“Regulatory Relief” for Banking: Selected
Legislation in the 114th Congress
Sean M. Hoskins, Coordinator
Analyst in Financial Economics
Raj Gnanarajah
Analyst in Financial Economics
Marc Labonte
Specialist in Macroeconomic Policy
Edward V. Murphy
Specialist in Financial Economics
Gary Shorter
Specialist in Financial Economics
May 14October 15, 2015
Congressional Research Service
7-5700
www.crs.gov
R44035
“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
Summary
The 114th Congress is considering legislation to provide “regulatory relief” for banks. The need
for this relief, some argue, results from new regulations introduced in response to vulnerabilities
that were identified during the financial crisis that began in 2007. Some have contended that the
increased regulatory burden —the cost associated with government regulation and its
implementation—is resulting in significant costs that restrain economic growth and
consumers’ access to credit. Regulatory burden is the cost associated with government regulation
and its implementation.
access to credit. Others, however, believe the current regulatory structure strengthens
financial financial
stability and increases protections for consumers, and they are concerned that regulatory
relief for
banks could negatively affect consumers and market stability. Regulatory relief
proposals,
therefore, may involve a trade-off between reducing costs associated with regulatory
burden and
reducing benefits of regulation.
The bills analyzed in this report propose to provideThis report discusses regulatory relief to banks in a number of
different ways. Title VIII of H.R. 37 would extend the phase-in period for a provision of the
Volcker Rule. Title III of H.R. 37 would expand exemptions on capital issuance to include thrifts.
Similarly, H.R. 650, H.R. 1259, and H.R. 1529 would expand exemptions from mortgage
regulations. H.R. 601 would limit the circumstances under which reporting requirements about
privacy notices are triggered. H.R. 685 would change the definition of points and fees associated
with a mortgage to exclude certain costs from a regulatory requirement. H.R. 1408 would delay
the implementation of new capital requirements until regulators conduct a study of their impact
on mortgage servicing assets (MSAs).
Banking regulation has various policy goals, and the bills under consideration span multiple
policy areas. H.R. 601, H.R. 650, H.R. 685, H.R. 1259, and H.R. 1529 are examples of bills that
address a trade-off between reducing the regulatory burden of banks and reducing consumer
protection. H.R. 1408 and Title VIII of H.R. 37 are examples of legislation that attempt to
reconcile a trade-off between safety and soundness and regulatory burden. Title III of H.R. 37 is
an example of legislation with a trade-off between investor protection and the regulatory burden
on thrifts. Some of these proposals modify new regulations, wheras others modify regulations that
predate the crisis.
Several of the bills mentioned above would modify regulations issued by the Consumer Financial
Protection Bureau (CFPB), a regulator created by the Dodd-Frank Act (P.L. 111-203) to provide
an increased regulatory emphasis on consumer protection. The Dodd-Frank Act gave the CFPB
new authority and transferred existing authorities to it from the banking regulators. These bills
could be viewed in light of a broader policy debate about whether the CFPB has struck the
appropriate balance between consumer protection and regulatory burden and whether
congressional action is needed to achieve a more desirable balance.
This report discusses regulatory relief legislation for banks in the 114th Congress that, at the time
this report was published, has seen floor action or has been ordered to be reported by a
committee. If Congress acts on additional legislation, the report will be updated to include it.
Congressional Research Service
“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
Contents
Introduction...................................................................................................................................... 1
Types of Regulatory Relief Proposals ....................................................................................... 2
H.R. 37: Promoting Job Creation and Reducing Small Business Burdens Act ............................... 3
Title III: Holding Company Registration Threshold Equalization Act ...................................... 3
Title VIII: Restoring Proven Financing for American Employers Act ...................................... 5
H.R. 601: Eliminate Privacy Notice Confusion Act ........................................................................ 6
H.R. 650: Preserving Access to Manufactured Housing Act of 2015 .............................................. 7
H.R. 685: Mortgage Choice Act of 2015 ....................................................................................... 11
H.R. 1259: Helping Expand Lending Practices in Rural Communities Act .................................. 15
H.R. 1408: Mortgage Servicing Asset Capital Requirements Act of 2015 .................................... 17
H.R. 1529: Community Institution Mortgage Relief Act of 2015 ................................................. 19
Contacts
Author Contact Information........................................................................................................... 24
Congressional Research Service
“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
Introduction
The 114th Congress is considering legislation to provide “regulatory relief” for banks.1 The need
for such relief, some argue, results from the increased regulation that was applied in response to
vulnerabilities that became evident during the financial crisis that began in 2007. In the aftermath
of the crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act;
P.L. 111-203), a wide-ranging package of regulatory reform legislation, was enacted.2 As financial
regulators have implemented the Dodd-Frank Act and other reforms, some in Congress claim that
the pendulum has swung too far toward excessive regulation. They argue that the additional
regulation has resulted in significant costs that have stymied economic growth and restricted
consumers’ access to credit. Others, however, believe the current regulatory structure has
strengthened financial stability and increased protections for consumers. They are concerned that
regulatory relief for banks could negatively affect consumers and market stability.
legislation for banks in the 114th Congress that, at the time
this report was published, has seen floor action or has been ordered to be reported by a
committee. Many, but not all, of the bills would make changes to the Dodd-Frank Act (P.L. 111203), wide ranging financial reform enacted in response to the financial crisis.
The bills analyzed in this report would provide targeted regulatory relief in a number of different
areas:
Safety and Soundness Regulations. Safety and soundness, or prudential,
regulation is designed to ensure that a bank maintains profitability and avoids
failure. After many banks failed during the financial crisis, the reforms
implemented in the wake of the crisis were intended to make banks less likely to
fail. While some view these efforts as essential to ensuring that the banking
system is safe, others view the reforms as having gone too far and imposing
excessive costs on banks. Critics of the status quo have proposed several bills to
reduce the burden associated with safety and soundness regulations.
Mortgage and Consumer Protection Regulations. Several bills would modify
regulations issued by the Consumer Financial Protection Bureau (CFPB), a
regulator created by the Dodd-Frank Act to provide an increased regulatory
emphasis on consumer protection. The Dodd-Frank Act gave the CFPB new
authority and transferred existing authorities to it from the banking regulators.
Many regulatory relief proposals could be viewed in light of a broader policy
debate about whether the CFPB has struck the appropriate balance between
consumer protection and regulatory burden and whether congressional action is
needed to achieve a more desirable balance. One legislative focus has been
several mortgage-related CFPB rulemakings pursuant to the Dodd-Frank Act.
Supervision and Enforcement. Supervision refers to regulators’ power to
examine banks, instruct banks to modify their behaviors, and to impose reporting
requirements on banks to ensure compliance with rules. Enforcement is the
authority to take certain legal actions, such as impose fines, against an institution
that fails to comply with rules and laws. Although regulators generally view their
supervisory and enforcement actions as striking the appropriate balance between
ensuring that institutions are well managed and minimizing the burden facing
banks, others believe the regulators are overreaching and preventing banks from
serving their customers and therefore have introduced legislation to address these
concerns.
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“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
Capital Issuance. Banks are partly funded by issuing capital to investors.
Disclosure requirements and investor protections may better inform investors
about the risks that they are assuming but can make it more costly for institutions
to raise capital. Whereas some view these existing regulatory requirements as
important safeguards that ensure investors are making educated decisions, others
see them as unnecessary red tape that stymies capital formation. The capital
issuance legislative proposals discussed in this report are generally geared toward
making it easier for financial institutions to raise funds.
Congress faces the question of how much discretion to give regulators in granting relief. Some
bills leave it up to the regulators to determine how much relief should be granted, whereas others
make relief mandatory. Some bills provide relief in areas regulators have already reduced
regulatory burden. Some of the legislation is focused on providing relief for small banks, whereas
other bills provide relief to the entire industry.
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“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
Contents
Introduction ..................................................................................................................................... 1
Regulatory Burden .................................................................................................................... 2
Types of Regulatory Relief Proposals ....................................................................................... 2
Safety and Soundness Regulations .................................................................................................. 3
Volcker Rule .............................................................................................................................. 4
Exemption for Community Banks (S. 1484/S. 1910) ......................................................... 4
CLOs and the Volcker Rule (H.R. 37) ................................................................................ 5
Change to the “Collins Amendment” (S. 1484/S. 1910) ........................................................... 6
Exemptive Authority (S. 1910) ................................................................................................. 7
Capital Treatment of Mortgage Servicing Assets (H.R. 1408 and S. 1484/S. 1910) ................ 7
Thresholds for Enhanced Regulation (S. 1484/S. 1910) ........................................................... 9
The Dodd-Frank Act and the EGRPRA Process (S. 1484/S. 1910) ......................................... 11
Mortgage and Consumer Protection Regulations .......................................................................... 13
Manufactured Housing (H.R. 650 and S. 1484/S. 1910) ........................................................ 13
Points and Fees (H.R. 685 and S. 1484/S. 1910) .................................................................... 17
Rural Lending (H.R. 1259 and S. 1484/S. 1910) .................................................................... 21
Mortgage Escrow and Servicing (H.R. 1529) ......................................................................... 23
Portfolio Qualified Mortgage (H.R. 1210 and S. 1484/S. 1910)............................................. 27
Integrated Disclosure Forms (H.R. 3192 and S. 1484/S. 1910) .............................................. 30
Privacy Notifications (H.R. 601 and S. 1484/S. 1910) ........................................................... 33
Supervision and Enforcement........................................................................................................ 33
Bank Exams ............................................................................................................................ 34
Exam Frequency for Small Banks (H.R. 1553 and S. 1484/S. 1910) ............................... 34
Exam Ombudsman and Appeals Process (H.R. 1941 and S. 1484/S. 1910)..................... 36
Call Report Reform (S. 1484/S. 1910) .................................................................................... 38
CFPB Supervisory Threshold (S. 1484/S. 1910) .................................................................... 40
Operation Choke Point (H.R. 766, H.R. 2578, S.Con.Res. 11, and S. 1484/S. 1910) ............ 41
Capital Issuance ............................................................................................................................. 44
Holding Company Registration Threshold Equalization (H.R. 37 and S. 1484/S.
1910) .................................................................................................................................... 44
Mutual Holding Company Dividend Waivers (S. 1484/S. 1910) ............................................ 46
Tables
Table 1. Selected Legislative Proposals Changing a Size Threshold .............................................. 3
Table A-1. Provisions Indexed for GDP Growth ........................................................................... 49
Table B-1. Provisions in the Financial Regulatory Improvement Act Covered in this
Report ......................................................................................................................................... 51
Appendixes
Appendix A. Indexing of Bank Regulatory Relief Provisions for GDP Growth ........................... 49
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“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
Appendix B. Provisions in the Financial Regulatory Improvement Act Covered in this
Report ......................................................................................................................................... 51
Contacts
Author Contact Information .......................................................................................................... 52
Congressional Research Service
“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
Introduction
The 114th Congress is considering legislation to provide “regulatory relief” for banks.1 The need
for such relief, some argue, results from the increased regulation that was applied in response to
vulnerabilities that became evident during the financial crisis that began in 2007. The 114th
Congress is considering legislation to provide “regulatory relief” for banks. In the aftermath of
the crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),2 a
wide-ranging package of regulatory reform legislation, was enacted.3 Bank failures spiked during
the crisis, and changes to banking regulation were a key part of financial reform. As financial
regulators have implemented the Dodd-Frank Act and other reforms, some in Congress claim that
the pendulum has swung too far toward excessive regulation. They argue that the additional
regulation has resulted in significant costs that have stymied economic growth and restricted
consumers’ access to credit. Others, however, contend the current regulatory structure has
strengthened financial stability and increased protections for consumers. They are concerned that
regulatory relief for banks could negatively affect consumers and market stability.
This report assesses banking regulatory relief proposals contained in bills that have been marked
up by committee or have seen floor action in the 114th Congress. In the House, proposals have
generally been considered in individual bills. In the Senate, proposals have been combined into
one legislative package, the Financial Regulatory Improvement Act (S. 1484/S. 1910).
The Financial Regulatory Improvement Act
The Financial Regulatory Improvement Act (S. 1484) was reported by the Senate Banking Committee on June 2, 2015.
It was then included, along with other provisions related to financial regulation, in the FY2016 Financial Services and
General Government Appropriations Act (S. 1910), which was reported by the Senate Appropriations Committee on
July 30, 2015. The Congressional Budget Office (CBO) estimated that S. 1484 “would increase net direct spending by
$284 million and reduce revenues by $93 million over the next 10 years, leading to a net increase in the deficit of
$377 million over the 2016-2025 period.”4 Of the $377 million increase in the deficit, CBO attributes $213 million to
an increase in “general administrative costs” and $164 million to provisions affecting systemically important financial
institutions (some of which are banks5). CBO does not provide cost estimates for each section, so it is unclear how
much of the $377 million is related to banking regulatory relief. (This report discusses only those provisions of S.
1484/S. 1910 related to regulatory relief and banking.)
Because banks are involved in many different activities, this report does not address all regulatory
relief proposals that would affect each aspect of a bank’s business (e.g., it does not cover
proposals affecting banks’ involvement in areas such as derivatives) but focuses on those
proposals that address the traditional areas of banking, such as taking deposits and offering
loans.6 Although many of the proposals would modify regulations issued after the crisis, some
would adjust policies that predated the financial crisis and some proposals are characterized as
1
For a summary of the regulatory relief debate, see CRS In Focus IF10162, Introduction to Financial Services:
“Regulatory Relief”, by Sean M. Hoskins and Marc Labonte.
2
P.L. 111-203.
3
For a summary, see CRS Report R41350, The Dodd-Frank Wall Street Reform and Consumer Protection Act:
Background and Summary, coordinated by Baird Webel.
4
Congressional Budget Office, Cost Estimate of S. 1484, July 29, 2015, at https://www.cbo.gov/sites/default/files/
114th-congress-2015-2016/costestimate/s1484.pdf.
5
These provisions are discussed below in the section entitled “Thresholds for Enhanced Regulation S. 1484/S. 1910.”
6
Some of the bills addressed in this report would modify a regulation that applies to banks and nonbanks engaged in a
specific activity.
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“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
technical fixes. Further, the report covers only the regulatory relief banking legislation that has
seen legislative action.
The proposals discussed in this report vary with regard to the type of relief, including to whom
relief would be provided and the manner in which it would be provided. For organizational
purposes, this report classifies regulatory relief proposals into the categories of safety and
soundness, consumer protection, supervision, or capital issuance. For each proposal, the report
explains what the bill would do and the main arguments offered by its supporters and opponents.
Regulatory Burden
In assessing whether regulatory relief is called for or whether a regulation has not gone far
enough, a central question is whether an appropriate trade-off has been struck between the
benefits and costs of regulation. The different objectives and potential benefits of financial
regulation include enhancing the safety and soundness of certain institutions; protecting
consumers and investors from fraud, manipulation, and discrimination; and promoting financial
stability while reducing systemic risk. The costs associated with government regulation are
referred to as regulatory burden.3 The presence of regulatory burden does not necessarily mean
that a regulation is undesirable or should be repealed. A regulation can have benefits that could
outweigh its costs, but the presence of costs means, tautologically, that there is regulatory burden.
Regulatory requirements often are imposed on the providers of financial services, so banks
frequently are the focus of discussions about regulatory burden. But some costs of regulation are
passed on to consumers, so consumers also may benefit from relief. Any benefits to banks or
consumers of regulatory relief, however, would need to be balanced against a potential reduction
to consumer protection and to the other benefits of regulation.
The concept of regulatory burden can be contrasted with the phrase unduly burdensome. Whereas
regulatory burden is about the costs associated with a regulation, unduly burdensome refers to the
balance between benefits and costs. For example, some would consider a regulation to be unduly
burdensome if costs were in excess of benefits or the same benefits could be achieved at a lower
cost. But the mere presence of regulatory burden does not mean that a regulation is unduly
burdensome. Policymakers advocating for regulatory relief argue that the regulatory burden
associated with certain regulations rises to the level of being unduly burdensome for banks,
whereas critics of those relief proposals typically believe the benefits of regulation outweigh the
regulatory burden.
1
For a summary of the regulatory relief debate, see CRS Report IF10162, Introduction to Financial Services:
“Regulatory Relief,” by Sean M. Hoskins and Marc Labonte.
2
For a summary, see CRS Report R41350, The Dodd-Frank Wall Street Reform and Consumer Protection Act:
Background and Summary, coordinated by Baird Webel.
3
Types of Regulatory Relief Proposals
As relief proposals for banks are debated, a useful framework to categorize proposals includes
assessing to whom relief would be provided and how relief would be provided. Relief could be
provided either to all banks to which a regulation applies or to only a subset of banks based on
size, type, or the activities the banks perform. The perceived need for relief for small banks has
been emphasized in the 114th Congress, and Table 1 summarizes legislative proposals in this
report that have a size threshold.7
7
For an analysis of the regulatory burden on small banks, see CRS Report R43999, An Analysis of the Regulatory
Burden on Small Banks, by Sean M. Hoskins and Marc Labonte.
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Types of Regulatory Relief Proposals
As relief proposals for banks are debated, a useful framework to categorize proposals includes
assessing to whom relief would be provided and how relief would be provided. Relief could be
provided either to all banks to which a regulation applies or to only a subset of banks based on
size, type, or the activities the banks perform. Policymakers also would need to consider whether
relief should be provided, for example, by repealing entire provisions, by providing exemptions
from specific requirements, or by tailoring a requirement so that it still applies to certain entities
but does so in a less burdensome way. Examples of different forms of tailoring are streamlining
the regulation, grandfathering existing firms or types of instruments from the regulation, and
phasing in a new regulation over time.
Some regulatory relief policies can be characterized as forward-looking—focusing on how to
modify the rulemaking process to reduce the burden associated with future rulemakings, such as
strengthening existing cost-benefit analysis requirements on financial regulators to bring them in
to line with executive agency standards. Alternatively, regulatory relief can be backwardlooking—modifying existing regulations. Modifications can be made to regulations stemming
from statutory requirements, regulatory or judicial interpretations of statute, or requirements
originating from regulators’ broad discretionary powers.
This report assesses backward-looking banking regulatory relief proposals that have been marked
up by committee or have seen floor action in the 114th Congress. Because banks are involved in
many different activities, this report does not address all regulatory relief proposals that would
affect each aspect of a bank’s business (e.g., it does not cover proposals affecting banks’
involvement in areas such as derivatives) but focuses on those proposals that address the
traditional areas of banking, such as taking deposits and offering loans.4 The proposals discussed
in this report vary with regard to the type of relief, including to whom relief would be provided
and the manner in which it would be provided. Although many of the proposals would modify
regulations issued after the crisis, some would adjust policies that predated the financial crisis and
some proposals are characterized as technical fixes. Further, the report does not cover banking
legislation that has seen legislative action but does not involve regulatory relief. For each
proposal, the report explains what the bill would do and the main arguments offered by its
supporters and opponents.
4
Some bills would modify a regulation that applies to banks and nonbanks engaged in a specific activity.
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H.R. 37: Promoting Job Creation and Reducing
Small Business Burdens Act
H.R. 37 passed the House on January 14, 2015. It contained 11 titles covering a variety of
financial services issues. This report reviews two titles that apply to banks.
Title III: Holding Company Registration Threshold
Equalization Act5
Title III of H.R. 37 would raise the exemption threshold on the Securities and Exchange
Commission’s (SEC’s) registration for thrift holding companies to match the current exemptions
for bank holding companies (BHCs).
Historically, under the Securities Act of 1933 (P.L. 73-22), banks and BHCs, similar to
nonfinancial firms, generally were required to register securities with the SEC if they had total
assets exceeding $10 million and the shares were held (as per shareholders of record) by 500
shareholders or more. Banks and BHCs also were allowed to stop registering securities with the
SEC, a process known as deregistration, if the number of their shareholders of record fell to 300
shareholders or fewer.
Title VI of the Jumpstart Our Business Startups Act (JOBS Act; P.L. 112-106) raised the SEC
shareholder registration threshold from 500 shareholders to 2,000 shareholders and increased the
upper limit for deregistration from 300 shareholders to 1,200 shareholders for those banks and
nonfinancial firms. In other words, the JOBS Act made it easier for banks and BHCs to increase
the number of their shareholders while remaining unregistered private banks and, if already
registered, to voluntarily deregister while also adding more shareholders.6 The provision went
into effect immediately upon the enactment of the JOBS Act on April 5, 2012.
These changes made by the JOBS Act did not apply to savings and loan holding companies
(SLHCs). Title III of H.R. 37 would amend the Securities Exchange Act of 1934 by extending the
higher registration and deregistration shareholder thresholds in the JOBS Act for banks and BHCs
to SLHCs.7 Savings and loans (also known as thrifts and savings banks) are similar to banks in
that they take deposits and make loans, but their regulation is somewhat different. Over time, the
differences between banks and savings and loans have narrowed.8 Under the provision, an SLHC
would be required to register with the SEC if its assets exceed $10 million and it has 2,000
shareholders of record, up from the current requirement of 500 shareholders of record. SLHCs
5
This section was authored by Gary Shorter, specialist in Financial Economics.
This section largely derives from: Katherine Koops, “The JOBS Act and SEC Deregistration: New Thresholds and
Special Considerations for Banks and Bank Holding Companies,” Bank Bryan Cave Law Firm, June 8, 2012, at
http://www.bankbryancave.com/2012/06/the-jobs-act-and-sec-deregistration-new-thresholds-and-specialconsiderations-for-banks-and-bank-holding-companies/.
7
Similar language was included in H.R. 801 in the 113th Congress. H.R. 801 passed the House on January 14, 2014.
8
See CRS Report R42572, The Consumer Financial Protection Bureau (CFPB): A Legal Analysis, by David H.
Carpenter.
6
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that want to deregister from the SEC would have to have no more than 1,200 shareholders of
record, an increase over the current 300 or fewer shareholders.
Policy Discussion. Generally speaking, the central perceived benefit of SEC registration is to
enhance investor protection by ensuring that investors have access to significant financial and
nonfinancial data about firms and the securities they issue. The cost of SEC registration is the
regulatory burden on the firm issuing securities associated with complying with SEC
requirements, which potentially raises the cost of capital and reduces how much capital a firm can
raise. For small firms, the regulatory burden of registration is thought to be greater than for larger
firms.9
Policymakers attempt to reach the optimal trade-off between costs and benefits of SEC
registration by exempting firms below a certain size from registration requirements. The JOBS
Act raised this threshold for banks, modifying the balance between costs and benefits.
Reports indicate that after passage of the JOBS Act, a number of privately held banks and BHCs
took advantage of Title VI’s reduction in shareholder ownership registration triggers by raising
capital from additional shareholders without having to register with the SEC.10 Some banks also
have taken the opportunity to deregister from the SEC.11 One of the few studies on changes to the
financial health of banks that took advantage of the JOBS Act threshold changes to deregister
found that the act was generally, but not entirely, financially beneficial to banks. For example, it
found that, on average, the legislation resulted in $1.31 in higher net bank income and $3.28
lower pretax expenses for every $1.00 of bank assets and was responsible for $1.54 million in
increased assets per bank employee.12 The study did not attempt to estimate the costs to investors
of reduced disclosure under the changes made by the JOBS Act.
In potentially expanding the exemption threshold on SEC registration for thrift holding
companies, there are two main points to consider. First, should exemption levels from SEC
registration requirements be different for thrifts and savings and loans than for banks? Current
law makes it more difficult for small thrifts to raise capital than for small banks. Second, are the
costs and benefits of registration requirements for small banks better balanced at the higher
thresholds enacted for banks in the JOBS Act or the lower thresholds in current law for thrifts?
9
See Independent Community Bankers of America (ICBA), “ICBA Statement on Senate Passage of JOBS Act,” press
release, March 22, 2012, at http://www.icba.org/news/newsreleasedetail.cfm?ItemNumber=123582.
10
For example, see ICBA, “Key JOBS Act Provision Must Be Addressed to Benefit Thrifts,” press release, September
13, 2012, at http://www.icba.org/files/ICBASites/PDFs/test091312.pdf.
11
For example, see Jeff Blumenthal, “100-plus Banks Deregister Stock since JOBS Act,” Philadelphia Business
Journal, February 15, 2013, at http://www.bizjournals.com/philadelphia/print-edition/2013/02/15/100-plus-banksderegister-stock-since.html; Brian Yurcan, “Small Banks Deregister in Droves Due to JOBS Act,” Bank Tech, May 30,
2012, at http://www.banktech.com/compliance/small-banks-deregister-in-droves-due-to-jobs-act/d/d-id/1295425.
12
Joshua Mitts, Did the JOBS Act Benefit Community Banks? A Regression Discontinuity Study, April 25, 2013, at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2233502.
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Title VIII: Restoring Proven Financing for American
Employers Act13
Title VIII of H.R. 37 would modify a provision of the final rule implementing Section 619 of the
Dodd-Frank Act, also known as the “Volcker Rule.” It would modify the Volcker Rule’s treatment
of certain collateralized loan obligations (CLOs) as impermissible covered fund investments.14 It
would allow banks with investments in certain CLOs issued before January 31, 2014, an
additional two years, until July 21, 2019, to be in compliance with the Volcker Rule.
A CLO is a form of securitization in which a pool of loans (typically, commercial loans) is funded
by issuing securities. CLOs provide nearly $300 billion in financing to U.S. companies.15 The
Volcker Rule has two main parts—it prohibits banks from proprietary trading of “risky” assets
and from “certain relationships” with “risky” investment funds.16 H.R. 37 involves the latter. In
December 2013, five financial regulators issued a final rule defining which funds are considered
risky and therefore prohibited under the Volcker Rule. Many of the trusts used to facilitate CLOs
were included in the definition of risky investment funds. As a result, banks would have to divest
themselves of certain CLO-related securities if the securities conveyed an impermissible interest
in the trust. The Volcker Rule does not ban CLOs or banking organizations from holding CLOs;
rather, it prohibits banking organizations from owning securities conferring ownership-like rights
in CLOs. Regulators already have exercised their discretion to extend the conformance period for
banks to divest themselves of these CLO-related assets to 2016 and could extend until 2017. An
extension beyond 2017 could require additional agency findings. H.R. 37 would extend the
conformance period to 2019 for all covered CLOs.17
H.R. 37 only applies to banks that hold securities issued by existing CLOs funded by commercial
loans. It would limit the extension period for conformance to those CLO securities issued prior to
January 31, 2014. Going forward, bank participation in newly issued CLOs would have to be
structured to comply with the Volcker Rule’s prohibition of bank interests in risky investment
firms.18
Policy Discussion. The potential economic impact of H.R. 37 depends on the characteristics of
CLO-related obligations already held in the banking system. If banks did not expect their CLO
holdings to be prohibited by the Volcker Rule, they may not have made any preparations to
comply with it. Thus, proponents of extending the conformance period argue that rapid divestiture
of CLO-related securities could force banks to sell these securities at a loss, perhaps in fire sales,
13
This section was authored by Edward V. Murphy, specialist in Financial Economics.
