InfoBytes, Regulatory Restructuring Report, Issue Eleven, November 13, 2009
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Senator Dodd Releases Financial Regulatory Reform Legislation; House Financial Services Considering Systemic Risk Legislation
Senate Banking Committee Chairman Dodd Releases Financial Reform Legislation. On November 10, Senate Banking Committee Chairman Christopher Dodd (D-CT) released a draft of the bill (the Dodd bill) that will serve as the primary vehicle for financial regulatory reform efforts in the Senate. In contrast to the piecemeal approach to consideration and passage taken by House Financial Services Committee Chairman Barney Frank (D-MA), Chairman Dodd included all of the relevant financial reform proposals in one large bill. No definitive timeline has been set for considering the legislation in the Senate Banking Committee, although some public statements suggest that the bill may be considered in Committee in mid-December. Notably, the Dodd bill was announced without any support from the Senate Republicans.
As anticipated, some pieces of the legislation differ significantly from both the House legislation and the proposals of the Obama Administration, most notably the creation of one single bank regulator to oversee the financial system. Senator Dodd’s proposal would not only combine the Office of Thrift Supervision and the Office of the Comptroller of the Currency, but also remove bank supervision authority from both the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board, and place authority in the "Financial Institutions Regulatory Administration" (FIRA). Within this new agency, Senator Dodd would create and house the new Consumer Financial Protection Agency (CFPA).
Senator Dodd’s CFPA language is substantially similar to the "discussion draft" released by Rep. Frank (D-MA) on September 25, which has become H.R. 3126 (reported in InfoBytes, Regulatory Restructuring Report, Issue Nine, Oct. 6, 2009). However, the Dodd bill does not contain any amended language added to H.R. 3126 during its markup (see InfoBytes, Regulatory Restructuring Report, Issue Ten Oct. 27, 2009 for a discussion of the markup). Therefore, currently, Dodd’s bill does not (i) relax the examination standards for banks with less than $10 billion in assets, (ii) carve out insurance products, (iii) include remittance transfers under the scope of the CFPA, and (iv) revise the broad preemption language to ostensibly codify the Barnett Bank case standard for nationally-chartered institutions. Instead, both nationally-chartered institutions and their subsidiaries would be subject to state consumer protection laws.
Independent of the House amendments, the Dodd bill contains some important differences relating to the CFPA title of the bill. Most significantly, the Dodd bill puts in place a 5-member Board, with one member servicing as the CFPA Director, to lead the CFPA rather than the single-director model favored by Rep. Frank. The Dodd bill also brings under the title of "enumerated consumer laws" the Community Reinvestment Act, Consumer Leasing Act, Fair Credit Billing Act and the Home Ownership and Equity Protection Act. In addition, under the Dodd bill the CFPA could define by rule any activity as a "financial activity," including any activity (i) entered into or conducted as a subterfuge, or (ii) with a purpose to evade the bill’s requirements or consumer laws. The "catch-all" provision in the House language is arguably more narrow; under that bill, the CFPA Director could bring under the definition of "financial activity" (i) an activity with a substantial likelihood of having a material adverse impact on the creditworthiness or financial well-being of consumers, or (ii) an activity incidental or complimentary to any other CFPA-regulated financial activity.
Another significant piece of the Dodd bill is the title devoted to regulating "systemic risk" and institutions that are "too big to fail." In particular, the Dodd bill would create the Agency for Financial Stability (AFS), run by a nine-member board of directors, whose purpose is to (i) identify risks to the stability of the financial system as a whole, (ii) promote market discipline by "eliminating expectations" that the U.S. Government would shield shareholders of complex financial institutions in the case of a failure, and (iii) respond to emerging risks presented by financial activities and products that could threaten the stability of U.S. financial markets. AFS would have the ability to require complex institutions (called "specified financial companies") to submit to enhanced supervision and prudential standards, and also to write and promulgate rules for capital, leverage, liquidity, risk management and other requirements for large, complex institutions. In addition, AFS could identify and require a bank holding company, or a non-bank financial company, to be subject to enhanced supervision and prudential requirements, upon determining that the failure of such institution could pose a threat to the financial stability of the US. Furthermore, AFS could, after notice and an opportunity for hearing, require a specified financial company that it determines could threaten the stability of the U.S. to (i) sell or otherwise transfer assets, (ii) terminate one or more activities, or (iii) impose activity restrictions or conditions. The Dodd bill also includes a new resolution authority regime to wind down complex institutions whose failure would have "serious adverse effects on financial stability or economic conditions" in the U.S. The FDIC will serve as the resolution authority under the proposal.
Finally, the Dodd bill would require the Securities and Exchange Commission and the new FIRA to adopt regulations that would mandate that any securitizer retains an economic interest in a "material portion of the credit risk" of any asset included in an asset-backed security that is sold or transferred, which should be not less than 10% of the credit risk.
A copy of the full text of the Dodd bill is available at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf, and a summary of the bill is available at http://banking.senate.gov/public/_files/FinancialReformDiscussionDraftRevised111009.pdf.
House Financial Services Committee Considering Systemic Risk Bill. On November 4, the House Financial Services Committee (the Committee) began a multi-day markup of the "Financial Stability Improvement Act," the piece of the financial regulatory reform plan that would address systemic risk and "too big to fail" institutions. The draft legislation, which will be reported as H.R. 3996, would accomplish a number of tasks aimed at reducing the likelihood that the failure of one or a couple large institutions would threaten the stability of the entire financial system. In particular, as currently drafted, the bill would:
- Establish the Financial Services Oversight Council, with the tasks of, among other things, monitoring the financial marketplace to identify threats to its stability, designating certain institutions (called "Identified Financial Holding Companies") and certain products that should be subject to heightened prudential standards, and resolving jurisdictional disputes;
- Revise holding company regulation to extend to non-bank financial institutions, Industrial Loan Companies, and other nonbank banks, as well as thrift holding companies;
- Provide for resolution authority to wind-down complex financial companies, housed in the Federal Deposit Insurance Corporation; and
- Require the banking regulatory agencies and the Securities and Exchange Commission to establish regulations that will require creditors to retain a portion of the credit risk of any loan transferred or sold into the secondary market (which, for most institutions, should be at least 10%).
The bill began markup the week of November 2, and the Committee has set aside November 17 through November 20 to finish consideration of the bill.