Sen. Shelby Pitches Bank Regulatory Relief; Dems Stand Firm in Defense of Dodd-Frank

By Jeff Bater

May 15 — Banks waiting for regulatory relief are pinning their hopes on Sen. Richard Shelby (R-Ala.), whose draft bill has already encountered Democratic resistance ahead of a May 21 Banking Committee markup.

The panel's ranking member, Sen. Sherrod Brown (D-Ohio) called the proposal “a sprawling, industry wish list of Dodd-Frank rollbacks.” White House spokesman Josh Earnest said it was “an example of Wall Street interests trying to advance legislation that would weaken important consumer, investor and taxpayer protections.”

Analysts see the draft as an initial offer rather than an indication of what, if any, banking legislation the Senate may ultimately produce.

“It is important to remember that this bill is the opening shot by Shelby,” said Jaret Seiberg, an analyst for Guggenheim Securities in a May 12 market commentary. “It is designed to elicit debate and counter-offers.”

A big part of the Financial Regulatory Improvement Act of 2015 is a proposal to raise the asset size at which a bank becomes subject to enhanced capital, liquidity, and leverage requirements. Under Shelby's bill, a bank would become a systemically important financial institution at $500 billion, instead of $50 billion. However, the Financial Stability Oversight Council could designate banks below the higher threshold as SIFIs based on their risk profile.

Regional Bank Praise 

Regional banks praised the bill and released a paper showing the $50 billion asset threshold the Dodd-Frank Act uses to designate banks as systemically important was never intended to serve as a risk threshold — and that more accurate measurements exist.

“Congress has a chance to establish a new regime that gives regulators flexibility to protect the financial system from systemic threats, while allowing those banks who pose no systemic risk from rules and costs that make no sense,” said William Moore, executive director of the Regional Bank Coalition.

Seiberg sees a path forward for Congress to raise the SIFI designation level, while acknowledging much will depend on whether Democrats are willing to compromise on the broader regulatory relief bill. “The more the debate over the bill is focused on issues other than the SIFI designation level—such as reforming the Federal Reserve or exempting more mortgage from QM—the easier it will be to reach a middle ground on the SIFI level.”

Community Banks 

Smaller banks are given relief under the bill as well. The package calls for adjusting the Federal Deposit Insurance Act to increase the number of banks that qualify for an 18-month on-site examination cycle—as opposed to a 12-month cycle—by raising the current asset threshold to $1 billion from $500 million.

Furthermore, Shelby's proposal gives highly-rated community banks the opportunity to submit a short-form call report in the first and third quarters of each year. An Independent Community Bankers of America survey of community banks last year found 98 percent of respondents said the short-form call report would reduce their regulatory burden, and 72 percent said the reduction would be substantial.

In addition, Shelby's bill amends Section 13 of the Bank Holding Company Act to exempt from the Volcker rule banks with $10 billion or less in assets. The Volcker rule implements Dodd-Frank's Section 619 requiring limitations on proprietary trading and investment in hedge funds by banks. Not only have community banks sought relief, a prominent regulator, Federal Reserve Governor Daniel Tarullo, has said the concerns addressed by the rule are substantially greater at bigger banks.

Bill Addresses Mortgages 

Shelby's bill also addresses mortgages. Specifically, it has language that would alter the qualified mortgage (QM) rule in order to include a safe harbor from litigation for certain loans held in a bank’s portfolio regardless of the bank's size or footprint. QM is a part of mortgage underwriting rules and servicing standards that were issued by the Consumer Financial Protection Bureau in 2013 and took effect last year.

The Shelby bill would allow all residential mortgages that remain on a bank balance sheet to qualify for the CFPB's QM safe harbor to the ability-to-repay standard despite the lender's size. Currently, loans held by banks with less than $2 billion in assets qualify for QM exemption.

Isaac Boltansky, a policy analyst at Compass Point Research & Trading LLC, said in a May 12 market note he expects “a considerable amount of push-back” from Senate Democrats on the safe harbor expansion.

Provisions from the Past 

Some provisions of Shelby's bill have appeared in other legislation in the current Congress and during its last session. For instance, Section 101 of the bill amends the Gramm-Leach-Bliley Act to provide relief for banks from annual written privacy policy notice requirements.

In April, the House passed H.R. 601, which would eliminate the current requirement that banks must mail to all customers annual privacy notices explaining information-sharing practices, even when a financial institution’s privacy policies haven't changed. Rep. Blaine Luetkemeyer’s (R-Mo.) bill would require banks and credit unions to provide information only if privacy policies have changed at the financial institution. The measure had been passed in the House in the 112th Congress and 113th Congress, but the Senate has not considered the bill.

Another part of the Shelby bill amends the Truth in Lending Act to exclude from the computation of points and fees any escrow for future payment of insurance. Rep. Bill Huizenga (R-Mich.) proposed a similar bill in the 113th Congress, and reintroduced it this year.

Supporters say H.R. 685 provides clarity to the calculation of points and fees, allowing more loans to qualify as qualified mortgages and increasing options for borrowers. The Obama administration, however, targeted the bill for veto, saying it would weaken Dodd-Frank. In an April 13 statement, the White House Office of Management and Budget said H.R. 685 would change TILA to allow certain charges to be excluded from the definition of points and fees even when the lender or its affiliates receives the fees.

“By exempting certain fees from the three-percent cap, H.R. 685 would allow lenders to increase the cost of loans and still be eligible for ‘qualified mortgage' treatment. This revision risks eroding consumer protections and returning the mortgage market to the days of careless lending focused on short-term profits,” the statement said.

Richard Hunt, the president of the Consumer Bankers Association, said that given the bipartisan support for a number of the bill's provisions in the past, his group hopes Republicans and Democrats can work together in the coming days to advance the changes.

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