The language in Title VIII originally was passed by the House as H.R. 4167 (in the 113th Congress) by voice vote
under suspension on April 29, 2014.
15
U.S. Congress, House Committee on Financial Services, Subcommittee on Capital Markets and Government
Sponsored Enterprises, The Dodd-Frank Act’s Impact on Asset-Backed Securities, Testimony of Meredith Coffey, 113th
Cong., 2nd sess., February 26, 2014.
16
CRS Legal Sidebar, What Companies Must Comply with the Volcker Rule?, David H. Carpenter. “Certain
relationships,” as defined by P.L. 111-203, §619, includes acquiring or retaining “any equity, partnership, or other
ownership interest in or sponsor a hedge fund or a private equity fund.”
17
CRS Legal Sidebar, Congress Contemplates Extending Volcker Rule Conformance Period for CLO Investments,
David Carpenter.
18
CRS Legal Sidebar, What Companies Must Comply with the Volcker Rule?, David H. Carpenter.
14
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if an extension is not granted. They argue that such stress in the banking system may curtail credit
available to small- and medium-sized commercial businesses.19
Opponents of Title VIII of H.R. 37, including the White House, argue that extending the
conformance period would undermine the intent of the Volcker Rule and allow risky securities to
remain in the banking system. They contend that it could result in future destabilizing losses for
banks that hold risky securities.20 On the other hand, H.R. 37 merely changes the grandfathering
date of existing commercial loan-related CLO securities from 2017 to 2019. It would neither
prohibit conforming CLO securities from being created in the future to fund small and medium
businesses nor exempt newly issued CLOs from the Volcker Rule going forward.
H.R. 601: Eliminate Privacy Notice Confusion Act21
H.R. 601 was passed by the House on April 13, 2015.22 It would reduce the number of
circumstances under which financial firms, including banks, were required to send customers
privacy notices. It is an example of a regulatory relief bill amending a law that predates the
financial crisis.
Under a provision of the Gramm-Leach-Bliley Act (15 U.S.C. §6803), financial firms are
required to send customers privacy notices when they establish a relationship with the customer
and annually thereafter. Firms also are required to send customers notices explaining how
customers may opt out of allowing the firm to share their personal information with third parties,
under certain circumstances.23
Under H.R. 601, financial firms would no longer be required to send annual privacy notices if
their privacy policy had not changed. Cases in which third-party information sharing triggers
notification and the opportunity to opt out under current law would remain unchanged.24
Policy Discussion. Financial firms argue that the privacy notice requirement is unduly
burdensome to them and of little value to customers because the notices are lengthy, confusing,
and thus likely to be ignored. Defenders of current law argue that it provides consumer protection
and safeguards privacy.25
19
Hamilton Place Strategies, Regulating Risk: Implementation of New Regulation, January 2015, at
http://hamiltonplacestrategies.com/sites/default/files/newsfiles/HPS%20White%20Paper%20%20Regulating%20Risk%20-%20Volcker%20and%20CLOs.pdf.
20
Executive Office of the President, Statement of Administrative Policy, January 12, 2015, at
http://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr37r_20150112.pdf.
21
This section was authored by Marc Labonte, specialist in Macroeconomic Policy.
22
A similar bill in the 113th Congress, H.R. 749, was ordered to be reported by the House Financial Services
Committee.
23
For a summary of the requirement, see Federal Trade Commission, In Brief: The Financial Privacy Requirements of
the Gramm-Leach-Bliley Act, July 2002, at https://www.ftc.gov/tips-advice/business-center/guidance/brief-financialprivacy-requirements-gramm-leach-bliley-act.
24
U.S. Congress, House Committee on Financial Services, Eliminate Privacy Notice Confusion Act, report to
accompany H.R. 601, 114th Cong., 1st sess., April 13, 2015, H.Rept. 114-59.
25
CFPB, 12 C.F.R. Part 1016, Docket No. CFPB–2014–0010, RIN 3170–AA39, p. 64059, at http://www.gpo.gov/
fdsys/pkg/FR-2014-10-28/pdf/2014-25299.pdf; http://fsroundtable.org/hr-601-eliminate-privacy-notice-confusion-act/.
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The Consumer Financial Protection Bureau (CFPB) contends that a rule it issued in 2014
modifying Regulation P (which implements 15 U.S.C. §6803) will reduce the regulatory burden
of compliance without undermining the policy’s benefits.26 The 2014 CFPB rule allows firms
under certain conditions to post privacy notices on the Internet rather than mail hard copies to
customers. The rule requires firms to continue sending printed notices when privacy policies are
changed or information is shared with third parties. Firms are required to provide annual
notification that privacy notices are available on the Internet and to provide printed notices upon
request. Proponents of H.R. 601 believe additional relief is needed beyond what was provided in
the 2014 CFPB rule.
The Congressional Budget Office (CBO) estimates that H.R. 601 as ordered reported would result
in an increase in direct spending that would not be significant.27 The bill would not affect
revenues or discretionary spending.
H.R. 650: Preserving Access to Manufactured
Housing Act of 201528
H.R. 650 was passed by the House on April 14, 2015.29 H.R. 650 as passed would affect the
market for manufactured housing by amending the definitions of mortgage originator and highcost mortgage in the Truth-in-Lending Act (TILA; 15 U.S.C. §§1601, et seq.).30 Manufactured
homes, which often are located in more rural areas, are a type of single-family housing that is
factory built and transported to a placement site rather than constructed on-site.31 When
purchasing a manufactured home, a consumer does not necessarily have to own the land on which
the manufactured home is placed. Instead, the consumer could lease the land, a practice that is
different from what is often done with a site-built home.32 Manufactured housing also differs
from site-built properties in other ways, such as which consumer protection laws apply to the
transaction and how state laws title manufactured housing.33
The Dodd-Frank Act changed the definitions for mortgage originator and high-cost mortgage to
provide additional consumer protections to borrowers for most types of housing transactions,
including manufactured housing. Some argue that these protections restrict credit for
manufactured housing. H.R. 650 would modify the definitions of mortgage originator and high26
Consumer Financial Protection Bureau (CFPB), 12 C.F.R. Part 1016, Docket No. CFPB–2014–0010, RIN 3170–
AA39, at http://www.gpo.gov/fdsys/pkg/FR-2014-10-28/pdf/2014-25299.pdf.
27
Congressional Budget Office (CBO), Cost Estimate of H.R. 601, April 7, 2015, at https://www.cbo.gov/sites/default/
files/cbofiles/attachments/hr601.pdf.
28
This section was authored by Sean Hoskins, analyst in Financial Economics.
29
A similar bill in the 113th Congress, H.R. 1779, was ordered to be reported by the House Financial Services
Committee.
30
15 U.S.C. §§1601 et seq.
31
CFPB, Manufactured-housing consumer finance in the United States, September 2014, p. 9, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
32
According to the CFPB, about “three-fifths of manufactured-housing residents who own their home also own the
land it is sited on.” CFPB, Manufactured-housing consumer finance in the United States, September 2014, p. 6, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
33
For more, see CFPB, Manufactured-housing consumer finance in the United States, September 2014, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
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cost mortgage with the goal of increasing credit. Critics of the proposal are concerned about the
effect on consumers of reducing the consumer protections. The first part of H.R. 650 would not
affect banks but would affect manufactured-home retailers. It is discussed briefly to provide
context for the second part of H.R. 650, which would affect banks more directly.
Definition of Mortgage Originator. In response to problems in the mortgage market when the
housing bubble burst, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008
(SAFE Act; P.L. 110-289) and the Dodd-Frank Act established new requirements for mortgage
originators’ licensing, registration, compensation, training, and other practices. A mortgage
originator is someone who, among other things, “(i) takes a residential mortgage loan application;
(ii) assists a consumer in obtaining or applying to obtain a residential mortgage loan; or (iii)
offers or negotiates terms of a residential mortgage loan.”34 The current definition in
implementing the regulation excludes employees of manufactured-home retailers under certain
circumstances, such as “if they do not take a consumer credit application, offer or negotiate credit
terms, or advise a consumer on credit terms.”35 H.R. 650 would expand the exception such that
retailers of manufactured homes or their employees would not be considered mortgage originators
unless they received more compensation for a sale that included a loan than for a sale that did not
include a loan.
Policy Discussion. Supporters of H.R. 650 argue that the current definition of mortgage
originator is too broad and negatively affects the manufactured-housing market. Manufacturedhome retailers “have been forced to stop providing technical assistance to consumers during the
process of home buying” because of concerns that providing this assistance will result in the
retailers being deemed loan originators, which in turn will lead to costs that the manufacturedhome retailers do not want to bear, according to supporters.36 Supporters of the bill argue that this
situation has unnecessarily complicated the purchase process for consumers. H.R. 650 would
allow manufactured-home retailers to provide minimal assistance to consumers for which they
would not be compensated.
Opponents of H.R. 650, however, note that the existing protections are intended to prevent
retailers from pressuring consumers into making their purchase through a particular creditor.
Expanding the exemption, they argue, “would perpetuate the conflicts of interest and steering that
plague this industry and allow lenders to pass additional costs on to consumers.”37
High-Cost Mortgage. H.R. 650 also would narrow the definition of high-cost mortgage for
manufactured housing. A high-cost mortgage often is referred to as a “HOEPA loan” because the
Home Ownership and Equity Protection Act (HOEPA; P.L. 103-325) provides additional
consumer protections to borrowers for certain high-cost transactions involving a borrower’s
home. The Dodd-Frank Act expanded the protections available to high-cost mortgages by having
more types of mortgage transactions be covered and by lowering the thresholds at which a
34
P.L. 111-203, §1401. The definition of mortgage originator has multiple exemptions, such as for those who perform
primarily clerical or administrative tasks in support of a mortgage originator or those who engage in certain forms of
seller financing.
35
CFPB, Manufactured-housing consumer finance in the United States, September 2014, p. 51, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
36
Rep. Stephen Fincher, Congressional Record, vol. 161, part 53 (April 14, 2015), p. H2178.
37
Corporation for Enterprise Development, “Consumer Groups Sign On Letter Opposing H.R. 650,” at http://cfed.org/
assets/pdfs/policy/federal/consumer_groups_sign_on_letter_opposing_HR_650.pdf.
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mortgage would be deemed high cost. The CFPB issued a rule implementing those changes in
2013.38
Consumers receive additional protections on high-cost transactions, such as “special disclosure
requirements and restrictions on loan terms, and borrowers in high-cost mortgages have enhanced
remedies for violations of the law.”39 Prior to originating the mortgage, lenders are required to
receive “written certification that the consumer has obtained counseling on the advisability of the
mortgage from a counselor that is approved to provide such counseling.”40 Because of these
protections and the added legal liability associated with originating a high-cost mortgage,
originating a HOEPA loan is generally considered more costly for a lender (which could be either
a bank or a nonbank) than originating a non-HOEPA loan. This is an example of the trade-off
between consumer protection and credit availability—if a loan is deemed high-cost, the consumer
has added protections, but the lender may be less willing to originate it.
A mortgage is high cost if certain thresholds are breached related to the mortgage’s (1) annual
percentage rate (APR) or (2) points and fees.41
The APR is a measure of how much a loan costs expressed as an annualized rate. Computation of
the APR includes the interest rate as well as certain fees, such as compensation to the lender and
other expenses. Under the APR test, a loan is considered to be a high-cost mortgage if the APR
exceeds the average prime offer rate (APOR, an estimate of the market mortgage rate based on a
survey of rates) by more than 6.5 percentage points for most mortgages or by 8.5 percentage
points for certain loans under $50,000.42 H.R. 650 would increase the threshold for the latter
category to 10 percentage points above the APOR for certain transactions involving manufactured
housing below $75,000.
Points and fees, the second factor, refers to certain costs associated with originating the mortgage.
The term point refers to compensation paid up front to the lender by the borrower. A point is
expressed as a percentage of the loan amount, with one point equal to 1% of the loan amount.43
The fees included in the definition of points and fees include prepayment penalties, certain types
of insurance premiums, and other real estate-related fees. Under the points and fees test, the
mortgage is high cost if the points and fees exceed (1) 5% of the total amount borrowed for most
loans in excess of $20,000 or (2) the lesser of 8% of the total amount or $1,000 for loans of less
than $20,000.44
H.R. 650 would create a third category for the points and fees test for manufactured-housing
loans. Under the third category, certain types of manufactured-housing transactions would be
38
CFPB, “High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation
Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X),” 78
Federal Register 6855, January 31, 2013.
39
Ibid, 6856.
40
12 C.F.R. §1026.34.
41
In addition to the APR test and points and fees test, a mortgage can be high cost if there is a prepayment penalty that
meets certain criteria, although that issue is not addressed by H.R. 650. See Ibid.
42
15 U.S.C. §1602(bb). Other thresholds apply to junior liens.
43
In some cases, a point may be excluded from the definition of points and fees if the point results in a reduction in the
interest rate that is charged to the borrower. See P.L. 111-203, §1412.
44
15 U.S.C. §1602(bb).
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deemed high cost if the points and fees on loans less than $75,000 were greater than 5% of the
total loan amount or greater than $3,000. This higher threshold would make it less likely that a
manufactured-housing loan would be high cost under the points and fees test, all else equal.
Policy Discussion. Data from the CFPB’s September 2014 report on the manufactured-housing
market indicate that manufactured-housing loans are more likely to be HOEPA loans than loans
for traditional, site-built homes. The CFPB analyzed data for originations from 2012, which was
before the more expansive Dodd-Frank definition of high-cost mortgage took effect. The CFPB
estimated the share of the 2012 market that would have violated the APR test (which is just one of
the high-cost triggers) had the current thresholds been in effect and found that “0.2 percent of all
home-purchase loans in the U.S. have an interest rate that exceeds the HOEPA APR threshold.
This fraction is only 0.01 percent for site-built homes but nearly 17 percent for manufactured
homes.”45
As the CFPB notes, this estimate of the share of HOEPA loans may understate the true share
because it does not include the points and fees test, but it also may overstate the true share
because lenders may have adjusted the points, fees, interest rate, profitability of the loan, and
other factors so that fewer loans would have been high-cost had the new thresholds been in
effect.46 Either way, the CFPB’s data are illustrative of the fact that a larger share of
manufactured-housing loans than site-built loans is likely to be affected by the high-cost
mortgage requirements. The CFPB stated that the changes to HOEPA made by Dodd-Frank likely
would lead to a larger share of all loans being high cost, but “the resulting increase in the share of
high-cost mortgages was much larger for manufactured-housing loans than for loans on site-built
homes.”47
Manufactured-housing loans are more likely to be high cost for several reasons. Manufacturedhousing loans usually are smaller than loans for site-built properties. The CFPB’s report found
that the “median loan amount for site-built home purchase was $176,000, more than three times
the manufactured home purchase loan median of $55,000.”48 Because manufactured-housing
loans often are for a smaller amount, they are likely to have higher APR and points and fees
ratios; the APR and points and fees computations include some fixed costs that do not vary
proportionately to the size of the loan. All else equal, smaller loans would be more likely to
breach the thresholds. To account for this, the APR test and the points and fees test have
thresholds that vary based on the size of the loan, as explained above. Additionally, because of
how some states title manufactured homes and other unique aspects of the manufactured-housing
market, a manufactured-housing loan is likely to have a higher interest rate than a loan involving
a site-built home (all else equal), which makes it more likely that the loan will violate the APR
threshold.49
Supporters of H.R. 650 argue that the high-cost thresholds are poorly targeted for manufacturedhousing loans because the fixed costs and higher rates associated with smaller manufactured-
45
CFPB, Manufactured-housing consumer finance in the United States, September 2014, pp. 35-36, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
46
Ibid, p. 48.
47
Ibid.
48
Ibid, p. 30.
49
Ibid, p. 6.
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housing loans make it more likely that the thresholds will be exceeded.50 The existing adjustments
for small-dollar loans are insufficient and allow too many manufactured-housing loans to be high
cost. As a result, critics of the current threshold argue, credit will be restricted as some lenders
will be less inclined to bear the expense and liability associated with originating high-cost
manufactured-housing loans. H.R. 650, they claim, is important for ensuring that credit is
available for borrowers who want to purchase a manufactured home.
Opponents of H.R. 650 argue that the APR and points and fees thresholds already are adjusted for
the size of the loan and do not need to be further modified. Doing so would weaken consumer
protections, they argue, for borrowers who are likely to have lower incomes and be more
“economically vulnerable consumers.”51 The Obama Administration has said that “if the
President were presented with H.R. 650, his senior advisors would recommend that he veto the
bill.”52
CBO estimates that H.R. 650 as ordered reported “would increase direct spending by less than
$500,000.”53 The bill would not affect revenues or discretionary spending.
H.R. 685: Mortgage Choice Act of 201554
H.R. 685 was passed by the House on April 14, 2015.55 H.R. 685 as passed would modify the
definition of points and fees to exclude from the definition (1) insurance held in escrow and (2)
certain fees paid to affiliates of the lender. As is elaborated upon below, points and fees refers to
certain costs that are paid by the borrower related to lender compensation and other expenses that
are associated with originating the mortgage. How points and fees are defined can have an effect
on credit availability (mortgage lenders argue that the current definition of points and fees makes
it harder for them to extend credit) and an effect on consumer protection (consumer groups argue
that expanding the definition could lead to borrowers being steered into more expensive
mortgages that they could be less able to repay).
The Ability-to-Repay Rule and Points and Fees. The definition of points and fees is a
component of multiple rules, but it is often discussed in the context of the Ability-to-Repay (ATR)
rule.56 Title XIV of the Dodd-Frank Act established the ATR requirement and instructed the CFPB
to establish the definition of a qualified mortgage (QM) as part of its implementation. The ATR
rule requires a lender to determine, based on documented and verified information, that at the
50
Manufactured Housing Institute, “The Preserving Access to Manufactured Housing Act (S. 682/H.R. 650),” at
http://www.manufacturedhousing.org/webdocs/S%20682%20HR%20650%20leave%20behind%20use.pdf.
51
Executive Office of the President, Office of Management and Budget, Statement of Administration Policy: H.R. 650 Preserving Access to Manufactured Housing Act of 2015, April 13, 2015, at https://www.whitehouse.gov/sites/default/
files/omb/legislative/sap/114/saphr650r_20150413.pdf.
52
Ibid.
53
CBO, Cost Estimate of H.R. 650, April 3, 2015, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/
hr_650.pdf.
54
This section was authored by Sean Hoskins, analyst in Financial Economics.
55
A similar bill, H.R. 3211, passed the House in the 113th Congress.
56
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6407, January 30, 2013. For more on the rule, see CRS Report R43081, The Ability-to-Repay Rule: Possible Effects of
the Qualified Mortgage Definition on Credit Availability and Other Selected Issues, by Sean M. Hoskins.
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time a mortgage loan is made the borrower has the ability to repay the loan. Failure to make such
a determination could result in a lender having to pay damages to a borrower who brings a
lawsuit claiming that the lender did not follow the ATR rule. This legal risk gives lenders added
incentive to comply with the ATR rule.
One of the ways a lender can comply with the ATR rule is by originating a QM.57 A QM is a
mortgage that satisfies certain underwriting and product-feature requirements, such as having
payments below specified debt-to-income ratios and having a term no longer than 30 years. By
making a QM, a lender is presumed to have complied with the ATR rule and receives legal
protections that could reduce its potential legal liability. A lender can comply with the ATR rule
by making a mortgage that is not a QM, but the lender will not receive the additional legal
protections. The definition of a QM, therefore, is important to a lender seeking to minimize its
legal risk. Because of this legal risk, some are concerned that, at least in the short term, the vast
majority of mortgages that are originated will be mortgages meeting the QM standards due to the
legal protections that QMs afford lenders, even though there are other means of complying with
the ATR rule.58
As an additional requirement for a mortgage to be a QM, certain points and fees associated with
the mortgage must be below specified thresholds. Some argue that the more types of fees that are
included in the QM rule’s definition of points and fees, the more likely a mortgage is to breach
the points and fees threshold and no longer qualify as a QM.59 The definition of points and fees,
therefore, may be important for determining whether a mortgage receives QM status, which can
influence whether the lender will extend the loan.
The points and fees threshold varies based on the size of the loan. The threshold is higher for
smaller loans because some fees are fixed costs that do not depend on the size of the loan. All else
equal, smaller loans would be more likely to breach the thresholds unless their thresholds were
higher. The thresholds, which are indexed for inflation, are currently as follows:
•
3% of the total loan amount for a loan greater than or equal to $100,000;
•
$3,000 for a loan less than $100,000 but greater than or equal to $60,000;
•
5% of the total amount for a loan less than $60,000 but greater than or equal to
$20,000;
•
$1,000 for a loan less than $20,000 but greater than or equal to $12,500; and
•
8% of the total loan amount for a loan less than $12,500.60
A loan that is above the respective points and fees cap cannot be a QM.
57
For the definition of a QM, see 12 C.F.R. §1026.43.
CFPB, Prepared remarks of Richard Cordray at a meeting of the Credit Union National Association, February 27,
2013, at http://www.consumerfinance.gov/speeches/prepared-remarks-of-richard-cordray-at-a-meeting-of-the-creditunion-national-association/. For a preliminary analysis of the effect of the QM rule on originations, see Bing Bai, Data
show surprisingly little impact of new mortgage rules, Urban Institute, August 21, 2014, at http://www.urban.org/
urban-wire/data-show-surprisingly-little-impact-new-mortgage-rules.
59
It is possible, however, that the market may adapt and have new fees so that the current definition may not affect
future outcomes.
60
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6587, January 30, 2013.
58
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The definition of points and fees includes certain costs associated with originating the mortgage.
The term point refers to compensation paid up front to the lender by the borrower. A point is
expressed as a percentage of the loan amount, with one point equal to 1% of the loan amount.61
The definition of fees has several different categories, but what is most pertinent with respect to
H.R. 685 is that certain fees are excluded from the definition of points and fees if “the charge is
paid to a third party unaffiliated with the creditor.”62 Certain fees paid to third parties affiliated63
with the lender are included in the definition. H.R. 685 would change the treatment of fees for
third parties affiliated with the lender by allowing (in some cases) those fees to also be excluded
from the definition of points and fees.
Policy Discussion. H.R. 685 would change the treatment of several types of fees. However, most
of the policy debate surrounding H.R. 685 has focused on title insurance because title insurance is
one of the larger fees associated with a mortgage that would be affected by the changes H.R. 685
proposes to the points and fees definition.64 Title insurance involves “searching the property’s
records to ensure that [a particular individual is] the rightful owner and to check for liens.”65 Title
insurance provides protection to the lender or borrower (depending on the type of policy) if there
turns out to be a defect in the title. Under the current definition for points and fees, fees for title
insurance provided by a title insurer that is independent of or unaffiliated with the lender may be
excluded from the points and fees definition, but the fees for an affiliated title insurer must be
included in the definition of points and fees. H.R. 685 would allow fees for affiliated title
insurance to be treated the same as independent title insurance, and both would be excluded from
the points and fees definition.
The cap on points and fees is intended to protect consumers from predatory loans by limiting fees
that can be placed on a QM and by aligning the incentives of the lender and the borrower.
Lenders can be compensated through points that are paid up front or through interest payments
over the life of the loan. The method by which the lender receives compensation may influence
the lender’s incentive to evaluate the borrower’s ability to repay the mortgage. As the CFPB notes
in its preamble to the ATR rule, the cap on points and fees may make lenders “take more care in
originating a loan when more of the return derives from performance over time (interest
payments) rather [than] from upfront payments (points and fees). As such, this provision [the cap
on points and fees] may offer lenders more incentive to underwrite these loans carefully.”66
Supporters of H.R. 685 argue that expanding the definition of points and fees is important to
ensuring that credit is available. The Mortgage Bankers Association, for example, stated that as a
61
In some cases, a point may be excluded from the definition of points and fees if the point results in a reduction in the
interest rate that is charged to the borrower. See P.L. 111-203, §1412.
62
15 U.S.C. §1602(bb).
63
An affiliated business arrangement is “an arrangement in which (A) a person who is in a position to refer business
incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of
such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent
in a provider of settlement services; and (B) either of such persons directly or indirectly refers such business to that
provider or affirmatively influences the selection of that provider.” See 12 U.S.C. §2602(7).
64
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6439, January 30, 2013.
65
Federal Reserve Board, “A Consumer’s Guide to Mortgage Refinancings,” at http://www.federalreserve.gov/pubs/
refinancings/.
66
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6562, January 30, 2013.
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result of the current definition of points and fees, “many affiliated loans, particularly those made
to low-and moderate-income borrowers, would not qualify as QMs and would be unlikely to be
made or would only be available at higher rates due to heightened liability risks. Consumers
would lose the ability to choose to take advantage of the convenience and market efficiencies
offered by one-stop shopping.”67 Putting the fees of affiliated and independent title insurers on
equal footing in the points and fees definition, supporters argue, would enhance competition in
the title insurance industry.68
Supporters also contend that because title insurance is regulated predominantly by the states and
many states have policies in place to determine how title insurance is priced, there is less need to
be concerned that title insurance fees are excessive.69 They note that the Real Estate Settlement
Procedures Act (RESPA; 12 U.S.C. §§2601, et seq.) allows affiliated business arrangements and
already has protections in place for consumers, such as “a requirement to disclose affiliation to
consumers.”70
Opponents of H.R. 685 argue that, by narrowing the definition of points and fees to exclude
affiliated providers, the bill “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.”71
For this reason, the Obama Administration has said that “if the President were presented with
H.R. 685, his senior advisors would recommend that he veto the bill.”72
Critics also contend that removing affiliated title insurers from the points and fees definition
would reduce the title insurance industry’s incentive to make the price of title insurance, which
some believe is already too high, “more reasonable.”73 They note that affiliated service providers
are likely to be able to receive business through references from their affiliate and, therefore,
“affiliates of a creditor may not have to compete in the market with other providers of a service
and thus may charge higher prices that get passed on to the consumer.”74
Escrow. Supporters of H.R. 685 state that the bill would clarify that insurance held in escrow75
should not be included in the definition of points and fees.76 They argue that the drafting of the
67
Letter from Mortgage Bankers Association, April 13, 2015, at http://mba.informz.net/MBA/data/images/
HR685Leadership4132015.pdf.
68
Ibid.
69
The Realty Alliance, “Congress Should Pass the Mortgage Choice Act,” at http://www.therealtyalliance.com/
getpublicfile.asp?ref=41.
