiaries of BHCs and thrift holding companies, likely meaning subsidiaries which provide lending or other financial services (such as a mortgage company subsidiary of a bank holding company).
Title VI establishes a deposit insurance moratorium for an industrial bank (a/k/a an industrial loan company), a credit card bank (i.e. a bank which only issues credit cards), or a trust bank that is directly or indirectly owned or controlled by a commercial firm after November 23, 2009. The BHC Act is also amended to allow credit card banks to issue credit cards to small businesses without their holding companies being subject to the BHC Act.
The Exchange Act of 1934 is amended to eliminate the “investment bank holding company” authority, where the safety and soundness was regulated by the SEC. Unlike the Fed, OCC, OTS, and FDIC, the SEC eliminated an absolute leverage ratio for this type of holding company under Basel II.
Functions of OTS Transferred to OCC; Increase in FDIC Deposit Insurance (Title III) •
The functions of the Office of Thrift Supervision (OTS) will be transferred to the Office of the Comptroller of the Currency (OCC). The existing rights of the OTS—such as with respect to supervisory agreements and so forth—will not be affected, and will be transferred to the OCC.
Bank and thrift deposit insurance will be permanently increased to $250,000. This increase also applies retroactively to institutions under FDIC receivership or conservatorship from January 1, 2008 to October 3, 2008. Credit union share insurance will be permanently increased to $250,000 without any retroactive application.
Pay It Back Act (Title XIII) •
Title XIII reduces the $700 billion TARP appropriation to approximately $475 billion, for deficit reduction purposes, and also requires that proceeds from Treasury Department sales of Fannie Mae, Freddie Mac, and FHLB obligations and securities be used for deficit reduction.
10% Concentration Limit (Title VI) •
A financial company may not control more than 10% of the aggregate liabilities of the U.S. financial sector.
15-to-1 Leverage Ratio for Systemically Important Institutions (6.67% Net Worth Ratio) (Title I) •
For systemically-risky (as determined by the Fed and the FSOC) BHCs with assets over $50 billion and nonbank financial companies, their leverage limit cannot be greater than a 15 to 1 debt to equity ratio (approximately 6.67% net worth ratio).
Credit Ratings Agency Regulation (Title IX) •
Title IX creates a new Office of Credit Ratings within the SEC to administer the Nationally Recognized Statistical Rating Organization (NRSRO) rules for determining accurate ratings and to minimize conflicts of interests.
Title IX also establishes a civil liability standard for law suits against NRSROs by investors.
Federal agencies will also need to replace references to NRSRO ratings in their regulations with an alternative system devised by those agencies (this will apply to NCUA to a limited extent regarding FCU and corporate credit union mortgage-based securities and other ABS investments).
Federal Reserve and FDIC Provisions (Title XI) •
Title XI authorizes the GAO to audit the Federal Reserve System.
The Fed will not have broad authority to open its discount window emergency lending facility to any “individuals, partnerships or corporations” such as non-banks and non-credit unions in an “unusual or exigent circumstance”—unless such lending occurs with a program or facility with “broad-based” eligibility.
The FDIC is authorized to create a Guarantee Fund after a “Liquidity Event,” which is a widely available program to guarantee obligations of solvent insured depository institutions/ holding companies during times of severe economic distress. This only applies to FDIC-insured institutions and not to credit unions.