70
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6438, January 30, 2013.
71
Executive Office of the President, Office of Management and Budget, Statement of Administration Policy: H.R. 685
– Mortgage Choice Act of 2015, April 13, 2015, at https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/
114/saphr685r_20150413.pdf.
72
Ibid.
73
Center for Responsible Lending, “H.R. 685 Will Lead to Higher Fees for Homebuyers,” at
http://ourfinancialsecurity.org/blogs/wp-content/ourfinancialsecurity.org/uploads/2015/04/
hr685_will_lead_to_higher_fees_for_homebuyers-fact-sheet-3.18.15.pdf.
74
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6439, January 30, 2013.
75
An escrow account is an account that a “mortgage lender may set up to pay certain recurring property-related
expense ... such as property taxes and homeowner’s insurance.” Property taxes and homeowner’s insurance are often
lump-sum payments owed annually or semiannually. See CFPB, “What is an escrow or impound account?,” at
(continued...)
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Dodd-Frank Act left unclear how insurance payments held in escrow should be treated in the
definition. Opponents of the bill have not cited this provision as a rationale for their opposition.
CBO estimates that H.R. 685 as ordered reported “would affect direct spending” but that “those
effects would be insignificant.”77 The bill would not affect revenues or discretionary spending,
according to CBO.
H.R. 1259: Helping Expand Lending Practices in
Rural Communities Act78
H.R. 1259 was passed by the House on April 13, 2015.79 H.R. 1259 as passed would establish a
temporary, two-year program in which individuals could petition the CFPB for counties that were
not designated as rural by the CFPB to receive the rural designation. It also would establish
evaluation criteria and an evaluation process for the CFPB to follow in assessing these petitions.
H.R. 1259 as passed could increase the credit available to borrowers in rural areas but would
reduce some of the protections put in place for rural consumers.
Definition of Rural. Statute allows for exemptions from certain consumer protection
requirements for companies operating in rural areas. In implementing the requirements, the CFPB
designates certain counties as rural. The exemptions and additional compliance options for
lenders in rural areas stem from concerns that borrowers in these areas may have a harder time
accessing credit than those in non-rural areas. For example, the ATR rule has an additional
compliance option that allows small lenders operating in rural or underserved areas to originate
balloon mortgages, subject to some restrictions.80
The Dodd-Frank Act specifies the additional compliance option for rural lenders, but it leaves the
definition of rural to the discretion of the CFPB. Balloon mortgages originated by lenders in areas
that are not designated as rural may be ineligible for the compliance option (although the CFPB
has established a two-year transition period to allow “small”81 lenders to originate balloon
mortgages until January 2016, subject to some restrictions). Lenders that benefit from exemptions
may offer products to their consumers that lenders in non-rural areas may be less likely to offer,
but consumers in rural areas may not receive the same protections as those in non-rural areas.
(...continued)
http://www.consumerfinance.gov/askcfpb/140/what-is-an-escrow-or-impound-account.html.
76
The Realty Alliance, “Congress Should Pass the Mortgage Choice Act,” at http://www.therealtyalliance.com/
getpublicfile.asp?ref=41.
77
CBO, Cost Estimate of H.R. 685, April 3, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/
hr_685.pdf.
78
This section was authored by Sean Hoskins, analyst in Financial Economics.
79
A similar bill, H.R. 2672, passed the House in the 113th Congress.
80
See 12 C.F.R. §1026.43 and see CRS Report R43081, The Ability-to-Repay Rule: Possible Effects of the Qualified
Mortgage Definition on Credit Availability and Other Selected Issues, by Sean M. Hoskins.
81
The CFPB originally defined small for the purpose of the ATR rule as having less than or equal to $2 billion in assets
and originating 500 or fewer mortgages in the previous year. The January 2015 proposal would, among other things,
raise the threshold to 2,000 mortgage loans. See CFPB, “CFPB Issues Proposal To Facilitate Access To Credit In Rural
And Underserved Areas,” January 29, 2015, at http://www.consumerfinance.gov/newsroom/cfpb-issues-proposal-tofacilitate-access-to-credit-in-rural-and-underserved-areas/.
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When publishing the ATR rule, the CFPB stated that it considers its method of designating
counties as rural, which is based on the U.S. Department of Agriculture’s Urban Influence
Codes,82 to be consistent with the intent of the exemptions contained in statute. The CFPB
estimated that its definition of rural results in 9.7% of the total U.S. population being in rural
areas.83 However, in light of various questions about its definition of rural raised during the
comment period, the CFPB said in 2013 that it intended “to study whether the [definition] of
‘rural’ ... should be adjusted.”84 As a result, the CFPB issued a proposed rule in January 2015 to
expand the definition of rural as a means of facilitating access to credit in rural areas. The new
definition would have two prongs: an area could be deemed rural under the existing methodology
involving the Urban Influence Codes or, if it is not designated as rural by that test, it could qualify
under an alternative method that involves the Census Bureau’s census block data.
To qualify for some of the exemptions, a lender not only must operate in a rural area but also
must meet the CFPB’s definition of small, which the CFPB also expanded in its January 2015
proposal.85 Based on 2013 data, the CFPB estimates “that the number of rural small creditors
would increase from about 2,400 to about 4,100 if the proposed provisions are adopted.”86
Policy Discussion. Although the proposed rule is intended to expand credit availability, the CFPB
notes that its analysis does not provide “direct evidence to estimate the degree to which the
proposed provisions would increase access to credit.”87 The CFPB explains that its inability to
estimate the change in credit availability from the proposal may be due to data limitations that
prevent it from testing certain hypotheses.88 Alternatively, the CFPB notes that the change in
credit availability may be difficult to estimate because borrowers in rural areas already may be
adequately served by lenders and therefore may not benefit from the CFPB’s expanded
definition.89
The CFPB maintains that the use of census blocks, as suggested in its proposed rule, allows for a
more granular approach, but critics have argued that the new approach “is still inadequate because
census tracts are only updated once every 10 years.”90 Supporters of H.R. 1259 believe the
CFPB’s method of designating counties as rural is inflexible and may not account for “atypical
population distributions or geographic boundaries.”91 H.R. 1259 is intended, supporters argue, to
82
For the definition of rural, see 12 C.F.R. §1026.35.
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6543, January 30, 2013.
84
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” p. 6, at
http://files.consumerfinance.gov/f/201305_cfpb_final-rule_atr-concurrent-final-rule.pdf.
85
The CFPB originally defined small for the purpose of the ATR rule as having less than or equal to $2 billion in assets
and originating 500 or fewer mortgages in the previous year. The January 2015 proposal would, among other things,
raise the threshold to 2,000 mortgage loans. See CFPB, “CFPB Issues Proposal To Facilitate Access To Credit In Rural
And Underserved Areas,” January 29, 2015, at http://www.consumerfinance.gov/newsroom/cfpb-issues-proposal-tofacilitate-access-to-credit-in-rural-and-underserved-areas/.
86
CFPB, Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act
(Regulation Z), p. 69, at http://files.consumerfinance.gov/f/201501_cfpb_amendments-relating-to-small-creditors-andrural-or-underserved-areas.pdf.
87
Ibid, p. 72.
88
Ibid, p. 73.
89
Ibid.
90
Rep. Andy Barr, Congressional Record, vol. 161, part 52 (April 13, 2015), p. H2121.
91
Conference of State Bank Supervisors, “Letter of Support for H.R. 2672,” December 4, 2013, at http://www.csbs.org/
(continued...)
83
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provide a way to challenge a CFPB designation and invites individuals “to participate in their
government and provide input on matters of local knowledge. It is about making the Federal
Government more accessible, more accountable, and more responsive to the people who know
their local communities best.”92
CBO estimates that H.R. 1259 as ordered reported would increase direct spending by $1 million
over the next 10 years but would not affect revenues or discretionary spending.93
H.R. 1408: Mortgage Servicing Asset Capital
Requirements Act of 201594
H.R. 1408 was ordered to be reported by the House Committee on Financial Services on March
26, 2015.95 H.R. 1408 as ordered to be reported would require the federal banking regulators—the
Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance
Corporation, and National Credit Union Administration—to “conduct a study of the appropriate
capital requirements for mortgage servicing assets for nonsystemic banking institutions”96 and
would delay the implementation of certain capital requirements until the report had been
completed. Nonsystemic banking institutions are defined as those banking institutions that have
not been identified by the Financial Stability Board (an intergovernmental body in which the
United States participates) as a global systemically important bank.97 Eight of the largest U.S.
banks currently have been identified as global systemically important banks.98
As discussed in more detail below, banks have identified the capital treatment for mortgage
servicing assets (MSAs) as one of the more costly aspects of the new capital requirements.
Supporters of H.R. 1408 want to delay implementation of the capital requirements until the
regulators further study MSAs. Opponents, by contrast, would like to see the capital rule
implemented without delay, although some acknowledge that there may be issues with the rule’s
treatment of MSAs.
Mortgage Servicing Assets and Basel III. Servicers collect payments from borrowers that are
current and forward them to the mortgage holder, work with borrowers that are delinquent to try
(...continued)
legislative/Documents/CSBSLetterofSupportforHR2672Dec42013.pdf.
92
Rep. Andy Barr, Congressional Record, vol. 161, part 52 (April 13, 2015), p. H2121.
93
CBO, Cost Estimate of H.R. 1259, April 6, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/hr1259.pdf.
94
This section was authored by Sean Hoskins, analyst in Financial Economics.
95
A similar bill, H.R. 4042, was ordered to be reported by the Financial Services Committee in the 113th Congress.
96
H.R. 1408, §2.
97
For more on the Financial Stability Board, see CRS Report IF10129, Introduction to Financial Services:
International Supervision, by Martin A. Weiss.
98
Eight U.S. firms currently would be identified as global systemically important banks under the proposal: Bank of
America Corporation, the Bank of New York Mellon Corporation, Citigroup Inc., The Goldman Sachs Group, Inc.,
JPMorgan Chase & Co., Morgan Stanley, State Street Corporation, and Wells Fargo & Company. For more on global
systemically important banks, see Federal Reserve, press release, December 9, 2014, at http://www.federalreserve.gov/
newsevents/press/bcreg/20141209a.htm.
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to get them current, and extinguish the mortgage (such as through foreclosure) if a borrower is in
default. A mortgage servicer is compensated for its work. A mortgage holder can service the
mortgage itself or hire an agent to act on its behalf. Just as the holder of a mortgage can sell the
mortgage and the right to receive the stream of payments associated with a mortgage to a
different investor, a servicer can sell to a different servicer the right to service a mortgage and to
receive the compensation for doing so, which can make mortgage servicing a valuable asset. A
mortgage servicing asset, therefore, is an asset that results “from contracts to service loans
secured by real estate, where such loans are owned by third parties.”99 Some banks will originate
a mortgage and sell the mortgage to a different investor but retain the servicing of the mortgage
(so they keep the MSA) to maintain their relationship with the customer.
Banks are required to fund their assets with a certain amount of capital to protect against the
possibility that their assets may drop in value. The riskier an asset, the more capital a bank is
required to hold to guard against losses. The Basel III framework is an international agreement
with U.S. participation that includes guidelines on how banks should be regulated, such as how
much capital they are required to hold against certain assets.100 The federal bank regulators have
issued rules generally implementing the Basel III framework and set capital requirements that
banks must follow.101
Policy Discussion. The new capital requirements mandate more capital for MSAs, making it
more costly for banks to hold MSAs. As a result, some banks have started selling their MSAs and
nonbanks (financial institutions that do not accept deposits and are not subject to the Basel III
capital requirements) have purchased MSAs.102 Although the CFPB regulates nonbank mortgage
servicers to ensure that they comply with consumer protections,103 some are worried that the
growth of nonbank servicers and the sale of MSAs may “trigger a race to the bottom that puts
homeowners at risk” as nonbank servicers cut costs to compete for business.104
Given the concerns about the effect the Basel III capital requirements are having on the mortgage
servicing market, some supporters of H.R. 1408 argue that the MSA capital requirements should
be delayed for all but the largest institutions. They contend that “there needs to be additional
review of whether or not additional capital is required simply for mortgage servicing.”105
Supporters do not believe the regulators performed sufficient analysis of the capital requirements’
99
H.R. 1408, §2.
For more on Basel, see CRS Report R42744, U.S. Implementation of the Basel Capital Regulatory Framework, by
Darryl E. Getter. The National Credit Union Administration (NCUA) has a similar capital rule for credit unions. See
NCUA, “Risk-Based Capital,” 80 Federal Register 17, January 27, 2015.
101
Although banks have begun implementing the Basel III capital rules already, including the new mortgage servicing
asset (MSA) treatment, the new treatment will not be fully phased in for several years. See Federal Reserve, Office of
the Comptroller of the Currency, “Regulatory Capital Rules,” 78 Federal Register 62079, October 11, 2013.
102
For more on the market shift to nonbank servicers, see Laurie Goodman and Pamela Lee, OASIS: A Securitization
Born from MSR Transfers, Urban Institute, at http://www.urban.org/sites/default/files/alfresco/publication-pdfs/
413086-OASIS-A-Securitization-Born-from-MSR-Transfers.PDF.
103
CRS Report R42572, The Consumer Financial Protection Bureau (CFPB): A Legal Analysis, by David H.
Carpenter.
104
Benjamin Lawsky, “Excerpts from Superintendent Lawsky’s Remarks on Non-Bank Mortgage Servicing in New
York City,” May 20, 2014, at http://www.dfs.ny.gov/about/press2014/pr1405201.htm.
105
Attributed to Rep. Ed Perlmutter by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Regulatory Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts-4653577?
9&search=M9QutUd4.
100
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implications prior to issuing these requirements and argue that they should do so before the rule
takes effect. Supporters also note that Basel III is an international agreement but that MSAs are a
product of the U.S. housing finance system, which is different than the housing finance system in
other countries. As a result, they contend that additional study needs to be given to this unique
topic.106
Some opponents of H.R. 1408 acknowledge that servicing has migrated to nonbanks and have
expressed concerns about the implications of that migration. They “fully support additional
research into the topics of the study which make up a large portion of” H.R. 1408.107 But these
opponents do not want implementation of the capital requirements to be delayed while the study
is ongoing because they believe Basel III is important to the safety and soundness of the banking
system.108
CBO estimates that H.R. 1408 as ordered to be reported would affect direct spending and
revenues but that “the net effect on the federal budget over the next 10 years would not be
significant.”109 CBO notes that by delaying the implementation of the capital requirements, H.R.
1408
would temporarily increase the regulatory capital of some banks by including additional
MSAs as capital. That increase could delay the corrective action or closure of a bank,
potentially increasing the cost of resolution if it was to ultimately fail. However, for a
number of reasons—the brief duration of the delay, the low ratio of MSAs to total assets, the
relatively low number of projected bank failures over the next year, and the phase-in of the
current rules—CBO expects that the probability and cost of future bank failures would not
increase significantly under the bill.110
H.R. 1529: Community Institution Mortgage Relief
Act of 2015111
H.R. 1529 was ordered reported by the House Committee on Financial Services on April 6,
2015.112 H.R. 1529 as ordered reported would make two modifications to CFPB mortgage rules.
It would (1) exempt from certain escrow requirements any mortgage held by a lender with assets
of $10 billion or less if the mortgage is held in the lender’s portfolio for three years and (2)
exempt from certain servicing requirements any servicer that annually services 20,000 mortgages
106
See American Bankers Association, “Letter to Representatives Luetkemeyer and Perlmutter,” May 12, 2014, at
http://www.aba.com/Advocacy/LetterstoCongress/Documents/ABALetteronMSAStop-StudyBill.pdf.
107
Attributed to Rep. Maxine Waters by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Regulatory Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts-4653577?
9&search=M9QutUd4.
108
CQ Congressional Transcripts, “House Financial Services Committee Holds Markup on Financial Regulatory
Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts-4653577?9&search=M9QutUd4.
109
CBO, Cost Estimate of H.R. 1408, April 9, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/
hr1408_1.pdf.
110
Regulatory capital ratios would increase because the computation used to determine capital levels would allow
banks to hold less capital. See Ibid.
111
This section was authored by Sean Hoskins, analyst in Financial Economics.
112
A similar bill, H.R. 4521, was ordered to be reported by the Financial Services Committee in the 113th Congress.
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or fewer. Supporters of H.R. 1529 argue that the bill would reduce the burden on small lenders
and servicers of complying with these regulations while giving added flexibility to consumers.
Opponents argue that the bill would roll back consumer protections that were put in place in
response to the housing and foreclosure crisis.
Escrow Accounts. An escrow account is an account that a “mortgage lender may set up to pay
certain recurring property-related expenses ... such as property taxes and homeowner’s
insurance.”113 Property taxes and homeowner’s insurance often are lump-sum payments owed
annually or semiannually. To ensure a borrower has enough money to make these payments, a
lender may divide up the amount owed and add it to a borrower’s monthly payment. The
additional amount paid each month is placed in the escrow account and then drawn on by the
mortgage servicer that administers the account to make the required annual or semiannual
payments. Maintaining escrow accounts for borrowers is an additional cost to banks and may be
especially costly for smaller firms.
An escrow account is not required for all types of mortgages but had been required for at least
one year for higher-priced mortgage loans even before the Dodd-Frank Act.114 A higher-priced
mortgage loan is a loan with an APR “that exceeds an ‘average prime offer rate’115 for a
comparable transaction by 1.5 or more percentage points for transactions secured by a first lien,
or by 3.5 or more percentage points for transactions secured by a subordinate lien.”116 If the first
lien is a jumbo mortgage (above the conforming loan limit117 for Fannie Mae and Freddie Mac),
then it is considered a higher-priced mortgage loan if its APR is 2.5 percentage points or more
above the average prime offer rate. The Dodd-Frank Act, among other things, extended the
amount of time an escrow account for a higher-priced mortgage loan must be maintained from
one year to five years, although the escrow account can be terminated after five years only if
certain conditions are met. It also provided additional disclosure requirements.118
The Dodd-Frank Act gave the CFPB the discretion to exempt from certain escrow requirements
lenders operating predominantly in rural areas if the lenders satisfied certain conditions.119 The
CFPB’s escrow rule included exemptions from escrow requirements for lenders that (1) operate
predominantly in rural or underserved areas; (2) extend 500 mortgages or fewer; (3) have less
than $2 billion in total assets; and (4) do not escrow for any mortgage they service (with some
exceptions).120 Additionally, a lender that satisfies the above criteria must intend to hold the loan
in its portfolio to be exempt from the escrow requirement for that loan. H.R. 1529 would expand
the exemption such that a lender also would be exempt from maintaining an escrow account for a
113
CFPB, “What is an escrow or impound account?,” at http://www.consumerfinance.gov/askcfpb/140/what-is-anescrow-or-impound-account.html.
114
A higher-priced mortgage loan is different from a high-cost mortgage described in H.R. 650. (See “H.R. 650:
Preserving Access to Manufactured Housing Act of 2015.”)
115
The average prime offer rate (APOR) is an estimate of the market mortgage rate based on a survey of rates. The
CFPB will publish the APOR weekly.
116
CFPB, “Escrow Requirements Under the Truth in Lending Act (Regulation Z),” 78 Federal Register 4726, January
22, 2013.
117
See CRS Report RS22172, The Conforming Loan Limit, by N. Eric Weiss and Sean M. Hoskins.
118
CFPB, Small Entity Compliance Guide: TILA Escrow Rule, April 18, 2013, p. 4, at http://files.consumerfinance.gov/
f/201307_cfpb_updated-sticker_escrows-implementation-guide.pdf.
119
P.L. 111-203, §1461.
120
See 12 C.F.R. §1026.35 and CFPB, “Escrow Requirements Under the Truth in Lending Act (Regulation Z),” 78
Federal Register 4726, January 22, 2013.
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mortgage as long as it satisfied two criteria: (1) the mortgage is held by the lender in its portfolio
for three or more years and (2) the lender has $10 billion or less in assets.
Policy Discussion. When the CFPB issued its escrow rule in January 2013, it estimated that
“there are 2,612 exempt creditors who originated ... first-lien higher-priced mortgage loans in
2011.”121 It also estimated that there would be 5,087 lenders with $10 billion or less in total assets
who, collectively, originated 91,142 first-lien higher-priced mortgage loans in 2011 that would
not be exempt from the escrow requirements.122 If H.R. 1529 had been in place in 2011, those
additional 5,087 lenders would have been exempt from the escrow requirements for the loans
held in portfolio for three or more years.
Supporters of H.R. 1529 argue that expanding the escrow exemption is important for reducing the
regulatory burden on small banks. Small banks already would have the incentive, the argument
goes, to make sure the borrower will pay taxes and insurance even without the escrow account
because the lender is exposed to some of the risk by keeping the mortgage in its portfolio.123
Because of this “skin in the game,” supporters believe the escrow requirement is unduly
burdensome for small banks. They also believe the requirement can be an unnecessary burden to
consumers who would rather manage their taxes and insurance payments on their own, especially
if those consumers have a history of making their required payments on previous loans.124
Opponents of H.R. 1529 argue that the escrow requirement is an important consumer protection.
The escrow account is required for higher-priced mortgage loans, and critics contend that the
higher interest rate on those loans reflects the fact that borrowers with these loans often are riskier
subprime borrowers.125 Because these borrowers already face a higher risk of default, opponents
of H.R. 1529 believe the escrow requirement is important for ensuring these borrowers are not
“being blindsided by additional costs at the end of each year.”126 They argue that the exemption
the CFPB gave for certain smaller entities already strikes the appropriate balance between
reducing the regulatory burden for some banks and protecting consumers.
Mortgage Servicers. The second part of H.R. 1529 addresses mortgage servicers. Servicers
received added attention from Congress after the surge in foreclosures following the bursting of
the housing bubble. The Dodd-Frank Act imposed additional requirements on servicers to protect
borrowers through amendments to TILA and RESPA.127 The new servicing protections128 include,
among other things, additional disclosure requirements about the timing of rate changes,
requirements for how payments would be credited, obligations to address errors in a timely
121
CFPB, “Escrow Requirements Under the Truth in Lending Act (Regulation Z),” 78 Federal Register 4747, January
22, 2013.The data the CFPB uses do not include non-depository institutions, so the CFPB estimates are a lower bound.
122
Ibid, 4748..
123
CQ Congressional Transcripts, “House Financial Services Committee Holds Markup on Financial Regulatory
Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts-4653577?9&search=M9QutUd4.
124
Ibid.
125
Ibid.
126
Ibid.
127
12 U.S.C. §§2601 et seq.
128
Some of the servicing requirements are specific mandates in the Dodd-Frank Act, and some are issued at the
discretion of the CFPB pursuant to its authority under RESPA and TILA.
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fashion, and guidance on when foreclosure could be initiated and how servicers must have
continuity of contact with borrowers. The CFPB issued rules implementing those changes.129
Servicers that service 5,000 mortgages or fewer and only service mortgages that they or an
affiliate owns or originated are considered small servicers and are exempted from some but not
all TILA and RESPA servicing requirements.130 H.R. 1529 would modify the exemption for the
rules implemented under RESPA by directing the CFPB to provide exemptions to or adjustments
from the RESPA servicing provisions for servicers that service 20,000 mortgages or fewer “in
order to reduce regulatory burdens while appropriately balancing consumer protections.”131 The
RESPA servicing provisions that could be affected by H.R. 1529 include, among other things,
how escrow accounts (if they are required) would be administered, disclosure to an applicant
about whether his or her servicing can be sold or transferred, notice to the borrower if the loan is
transferred, prohibitions on the servicer relating to fees and imposing certain types of insurance,
and other consumer protections.132
Policy Discussion. In its discussion of its servicing rule, the CFPB notes that “servicers that
service relatively few loans, all of which they either originated or hold on portfolio, generally
have incentives to service well.”133 The incentive to service the loans well comes from the fact
that “foregoing the returns to scale of a large servicing portfolio indicates that the servicer
chooses not to profit from volume, and owning or having originated all of the loans serviced
indicates a stake in either the performance of the loan or in an ongoing relationship with the
borrower.”134 The CFPB, therefore, found that an “exemption may be appropriate only for
servicers that service a relatively small number of loans and either own or originated the loans
they service.”135
The CFPB set the loan threshold at 5,000 loans because it concluded that this category “identifies
the group of servicers that make loans only or largely in their local communities or more
generally have incentives to provide high levels of customer contact and information.”136 The
CFPB’s data analysis of the threshold concluded that
With the threshold set at 5,000 loans, the Bureau estimates that over 98% of insured
depositories and credit unions with under $2 billion in assets fall beneath the threshold. In
contrast, only 29% of such institutions with over $2 billion in assets fall beneath the
threshold and only 11% of such institutions with over $10 billion in assets do so. Further,
129
CFPB, “Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X),” 78 Federal
Register 10695, February 14, 2013, and CFPB, “Mortgage Servicing Rules Under the Truth in Lending Act (Regulation
Z),” 78 Federal Register 10901, February 14, 2013.
130
See, for example, 12 C.F.R. 1026.41. The CFPB provided exemptions to small servicers from certain TILA
requirements using its authority under TILA. The CFPB elected not to extend certain RESPA requirements to small
servicers. See CFPB, “Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X),” 78
Federal Register 10699, February 14, 2013.
131
H.R. 4521, §3.
132
For a full list, see 12 U.S.C. §2605 and CFPB, “Mortgage Servicing Rules Under the Real Estate Settlement
Procedures Act (Regulation X),” 78 Federal Register 10699, February 14, 2013.
133
CFPB, “Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z),” 78 Federal Register 10980,
February 14, 2013.
134
Ibid.
135
Ibid, 10975.
136
Ibid, 10981.
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over 99.5% of insured depositories and credit unions that meet the traditional threshold for a
community bank—$1 billion in assets—fall beneath the threshold. The Bureau estimates
there are about 60 million closed-end mortgage loans overall, with about 5.7 million serviced
by insured depositories and credit unions that qualify for the exemption.137
The CFPB’s 2013 rulemaking did not discuss the effect of setting the threshold at 20,000 loans, as
H.R. 1529 would, but it noted that if “the loan count threshold were set at 10,000 mortgage loans,
for example, over 99.5% of insured depositories and credit unions with under $2 billion in assets
would fall beneath the threshold. However, 50% of insured depositories with over $2 billion in
assets and 20% of those with over $10 billion in assets would fall beneath the threshold.”138
Those entities that service more than 5,000 loans, the CFPB contends, may be more likely to use
a different servicing model that would not have the same “incentives to provide high levels of
customer contact and information.”139 The CFPB, therefore, set the threshold at 5,000 loans.
Supporters of H.R. 1529 argue that the bill is intended to give the CFPB the discretion to either
provide “exemptions or adjustments to the requirements of the existing codes section and should
do so appropriately balancing consumer protections. So the near-small institutions will either get
the relief currently granted to the small institutions or a bit less relief, and that will be determined
by the CFPB.”140 Raising the threshold from 5,000 loans to 20,000 loans, supporters argue, “will
better delineate small servicers from the large servicers, and give credit union and community
banks greater flexibility to ensure that more of their customers can stay in their homes.”141
Opponents of H.R. 1529 have contended that the exemptions in the CFPB’s regulations are
sufficient to protect small lenders and that expanding the exemptions would weaken the
protections available to consumers. They note that by not only raising the threshold but also
removing the requirement that servicers own the mortgage, the servicers would have “less skin in
that game if bad servicing practices were to result in default and foreclosure.”142 Critics point to
mortgage servicers in particular as actors that performed poorly during the foreclosure crisis and
should not receive additional exemptions from CFPB regulations.143
CBO estimates that H.R. 1529 as ordered reported would “increase direct spending by less than
$500,000 for expenses of the CFPB to prepare and enforce new rules” but would not affect
revenues or discretionary spending.144
137
Ibid.
Ibid.
139
Ibid. The CFPB notes that its estimates are only for depository institutions and do not include non-depositories due
to data limitations.
140
Attributed to Rep. Brad Sherman by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Regulatory Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts-4653577?
0&search=4xqeO9ST.
141
Attributed to Rep. Blaine Luetkemeyer by CQ Congressional Transcripts, “House Financial Services Committee
Holds Markup on Financial Regulatory Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts4653577?0&search=4xqeO9ST.
142
Attributed to Rep. Maxine Waters by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Regulatory Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts-4653577?
0&search=4xqeO9ST.
143
Ibid. See also CRS Report R41491, “Robo-Signing” and Other Alleged Documentation Problems in Judicial and
Nonjudicial Foreclosure Processes, by David H. Carpenter.
144
CBO, Cost Estimate of H.R. 1529, April 3, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/
(continued...)
138
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Author Contact Information
Sean M. Hoskins, Coordinator
Analyst in Financial Economics
shoskins@crs.loc.gov, 7-8958
Edward V. Murphy
Specialist in Financial Economics
tmurphy@crs.loc.gov, 7-6201
Marc Labonte
Specialist in Macroeconomic Policy
mlabonte@crs.loc.gov, 7-0640
Gary Shorter
Specialist in Financial Economics
gshorter@crs.loc.gov, 7-7772
(...continued)
hr_1529.pdf.
Congressional Research Service
24Table 1. Selected Legislative Proposals Changing a Size Threshold
Topic
Bill Number
Proposed Exemption Level
Volcker Rule—Community Bank
Exemption
S. 1484/S. 1910
$10 billion in assets, indexed to GDP
Thresholds for Enhanced Regulation
S. 1484/S. 1910
$500 billion in assets, with a designation
process for entities between $50 billion
and $500 billion in assets
Risk Committee Requirements,
Company-Run Stress Tests
S. 1484/S. 1910
$50 billion in assets
Regulators’ Exemptive Authority
S. 1910
$10 billion in assets
Exam Frequency
S. 1484/S. 1910, H.R. 1553
$200 million, $1 billion in assets
CFPB Supervisory Threshold
S. 1484/S. 1910
$50 billion in assets
Escrow
H.R. 1529
$10 billion in assets
Mortgage Servicing
H.R. 1529
Service 20,000 mortgages
Holding Company Threshold
Equalization
S. 1484/S. 1910, H.R. 37
SHLC with $10 million in assets and
1,200/2,000 shareholders
Source: Table created by the Congressional Research Service (CRS).
Notes: See text for details. SHLC=savings and loan holding company. Additional regulations discussed in this
report have size-based thresholds, but Table 1 only highlights legislative proposals that would add or change
exemption levels. Some of the exemption levels are indexed to gross domestic product (GDP). For more on
GDP indexing, see Table A-1.
Regulatory relief can be provided in different forms, including by repealing entire provisions, by
providing exemptions from specific requirements or by tailoring a requirement so that it still
applies to certain entities but does so in a less burdensome way. Examples of different forms of
tailoring are streamlining a regulation, grandfathering existing firms or types of instruments from
a regulation, and phasing in a new regulation over time. Modifications can be made to regulations
stemming from statutory requirements, regulatory or judicial interpretations of statute, or
requirements originating from regulators’ broad discretionary powers.
Safety and Soundness Regulations
The goal of safety and soundness (or prudential) regulation is to ensure that a bank maintains
profitability and avoids failure. The rationale for safety and soundness regulation is to protect
taxpayers (who backstop federal deposit insurance) and to maintain financial stability. Regulators
monitor the bank’s risk profile and set various metrics that banks must maintain in areas such as
capital and liquidity. After the spike in bank failures surrounding the crisis, many of the reforms
implemented in the wake of the financial crisis were intended to make banks less likely to fail.
Whereas some view these efforts as essential to ensuring the banking system is safe, others view
the reforms as having gone too far and imposing excessive costs on banks.
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Volcker Rule8
Section 619 of the Dodd-Frank Act, also known as the “Volcker Rule,” has two main parts—it
prohibits banks from proprietary trading of “risky” assets and from “certain relationships” with
risky investment funds, including acquiring or retaining “any equity, partnership, or other
ownership interest in or sponsor a hedge fund or a private equity fund.”9 The statute carves out
exemptions from the rule for trading activities that Congress viewed as legitimate for banks to
participate in, such as risk-mitigating hedging and market-making related to broker-dealer
activities. It also exempts certain securities, including those issued by the federal government,
government agencies, states, and municipalities, from the ban on proprietary trading.10 The final
rule implementing the Volcker Rule was adopted on January 31, 2014.11
Exemption for Community Banks (S. 1484/S. 1910)
Section 115 of S. 1484 (Section 916 of S. 1910) would exempt banks with total consolidated
assets of $10 billion or less (indexed in future years to the growth in GDP) from the Volcker Rule.
Despite the exemption, regulators would be given discretion to apply the Volcker Rule to
individual small banks if they determine that the bank’s activities are “inconsistent with
traditional banking activities or due to their nature or volume pose a risk to the safety and
soundness of the insured depository institution.”
Background. Banks of all sizes must comply with the Volcker Rule, but regulators have adopted
streamlined compliance requirements for banks with less than $10 billion in assets. Small banks
with activities covered by the Volcker Rule can meet the requirements of the rule within existing
compliance policies and procedures. However, according to the FDIC’s guidance for community
banks accompanying the Volcker Rule,
The vast majority of these community banks have little or no involvement in prohibited
proprietary trading or investment activities in covered funds. Accordingly, community
banks do not have any compliance obligations under the Final Rule if they do not engage
in any covered activities other than trading in certain government, agency, State or
municipal obligations.12
Policy Discussion. Regulators contend that “the vast majority of community banks” who do not
face compliance obligations do not face excessive burden. Banks argue that the act of evaluating
the Volcker Rule to ensure that they are in compliance is burdensome in and of itself.
The fact that the vast majority of community banks do not engage in activities subject to the
Volcker Rule has been used by different bank regulatory officials as a rationale to support and
oppose an exemption from the Volcker Rule for small banks. On the one hand, Federal Reserve
(Fed) Governor Daniel Tarullo argued in favor of an exemption on the grounds that “both
8
This section was authored by Marc Labonte, specialist in Macroeconomic Policy, and Edward V. Murphy, specialist
in Financial Economics.
9
P.L. 111-203, §619. For more information, see CRS Legal Sidebar, What Companies Must Comply with the Volcker
Rule?, David H. Carpenter.
10
For a summary of the Volcker Rule, see Federal Reserve, “Final Rules to Implement the ‘Volcker Rule,’” at
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a3.pdf.
11
“Prohibitions and Restrictions on Proprietary Trading and Certain Interests,” 79 Federal Register 5778, January 31,
2014.
12
Federal Deposit Insurance Corporation, The Volcker Rule: Community Bank App, at https://www.fdic.gov/
regulations/reform/volcker/summary.html.
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community banks and supervisors would benefit from not having to focus on formal compliance
with regulation of matters that are unlikely to pose problems at smaller banks.”13 On the other
hand, Federal Deposit Insurance Corporation (FDIC) Vice Chairman Thomas Hoenig says that
among community banks subject to compliance requirements, those with traditional hedging
activities can comply simply by having clear policies and procedures in place that can be
reviewed during the normal examination process. Of the remainder, he estimates that the number
of community banks facing significant compliance costs represent “less than 400 of a total of
approximately 6,400 smaller banks in the U.S. And of these 400, most will find that their tradinglike activities are already exempt from the Volcker Rule. If the remainder of these banks have the
expertise to engage in complex trading, they should also have the expertise to comply with
Volcker Rule.” He concludes that
On balance, therefore, a blanket exemption for smaller institutions to engage in
proprietary trading and yet be exempt from the Volcker Rule is unwise. A blanket
exemption would provide no meaningful regulatory burden relief for the vast majority of
community banks that do not engage at all in the activities that the Volcker Rule restricts.
However, a blanket exemption for this subset of banks would invite the group to use
taxpayer subsidized funds to engage in proprietary trading and investment activities that
should be conducted in the marketplace, outside of the [federal] safety net.14
CLOs and the Volcker Rule (H.R. 37)
The Promoting Job Creation and Reducing Small Business Burdens Act (H.R. 37) passed the
House on January 14, 2015. Title VIII of H.R. 37 would modify a provision of the final rule
implementing the Volcker Rule. It would modify the Volcker Rule’s treatment of certain
collateralized loan obligations (CLOs) as impermissible covered fund investments. It would allow
banks with investments in certain CLOs issued before January 31, 2014, an additional two years,
until July 21, 2019, to be in compliance with the Volcker Rule.
Background. H.R. 37 involves the part of the Volcker Rule prohibiting “certain relationships”
with “risky” investment funds. A CLO is a form of securitization in which a pool of loans
(typically, commercial loans) is funded by issuing securities. CLOs provide nearly $300 billion in
financing to U.S. companies.15 In the final rule implementing the Volcker Rule, many of the trusts
used to facilitate CLOs were included in the definition of risky investment funds. As a result,
banks would have to divest themselves of certain CLO-related securities if the securities
conveyed an impermissible interest in the trust. The Volcker Rule does not ban CLOs or banking
organizations from holding CLOs; rather, it prohibits banking organizations from owning
securities conferring ownership-like rights in CLOs.
Regulators already have exercised their discretion to extend the conformance period for banks to
divest themselves of these CLO-related assets to 2016 and could extend it again until 2017. An
extension beyond 2017 could require additional agency findings. H.R. 37 would extend the
13
Gov. Daniel Tarullo, “A Tiered Approach to Regulation and Supervision of Community Banks,” speech at the
Community Bankers Symposium, Chicago, Illinois, November, 7, 2014, at http://www.federalreserve.gov/newsevents/
speech/tarullo20141107a.htm.
14
Thomas Hoenig, speech at the National Press Club, April 15, 2015, at https://www.fdic.gov/news/news/speeches/
spapril1515.html.
15
U.S. Congress, House Committee on Financial Services, Subcommittee on Capital Markets and Government
Sponsored Enterprises, The Dodd-Frank Act’s Impact on Asset-Backed Securities, Testimony of Meredith Coffey, 113th
Cong., 2nd sess., February 26, 2014.
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conformance period to 2019 for CLOs.16 H.R. 37 applies only to banks that hold securities issued
by existing CLOs funded by commercial loans. It would limit the extension period for
conformance to those CLO securities issued prior to January 31, 2014. Going forward, bank
participation in newly issued CLOs would have to be structured to comply with the Volcker
Rule’s prohibition of bank interests in risky investment firms.17
Policy Discussion. The potential economic impact of H.R. 37 depends on the characteristics of
CLO-related obligations already held in the banking system. If banks did not expect their CLO
holdings to be prohibited by the Volcker Rule, they may not have made any preparations to
comply with it. Thus, proponents of extending the conformance period argue that rapid divestiture
of CLO-related securities could force banks to sell these securities at a loss, perhaps in fire sales,
if an extension is not granted. They argue that such stress in the banking system may curtail credit
available to small- and medium-sized commercial businesses.18
Opponents of Title VIII of H.R. 37, including the White House, argue that extending the
conformance period would undermine the intent of the Volcker Rule and allow risky securities to
remain in the banking system. They contend that it could result in future destabilizing losses for
banks that hold risky securities.19 By contrast, H.R. 37 merely changes the grandfathering date of
existing commercial loan-related CLO securities from 2017 to 2019. It would neither prohibit
conforming CLO securities from being created in the future to fund small and medium businesses
nor exempt newly issued CLOs from the Volcker Rule going forward.
Change to the “Collins Amendment” (S. 1484/S. 1910) 20
The “Collins Amendment,” Section 171 of the Dodd-Frank Act, requires bank holding
companies, thrift holding companies, and non-bank SIFIs to have capital and leverage
requirements at the holding company level that are no lower than those applied at the depository
subsidiary. As a result, certain capital instruments, such as trust preferred securities, that had
previously counted toward certain capital requirements at the holding company level would no
longer be eligible. The Collins Amendment allowed capital instruments that were otherwise no
longer eligible to receive grandfathered treatment if they were issued before May 19, 2010. For
institutions with more than $15 billion in assets as of December 31, 2009, the instruments would
be grandfathered until January 1, 2016. For institutions with less than $15 billion in assets,
instruments issued before May 19, 2010, would be permanently grandfathered.21 For institutions
with less than $1 billion (those subject to the Small Bank Holding Company policy), capital
instruments issued on any (past or future) date would be eligible for capital requirements.
16
See CRS Legal Sidebar, Congress Contemplates Extending Volcker Rule Conformance Period for CLO Investments,
David H. Carpenter.
17
See CRS Legal Sidebar, What Companies Must Comply with the Volcker Rule?, David H. Carpenter.
18
Hamilton Place Strategies, Regulating Risk: Implementation of New Regulation, January 2015, at
http://hamiltonplacestrategies.com/sites/default/files/newsfiles/HPS%20White%20Paper%20%20Regulating%20Risk%20-%20Volcker%20and%20CLOs.pdf.
19
Executive Office of the President, Statement of Administrative Policy, January 12, 2015, at
http://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr37r_20150112.pdf.
20
This section was authored by Marc Labonte, specialist in Macroeconomic Policy.
21
The regulation implementing this section places limits on the share of grandfathered instruments that can be used to
meet capital requirements. See Office of the Comptroller of the Currency and Federal Reserve System, “Regulatory
Capital Rules,” 78 Federal Register, October 11, 2013, p. 62052, http://www.gpo.gov/fdsys/pkg/FR-2013-10-11/pdf/
2013-21653.pdf.
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Section 123 of S. 1484 (Section 924 of S. 1910) would change the date for determining whether
banks were above the $15 billion threshold from December 31, 2009, to “December 31, 2009 or
March 31, 2010.”
Exemptive Authority (S. 1910)22
Section 928 of S. 191023 would give the banking regulators discretion to exempt any bank or
thrift, at the subsidiary or holding company level, with less than $10 billion in assets from any
rule issued by the regulators or any provision of banking law. Regulators could exempt banks on
the grounds that the provision or rule is unduly burdensome, is unnecessary to promote safety and
soundness, and is in the public interest. Currently, regulators may carve out a size exemption
depending on whether the relevant provision of law permits it.24
Policy Discussion. Granting regulators more discretion to provide exemptions could be useful if
it is believed that more specialized, technical expertise is required than Congress possesses to
identify when policies are unduly burdensome or when exemptions would undermine the broad
goals of regulation.
An alternative view is that regulatory relief involves policy tradeoffs that Congress is better
placed to make than regulators. Granting regulators discretion to provide relief could result in
more or less regulatory relief than Congress intended—indeed, it does not guarantee that any
regulatory relief will occur. In some cases, by granting exemptions, regulators would be
overriding the will of Congress, who expressly declined to include size exemptions when
provisions were originally enacted.
Capital Treatment of Mortgage Servicing Assets (H.R. 1408 and S.
1484/S. 1910)25
The Mortgage Servicing Asset Capital Requirements Act of 2015 (H.R. 1408) was agreed to by
voice vote in the House on July 14, 2015. Section 116 of S. 1484 (Section 917 of S. 1910) is
similar in content to H.R. 1408. The bills would require the federal banking regulators—the
Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance
Corporation, and National Credit Union Administration—to “conduct a study of the appropriate
capital requirements for mortgage servicing assets for banking institutions.”26 H.R. 1408 as
introduced would have delayed the implementation of Basel III for all but the largest institutions
until the study was completed, but that provision was removed prior to House passage.
Mortgage Servicing Assets. Mortgage servicers collect payments from borrowers that are current
and forward them to mortgage holders, work with borrowers that are delinquent to try to get them
current, and extinguish mortgages (such as through foreclosures) if a borrower is in default. A
mortgage servicer is compensated for its work. A mortgage holder can service the mortgage itself
22
This section was authored by Marc Labonte, specialist in Macroeconomic Policy.
This section is similar to S. 1799. It is the only provision of S. 1910 discussed in this report that was not originally
part of S. 1484.
24
In a recent speech, Fed Gov. Tarullo gave some examples of policies where he thought a size exemption might be
warranted but the law did not permit it. Gov. Daniel Tarullo, “A Tiered Approach to Regulation and Supervision of
Community Banks,” speech at the Community Bankers Symposium, Chicago, Illinois, November, 7, 2014, at
http://www.federalreserve.gov/newsevents/speech/tarullo20141107a.htm.
25
This section was authored by Sean Hoskins, analyst in Financial Economics.
26
H.R. 1408, §2.
23
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or hire an agent to act on its behalf. Just as the mortgage holder can sell the mortgage and the
right to receive the stream of payments associated with a mortgage to a different investor, a
servicer can sell to a different servicer the right to service a mortgage and to receive the
compensation for doing so, which can make mortgage servicing a valuable asset. A mortgage
servicing asset (MSA), therefore, is an asset that results “from contracts to service loans secured
by real estate, where such loans are owned by third parties.”27 Some banks will originate a
mortgage and sell the mortgage to a different investor but retain the servicing of the mortgage (so
they keep the MSA) to maintain their relationship with the customer.
Banks are required to fund their assets with a certain amount of capital to protect against the
possibility that their assets may drop in value. The riskier an asset, the more capital a bank is
required to hold to guard against losses. The Basel III framework is an international agreement
with U.S. participation that includes guidelines on how banks should be regulated, such as how
much capital they are required to hold against certain assets.28 The federal bank regulators have
issued rules generally implementing the Basel III framework and setting capital requirements that
banks must follow.29 Banks have identified the capital treatment for MSAs as one of the more
costly aspects of the new capital requirements.
Policy Discussion. The new capital requirements mandate more capital for MSAs, making it
more costly for banks to hold MSAs. As a result, some banks have started selling their MSAs and
nonbanks (financial institutions that do not accept deposits and are not subject to the Basel III
capital requirements) have purchased MSAs.30 Although the CFPB regulates nonbank mortgage
servicers to ensure that they comply with consumer protections,31 some are worried that the
growth of nonbank servicers and the sale of MSAs may “trigger a race to the bottom that puts
homeowners at risk” as nonbank servicers cut costs to compete for business.32
Given the concerns about the effect the Basel III capital requirements are having on the mortgage
servicing market, some argue that “there needs to be additional review of whether or not
additional capital is required simply for mortgage servicing.”33 Supporters of additional review
note that Basel III is an international agreement but that MSAs are a product of the U.S. housing
finance system, which is different than the housing finance system in other countries. As a result,
they contend that additional study needs to be given to this unique topic.34
27
H.R. 1408, §2.
For more on Basel, see CRS Report R42744, U.S. Implementation of the Basel Capital Regulatory Framework, by
Darryl E. Getter. The National Credit Union Administration (NCUA) has a similar capital rule for credit unions. See
NCUA, “Risk-Based Capital,” 80 Federal Register 17, January 27, 2015.
29
Although banks have begun implementing the Basel III capital rules already, including the new mortgage servicing
asset (MSA) treatment, the new treatment will not be fully phased in for several years. See Federal Reserve, Office of
the Comptroller of the Currency, “Regulatory Capital Rules,” 78 Federal Register 62079, October 11, 2013.
30
For more on the market shift to nonbank servicers, see Laurie Goodman and Pamela Lee, OASIS: A Securitization
Born from MSR Transfers, Urban Institute, at http://www.urban.org/sites/default/files/alfresco/publication-pdfs/
413086-OASIS-A-Securitization-Born-from-MSR-Transfers.PDF.
31
For more information, see CRS Report R42572, The Consumer Financial Protection Bureau (CFPB): A Legal
Analysis, by David H. Carpenter.
32
Benjamin Lawsky, “Excerpts from Superintendent Lawsky’s Remarks on Non-Bank Mortgage Servicing in New
York City,” May 20, 2014, at http://www.dfs.ny.gov/about/press2014/pr1405201.htm.
33
Attributed to Rep. Ed Perlmutter by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Regulatory Legislation,” March 25, 2015, at http://www.cq.com/doc/financialtranscripts4653577?9&search=M9QutUd4.
34
See American Bankers Association, “Letter to Representatives Luetkemeyer and Perlmutter,” May 12, 2014, at
http://www.aba.com/Advocacy/LetterstoCongress/Documents/ABALetteronMSAStop-StudyBill.pdf.
28
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Some Members of Congress acknowledge that servicing has migrated to nonbanks and have
expressed concerns about the implications of that migration. They have stated that they are
generally supportive of having a study, but do not want the study to result in the delayed
implementation of the Basel III requirements.35 Critics of H.R. 1408 supported the removal of the
provision in H.R. 1408 that would have delayed the implementation of Basel III for all but the
largest institutions until the study was completed. They contend Basel III is important to the
safety and soundness of the banking system.36
CBO estimates that H.R. 1408 as ordered to be reported would affect direct spending and
revenues but that “the net effect on the federal budget over the next 10 years would not be
significant.”37
Thresholds for Enhanced Regulation (S. 1484/S. 1910)38
To address the “too big to fail” problem, Title I of the Dodd-Frank Act created an enhanced
prudential regulatory regime for all large bank holding companies (BHCs) and “systemically
important” non-bank financial institutions (SIFIs). Under Subtitle C of Title I, the Fed is the
prudential regulator for firms that the Financial Stability Oversight Council (FSOC) has
designated as a SIFI and any BHC with total consolidated assets of more than $50 billion.39 (The
FSOC and Fed were granted the discretion to raise the asset threshold above $50 billion.) The
Fed, with the FSOC’s advice, is required to set safety and soundness standards that are more
stringent than those applicable to other non-bank financial firms and BHCs that do not pose a
systemic risk. There are currently about 30 U.S. BHCs with more than $50 billion in consolidated
assets.40
Section 201 of S. 1484 (Section 931 of S. 1910) would raise the asset threshold from $50 billion
to $500 billion under which BHCs are automatically subject to Title I’s enhanced prudential
regulation by the Fed. For BHCs with assets between $50 billion and $500 billion, FSOC would
have the authority to designate them as systemically important and thus subject to enhanced
prudential regulation. In future years, these thresholds are indexed based on the growth rate of
GDP. For a BHC to be designated, at least two-thirds of FSOC voting members, including the
chairman (the Treasury Secretary), would have to find that it is systemically important under a
designation process laid out in the bill. As discussed below, a FSOC designation process is
already used for non-bank financial firms; compared with the current non-bank designation
process, S. 1484/S. 1910 would require FSOC to provide more information to (bank or non-bank)
institutions and would give institutions more opportunities to take actions to avoid or reverse a
35
Attributed to Rep. Maxine Waters by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Regulatory Legislation,” March 25, 2015, at http://www.cq.com/doc/financialtranscripts4653577?9&search=M9QutUd4.
36
CQ Congressional Transcripts, “House Financial Services Committee Holds Markup on Financial Regulatory
Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts-4653577?9&search=M9QutUd4.
37
CBO, Cost Estimate of H.R. 1408, April 9, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/
hr1408_1.pdf.
38
This section was authored by Marc Labonte, specialist in Macroeconomic Policy.
39
FSOC is a council of financial regulators, headed by the Treasury Secretary, that was created by the Dodd-Frank Act.
40
A current list of top 50 depositories by asset size is available at http://www.ffiec.gov/nicpubweb/nicweb/
Top50Form.aspx. Some of the firms on this list are not bank holding companies. Other types of depositories, such as
savings and loan holding companies, with more than $50 billion in assets are not subject to the final rule, but the Fed
has indicated that it intends to propose rulemaking in the future that apply to them.
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SIFI designation. It would increase public disclosure requirements surrounding the designation
process, including the identity of firms under consideration for designation.
S. 1484/S. 1910 would also modify other parts of the Dodd-Frank Act that apply to BHCs with
more than $50 billion in assets (e.g., fees to finance enhanced regulation and the Office of
Financial Research) to apply instead to banks subject to the revised enhanced supervision. Section
202 of S. 1484 (Section 932 of S. 1910) would increase the thresholds from $10 billion to $50
billion for requiring a BHC to form a risk committee (if the BHC is publicly-traded) and conduct
company-run stress tests; the threshold would be indexed in future years based on GDP growth.
Section 506 of S. 1484 (Section 966 of S. 1910) would require GAO to conduct a study of the
Fed’s enhanced regulatory regime for banks and non-banks.
Background. The final rule implementing parts of Subtitle C for banks was adopted in February
2014, and banks had to be in compliance by January 1, 2015.41 The final rule includes
requirements for stress tests run by the Fed, capital planning, liquidity standards, living wills and
risk management. In the event that the FSOC has determined that it poses a “grave threat” to
financial stability, the final rule also requires any bank with more than $50 billion in assets to
comply with a 15 to 1 debt to equity limit. Exposure limits of 25% of a company’s capital per
single counterparty were included in the proposed rule, but the Fed has indicated that it plans to
finalize them at a later date. Enhanced capital requirements have not been required of all BHCs
with $50 billion or more in assets; instead enhanced capital requirements for only the largest
banks have been proposed or implemented through rules implementing Basel III.42 This is an
example of how there is already some “tiering” of regulation for large banks.43
A large number of foreign banks operating in the United States are also subject to the enhanced
prudential regime.44 Foreign banks operating with more than $50 billion in assets in the United
States are required to set up intermediate BHCs that will be subject to heightened standards
comparable to those applied to U.S. banks. Less stringent requirements apply to large foreign
banks with less than $50 billion in assets in the United States.
Policy Discussion. Critics of the $50 billion asset threshold argue that many banks above that
range are not systemically important. In particular, critics distinguish between “regional banks,”
who tend to be at the lower end of the asset range and, it is claimed, have a traditional banking
business model comparable to community banks, and “Wall Street banks,” a term applied to the
largest, most complex organizations that tend to have significant non-bank financial activities.45 If
41
The rule, “Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations,” can be
accessed at http://federalreserve.gov/newsevents/press/bcreg/20140218a.htm.
42
For more information, see CRS Report R42150, Systemically Important or “Too Big to Fail” Financial Institutions,
by Marc Labonte.
43
For a detailed discussion of tiered regulation for large banks, see Daniel Tarullo, testimony before the Senate
Banking Committee, March 19, 2015, at http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&
FileStore_id=2f189eda-33df-41e4-a2cd-a41c63d34499.
44
The Congressional Research Service was not able to locate an official list of banks subject to Title I enhanced
supervision. In 2015, 31 BHCs were subject to the Title I Federal Reserve stress tests because they had over $50 billion
in assets. See Federal Reserve, Dodd-Frank Act Stress Test 2015, March 2015, http://www.federalreserve.gov/
newsevents/press/bcreg/bcreg20150305a1.pdf. About 130 banks (foreign and domestic) have submitted resolution
plans (“living wills”) pursuant to Title I, however. See Chairman Martin Gruenberg, testimony before the Senate
Committee on Banking, Housing, and Urban Affairs, September 9, 2014, p. 5, available at
http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=b15fc832-df1847d7-8c7d-1367e5770086&Witness_ID=c15856a4-8f8c-4958-ad7c-a385bb31c3f8.
45
The argument that regional banks have a traditional business model has been disputed. See, for example, Simon
Johnson, testimony before the Senate Banking Committee, March 24, 2015, at http://www.banking.senate.gov/public/
(continued...)
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critics are correct that some banks that are currently subject to enhanced prudential regulation are
not systemically important, then there may be little societal benefit from subjecting them to
enhanced regulation, making that regulation unduly burdensome to them. Alternatively,
proponents view practices such as living wills, stress tests, and risk committees as “best
practices” that any well-managed bank should follow to prudentially manage risk.46
Many economists believe that the economic problem of “too big to fail” is really a problem of too
complex or interdependent to fail. In other words, policymakers are reluctant to allow a firm to
fail if it is too complex to be wound down swiftly and orderly or if its failure would cause other
firms to fail or would disrupt critical functions in financial markets. The reluctance of
policymakers to allow the firms to fail is recognized by the firms and their creditors, thereby
creating incentives for those firms to take on excessive risk. In regulatory terms, these firms are
referred to as “systemically important.”
Size correlates with complexity and interdependence, but not perfectly. It follows that a size
threshold is unlikely to successfully capture all and only those banks that are systemically
important—it will capture some banks that are not systemically important if set too low or leave
out some banks that are systemically important if set to high. (Alternatively, if policymakers
believe that size is the paramount policy problem, then a numerical threshold is the best approach,
although policymakers may debate the most appropriate number.) Size is a much simpler and
more transparent metric than complexity or interdependence, however. Thus, policymakers face a
tradeoff between using a simple, transparent but imperfect proxy for systemic importance, or they
can try to better target enhanced regulation by evaluating banks on a case-by-case basis. A caseby-case designation process would be more time-consuming and resource-intensive, however. For
example, only four non-banks were designated as SIFIs in three years under the existing process,
and S. 1484/S. 1910 would add several additional formal steps to the process. Furthermore, there
is no guarantee that FSOC will correctly identify systemically important BHCs since there is no
definitive proof that a BHC is systemically important until it becomes distressed.
The Dodd-Frank Act and the EGRPRA Process (S. 1484/S. 1910)47
Background. Under the Economic Growth and Regulatory Paperwork Reduction Act
(EGRPRA),48 the OCC, Federal Reserve, and FDIC are required to conduct a review at least
every 10 years “to identify outdated or otherwise unnecessary regulatory requirements imposed
on insured depository institutions.”49 The agencies began the latest review process by seeking
public comment in June 2014. In this review, the agencies are placing an emphasis on reducing
the regulatory burden on community banks.50
(...continued)
index.cfm?FuseAction=Files.View&FileStore_id=14d286e0-9c50-4b96-87cf-fe999112550f.
46
Simon Johnson, testimony before the Senate Banking Committee, March 24, 2015, at
http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=14d286e0-9c50-4b96-87cffe999112550f.
47
This section was authored by Sean Hoskins, analyst in Financial Economics.
48
P.L. 104-208, 12 U.S.C. §3311.
49
OCC, Federal Reserve, FDIC, “Regulatory Publication and Review Under the Economic Growth and Regulatory
Paperwork Reduction Act of 1996,” 80 Federal Register 7980, February 13, 2015.
50
OCC, Federal Reserve, FDIC, “Regulatory Publication and Review Under the Economic Growth and Regulatory
Paperwork Reduction Act of 1996,” 79 Federal Register 32173, June 4, 2014. Regulations under review can be found
at FFIEC, “Regulations Under Review,” at http://egrpra.ffiec.gov/regulations-under-review/regulations-under-review(continued...)
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Section 125 of S. 1484 (Section 926 of S. 1910) would require the Dodd-Frank Act to be included
in the EGRPRA review and would require the NCUA and the Consumer Financial Protection
Bureau (CFPB) to also participate. Currently, the NCUA is not required to review its regulations
under EGRPRA, but has elected to do so “in keeping with the spirit of the law.”51 The CFPB is
also not required to review its regulations through EGRPRA, but the “CFPB is required” by the
Dodd-Frank Act “to review its significant rules and publish a report of its review no later than
five years after they take effect.”52
Policy Discussion. Initially, the banking regulators decided that “new regulations that have only
recently gone into effect, or rules that we have yet to fully implement” would not be included in
the current EGRPRA review.53 The agencies argued that they were already “required to take
burden into account in adopting these regulations,” so including them in the EGRPRA process
was unnecessary.54 The regulators, however, later “decided to expand the scope of the EGRPRA
review to cover more recent regulations.”55 The legislation would codify this decision.
Some argue that the Dodd-Frank Act should not be included in the EGRPRA review because such
“a review would be premature and unwise, as many Dodd-Frank Act reforms have not even been
implemented, and those that are in place have had a very limited time to make the intended
impact.”56 If the Dodd-Frank regulations are to be included, critics contend that the “review
should not be limited to the impact of regulation on regulated entities but must include a thorough
analysis of the benefits of those rules collectively, including specifically the benefits of those
rules in avoiding a future financial crisis and the costs, burdens, bailouts, and suffering that would
accompany such a crisis.”57
Supporters of the legislation argue that it is necessary to include the Dodd-Frank Act as well as
the NCUA and the CFPB in the review in order to provide a more meaningful assessment of the
regulatory burden facing financial institutions. In particular, they contend that the EGRPRA
“review is only meaningful if we identify the biggest challenges for community banks and credit
unions and provide real solutions.”58
(...continued)
index.html. The previous report can be accessed at FFIEC, Joint Report to Congress: EGRPRA, July 31, 2007, p. 30, at
http://egrpra.ffiec.gov/docs/egrpra-joint-report.pdf.
51
NCUA, “Regulatory Publication and Review Under the Economic Growth and Regulatory Paperwork Reduction Act
of 1996,” 79 Federal Register 75763, December 19, 2014.
52
OCC, Federal Reserve, FDIC, “Regulatory Publication and Review Under the Economic Growth and Regulatory
Paperwork Reduction Act of 1996,” 80 Federal Register 7980, February 13, 2015.
53
OCC, Federal Reserve, FDIC, “Regulatory Publication and Review Under the Economic Growth and Regulatory
Paperwork Reduction Act of 1996,” 79 Federal Register 32174, June 4, 2014.
54
Ibid.
55
Federal Reserve, FDIC, OCC, “Agencies Announce Additional EGRPRA Outreach Meetings,” press release, April 6,
2015, at http://www.federalreserve.gov/newsevents/press/bcreg/20150406a.htm.
56
Better Markets, Regulatory Publication and Review under the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("EGRPRA”), March 14, 2015, at http://www.federalreserve.gov/SECRS/2015/May/20150522/
R-1510/R-1510%20_051415_129942_418572489457_1.pdf.
57
Ibid.
58
Senator Mike Crapo, “Crapo: Dodd-Frank, CFPB Rules Must Be Included in 10-Year Regulatory Review,” press
release, March 27, 2015, at http://www.crapo.senate.gov/media/newsreleases/release_full.cfm?id=358726.
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Mortgage and Consumer Protection Regulations
Banks are also regulated for consumer protection. These regulations are intended to ensure the
safety of the products, such as loans, that banks offer to consumers.
Several bills would modify regulations issued by the Consumer Financial Protection Bureau, a
regulator created by the Dodd-Frank Act to provide an increased regulatory emphasis on
consumer protection. Prior to the Dodd-Frank Act, bank regulators were responsible for consumer
protection. The Dodd-Frank Act gave the CFPB new authority and transferred existing authorities
to it from the banking regulators. The Dodd-Frank Act also directed the CFPB to implement
several new mortgage-related policy changes through rulemakings. The bills included in this
section could be viewed in light of a broader policy debate about whether the CFPB has struck
the appropriate balance between consumer protection and regulatory burden, and whether
congressional action is needed to achieve a more desirable balance.
Manufactured Housing (H.R. 650 and S. 1484/S. 1910)59
The Preserving Access to Manufactured Housing Act of 2015 (H.R. 650) was passed by the
House on April 14, 2015. H.R. 650 as passed would affect the market for manufactured housing
by amending the definitions of mortgage originator and high-cost mortgage in the Truth-inLending Act (TILA).60 Section 108 of S. 1484 (Section 909 of S. 1910) contains a similar
provision.
Manufactured homes, which often are located in more rural areas, are a type of single-family
housing that is factory built and transported to a placement site rather than constructed on-site.61
When purchasing a manufactured home, a consumer does not necessarily have to own the land on
which the manufactured home is placed. Instead, the consumer could lease the land, a practice
that is different from what is often done with a site-built home.62 Manufactured housing also
differs from site-built properties in other ways, such as which consumer protection laws apply to
the transaction and how state laws title manufactured housing.63
The Dodd-Frank Act changed the definitions for mortgage originator and high-cost mortgage to
provide additional consumer protections to borrowers for most types of housing transactions,
including manufactured housing. Some argue that these protections restrict credit for
manufactured housing. The proposals would modify the definitions of mortgage originator and
high-cost mortgage with the goal of increasing credit. Critics of the proposal are concerned about
the effect on consumers of reducing the consumer protections. The first part of the proposals
would not affect banks but would affect manufactured-home retailers. It is discussed briefly to
provide context for the second part of the proposals, which would affect banks more directly.
59
This section was authored by Sean Hoskins, analyst in Financial Economics.
15 U.S.C. §§1601 et seq.
61
CFPB, Manufactured-housing consumer finance in the United States, September 2014, p. 9, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
62
According to the CFPB, about “three-fifths of manufactured-housing residents who own their home also own the
land it is sited on.” CFPB, Manufactured-housing consumer finance in the United States, September 2014, p. 6, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
63
For more, see CFPB, Manufactured-housing consumer finance in the United States, September 2014, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
60
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Definition of Mortgage Originator. In response to problems in the mortgage market when the
housing bubble burst, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008
(SAFE Act)64 and the Dodd-Frank Act established new requirements for mortgage originators’
licensing, registration, compensation, training, and other practices. A mortgage originator is
someone who, among other things, “(i) takes a residential mortgage loan application; (ii) assists a
consumer in obtaining or applying to obtain a residential mortgage loan; or (iii) offers or
negotiates terms of a residential mortgage loan.”65 The current definition in implementing the
regulation excludes employees of manufactured-home retailers under certain circumstances, such
as “if they do not take a consumer credit application, offer or negotiate credit terms, or advise a
consumer on credit terms.”66 The legislation would expand the exception such that retailers of
manufactured homes or their employees would not be considered mortgage originators unless
they received more compensation for a sale that included a loan than for a sale that did not
include a loan.
Policy Discussion. Supporters of the proposals argue that the current definition of mortgage
originator is too broad and negatively affects the manufactured-housing market. Manufacturedhome retailers “have been forced to stop providing technical assistance to consumers during the
process of home buying” because of concerns that providing this assistance will result in the
retailers being deemed loan originators, which in turn will lead to costs that the manufacturedhome retailers do not want to bear, according to supporters.67 Supporters of the bills argue that
this situation has unnecessarily complicated the purchase process for consumers. H.R. 650 would
allow manufactured-home retailers to provide minimal assistance to consumers for which they
would not be compensated.
Opponents of the proposals, however, note that the existing protections are intended to prevent
retailers from pressuring consumers into making their purchase through a particular creditor.
Expanding the exemption, they argue, “would perpetuate the conflicts of interest and steering that
plague this industry and allow lenders to pass additional costs on to consumers.”68
High-Cost Mortgage. The proposals also would narrow the definition of high-cost mortgage for
manufactured housing. A high-cost mortgage often is referred to as a “HOEPA loan” because the
Home Ownership and Equity Protection Act (HOEPA)69 provides additional consumer protections
to borrowers for certain high-cost transactions involving a borrower’s home. The Dodd-Frank Act
expanded the protections available to high-cost mortgages by having more types of mortgage
transactions be covered and by lowering the thresholds at which a mortgage would be deemed
high-cost. The CFPB issued a rule implementing those changes in 2013.70
64
P.L. 110-289.
P.L. 111-203, §1401. The definition of mortgage originator has multiple exemptions, such as for those who perform
primarily clerical or administrative tasks in support of a mortgage originator or those who engage in certain forms of
seller financing.
66
CFPB, Manufactured-housing consumer finance in the United States, September 2014, p. 51, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
67
Rep. Stephen Fincher, Congressional Record, vol. 161, part 53 (April 14, 2015), p. H2178.
68
Corporation for Enterprise Development, “Consumer Groups Sign On Letter Opposing H.R. 650,” at http://cfed.org/
assets/pdfs/policy/federal/consumer_groups_sign_on_letter_opposing_HR_650.pdf.
69
P.L. 103-325.
70
CFPB, “High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation
Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X),” 78
Federal Register 6855, January 31, 2013.
65
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Consumers receive additional protections on high-cost transactions, such as “special disclosure
requirements and restrictions on loan terms, and borrowers in high-cost mortgages have enhanced
remedies for violations of the law.”71 Prior to originating the mortgage, lenders are required to
receive “written certification that the consumer has obtained counseling on the advisability of the
mortgage from a counselor that is approved to provide such counseling.”72 Because of these
protections and the added legal liability associated with originating a high-cost mortgage,
originating a HOEPA loan is generally considered more costly for a lender (which could be either
a bank or a nonbank) than originating a non-HOEPA loan. This is an example of the trade-off
between consumer protection and credit availability—if a loan is deemed high-cost, the consumer
has added protections, but the lender may be less willing to originate it.
A mortgage is high cost if certain thresholds are breached related to the mortgage’s (1) annual
percentage rate (APR) or (2) points and fees.73
The APR is a measure of how much a loan costs expressed as an annualized rate. Computation of
the APR includes the interest rate as well as certain fees, such as compensation to the lender and
other expenses. Under the APR test, a loan is considered to be a high-cost mortgage if the APR
exceeds the average prime offer rate (APOR, an estimate of the market mortgage rate based on a
survey of rates) by more than 6.5 percentage points for most mortgages or by 8.5 percentage
points for certain loans under $50,000.74 The bills would increase the threshold for the latter
category to 10 percentage points above the APOR for certain transactions involving manufactured
housing below $75,000.
Points and fees, the second factor, refers to certain costs associated with originating the mortgage.
The term point refers to compensation paid up front to the lender by the borrower. A point is
expressed as a percentage of the loan amount, with one point equal to 1% of the loan amount.75
The fees included in the definition of points and fees include prepayment penalties, certain types
of insurance premiums, and other real estate-related fees. Under the points and fees test, the
mortgage is high cost if the points and fees exceed (1) 5% of the total amount borrowed for most
loans in excess of $20,000 or (2) the lesser of 8% of the total amount or $1,000 for loans of less
than $20,000.76
The proposals would create a third category for the points and fees test for manufactured-housing
loans. Under the third category, certain types of manufactured-housing transactions would be
deemed high cost if the points and fees on loans less than $75,000 were greater than 5% of the
total loan amount or greater than $3,000. This higher threshold would make it less likely that a
manufactured-housing loan would be high-cost under the points and fees test, all else equal.
Policy Discussion. Data from the CFPB’s September 2014 report on the manufactured-housing
market indicate that manufactured-housing loans are more likely to be HOEPA loans than loans
for traditional, site-built homes. The CFPB analyzed data for originations from 2012, which was
before the more expansive Dodd-Frank definition of high-cost mortgage took effect. The CFPB
estimated the share of the 2012 market that would have violated the APR test (which is just one of
71
Ibid, 6856.
12 C.F.R. §1026.34.
73
In addition to the APR test and points and fees test, a mortgage can be high cost if there is a prepayment penalty that
meets certain criteria, although that issue is not addressed by H.R. 650. See Ibid.
74
15 U.S.C. §1602(bb). Other thresholds apply to junior liens.
75
In some cases, a point may be excluded from the definition of points and fees if the point results in a reduction in the
interest rate that is charged to the borrower. See P.L. 111-203, §1412.
76
15 U.S.C. §1602(bb).
72
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the high-cost triggers) had the current thresholds been in effect and found that “0.2 percent of all
home-purchase loans in the U.S. have an interest rate that exceeds the HOEPA APR threshold.
This fraction is only 0.01 percent for site-built homes but nearly 17 percent for manufactured
homes.”77
As the CFPB notes, this estimate of the share of HOEPA loans may understate the true share
because it does not include the points and fees test, but it also may overstate the true share
because lenders may have adjusted the points, fees, interest rate, profitability of the loan, and
other factors so that fewer loans would have been high-cost had the new thresholds been in
effect.78 Either way, the CFPB’s data are illustrative of the fact that a larger share of
manufactured-housing loans than site-built loans is likely to be affected by the high-cost
mortgage requirements. The CFPB stated that the changes to HOEPA made by Dodd-Frank likely
would lead to a larger share of all loans being high-cost, but “the resulting increase in the share of
high-cost mortgages was much larger for manufactured-housing loans than for loans on site-built
homes.”79
Manufactured-housing loans are more likely to be high-cost for several reasons. Manufacturedhousing loans usually are smaller than loans for site-built properties. The CFPB’s report found
that the “median loan amount for site-built home purchase was $176,000, more than three times
the manufactured home purchase loan median of $55,000.”80 Because manufactured-housing
loans often are for a smaller amount, they are likely to have higher APR and points and fees
ratios; the APR and points and fees computations include some fixed costs that do not vary
proportionately to the size of the loan. All else equal, smaller loans would be more likely to
breach the thresholds. To account for this, the APR test and the points and fees test have
thresholds that vary based on the size of the loan, as explained above. Additionally, because of
how some states title manufactured homes and other unique aspects of the manufactured-housing
market, a manufactured-housing loan is likely to have a higher interest rate than a loan involving
a site-built home (all else equal), which makes it more likely that the loan will violate the APR
threshold.81
Supporters of the bills argue that the high-cost thresholds are poorly targeted for manufacturedhousing loans because the fixed costs and higher rates associated with smaller manufacturedhousing loans make it more likely that the thresholds will be exceeded.82 The existing adjustments
for small-dollar loans are insufficient and allow too many manufactured-housing loans to be highcost. As a result, critics of the current threshold argue, credit will be restricted as some lenders
will be less inclined to bear the expense and liability associated with originating high-cost
manufactured-housing loans. H.R. 650, they claim, is important for ensuring that credit is
available for borrowers who want to purchase a manufactured home.
Opponents of the legislation argue that the APR and points and fees thresholds already are
adjusted for the size of the loan and do not need to be further modified. Doing so would weaken
77
CFPB, Manufactured-housing consumer finance in the United States, September 2014, pp. 35-36, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
78
CFPB, Manufactured-housing consumer finance in the United States, September 2014, p. 48, at
http://files.consumerfinance.gov/f/201409_cfpb_report_manufactured-housing.pdf.
79
Ibid, p. 48.
80
Ibid, p. 30.
81
Ibid, p. 6.
82
Manufactured Housing Institute, “The Preserving Access to Manufactured Housing Act (S. 682/H.R. 650),” at
http://www.manufacturedhousing.org/webdocs/S%20682%20HR%20650%20leave%20behind%20use.pdf.
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consumer protections, they argue, for borrowers who are likely to have lower incomes and be
more “economically vulnerable consumers.”83 The Obama Administration has said that “if the
President were presented with H.R. 650, his senior advisors would recommend that he veto the
bill.”84
CBO estimates that H.R. 650 as ordered reported “would increase direct spending by less than
$500,000.”85 The bill would not affect revenues or discretionary spending.
Points and Fees (H.R. 685 and S. 1484/S. 1910)86
The Mortgage Choice Act of 2015 (H.R. 685) was passed by the House on April 14, 2015. H.R.
685 as passed would modify the definition of points and fees to exclude from the definition (1)
insurance held in escrow and (2) certain fees paid to affiliates of the lender. S. 1484 and S. 1910
would also exclude insurance held in escrow from the definition of points and fees, but would not
exclude fees paid to affiliates. Instead, Section 107 of S. 1484 (Section 908 of S. 1910) would
require a study and report that would examine the effect of the Dodd-Frank Act on the ability of
affiliated lenders to provide mortgage credit, on the mortgage market for mortgages that are not
qualified mortgages, on the ability of prospective homeowners to obtain financing, and several
other issues.
As is elaborated upon below, points and fees refers to certain costs that are paid by the borrower
related to lender compensation and other expenses that are associated with originating the
mortgage. How points and fees are defined can have an effect on credit availability (mortgage
lenders argue that the current definition of points and fees makes it harder for them to extend
credit) and an effect on consumer protection (consumer groups argue that expanding the
definition could lead to borrowers being steered into more expensive mortgages that they could
be less able to repay).
The Ability-to-Repay Rule and Points and Fees. The definition of points and fees is a
component of multiple rules, but it is often discussed in the context of the Ability-to-Repay (ATR)
rule.87 Title XIV of the Dodd-Frank Act established the ATR requirement and instructed the CFPB
to establish the definition of a qualified mortgage (QM) as part of its implementation. The ATR
rule requires a lender to determine, based on documented and verified information, that at the
time a mortgage loan is made the borrower has the ability to repay the loan. Failure to make such
a determination could result in a lender having to pay damages to a borrower who brings a
lawsuit claiming that the lender did not follow the ATR rule. This legal risk gives lenders added
incentive to comply with the ATR rule.
One of the ways a lender can comply with the ATR rule is by originating a QM.88 A QM is a
mortgage that satisfies certain underwriting and product-feature requirements, such as having
83
Executive Office of the President, Office of Management and Budget, Statement of Administration Policy: H.R. 650
- Preserving Access to Manufactured Housing Act of 2015, April 13, 2015, at https://www.whitehouse.gov/sites/
default/files/omb/legislative/sap/114/saphr650r_20150413.pdf.
84
Ibid.
85
CBO, Cost Estimate of H.R. 650, April 3, 2015, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/
hr_650.pdf.
86
This section was authored by Sean Hoskins, analyst in Financial Economics.
87
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6407, January 30, 2013. For more on the rule, see CRS Report R43081, The Ability-to-Repay Rule: Possible Effects of
the Qualified Mortgage Definition on Credit Availability and Other Selected Issues, by Sean M. Hoskins.
88
For the definition of a QM, see 12 C.F.R. §1026.43.
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payments below specified debt-to-income ratios and having a term no longer than 30 years. By
making a QM, a lender is presumed to have complied with the ATR rule and receives legal
protections that could reduce its potential legal liability. A lender can comply with the ATR rule
by making a mortgage that is not a QM, but the lender will not receive the additional legal
protections. The definition of a QM, therefore, is important to a lender seeking to minimize its
legal risk. Because of this legal risk, some are concerned that, at least in the short term, the vast
majority of mortgages that are originated will be mortgages meeting the QM standards due to the
legal protections that QMs afford lenders, even though there are other means of complying with
the ATR rule.89
As an additional requirement for a mortgage to be a QM, certain points and fees associated with
the mortgage must be below specified thresholds. Some argue that the more types of fees that are
included in the QM rule’s definition of points and fees, the more likely a mortgage is to breach
the points and fees threshold and no longer qualify as a QM.90 The definition of points and fees,
therefore, may be important for determining whether a mortgage receives QM status, which can
influence whether the lender will extend the loan.
The points and fees threshold varies based on the size of the loan. The threshold is higher for
smaller loans because some fees are fixed costs that do not depend on the size of the loan. All else
equal, smaller loans would be more likely to breach the thresholds unless their thresholds were
higher. The thresholds, which are indexed for inflation, are currently as follows:
3% of the total loan amount for a loan greater than or equal to $100,000;
$3,000 for a loan less than $100,000 but greater than or equal to $60,000;
5% of the total amount for a loan less than $60,000 but greater than or equal to
$20,000;
$1,000 for a loan less than $20,000 but greater than or equal to $12,500; and
8% of the total loan amount for a loan less than $12,500.91
A loan that is above the respective points and fees cap cannot be a QM.
The definition of points and fees includes certain costs associated with originating the mortgage.
The term point refers to compensation paid up front to the lender by the borrower. A point is
expressed as a percentage of the loan amount, with one point equal to 1% of the loan amount.92
The definition of fees has several different categories of fees, but what is most pertinent with
respect to H.R. 685 is that certain fees are excluded from the definition of points and fees if “the
charge is paid to a third party unaffiliated with the creditor.”93 Certain fees paid to third parties
89
CFPB, Prepared remarks of Richard Cordray at a meeting of the Credit Union National Association, February 27,
2013, at http://www.consumerfinance.gov/speeches/prepared-remarks-of-richard-cordray-at-a-meeting-of-the-creditunion-national-association/. For a preliminary analysis of the effect of the QM rule on originations, see Bing Bai, Data
show surprisingly little impact of new mortgage rules, Urban Institute, August 21, 2014, at http://www.urban.org/
urban-wire/data-show-surprisingly-little-impact-new-mortgage-rules.
90
It is possible, however, that the market may adapt and have new fees so that the current definition may not affect
future outcomes.
91
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6587, January 30, 2013.
92
In some cases, a point may be excluded from the definition of points and fees if the point results in a reduction in the
interest rate that is charged to the borrower. See P.L. 111-203, §1412.
93
15 U.S.C. §1602(bb).
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affiliated94 with the lender are included in the definition. H.R. 685 would change the treatment of
fees for third parties affiliated with the lender by allowing (in some cases) those fees to also be
excluded from the definition of points and fees. S. 1484 and S. 1910 would not exclude fees for
third parties affiliated with the lender from the definition of points and fees, but would require a
study that would examine the issue.
Policy Discussion. As mentioned above, the legislative proposals address the treatment of several
types of fees. However, most of the policy debate surrounding fees for affiliated entities has
focused on title insurance because title insurance is one of the larger fees associated with a
mortgage that would be affected by the changes H.R. 685 proposes to the points and fees
definition.95 Title insurance involves “searching the property’s records to ensure that [a particular
individual is] the rightful owner and to check for liens.”96 Title insurance provides protection to
the lender or borrower (depending on the type of policy) if there turns out to be a defect in the
title. Under the current definition for points and fees, fees for title insurance provided by a title
insurer that is independent of or unaffiliated with the lender may be excluded from the points and
fees definition, but the fees for an affiliated title insurer must be included in the definition of
points and fees. H.R. 685 would allow fees for affiliated title insurance to be treated the same as
independent title insurance, and both would be excluded from the points and fees definition.
The cap on points and fees is intended to protect consumers from predatory loans by limiting fees
that can be placed on a QM and by aligning the incentives of the lender and the borrower.
Lenders can be compensated through points that are paid up front or through interest payments
over the life of the loan. The method by which the lender receives compensation may influence
the lender’s incentive to evaluate the borrower’s ability to repay the mortgage. As the CFPB notes
in its preamble to the ATR rule, the cap on points and fees may make lenders “take more care in
originating a loan when more of the return derives from performance over time (interest
payments) rather [than] from upfront payments (points and fees). As such, this provision [the cap
on points and fees] may offer lenders more incentive to underwrite these loans carefully.”97
Supporters of H.R. 685 argue that expanding the definition of points and fees is important to
ensuring that credit is available. The Mortgage Bankers Association, for example, stated that as a
result of the current definition of points and fees, “many affiliated loans, particularly those made
to low-and moderate-income borrowers, would not qualify as QMs and would be unlikely to be
made or would only be available at higher rates due to heightened liability risks. Consumers
would lose the ability to choose to take advantage of the convenience and market efficiencies
offered by one-stop shopping.”98 Putting the fees of affiliated and independent title insurers on
94
An affiliated business arrangement is “an arrangement in which (A) a person who is in a position to refer business
incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of
such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent
in a provider of settlement services; and (B) either of such persons directly or indirectly refers such business to that
provider or affirmatively influences the selection of that provider.” See 12 U.S.C. §2602(7).
95
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6439, January 30, 2013.
96
Federal Reserve Board, “A Consumer’s Guide to Mortgage Refinancings,” at http://www.federalreserve.gov/pubs/
refinancings/.
97
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6562, January 30, 2013.
98
Letter from Mortgage Bankers Association, April 13, 2015, at http://mba.informz.net/MBA/data/images/
HR685Leadership4132015.pdf.
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equal footing in the points and fees definition, supporters argue, would enhance competition in
the title insurance industry.99
Supporters also contend that because title insurance is regulated predominantly by the states and
many states have policies in place to determine how title insurance is priced, there is less need to
be concerned that title insurance fees are excessive.100 They note that the Real Estate Settlement
Procedures Act (RESPA)101 allows affiliated business arrangements and already has protections in
place for consumers, such as “a requirement to disclose affiliation to consumers.”102
Opponents of H.R. 685 argue that, by narrowing the definition of points and fees to exclude
affiliated providers, the bill “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.”103
For this reason, the Obama Administration has said that “if the President were presented with
H.R. 685, his senior advisors would recommend that he veto the bill.”104
Critics also contend that removing affiliated title insurers from the points and fees definition
would reduce the title insurance industry’s incentive to make the price of title insurance, which
some believe is already too high, “more reasonable.”105 They note that affiliated service providers
are likely to be able to receive business through references from their affiliate and, therefore,
“affiliates of a creditor may not have to compete in the market with other providers of a service
and thus may charge higher prices that get passed on to the consumer.”106
Escrow. H.R. 685, S. 1484, and S. 1910 would modify the definition of points and fees to exclude
from the definition insurance held in escrow. Supporters of the proposals state that the bill would
clarify that insurance held in escrow107 should not be included in the definition of points and
fees.108 They argue that the drafting of the Dodd-Frank Act left unclear how insurance payments
held in escrow should be treated in the definition. Opponents of the proposals have not cited this
provision as a rationale for their opposition.
99
Ibid.
The Realty Alliance, “Congress Should Pass the Mortgage Choice Act,” at http://www.therealtyalliance.com/
getpublicfile.asp?ref=41.
101
12 U.S.C. §§2601 et seq.
102
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6438, January 30, 2013.
103
Executive Office of the President, Office of Management and Budget, Statement of Administration Policy: H.R. 685
– Mortgage Choice Act of 2015, April 13, 2015, at https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/
114/saphr685r_20150413.pdf.
104
Ibid.
105
Center for Responsible Lending, “H.R. 685 Will Lead to Higher Fees for Homebuyers,” at
http://ourfinancialsecurity.org/blogs/wp-content/ourfinancialsecurity.org/uploads/2015/04/
hr685_will_lead_to_higher_fees_for_homebuyers-fact-sheet-3.18.15.pdf.
106
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6439, January 30, 2013.
107
An escrow account is an account that a “mortgage lender may set up to pay certain recurring property-related
expense ... such as property taxes and homeowner’s insurance.” Property taxes and homeowner’s insurance are often
lump-sum payments owed annually or semiannually. See CFPB, “What is an escrow or impound account?,” at
http://www.consumerfinance.gov/askcfpb/140/what-is-an-escrow-or-impound-account.html.
108
The Realty Alliance, “Congress Should Pass the Mortgage Choice Act,” at http://www.therealtyalliance.com/
getpublicfile.asp?ref=41.
100
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CBO estimates that H.R. 685 as ordered reported “would affect direct spending” but that “those
effects would be insignificant.”109 The bill would not affect revenues or discretionary spending,
according to CBO.
Rural Lending (H.R. 1259 and S. 1484/S. 1910)110
Helping Expand Lending Practices in Rural Communities Act (H.R. 1259) was passed by the
House on April 13, 2015. H.R. 1259 as passed would establish a temporary, two-year program in
which individuals could petition the CFPB for counties that were not designated as rural by the
CFPB to receive the rural designation. It also would establish evaluation criteria and an
evaluation process for the CFPB to follow in assessing these petitions. Section 103 of S. 1484
(Section 904 of S. 1910) would establish a petition process similar to the one proposed by H.R.
1259, but the process under S. 1484 and S. 1910 would not sunset after two years. The legislative
proposals could increase the credit available to borrowers in rural areas but would reduce some of
the protections put in place for rural consumers.
Definition of Rural. Statute allows for exemptions from certain consumer protection
requirements for companies operating in rural areas. In implementing the requirements, the CFPB
designates certain counties as rural. The exemptions and additional compliance options for
lenders in rural areas stem from concerns that borrowers in these areas may have a harder time
accessing credit than those in non-rural areas. For example, the ATR rule has an additional
compliance option that allows small lenders operating in rural or underserved areas to originate
balloon mortgages, subject to some restrictions.111
The Dodd-Frank Act specifies the additional compliance option for rural lenders, but it leaves the
definition of rural to the discretion of the CFPB. Balloon mortgages originated by lenders in areas
that are not designated as rural may be ineligible for the compliance option (although the CFPB
has established a two-year transition period to allow “small”112 lenders to originate balloon
mortgages until January 2016, subject to some restrictions). Lenders that benefit from exemptions
may offer products to their consumers that lenders in non-rural areas may be less likely to offer,
but consumers in rural areas may not receive the same protections as those in non-rural areas.
When publishing the ATR rule, the CFPB stated that it considers its method of designating
counties as rural, which is based on the U.S. Department of Agriculture’s Urban Influence
Codes,113 to be consistent with the intent of the exemptions contained in statute. The CFPB
estimated that its definition of rural results in 9.7% of the total U.S. population being in rural
areas.114 However, in light of various questions about its definition of rural raised during the
109
CBO, Cost Estimate of H.R. 685, April 3, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/
hr_685.pdf.
110
This section was authored by Sean Hoskins, analyst in Financial Economics.
111
See 12 C.F.R. §1026.43 and see CRS Report R43081, The Ability-to-Repay Rule: Possible Effects of the Qualified
Mortgage Definition on Credit Availability and Other Selected Issues, by Sean M. Hoskins.
112
The CFPB originally defined small for the purpose of the ATR rule as having less than or equal to $2 billion in
assets and originating 500 or fewer mortgages in the previous year. The September 2015 rule, among other things,
raised the threshold to 2,000 mortgage loans. See CFPB, “CFPB Finalizes Rule to Facilitate Access to Credit in Rural
and Underserved Areas,” September 21, 2015, at http://www.consumerfinance.gov/newsroom/cfpb-finalizes-rule-tofacilitate-access-to-credit-in-rural-and-underserved-areas/.
113
For the definition of rural, see 12 C.F.R. §1026.35.
114
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6543, January 30, 2013.
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comment period, the CFPB said in 2013 that it intended “to study whether the [definition] of
‘rural’ ... should be adjusted.”115 As a result, the CFPB issued a rule in September 2015 to expand
the definition of rural as a means of facilitating access to credit in rural areas.116 The new
definition would have two prongs: an area could be deemed rural under the existing methodology
involving the Urban Influence Codes or, if it is not designated as rural by that test, it could qualify
under an alternative method that involves the Census Bureau’s census block data.
To qualify for some of the exemptions, a lender not only must operate in a rural area but also
must meet the CFPB’s definition of small, which the CFPB also expanded in its September 2015
rule. Based on 2013 data, the CFPB estimates “that the number of rural small creditors would
increase from about 2,400 to about 4,100.”117
Policy Discussion. Although rule is intended to expand credit availability, the CFPB notes that its
analysis “did not find specific evidence that the final provisions would increase access to
credit.”118 The CFPB explains that its inability to estimate the change in credit availability from
the rule may be due to data limitations that prevent it from testing certain hypotheses.119
Alternatively, the CFPB notes that the change in credit availability may be difficult to estimate
because borrowers in rural areas already may be adequately served by lenders and therefore may
not benefit from the CFPB’s expanded definition.120
The CFPB maintains that the use of census blocks, as suggested in its rule, allows for a more
granular approach, but critics have argued that the new approach “is still inadequate because
census tracts are only updated once every 10 years.”121 Supporters of the proposals contend the
CFPB’s method of designating counties as rural is inflexible and may not account for “atypical
population distributions or geographic boundaries.”122 The proposals are intended, supporters
argue, to provide a way to challenge a CFPB designation and invites individuals “to participate in
their government and provide input on matters of local knowledge. It is about making the Federal
Government more accessible, more accountable, and more responsive to the people who know
their local communities best.”123
CBO estimates that H.R. 1259 as ordered reported would increase direct spending by $1 million
over the next 10 years but would not affect revenues or discretionary spending.124
115
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” p. 6, at
http://files.consumerfinance.gov/f/201305_cfpb_final-rule_atr-concurrent-final-rule.pdf.
116
CFPB, “CFPB Finalizes Rule to Facilitate Access to Credit in Rural and Underserved Areas,” September 21, 2015,
at http://www.consumerfinance.gov/newsroom/cfpb-finalizes-rule-to-facilitate-access-to-credit-in-rural-andunderserved-areas/.
117
CFPB, “Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act
(Regulation Z),” p. 73, at http://files.consumerfinance.gov/f/201509_cfpb_amendments-relating-to-small-creditors-andrural-or-underserved-areas-under-the-truth-in-lending-act-regulation-z.pdf.
118
Ibid, p. 76
119
Ibid, p. 77.
120
Ibid, p. 77.
121
Rep. Andy Barr, Congressional Record, vol. 161, part 52 (April 13, 2015), p. H2121.
122
Conference of State Bank Supervisors, “Letter of Support for H.R. 2672,” December 4, 2013, at
http://www.csbs.org/legislative/Documents/CSBSLetterofSupportforHR2672Dec42013.pdf.
123
Rep. Andy Barr, Congressional Record, vol. 161, part 52 (April 13, 2015), p. H2121.
124
CBO, Cost Estimate of H.R. 1259, April 6, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/hr1259.pdf.
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Mortgage Escrow and Servicing (H.R. 1529)125
The Community Institution Mortgage Relief Act of 2015 (H.R. 1529) was reported by the House
Committee on Financial Services on April 6, 2015.126 H.R. 1529 as reported would make two
modifications to CFPB mortgage rules. It would (1) exempt from certain escrow requirements
any mortgage held by a lender with assets of $10 billion or less if the mortgage is held in the
lender’s portfolio for three years and (2) exempt from certain servicing requirements any servicer
that annually services 20,000 mortgages or fewer. Supporters of H.R. 1529 argue that the bill
would reduce the burden on small lenders and servicers of complying with these regulations
while giving added flexibility to consumers. Opponents argue that the bill would roll back
consumer protections that were put in place in response to the housing and foreclosure crisis.
Escrow Accounts. An escrow account is an account that a “mortgage lender may set up to pay
certain recurring property-related expenses ... such as property taxes and homeowner’s
insurance.”127 Property taxes and homeowner’s insurance often are lump-sum payments owed
annually or semiannually. To ensure a borrower has enough money to make these payments, a
lender may divide up the amount owed and add it to a borrower’s monthly payment. The
additional amount paid each month is placed in the escrow account and then drawn on by the
mortgage servicer that administers the account to make the required annual or semiannual
payments. Maintaining escrow accounts for borrowers is an additional cost to banks and may be
especially costly for smaller firms.
An escrow account is not required for all types of mortgages but had been required for at least
one year for higher-priced mortgage loans even before the Dodd-Frank Act.128 A higher-priced
mortgage loan is a loan with an APR “that exceeds an ‘average prime offer rate’129 for a
comparable transaction by 1.5 or more percentage points for transactions secured by a first lien,
or by 3.5 or more percentage points for transactions secured by a subordinate lien.”130 If the first
lien is a jumbo mortgage (above the conforming loan limit131 for Fannie Mae and Freddie Mac),
then it is considered a higher-priced mortgage loan if its APR is 2.5 percentage points or more
above the average prime offer rate. The Dodd-Frank Act, among other things, extended the
amount of time an escrow account for a higher-priced mortgage loan must be maintained from
one year to five years, although the escrow account can be terminated after five years only if
certain conditions are met. It also provided additional disclosure requirements.132
The Dodd-Frank Act gave the CFPB the discretion to exempt from certain escrow requirements
lenders operating predominantly in rural areas if the lenders satisfied certain conditions.133 The
125
This section was authored by Sean Hoskins, analyst in Financial Economics.
A similar bill, H.R. 4521, was ordered to be reported by the Financial Services Committee in the 113th Congress.
127
CFPB, “What is an escrow or impound account?,” at http://www.consumerfinance.gov/askcfpb/140/what-is-anescrow-or-impound-account.html.
128
A higher-priced mortgage loan is different from a high-cost mortgage described in H.R. 650. (See “Manufactured
Housing.”)
129
The average prime offer rate (APOR) is an estimate of the market mortgage rate based on a survey of rates. The
CFPB will publish the APOR weekly.
130
CFPB, “Escrow Requirements Under the Truth in Lending Act (Regulation Z),” 78 Federal Register 4726, January
22, 2013.
131
See CRS Report RS22172, The Conforming Loan Limit, by N. Eric Weiss and Sean M. Hoskins.
132
CFPB, Small Entity Compliance Guide: TILA Escrow Rule, April 18, 2013, p. 4, at http://files.consumerfinance.gov/
f/201307_cfpb_updated-sticker_escrows-implementation-guide.pdf.
133
P.L. 111-203, §1461.
126
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CFPB’s escrow rule included exemptions from escrow requirements for lenders that (1) operate
predominantly in rural or underserved areas; (2) extend 2,000 mortgages or fewer; (3) have less
than $2 billion in total assets; and (4) do not escrow for any mortgage they service (with some
exceptions).134 Additionally, a lender that satisfies the above criteria must intend to hold the loan
in its portfolio to be exempt from the escrow requirement for that loan. H.R. 1529 would expand
the exemption such that a lender also would be exempt from maintaining an escrow account for a
mortgage as long as it satisfied two criteria: (1) the mortgage is held by the lender in its portfolio
for three or more years and (2) the lender has $10 billion or less in assets.
Policy Discussion. When the CFPB issued its escrow rule in January 2013, it estimated that
“there are 2,612 exempt creditors who originated ... first-lien higher-priced mortgage loans in
2011.”135 It also estimated that there would be 5,087 lenders with $10 billion or less in total assets
who, collectively, originated 91,142 first-lien higher-priced mortgage loans in 2011 that would
not be exempt from the escrow requirements.136 If H.R. 1529 had been in place in 2011, those
additional 5,087 lenders would have been exempt from the escrow requirements for the loans
held in portfolio for three or more years.137
Supporters of H.R. 1529 argue that expanding the escrow exemption is important for reducing the
regulatory burden on small banks. Small banks already would have the incentive, the argument
goes, to make sure the borrower will pay taxes and insurance even without the escrow account
because the lender is exposed to some of the risk by keeping the mortgage in its portfolio.138
Because of this “skin in the game,” supporters argue the escrow requirement is unduly
burdensome for small banks. They also believe the requirement can be an unnecessary burden to
consumers who would rather manage their taxes and insurance payments on their own, especially
if those consumers have a history of making their required payments on previous loans.139
Opponents of H.R. 1529 argue that the escrow requirement is an important consumer protection.
The escrow account is required for higher-priced mortgage loans, and critics contend that the
higher interest rate on those loans reflects the fact that borrowers with these loans often are riskier
subprime borrowers.140 Because these borrowers already face a higher risk of default, opponents
of H.R. 1529 argue the escrow requirement is important for ensuring these borrowers are not, in
the words of Ranking Member Waters, “being blindsided by additional costs at the end of each
134
See 12 C.F.R. §1026.35 and CFPB, “Escrow Requirements Under the Truth in Lending Act (Regulation Z),” 78
Federal Register 4726, January 22, 2013. The CFPB’s September 2015 rule also the escrow requirements, see CFPB,
“Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act
(Regulation Z),” at http://files.consumerfinance.gov/f/201509_cfpb_amendments-relating-to-small-creditors-and-ruralor-underserved-areas-under-the-truth-in-lending-act-regulation-z.pdf.
135
CFPB, “Escrow Requirements Under the Truth in Lending Act (Regulation Z),” 78 Federal Register 4747, January
22, 2013.The data the CFPB uses do not include non-depository institutions, so the CFPB estimates are a lower bound.
136
Ibid., p. 4748.
137
The CFPB expanded its definitions of small and rural, allowing more lenders to be deemed small and areas to be
deemed rural. With this change, there would be more small lenders in rural areas than when the escrow rule was
proposed in 2013, but H.R. 1529 would still increase the number of exempt lenders. See CFPB, “Amendments Relating
to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act (Regulation Z),” at
http://files.consumerfinance.gov/f/201509_cfpb_amendments-relating-to-small-creditors-and-rural-or-underservedareas-under-the-truth-in-lending-act-regulation-z.pdf.
138
CQ Congressional Transcripts, “House Financial Services Committee Holds Markup on Financial Regulatory
Legislation, March 25, 2015, at http://www.cq.com/doc/financialtranscripts-4653577?9&search=M9QutUd4.
139
Ibid.
140
Ibid.
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year.”141 They argue that the exemption the CFPB gave for certain smaller entities already strikes
the appropriate balance between reducing the regulatory burden for some banks and protecting
consumers.
Mortgage Servicers. The second part of H.R. 1529 addresses mortgage servicers. Servicers
received added attention from Congress after the surge in foreclosures following the bursting of
the housing bubble. The Dodd-Frank Act imposed additional requirements on servicers to protect
borrowers through amendments to TILA and RESPA.142 The new servicing protections143 include,
among other things, additional disclosure requirements about the timing of rate changes,
requirements for how payments would be credited, obligations to address errors in a timely
fashion, and guidance on when foreclosure could be initiated and how servicers must have
continuity of contact with borrowers. The CFPB issued rules implementing those changes.144
Servicers that service 5,000 mortgages or fewer and only service mortgages that they or an
affiliate owns or originated are considered small servicers and are exempted from some but not
all TILA and RESPA servicing requirements.145 H.R. 1529 would modify the exemption for the
rules implemented under RESPA by directing the CFPB to provide exemptions to or adjustments
from the RESPA servicing provisions for servicers that service 20,000 mortgages or fewer “in
order to reduce regulatory burdens while appropriately balancing consumer protections.”146 The
RESPA servicing provisions that could be affected by H.R. 1529 include, among other things,
how escrow accounts (if they are required) would be administered, disclosure to an applicant
about whether his or her servicing can be sold or transferred, notice to the borrower if the loan is
transferred, prohibitions on the servicer relating to fees and imposing certain types of insurance,
and other consumer protections.147
Policy Discussion. In its discussion of its servicing rule, the CFPB notes that “servicers that
service relatively few loans, all of which they either originated or hold on portfolio, generally
have incentives to service well.”148 The incentive to service the loans well comes from the fact
that “foregoing the returns to scale of a large servicing portfolio indicates that the servicer
chooses not to profit from volume, and owning or having originated all of the loans serviced
indicates a stake in either the performance of the loan or in an ongoing relationship with the
borrower.”149 The CFPB, therefore, found that an “exemption may be appropriate only for
141
Ibid.
12 U.S.C. §§2601 et seq.
143
Some of the servicing requirements are specific mandates in the Dodd-Frank Act, and some are issued at the
discretion of the CFPB pursuant to its authority under RESPA and TILA.
144
CFPB, “Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X),” 78 Federal
Register 10695, February 14, 2013, and CFPB, “Mortgage Servicing Rules Under the Truth in Lending Act (Regulation
Z),” 78 Federal Register 10901, February 14, 2013.
145
See, for example, 12 C.F.R. 1026.41. The CFPB provided exemptions to small servicers from certain TILA
requirements using its authority under TILA. The CFPB elected not to extend certain RESPA requirements to small
servicers. See CFPB, “Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X),” 78
Federal Register 10699, February 14, 2013.
146
H.R. 4521, §3.
147
For a full list, see 12 U.S.C. §2605 and CFPB, “Mortgage Servicing Rules Under the Real Estate Settlement
Procedures Act (Regulation X),” 78 Federal Register 10699, February 14, 2013.
148
CFPB, “Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z),” 78 Federal Register 10980,
February 14, 2013.
149
Ibid, p. 10980.
142
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servicers that service a relatively small number of loans and either own or originated the loans
they service.”150
The CFPB set the loan threshold at 5,000 loans because it concluded that this category “identifies
the group of servicers that make loans only or largely in their local communities or more
generally have incentives to provide high levels of customer contact and information.”151 The
CFPB’s data analysis of the threshold concluded that
With the threshold set at 5,000 loans, the Bureau estimates that over 98% of insured
depositories and credit unions with under $2 billion in assets fall beneath the threshold. In
contrast, only 29% of such institutions with over $2 billion in assets fall beneath the
threshold and only 11% of such institutions with over $10 billion in assets do so. Further,
over 99.5% of insured depositories and credit unions that meet the traditional threshold
for a community bank—$1 billion in assets—fall beneath the threshold. The Bureau
estimates there are about 60 million closed-end mortgage loans overall, with about 5.7
million serviced by insured depositories and credit unions that qualify for the
exemption.152
The CFPB’s 2013 rulemaking did not discuss the effect of setting the threshold at 20,000 loans, as
H.R. 1529 would, but it noted that if “the loan count threshold were set at 10,000 mortgage loans,
for example, over 99.5% of insured depositories and credit unions with under $2 billion in assets
would fall beneath the threshold. However, 50% of insured depositories with over $2 billion in
assets and 20% of those with over $10 billion in assets would fall beneath the threshold.”153
Those entities that service more than 5,000 loans, the CFPB contends, may be more likely to use
a different servicing model that would not have the same “incentives to provide high levels of
customer contact and information.”154 The CFPB, therefore, set the threshold at 5,000 loans.
Supporters of H.R. 1529 argue that the bill is intended to give the CFPB the discretion to either
provide “exemptions or adjustments to the requirements of the existing codes section and should
do so appropriately balancing consumer protections. So the near-small institutions will either get
the relief currently granted to the small institutions or a bit less relief, and that will be determined
by the CFPB.”155 Raising the threshold from 5,000 loans to 20,000 loans, supporters argue, “will
better delineate small servicers from the large servicers, and give credit union and community
banks greater flexibility to ensure that more of their customers can stay in their homes.”156
Opponents of H.R. 1529 have contended that the exemptions in the CFPB’s regulations are
sufficient to protect small lenders and that expanding the exemptions would weaken the
protections available to consumers. They note that by not only raising the threshold but also
removing the requirement that servicers own the mortgage, the servicers would have “less skin in
150
Ibid, p. 10975.
Ibid, p. 10981.
152
Ibid, p. 10982.
153
Ibid, p. 10981.
154
Ibid, p. 10981. The CFPB notes that its estimates are only for depository institutions and do not include nondepositories due to data limitations.
155
Attributed to Rep. Brad Sherman by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Regulatory Legislation,” March 25, 2015, at http://www.cq.com/doc/financialtranscripts4653577?0&search=4xqeO9ST.
156
Attributed to Rep. Blaine Luetkemeyer by CQ Congressional Transcripts, “House Financial Services Committee
Holds Markup on Financial Regulatory Legislation,” March 25, 2015, at http://www.cq.com/doc/financialtranscripts4653577?0&search=4xqeO9ST.
151
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that game if bad servicing practices were to result in default and foreclosure.”157 Critics point to
mortgage servicers in particular as actors that performed poorly during the foreclosure crisis and
should not receive additional exemptions from CFPB regulations.158
CBO estimates that H.R. 1529 as ordered reported would “increase direct spending by less than
$500,000 for expenses of the CFPB to prepare and enforce new rules” but would not affect
revenues or discretionary spending.159
Portfolio Qualified Mortgage (H.R. 1210 and S. 1484/S. 1910)160
The Portfolio Lending and Mortgage Access Act (H.R. 1210) was ordered to be reported by the
House Committee on Financial Services on July 29, 2015. H.R. 1210 would establish a new
qualified mortgage (QM) category for a mortgage held in a lender’s portfolio. Section 106 of S.
1484 (Section 907 of S. 1910) would also establish a portfolio QM category. S. 1484/S. 1910
would require a loan to meet stricter criteria than under H.R. 1210 but would have more relaxed
portfolio requirements than H.R. 1210. The legislative proposals are intended to increase credit
availability and to reduce the regulatory burden on lenders. Critics argue that the proposals would
go too far in reducing consumer protections and would allow lenders to receive legal protections
for offering risky, non-standard mortgage products.
The Ability-to-Repay Rule and Portfolio Loans. Title XIV of the Dodd-Frank Act established
the ability-to-repay (ATR) requirement. Under the ATR requirement, a lender must determine
based on documented and verified information that, at the time a mortgage loan is made, the
borrower has the ability to repay the loan. The rule enumerates the type of information that a
lender must consider and verify prior to originating a loan, including the applicant’s income or
assets, credit history, outstanding debts, and other criteria. Lenders that fail to comply with the
ATR rule could be subject to legal liability could be subject to legal liability, such as the payment
of certain statutory damages.161
A lender can comply with the ATR rule in one of two ways. A lender can either originate a
mortgage that meets the less concrete underwriting and product feature standards of the General
ATR Option or a mortgage that satisfies the more stringent, specific standards of the Qualified
Mortgage. A QM is a mortgage that satisfies certain underwriting and product feature
requirements. There are several different types of QM, with the different categories applying to
different lenders and having different underwriting and product feature requirements. For
example, the Standard QM that is available to all lenders requires the mortgage to not have
balloon payments or a loan term over 30 years, has restrictions on the fees that can be charged,
and has other requirements that must be met in order for the mortgage to receive QM status.
These underwriting and product feature requirements are intended to ensure that a mortgage
receiving QM status satisfies certain minimum standards, with the standards intended to offer
157
Attributed to Rep. Maxine Waters by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Regulatory Legislation,” March 25, 2015, at http://www.cq.com/doc/financialtranscripts4653577?0&search=4xqeO9ST.
158
Ibid. See also CRS Report R41491, “Robo-Signing” and Other Alleged Documentation Problems in Judicial and
Nonjudicial Foreclosure Processes, by David H. Carpenter.
159
CBO, Cost Estimate of H.R. 1529, April 3, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/
hr_1529.pdf.
160
This section was authored by Sean Hoskins, analyst in Financial Economics.
161
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6416, January 30, 2013.
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protections to borrowers. A loan that satisfies the less concrete standards of the General ATR
Option, in contrast, is allowed to have a balloon payment and a term in excess of 30 years so long
as the lender verifies that the borrower would have the ability to repay the loan.
If a lender originates a mortgage that receives QM status, then it is presumed to have complied
with the ATR rule and receives legal protections that could reduce its potential legal liability.162
As mentioned above, a lender can comply with the ATR rule by making a mortgage that is not a
QM and instead satisfies the General ATR Option, but the lender will not receive the additional
legal protections. The definition of a QM, therefore, is important to a lender seeking to minimize
its legal risk. Because of this legal risk, some are concerned that, at least in the short term, few
mortgages will be originated that do not meet the QM standards due to the legal protections that
QMs afford lenders, even though there are other means of complying with the ATR rule.163
If a mortgage does not receive QM status under the Standard QM – the general approach that
most focus on when discussing the QM compliance options – the mortgage may still receive QM
status if it complies with the Small Creditor Portfolio QM option. To do so, three broad sets of
criteria must be satisfied. First, the loan must be held in portfolio for at least three years (subject
to several exceptions).164 Second, the loan must be held by a small lender, which is defined as a
lender who originated 2,000 or fewer mortgages in the previous year and has less than $2 billion
in assets.165 Third, the loan must meet certain underwriting and product feature requirements.166
Compared to the Standard QM, the Small Creditor Portfolio QM has less prescriptive
underwriting requirements. For example, to receive QM status under the Standard QM, a
borrower must have a debt-to-income (DTI) ratio below 43% after accounting for the payments
associated with the mortgage and other debt obligations, but under the Small Creditor Portfolio
QM, the lender is required to consider and verify the borrower’s DTI but does not have a specific
threshold that the borrower must be below.
162
A lender that originates a QM is entitled to a “presumption of compliance” with the ATR requirement, but the type
of presumption of compliance and the amount of legal protection the lender receives depends on the mortgage interest
rate. A QM with an annual percentage rate (APR) less than 1.5 percentage points above the average prime offer rate
(APOR) for a first lien or less than 3.5 percentage points above the APOR for a subordinate lien qualifies for a safe
harbor, a conclusive presumption of compliance with the ATR requirement. Mortgages that qualify for a safe harbor
are referred to by the CFPB as prime mortgages. Mortgages above the thresholds that otherwise meet the QM
requirements are deemed to be “higher-priced covered transactions” and qualify for a rebuttable presumption of
compliance. The CFPB refers to QMs receiving a rebuttable presumption as subprime loans. See CFPB, “Ability-toRepay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register 6408, January 30,
2013.
163
CFPB, Prepared remarks of Richard Cordray at a meeting of the Credit Union National Association, February 27,
2013, at http://www.consumerfinance.gov/speeches/prepared-remarks-of-richard-cordray-at-a-meeting-of-the-creditunion-national-association/. For a preliminary analysis of the effect of the QM rule on originations, see Bing Bai, Data
show surprisingly little impact of new mortgage rules, Urban Institute, August 21, 2014, at http://www.urban.org/
urban-wire/data-show-surprisingly-little-impact-new-mortgage-rules.
164
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” p. 5, at
http://files.consumerfinance.gov/f/201305_cfpb_final-rule_atr-concurrent-final-rule.pdf.
165
The definition of “small” can be found in 12 C.F.R. §1026.35(b)(2)(iii)(B) and (C). The CFPB changed its
definition of small from originating 500 mortgages in the previous calendar year to 2,000 mortgages. See CFPB,
“Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act
(Regulation Z),” at http://files.consumerfinance.gov/f/201509_cfpb_amendments-relating-to-small-creditors-and-ruralor-underserved-areas-under-the-truth-in-lending-act-regulation-z.pdf.
166
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z),” 78
Federal Register 35431, June 12, 2013.
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The CFPB was willing to relax the underwriting standards for some portfolio loans because it
believed “that portfolio loans made by small creditors are particularly likely to be made
responsibly and to be affordable for the consumer.”167 By keeping the loan in portfolio, the CFPB
argues, small creditors have added incentive to consider whether the borrower will be able to
repay the loan168 because the lender retains the default risk and could be exposed to losses if the
borrower does not repay. This exposure, the argument goes, would encourage small creditors to
provide additional scrutiny during the underwriting process, even in the absence of a legal
requirement to do so. Keeping the mortgage in portfolio is intended to align “consumers’ and
creditors’ interests regarding ability to repay.”169
Policy Discussion. The Small Creditor Portfolio QM is intended to increase the amount of credit
that is available to consumers by making it easier for small lenders to extend portfolio loans.
Some in Congress argue that the Small Creditor Portfolio QM, while useful to expand credit and
reduce regulatory burden, is too narrow. They propose establishing an additional portfolio QM
option that would have more relaxed eligibility criteria. The proposals would allow larger lenders
to participate and would not require all of the Small Creditor Portfolio QM’s underwriting and
product feature requirements (such as the DTI ratio) to be met in order to receive QM status.
Supporters of an expanded portfolio lending option argue that when a larger lender holds the
mortgage in portfolio, it too has the incentive to ensure that the borrower will repay the loan
because it is also exposed to the risk of default. They argue that this incentive is present whether
the lender is large or small. The incentive to ensure the loan is properly underwritten, supporters
argue, is sufficient to merit the loan receiving QM status and the commensurate legal protections.
Extending the legal protections to portfolio loans, the argument goes, will encourage lenders to
expand credit and allow more individuals to purchase homes.
Critics of the proposals contend that the incentive alignment associated with holding a mortgage
in portfolio is not sufficient to justify extending QM status to portfolio loans held by large
lenders. Certain traits that are more likely to be found in small lenders, they argue, are also
important for ensuring that a lender thoroughly evaluates a borrower’s ability to repay. The CFPB
limited the Small Creditor Portfolio QM to small lenders because the CFPB believes the
“relationship-based” business model often employed by small lenders may make small lenders
better able to assess a borrower’s ability to repay than larger lenders.170 Additionally, the CFPB
argues that small lenders often have close ties to their communities, which provides added
incentive to thoroughly underwrite their mortgages for the borrower’s ability to repay.171 The
level at which a lender should not be considered small because it no longer is influenced by its
ties to its communities, however, is subject to much debate.
CBO estimates that H.R. 1210 as ordered reported could affect direct spending but that the effect
would be insignificant.172 The bill would not affect revenues. CBO notes that the more relaxed
167
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z),” 78
Federal Register 6539, January 30, 2013.
168
Ibid.
169
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z),” 78
Federal Register 35483, June 12, 2013.
170
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z),” 78
Federal Register 35437, June 12, 2013.
171
Ibid.
172
Congressional Budget Office (CBO), Cost Estimate of H.R. 1210, September 29, 2015, at https://www.cbo.gov/
sites/default/files/114th-congress-2015-2016/costestimate/hr1210.pdf.
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definition of QM could result in higher losses to financial institutions which could increase their
likelihood of failure and potential cost to the government, but CBO states that this is a small
probability that “CBO’s baseline estimates would result in additional costs to the federal
government of less than $500,000 over the 2016-2025 period.”173
Integrated Disclosure Forms (H.R. 3192 and S. 1484/S. 1910)174
The Homebuyers Assistance Act (H.R. 3192) was passed by the House on October 7, 2015. H.R.
3192 as passed would prevent the TILA and RESPA integrated disclosure requirements from
being enforced until February 1, 2016. It would also prohibit anyone from filing a suit against a
lender related to the TILA-RESPA integrated disclosure forms during that time period so long as
the lender has made a good faith effort to comply with the requirements.
Section 117 of S. 1484 (Section 918 of S. 1910) would provide a safe harbor for lenders related to
the integrated disclosure forms. It would make a lender that provides the required disclosures not
“subject to any civil, criminal, or administrative action or penalty for failure to fully comply”. 175
The safe harbor would be in effect until one month after the CFPB director certifies that the new
disclosures “are accurate and in compliance with all State laws”.176 In addition, S. 1484/S. 1910
would eliminate the requirement that a mortgage closing be delayed three days if the lender
offered the borrower a mortgage with a lower annual percentage rate than the rate that was
originally offered.
Integrated Disclosures. On November 20, 2013, the CFPB issued the TILA-RESPA Final Rule
that would require mortgage lenders to use more easily understood and streamlined mortgage
disclosure forms.177 TILA and RESPA have long required lenders to provide consumers
disclosures about the estimated and actual real estate settlement costs and financial terms of the
mortgages they offer. These disclosures are intended to help consumers compare the terms and
make informed decisions regarding the suitability of various mortgage products and services they
are offered. However, TILA and RESPA required disclosures of duplicative information while
using inconsistent language, which might have led to increased regulatory costs and consumer
confusion.178 In light of these concerns, Sections 1098 and 1100A of the Dodd-Frank Act required
the CFPB to develop “a single, integrated disclosure for mortgage loan transactions ... to aid the
borrower ... in understanding the transaction by utilizing readily understandable language to
simplify the technical nature of the disclosures” that remains compliant with both TILA and
RESPA.179
The TILA-RESPA Final Rule is the culmination of more than two years of study through, among
other things, consumer testing and a Small Business Review Panel.180 The Board of Governors of
173
Congressional Budget Office (CBO), Cost Estimate of H.R. 1210, September 29, 2015, at https://www.cbo.gov/
sites/default/files/114th-congress-2015-2016/costestimate/hr1210.pdf.
174
Parts of this section were adapted from CRS Legal Sidebar WSLG1348, Administrative Gaffe Forces CFPB to
Delay Mortgage Disclosure Rule, by David H. Carpenter.
175
S. 1484, §117 (S. 1910, §918).
176
S. 1484, §117 (S. 1910, §918).
177
CFPB, “Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the
Truth In Lending Act (Regulation Z),” 78 Federal Register 79730, December 31, 2013.
178
CFPB, “Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the
Truth In Lending Act (Regulation Z),” 78 Federal Register 79734, December 31, 2013.
179
P.L. 111-203, §1100A.
180
CFPB, “Know Before You Owe,” at http://www.consumerfinance.gov/know-before-you-owe/.
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the Federal Reserve System and the Department of Housing and Urban Development, which prior
to the Dodd-Frank Act implemented TILA and RESPA, had attempted but failed to make similar
changes to these disclosure forms. In short, combining these mortgage disclosures into a single
form was a massive undertaking, and, upon taking effect, the TILA-RESPA Final Rule will have a
significant impact on consumers, lenders, and other participants in the mortgage market.
Policy Discussion. The CFPB chose to give the industry until August 1, 2015—nearly two years
from the date on which the Final Rule was first publicly released—to comply. In spite of this
lead-time, mortgage bankers and lenders in recent months have expressed concern about their
inability to update software and make other necessary changes to meet the compliance
deadline.181 This led some to ask CFPB Director Richard Cordray for additional time to comply
before the CFPB starts enforcing the law.182 Those requests went unheeded until it was discovered
that, because of an “administrative error,”183 the August 1st effective date would violate a
provision of the Congressional Review Act184 that prevents a major rule185 from going into effect
until at least 60 days from the date on which the rule was published in the Federal Register or
was formally reported to Congress, whichever is later. The CFPB recently announced that,“[t]o
comply with the CRA and to help ensure the smooth implementation of the TILA-RESPA Final
Rule, the Bureau is extending the effective date ... [from August 1 to] October 3, 2015.... ”186
The CFPB has also announced what some have characterized as a restrained enforcement period
related to the integrated disclosures.187 In a letter to Members of Congress, the CFPB stated that
its “oversight of the implementation of the Rule will be sensitive to the progress made by those
entities that have squarely focused on making good-faith efforts to come into compliance with the
Rule on time.”188 The CFPB also announced that it sent a letter to industry trade groups in which
it stated that
During initial examinations for compliance with the rule, the Bureau’s examiners will
evaluate an institution’s compliance management system and overall efforts to come into
compliance, recognizing the scope and scale of changes necessary for each supervised
institution to achieve effective compliance. Examiners will expect supervised entities to
181
Lisa Prevost, “Request for Delay of Mortgage-Disclosure Rule,” The New York Times, May 29, 2015, at
http://www.nytimes.com/2015/05/31/realestate/request-for-delay-of-mortgage-disclosure-rule.html.
182
Letter from industry groups to Richard Cordray, Director of the CFPB, March 18, 2015, at https://www.mba.org/
Documents/Comment%20Letters/03-18-15sign-onlettertoCFPBonTILA-RESPA.PDF.
183
CFPB, “2013 Integrated Mortgage Disclosures Under RESPA and TILA; Delay of Effective Date,” at
http://files.consumerfinance.gov/f/201507_cfpb_2013-integrated-mortgage-disclosures-rule-under-the-real-estatesettlement-procedures-act-regulation-x-and-the-truth-in-lending-act-regulation-z-and-amendments-delay-of-effectivedate.pdf.
184
5 U.S.C. §801 et seq.
185
For the definition of major rule, see 5 U.S.C. §804.
186
CFPB, “2013 Integrated Mortgage Disclosures Under RESPA and TILA; Delay of Effective Date,” at
http://files.consumerfinance.gov/f/201507_cfpb_2013-integrated-mortgage-disclosures-rule-under-the-real-estatesettlement-procedures-act-regulation-x-and-the-truth-in-lending-act-regulation-z-and-amendments-delay-of-effectivedate.pdf.
187
Trey Garrison, “Industry Welcomes TRID Grace Period But Congress Says It’s Not Enough,” Housingwire, June 3,
2015, at http://www.housingwire.com/articles/34086-industry-welcomes-trid-grace-period-but-congress-says-its-notenough.
188
Letter from Richard Cordray, CFPB Director, to Rep. Barr and Maloney, June 3, 2015, at
http://www.cfpbmonitor.com/files/2015/06/2015-06-03-RC-to-Barr-Maloney-et-al_TILA-RESPA.pdf. Also see,
CFPB, “Know Before You Owe: You’ll get 3 days to review your mortgage closing documents,” June 3, 2015, at
http://www.consumerfinance.gov/blog/know-before-you-owe-youll-get-3-days-to-review-your-mortgage-closingdocuments/.
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make good faith efforts to comply with the rule’s requirements in a timely manner.
Specifically, examiners will consider: the institution’s implementation plan, including
actions taken to update policies, procedures, and processes; its training of appropriate
staff; and, its handling of early technical problems or other implementation challenges.189
Supporters of H.R. 3192 and S. 1484/S. 1910 argue that an additional two months is insufficient
for lenders to make the upgrades needed to satisfy the deadline and that the restrained
enforcement period does not address several underlying concerns. Supporters of a safe harbor
contend that lenders should have to use the new disclosure forms and procedures but should have
a grace period to test out the new systems.190 The grace period that supporters are seeking would
not just apply to actions taken by the regulators but would also protect lenders from being sued by
borrowers claiming that the correct disclosure forms and procedures were not followed. The
threat of this private litigation risk, supporters argue, is not addressed by the CFPB’s extension
and could cause some lenders to delay or cancel mortgage closings if there is uncertainty about
how the new process should be implemented.191 In addition, supporters of a delay argue that there
is uncertainty as to whether the rule conflicts with state law, and the potential conflicts should be
clarified prior to implementation.192
Critics of delaying the implementation argue that the actions already taken by the CFPB are
sufficient to protect lenders from the risks that they face and that the extended implementation
timeframe allows lenders enough time to adopt the necessary systems and processes. They also
argue “that private liability works to ensure that regulated entities are diligent in complying
promptly with the new TRID disclosures” and that the private liability should not be delayed.193
Critics also note that the litigation risk “that [is] part of the new TRID rule has been overstated, as
private litigants rarely bring actions that prevail under the provisions of TILA that are implicated
by the new TRID disclosures.”194 The delay that some are hoping for, according to critics, “is
unnecessary in light of the limited liability for disclosure- related violations under TILA and the
steps already taken by the CFPB.”195 If a further delay was put in place, some argue that
homeowners “who would receive false or misleading mortgage cost disclosures during such a
period would have no remedy.”196
CBO estimates that H.R. 3192 as ordered reported would result in an increase in direct spending
that would be negligible.197 The bill would not affect revenues or discretionary spending.
189
CFPB, “CFPB Sends Industry Letter on Know Before You Owe Mortgage Disclosure Rule Compliance,” press
release, October 2, 2015.
190
Rep. Andy Barr, “Barr Responds to CFPB’s New TRID Effective Date,” press release, June 18, 2015, at
https://barr.house.gov/media-center/press-releases/barr-responds-to-cfpb-s-new-trid-effective-date.
191
Ibid.
192
Mortgage Bankers Association, “TILA-RESPA Integrated Disclosure Rule,” at https://www.mba.org/issues/
residential-issues/tila/respa-integration-rule
193
Attributed to Rep. Maxine Waters by CQ Congressional Transcripts, “House Financial Services Committee Holds
Markup on Financial Services Bills, Day 1,” July 28, 2015, at http://www.cq.com/doc/financialtranscripts-4736108?0.
194
Ibid.
195
Ibid.
196
Letter from Consumer Groups to Members of Congress, July 27, 2015, at https://www.nclc.org/images/pdf/
legislation/letter-opposing-hr3192-2015.pdf.
197
Congressional Budget Office (CBO), Cost Estimate of H.R. 3192, September 28, 2015, at https://www.cbo.gov/
sites/default/files/114th-congress-2015-2016/costestimate/hr3192.pdf.
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Privacy Notifications (H.R. 601 and S. 1484/S. 1910)198
The Eliminate Privacy Notice Confusion Act (H.R. 601) was passed by the House on April 13,
2015. Section 101 of S. 1484 (Section 902 of S. 1910) includes similar language. It would reduce
the number of scenarios under which financial firms were required to send customers privacy
notices. Under H.R. 601, financial firms would no longer be required to send annual privacy
notices if their privacy policy had not changed. Cases in which third-party information sharing
triggers notification and the opportunity to opt out under current law would remain unchanged.199
It is an example of a regulatory relief bill amending a law that predates the financial crisis.
Background. Under a provision of the Gramm-Leach-Bliley Act (15 U.S.C. §6803), financial
firms, including banks, are required to send customers privacy notices when they establish a
relationship with the customer and annually thereafter. Firms also are required to send customers
notices explaining how customers may opt out of allowing the firm to share their personal
information with third parties, under certain circumstances.200
Policy Discussion. Financial firms argue that the privacy notice requirement is unduly
burdensome to them and of little value to customers because the notices are lengthy, confusing,
and thus likely to be ignored. Defenders of current law argue that it provides consumer protection
and safeguards privacy.201
The CFPB contends that a rule it issued in 2014 modifying Regulation P (which implements 15
U.S.C. §6803) will reduce the regulatory burden of compliance without undermining the policy’s
benefits.202 The 2014 CFPB rule allows firms under certain conditions to post privacy notices on
the Internet rather than mail hard copies to customers. The rule requires firms to continue sending
printed notices when privacy policies are changed or information is shared with third parties.
Firms are required to provide annual notification that privacy notices are available on the Internet
and to provide printed notices upon request. Some believe additional relief is needed beyond what
was provided in the 2014 CFPB rule.
CBO estimates that H.R. 601 as ordered reported would result in an increase in direct spending
that would not be significant.203 The bill would not affect revenues or discretionary spending.
Supervision and Enforcement
Supervision refers to the power to examine banks, instruct banks to modify their behavior, and to
impose reporting requirements on banks to ensure compliance with rules. In some cases,
examiners confirm whether banks meet quantitative targets and thresholds set by regulation; in
198
This section was authored by Marc Labonte, specialist in Macroeconomic Policy.
U.S. Congress, House Committee on Financial Services, Eliminate Privacy Notice Confusion Act, report to
accompany H.R. 601, 114th Cong., 1st sess., April 13, 2015, H.Rept. 114-59.
200
For a summary of the requirement, see Federal Trade Commission, In Brief: The Financial Privacy Requirements of
the Gramm-Leach-Bliley Act, July 2002, at https://www.ftc.gov/tips-advice/business-center/guidance/brief-financialprivacy-requirements-gramm-leach-bliley-act.
201
CFPB, 12 C.F.R. Part 1016, Docket No. CFPB–2014–0010, RIN 3170–AA39, p. 64059, at http://www.gpo.gov/
fdsys/pkg/FR-2014-10-28/pdf/2014-25299.pdf; http://fsroundtable.org/hr-601-eliminate-privacy-notice-confusion-act/.
202
CFPB, 12 C.F.R. Part 1016, Docket No. CFPB–2014–0010, RIN 3170–AA39, at http://www.gpo.gov/fdsys/pkg/FR2014-10-28/pdf/2014-25299.pdf.
203
CBO, Cost Estimate of H.R. 601, April 7, 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/
hr601.pdf.
199
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others, they have discretion to interpret whether a bank’s actions satisfy the goals of a regulation.
Enforcement is the authority to take certain legal actions, such as imposing fines, against an
institution that fails to comply with rules and laws.
While regulators generally view their supervisory and enforcement actions as striking the
appropriate balance between ensuring that institutions are well managed and minimizing the
burden facing banks, others believe the regulators are overreaching and preventing banks from
serving their customers.
Bank Exams
On-site examinations, which stem from a regulator’s visitorial powers, are part of the supervisory
process. A regulator’s visitorial powers include
(i) Examination of a bank; (ii) Inspection of a bank’s books and records; (iii) Regulation
and supervision of activities authorized or permitted pursuant to federal banking law; and
(iv) Enforcing compliance with any applicable Federal or state laws concerning those
activities, including through investigations that seek to ascertain compliance through
production of non-public information by the bank... [with certain limitations]. 204
Exam Frequency for Small Banks (H.R. 1553 and S. 1484/S. 1910)205
Section 109 of S. 1484 (Section 910 of S. 1910) would raise the size thresholds for banks subject
to an 18-month exam cycle from $500 million to $1 billion in assets if the bank received an
outstanding exam rating. For banks that received a good exam rating, it gives the regulator
discretion to raise the threshold from $100 million up to $1 billion (currently, the regulator may
raise it to up to $500 million) in assets if it believes raising it would be consistent with safety and
soundness.
H.R. 1553 was passed by the House on October 6, 2015. It would raise the size thresholds for
banks subject to an 18-month exam cycle from $500 million to $1 billion in assets if the bank
received an outstanding exam rating and from $100 million to $200 million if the bank received a
good exam rating. It gives the bank regulator discretion to raise the latter threshold from $200
million up to $1 billion (currently, the regulator may raise it to up to $500 million) in assets if it
believes raising it would be consistent with safety and soundness. CBO estimates that the net
budgetary effects of the bill would be insignificant.206
Background. Regulators examine banks at least once every 12 months, but banks with less than
$500 million in total assets that have high supervisory ratings and meet certain conditions are
examined once every 18 months.207 Regulators changed the frequency of examinations in 2007
from once every 12 months to once every 18 months pursuant to the Financial Services
Regulatory Relief Act.208 In contrast, some large and complex banks have examiners conducting
204
12 C.F.R. §7.4000.
This section was authored by Sean Hoskins, analyst in Financial Economics, and Marc Labonte, specialist in
Macroeconomic Policy.
206
CBO, Cost Estimate for H.R. 1553, September 10, 2015, https://www.cbo.gov/sites/default/files/114th-congress2015-2016/costestimate/hr1553.pdf.
207
For example, see Federal Reserve System, Inspection Frequency and Scope Requirements for Bank Holding
Companies and Savings and Loan Holding Companies with Total Consolidated Assets of $10 Billion or Less, SR 1321, December 17, 2013, at http://www.federalreserve.gov/bankinforeg/srletters/sr1321.htm.
208
P.L. 109-351. For more information, see FFIEC, Joint Report to Congress: EGRPRA, July 31, 2007, p. 60, at
http://egrpra.ffiec.gov/docs/egrpra-joint-report.pdf.
205
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full-time monitoring on-site. The bank receives a report of the findings when an examination is
completed.
Policy Discussion. CBO estimates that 500 to 600 institutions would see the frequency of their
exams reduced under H.R. 1553.209 Regulators have taken steps to reduce the regulatory burden
associated with on-site examinations. The Fed introduced a new examination program in January
2014 that, according to Governor Tarullo, “more explicitly links examination intensity to the
individual community bank’s risk profile.... The new program calls for examiners to spend less
time on low-risk compliance issues at community banks.”210 In testimony before the Senate
Banking Committee, Governor Tarullo also stated,
Recognizing the burden that the on-site presence of many examiners can place on the
day-to-day business of a community bank, we are also working to increase our level of
off-site supervisory activities…. To that end, last year we completed a pilot on
conducting parts of the labor-intensive loan review off-site using electronic records from
banks.211
Although regulators have already taken these steps to reduce regulatory burden related to exams,
the OCC has proposed increasing the threshold for the 18-month exam cycle to banks with $750
million.212
In response to a congressional request, bank regulators’ inspectors general conducted studies on
the regulatory burden to small banks stemming from compliance with supervisory exams. From
2007 to 2011, OCC community bank exams typically took 120 days or less (as they are intended
to), but sometimes took up to a year, and occasionally took over a year.213 The length of exams
was slightly longer from 2008 to 2010, when the most banks were failing. In 2011, FDIC
community bank risk-management exams varied in length from an average of 335 hours to 1,820
hours based on the size of the bank and its supervisory rating. From 2007 to 2011, exams of
banks with poor supervisory ratings became shorter over time and banks with good supervisory
ratings took longer over time. In addition, the FDIC conducts thousands of compliance and a few
CRA exams annually. In 2011, the FDIC spent an average of 24 days to 57 days on-site for risk
management exams, based on supervisory rating.214 Fed exams (not including state-led exams,
which took longer), averaged 63 days to 79 days between 2007 and 2011, peaking in 2009.215
209
CBO, Cost Estimate for H.R. 1553, September 10, 2015, https://www.cbo.gov/sites/default/files/114th-congress2015-2016/costestimate/hr1553.pdf.
210
Gov. Daniel Tarullo, “A Tiered Approach to Regulation and Supervision of Community Banks,” speech at the
Community Bankers Symposium, Chicago, Illinois, November, 7, 2014, at http://www.federalreserve.gov/newsevents/
speech/tarullo20141107a.htm.
211
U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Governor Daniel K.
Tarullo, Federal Reserve, 113th Cong., 2nd sess., September 9, 2014. More information on the pilot program is available
at Federal Reserve System, “Federal Reserve Seeks to Conduct More Loan Reviews Off-Site,” at
https://www.communitybankingconnections.org/articles/2014/q2/loan-reviews-off-site.
212
Senior Deputy Comptroller Toney Bland, Testimony before the House Financial Services Committee, 114 th
Congress, April 23, 2015, at http://financialservices.house.gov/uploadedfiles/hhrg-114-ba15-wstate-tbland20150423.pdf.
213
Department of the Treasury, Office of Inspector General, Safety and Soundness: Review of OCC Community Bank
Examination and Appeals Processes, August 31, 2012, at http://www.treasury.gov/about/organizational-structure/ig/
Audit%20Reports%20and%20Testimonies/OIG12070.pdf.
214
See FDIC, Office of Inspector General, The FDIC’s Examination Process for Small Community Banks, AUD-12011, p. 8, August 2012, at http://www.fdicoig.gov/reports12/12-011AUD.pdf.
215
Federal Reserve System, Office of Inspector General, Audit of the Small Community Bank Examination Process, p.
18, August 2012, at http://oig.federalreserve.gov/reports/Audit_SCB_Exam_Process_August2012.pdf.
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Although costs cannot be derived directly from hours spent on exams, this data may nevertheless
give some indication of regulatory burden caused by meeting with examination staff and
uncertainty created while waiting for exam results.
One concern raised by small banks is that there are economies of scale in compliance—in other
words, compliance costs rise less than proportionately with size. The FDIC inspector general’s
study provides some evidence of economies of scale in compliance in the area of exams. It found
that exams of banks with less than $50 million in assets averaged 335 hours, whereas banks with
$500 million-$1 billion in assets averaged 850 hours in 2011. In other words, exams for larger
banks took longer, but the increase in hours was not linear with the increase in assets.216
Exam Ombudsman and Appeals Process (H.R. 1941 and S. 1484/S. 1910)217
H.R. 1941 was ordered to be reported by the House Financial Services Committee on July 29,
2015. It would require regulators to provide a bank a final exam report within 60 days of the
conclusion the exam exit interview or when follow up materials have been provided. It would
require the exit interview to take place no more than nine months after the exam begins unless the
agency provides written notice for an extension. It sets detailed exam standards for commercial
loans to prevent an adverse action when the underlying collateral has deteriorated. It would
require the banking regulators to harmonize their standards for non-accrual loans. It would
establish an ombudsman (called the Office of Independent Examination Review) within the
Federal Financial Institutions Examination Council (FFIEC)218 to investigate complaints from
banks about supervisory exams. The head of the office would be appointed by FFIEC. It would
prohibit specific actions by the supervisor in retaliation for appealing. It would give banks the
right to appeal exam results to the ombudsman or an administrative law judge, and would not
allow the ombudsman or judge to defer to the supervisor’s opinions. It would not permit further
appeal by the supervisor, but would allow the bank to appeal this decision to appellate court. It
would add the CFPB to the statutory appeals process,219 including the new ombudsman.
Similarly, section 104 of S. 1484 (Section 905 of S. 1910) would establish an ombudsman (called
the Office of Independent Examination Review) within FFIEC to investigate complaints from
banks about supervisory exams. The head of the office would be appointed by FFIEC to a fiveyear term, but could be removed by the President without cause. It would prohibit specific actions
by the supervisor in retaliation for appealing. It would add the CFPB to the statutory appeals
process, including the new ombudsman.
Background. Bank regulators have established multiple processes for a bank to appeal the results
of its examination.220 Regulators typically encourage a bank to attempt to resolve any dispute
informally through discussions with the bank examiner.221 The Riegle Community Development
216
Data are for banks with high CAMELS rating. See FDIC Office of Inspector General, The FDIC’s Examination
Process for Small Community Banks, AUD-12-011, August 2012, at http://www.fdicoig.gov/reports12/12011AUD.pdf.
217
This section was authored by Sean Hoskins, analyst in Financial Economics, and Marc Labonte, specialist in
Macroeconomic Policy.
218
The Federal Financial Institutions Examination Council (FFIEC) is an interagency council established by Congress
to “prescribe uniform principles and standards for federal examination of financial institutions” and create standardized
reporting forms. FFIEC consists of representatives from the OCC, Fed, FDIC, NCUA, CFPB, and a state regulator.
219
12 U.S.C. §4806.
220
The CFPB only examines banks with over $10 billion in assets.
221
See OCC, OCC Bulletin 2013-15: Bank Appeals Process, at http://www.occ.gov/news-issuances/bulletins/2013/
bulletin-2013-15.html.
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and Regulatory Improvement Act of 1994222 required banking regulators to establish a formal
independent appeals process for supervisory findings, appoint an independent ombudsman, and
create safeguards to prevent retaliation (which is not defined in the act) against a bank that
disputes their examination findings.223 While each ombudsman’s exact role varies by agency, they
generally fit the description of the Fed’s—to “serve as a facilitator and mediator for the timely
resolution of complaints.”224 The independent appeals process currently involves bank examiners
at the agency that were not involved in the examination, as well as agency leadership. Only the
OCC allows banks to appeal an examination directly to the agency’s ombudsman.225
Policy Discussion. By statute,226 banks may already appeal exam results to the regulator that
conducted it, and each banking agency already has an ombudsman. Skeptics view the creation of
an additional ombudsman for all banking agencies as redundant. Proponents of the legislation
argue that the proposed ombudsman would be more independent from the banking agencies,
although it would be funded by the agencies227 and would still be located within a forum (FFIEC)
controlled by the banking agencies. The role of ombudsman in the appeals process in H.R. 1491
would be new for all of the regulators except the OCC, however.
In exams, supervisors are balancing the profitability of the bank with the risk of bank failure to
the taxpayer. Critics of H.R. 1941 argue that shifting the appeals process away from the regulator
to the newly created ombudsman would put the taxpayer at risk by making it more likely that
supervisory decisions would be overturned. Further, the new ombudsman would arguably not
have “inside knowledge” of the supervisory process, which involves discretion. Proponents of
H.R. 1491 argue that in the current appeals process, the supervisor plays the role of prosecutor,
judge, and jury, and therefore the supervisor is unlikely to be willing to admit that a mistake had
been made in the original exam. In the American Bankers Association’s view, the current process
is “time-consuming, expensive, and rarely result in a reversal of the matter being appealed. There
also is a concern among ABA members that appealing will risk examiner retribution,”228 though
retaliation is already forbidden by statute. The knowledge that exams could be independently
appealed could make examiners more careful to adhere to guidelines, or it could make them less
willing to make adverse decisions so as to avoid the “hassle” of appeals.
The urgency of changing the appeals process depends on how well it is currently working. Since
all supervisory information is confidential, disputes about the fairness of exams and appeals is
prone to a “he said/she said” dynamic between bank and regulator that is difficult for a third party
to evaluate. The frequency of appeals might give some indication of bank displeasure with the
examination process. In response to a congressional request, bank regulators’ inspectors general
conducted studies on the regulatory burden to small banks and found that banks only formally
appealed 22 OCC exam results (informally appealed 24 more), 23 FDIC exams (informally
appealed 18 more), and 12 Fed exams (no informal appeal data) out of the thousands of exams
222
P.L. 103-325.
P.L. 103-325, §309.
224
Federal Reserve System, Office of Inspector General, Audit of the Small Community Bank Examination Process,
August 2012, p. 23, at http://oig.federalreserve.gov/reports/Audit_SCB_Exam_Process_August2012.pdf.
225
OCC, “Guidance for Bankers,” June 7, 2013, at http://www.occ.gov/news-issuances/bulletins/2013/bulletin-201315.html.
226
12 U.S.C. §4806.
227
The ombudsman is explicitly funded by the regulators in S. 1494, but funding is not specified in H.R. 1941.
228
American Bankers Association, “Examination Review/Appeals Process,” webpage, http://www.aba.com/Issues/
Index/Pages/Issues_ExaminationReview.aspx.
223
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performed between 2007 and 2011.229 However, banks might not appeal an exam result they
thought was unfair if they thought their appeal had no chance of succeeding. Further, many
disputes are resolved informally through the supervisory process, before an exam is completed.
Call Report Reform (S. 1484/S. 1910)230
The primary source of bank regulatory data is the quarterly Reports of Condition and Income, or
call report, that a bank submits to its regulator. Section 119 of S. 1484 (Section 920 of S. 1910)
requires the banking regulators to review the current call report and, “to the extent appropriate,”
develop a shorter call report.
Background. Bank supervision is not a one-time event that occurs when the examiner visits the
bank, but rather is an ongoing process that includes monitoring data collected from banks. A
primary source of data is the call report, in which banks report data on various aspects of their
operations using a standard definition so that data can be compared across banks by the regulators
and the public.231 The call report is made up of various schedules, each with multiple line items,
and the number of schedules and items that a bank must report depends on its size and activities.
Current statute requires the regulators to review call reports every five years in order to eliminate
any information or schedule that “is no longer necessary or appropriate.”232 This requirement does
not reference the size of the institution. The next review is due by October 13, 2016. FFIEC has
announced that they are accelerating this review and expect it to take effect for the December
2015 or March 2016 call reports.233 The bank regulators released a proposed rule in September
2015 that proposes to delete a number of items from current call reports, exempt banks with
under $1 billion in assets from four items, surveys regulators to find out the usefulness of each
item on the call report, and dialogues with banks to find out the regulatory burden associated with
reporting each item, among other things.234 They are also “evaluating the feasibility and merits of
creating a streamlined version of the quarterly Call Report for community institutions….”235
Statute also required the regulators to modernize the call report process in 1994 and 2000.
Included was a requirement that the regulators eliminate call report items that were “not
warranted for reasons of safety and soundness or other public purposes.”236
Policy Discussion. The FDIC has argued that call reports “provide an early indication that an
institution’s risk profile may be changing” and are therefore important parts of the supervision
229
Department of the Treasury, Office of Inspector General, Safety and Soundness: Review of OCC Community Bank
Examination and Appeals Processes, August 31, 2012, at http://www.treasury.gov/about/organizational-structure/ig/
Audit%20Reports%20and%20Testimonies/OIG12070.pdf; FDIC, Office of Inspector General, The FDIC’s
Examination Process for Small Community Banks, AUD-12-011, August 2012, at http://www.fdicoig.gov/reports12/
12-011AUD.pdf; Federal Reserve System, Office of Inspector General, Audit of the Small Community Bank
Examination Process, August 2012, at http://oig.federalreserve.gov/reports/
Audit_SCB_Exam_Process_August2012.pdf.
230
This section was authored by Sean Hoskins, analyst in Financial Economics, and Marc Labonte, specialist in
Macroeconomic Policy.
231
Call reports can be accessed at https://cdr.ffiec.gov/public/.
232
12 U.S.C. §1817(a)(11).
233
FFIEC, press release, September 8, 2015, http://www.ffiec.gov/press/pr090815.htm.
234
Joint Agency, “Proposed Agency Information Collection Activities,” 80 Federal Register 56539, September 18,
2015, http://www.ffiec.gov/press/PDF/2015xInitialF_%20Notice090715final.pdf.
235
FFIEC, press release, September 8, 2015, http://www.ffiec.gov/press/pr090815.htm.
236
12 U.S.C. §§4805-4805a.
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process.237 Removing too many items from the call report could mute the early warning signal it
provides. Proponents of the legislation argue that call reports are currently unduly complex and
burdensome for community banks with traditional business operations. The call report is
currently structured to lower the burden on small banks relative to larger and more complex
banks, however. The FDIC states that
The Call Report itself is tiered to size and complexity of the filing institution, in that
more than one-third of the data items are linked to asset size or activity levels. Based on
this tiering alone, community banks never, or rarely, need to fill out a number of pages in
the Call Report, not counting the data items and pages that are not applicable to a
particular bank based on its business model. For example, a typical $75 million
community bank showed reportable amounts in only 14 percent of the data items in the
Call Report and provided data on 40 pages. Even a relatively large community bank, at
$1.3 billion, showed reportable amounts in only 21 percent of data items and provided
data on 47 pages.238
There is no official data on the regulatory burden associated with call reports. As evidence that
the regulatory burden has increased over time, the American Bankers Association claims that the
number of items required in call reports has increased from 309 in 1980 to 1,955 in 2012.239 The
Independent Community Bankers of America, a trade association representing community banks,
conducted a survey which found that “[a]lmost three quarters of respondents stated that the
number of hours required to complete the call report had increased over the last ten years. Over
one third of respondents indicated a significant increase in hours over this period. Well over three
quarters of respondents noted increased costs in call report preparation with almost one third
noting that costs increased significantly.”240 The survey showed mixed evidence of economies of
scale in call report compliance. For banks with less than $500 million in assets, costs were similar
regardless of the banks’ size, but for banks with more than $500 million in assets, costs were
significantly higher than for banks with less than $500 million in assets. Because the survey was
of members and members are generally small, it did not contain evidence for call report
compliance costs for the largest banks, however. As noted above, regulators argue that the call
reports are already tailored to reduce the burden on small banks.
Since S. 1484 leaves it to regulators to shorten the call report, and regulators are currently
undergoing a statutorily required review to eliminate unnecessary items from the call report, it is
unclear what additional effect S. 1484 would have beyond the current review. One could argue
that it would signal to regulators that Congress desires the current review to result in a shorter call
report.
237
U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Ms. Doreen R. Eberley,
FDIC, 113th Cong., 2nd sess., September 16, 2014.
238
U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Ms. Doreen R. Eberley,
FDIC, 113th Cong., 2nd sess., September 16, 2014.
239
American Bankers Association, “An Avalanche of Regulation,” infographic, at http://www.aba.com/Issues/Index/
Documents/2014RegBurdenInfographic.pdf.
240
Independent Community Bankers of America, 2014 ICBA Community Bank Call Report Burden Survey, at
http://www.icba.org/files/ICBASites/PDFs/2014CallReportSurveyResults.pdf.
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CFPB Supervisory Threshold (S. 1484/S. 1910)241
Section 110 of S. 1484 (Section 911 of S. 1910) would increase the threshold at which insured
depository institutions (including banks and savings associations) and insured credit unions
would be subject to CFPB supervision from $10 billion in total assets to $50 billion in total
assets. The legislation would also index the $50 billion level to the annual change in gross
domestic product.
Bank and Credit Union Regulation. Banks, savings associations, and credit unions are
regulated for safety and soundness as well as for consumer compliance. Safety and soundness, or
prudential, regulation is intended to ensure an institution is managed to maintain profitability and
avoid failure. The focus of consumer compliance regulation, by contrast, is ensuring institutions
conform with applicable consumer protection and fair-lending laws. Prior to the Dodd-Frank Act,
the federal banking regulators (the Federal Reserve Board, the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, and the National Credit Union
Administration) were charged with the two-pronged mandate of regulating for both safety and
soundness and consumer compliance. Pursuant to the Dodd-Frank Act, the CFPB acquired certain
consumer compliance powers over banks and credit unions that vary based on whether the
institution holds more or less than $10 billion in assets.
For institutions with more than $10 billion in assets, the CFPB is the primary regulator for
consumer compliance, whereas safety and soundness regulation continues to be performed by the
prudential regulator. As a regulator of larger entities, the CFPB has rulemaking, supervisory, and
enforcement authorities. This means the CFPB can issue rules for a large bank to follow, examine
the bank to ensure it is in compliance with these rules, and take enforcement actions (such as
imposing fines) against banks that fail to comply. A large institution, therefore, has different
regulators for consumer protection and safety and soundness.
For institutions with $10 billion or less in assets, the rulemaking, supervisory, and enforcement
authorities for consumer protection are divided between the CFPB and a prudential regulator. The
CFPB may issue rules that would apply to smaller institutions from authorities granted under the
federal consumer financial protection laws. The prudential regulator, however, would maintain
primary supervisory and enforcement authority for consumer protection. The CFPB has limited
supervisory authority over smaller institutions; it can participate in examinations of smaller
entities performed by the prudential regulator “on a sampling basis.” The CFPB does not have
enforcement powers over small entities, but it may refer potential enforcement actions against
small entities to the entities’ prudential regulators (the prudential regulators must respond to such
a referral but are not bound to take any other substantive steps).
Policy Discussion. Approximately 120 banks and credit unions have over $10 billion in assets. If
the threshold was increased to $50 billion, about 80 institutions that are currently subject to CFPB
supervision would no longer be, with approximately 40 institutions remaining under CFPB
supervision. Though small in number, the largest institutions hold the vast majority of the
industry’s total assets.
Supporters of the legislative proposals to raise the CFPB threshold argue that financial
institutions are subject to overly burdensome examinations that require bank managers to invest
time and other resources that, the supporters believe, could be better spent elsewhere. By raising
the threshold, the institutions “would still be examined by their primary regulators who are
241
Parts of this section were adapted from CRS In Focus IF10031, Introduction to Financial Services: The Consumer
Financial Protection Bureau (CFPB), by David H. Carpenter and Sean M. Hoskins.
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required by law to enforce the CFPB rules and regulations” but, supporters contend, the
institutions “wouldn't have to go through yet another exam with the CFPB in addition to the ones
they already have to go through with their primary regulators.”242 A higher threshold could reduce
the regulatory burden imposed on those banks but, in supporters’ opinion, still ensure that the
institutions would be examined for consumer compliance.
Critics of the proposal noted that exam cycles could be better coordinated to reduce the burden
institutions faced, but did not support raising the CFPB threshold. They argue that some of the
banks in the asset range that would no longer be primarily supervised by the CFPB were, in
critics’ opinions, “some of the worst violators of consumer protections” in the housing bubble,
with IndyMac at approximately $30 billion in assets an example that they highlight.243 Raising the
threshold could lead to those entities being subject to less intensive consumer compliance
supervision (though it would not affect the consumer protection rules with which an entity would
be required to comply, just the supervision).
Operation Choke Point (H.R. 766, H.R. 2578, S.Con.Res. 11, and S.
1484/S. 1910)244
Operation Choke Point (OCP) was a Department of Justice (DOJ) initiative aimed at curbing
Internet fraudsters operating in conjunction with third-party payment processors.245 It is the
subject of numerous pieces of legislation. Section 126 of S. 1484 (Section 927 of S. 1910) would
prohibit the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve, the Bureau of Consumer Financial
Protection, and the National Credit Union Administration from implementing or participating in
Operation Choke Point.
The Financial Institution Consumer Protection Act of 2015 (H.R. 766), which was reported by the
House Committee on Financial Services on July 29, 2015, would bar banking regulators from
formally requesting or informally suggesting a depository bank to close customer accounts unless
the regulators have a material reason246 for the request. The bill requires the regulators to report
annually to Congress the number of accounts terminated at the request of the regulator and the
legal justification for the request.
Other legislative proposals also address OCP. The Commerce, Justice, Science, and Related
Agencies Appropriations Act, 2016 (H.R. 2578), which passed the House on June 3, 2015, would
prohibit funds provided by H.R. 2578 from being used for OCP. The budget resolution for
242
Attributed to Senator Toomey by CQ Congressional Transcripts, “Senate Banking, Housing and Urban Affairs
Committee Holds Markup on the Financial Regulatory Improvement Act,” May 21, 2015, at http://www.cq.com/doc/
congressionaltranscripts-4691548?8&search=Re1SwoJi.
243
Attributed to Senator Brown by CQ Congressional Transcripts, “Senate Banking, Housing and Urban Affairs
Committee Holds Markup on the Financial Regulatory Improvement Act,” May 21, 2015, at http://www.cq.com/doc/
congressionaltranscripts-4691548?8&search=Re1SwoJi.
244
This section was written by Raj Gnanarajah, analyst in Financial Economics.
245
For additional information see CRS Legal Sidebar WSLG1023, FDIC Moves to Modify Guidance “Choking”
Banking Services for Certain Legitimate Businesses, by M. Maureen Murphy.
246
The bill does not define “material reason,” but states that it could be based on a banking regulator’s belief that a
specific customer or a group of customers pose a threat to national security, including any belief that they are involved
in terrorist financing.
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FY2016 (S.Con.Res. 11) includes a provision for a non-binding deficit-neutral reserve fund to
end OCP.247
Operation Choke Point. According to DOJ, OCP’s stated goal was “to attack Internet,
telemarketing, mail, and other mass market fraud against consumers, by choking fraudsters’
access to the banking system.” 248 While OCP remained a DOJ initiative, DOJ did communicate
with other law enforcement agencies and financial regulators to ensure it had all the information
needed to evaluate the enforcement options available to address the violations.249 The operation
held banks and payments processors accountable for processing transactions that they knew were
fraudulent.250 Fraud may be committed by scammers who take advantage of increased online
commerce to systemically extract money from consumers’ bank accounts. According to DOJ,
once a fraudulent merchant enters the banking system, they can debit consumers bank accounts
and credit their own account repeatedly, without permission and in violation of federal law, unless
someone stops them.251 The DOJ has sought legal action in certain circumstances that has resulted
in civil monetary penalty fees levied against financial institutions who, despite indications of
fraud, continued to process fraudulent merchant transactions-in violation of federal law.252
Policy Discussion. One of the major issues related to OCP is whether it affected businesses that
are lawful and legitimate. Allegedly, DOJ and bank regulators labeled certain firms as high-risk,
including credit repair companies, debt consolidation and forgiveness programs, online gamblingrelated operations, government-grant or will-writing kits, pornography, online tobacco or firearm
sales, pharmaceutical sales, sweepstakes, magazine subscriptions, and payday or subprime loans.
Certain bank regulators also considered some of these merchants to pose a reputational risk253 to
the financial institutions that provide services to these merchants.254 Federal banking regulators
247
Congress frequently includes “reserve funds” in the budget resolution. Such provisions provide the chairs of the
House or Senate Budget Committees the authority to adjust the budgetary allocations, aggregates, and levels included
in the budget resolution in the future if certain conditions are met. Typically, these conditions consist of legislation
dealing with a particular policy being reported by the appropriate committee or an amendment dealing with that policy
being offered on the floor. Generally, the goal of such a reserve fund or adjustment is to allow certain policies to be
considered on the floor without triggering a point of order for violating levels in the budget resolution. For a detailed
description of reserve funds, see CRS Report R43535, Provisions in the Bipartisan Budget Act of 2013 as an
Alternative to a Traditional Budget Resolution, by Megan S. Lynch.
248
G. Bradley Weinsheimer, OPR Inquiry Regarding Operation Choke Point, U.S. Department of Justice - Office Of
Professional Responsibility, July 7, 2015, p. 4.
249
U.S. Congress, House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial And
Antitrust Law, Guilty Until Proven Innocent? A Study of the Propriety and Legal Authority for the Justice
Department’s Operation Choke Point, Statement of Stuart F. Delery, Assistant Attorney General Civil Division, 113 th
Cong., 2nd sess., July 17, 2014, pp. 1-3.
250
Reportedly, Operation Choke Point was conceived in by the Department of Justice in 2012 and began in early 2013.
Michael J. Bresnickat, Justice News - Financial Fraud Enforcement Task Force, The U.S. Department of Justice,
March 20, 2013, at http://www.justice.gov/opa/speech/financial-fraud-enforcement-task-force-executive-directormichael-j-bresnick-exchequer.
251
U.S. Congress, House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial And
Antitrust Law, Guilty Until Proven Innocent? A Study of the Propriety and Legal Authority for the Justice
Department’s Operation Choke Point, Statement of Stuart F. Delery, Assistant Attorney General Civil Division, 113 th
Cong., 2nd sess., July 17, 2014, pp. 1-2.
252
U.S. Congress, House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial And
Antitrust Law, Guilty Until Proven Innocent? A Study of the Propriety and Legal Authority for the Justice
Department’s Operation Choke Point, Statement of Stuart F. Delery, Assistant Attorney General Civil Division, 113th
Cong., 2nd sess., July 17, 2014, pp. 1-2.
253
Federal Deposit Insurance Corporation, Office of Inspector General, The FDIC’s Role in Operation Chokepoint,
Report no. AUD-15-008, September 2015, p. iii, https://www.fdicig.gov/reports15%5C15-008AUD.pdf.
254
U.S. Congress, House Committee on Oversight and Government Reform, The Department of Justice’s “Operations
(continued...)
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have also supported DOJ efforts either through guidance or policy statements. As an example,
Federal Deposit Insurance Cooperation’s Guidance on Payment Processor Relationships
recommended banks to conduct heightened scrutiny of certain types of accounts.255
Some have argued that, contrary to DOJ public statements, OCP was primarily focused on the
payday lending industry.256 In addition, they contend that DOJ was pressuring banks to shut down
accounts without proving the merchants using the banking services broke the laws. They further
assert, in instances when the banks did not shut down the accounts, DOJ has penalized the banks
for wrongdoing that may or may not have happened.257
Based on the staff report by the Committee on Oversight and Government Reform and a letter
from Members of Congress,258 DOJ’s Office of Professional Responsibility performed a review of
OCP. The review concluded that
Department of Justice attorneys did not improperly target lawful participants involved in
the Internet payday lending industry ... To the extent that Civil Division attorneys
involved in Operation Choke Point investigated Internet payday lending, their focus
appeared to be on only a small number of lenders they had reason to suspect were
engaged in fraudulent practices.259
The review found some evidence indicating that “some of the congressional and industry
concerns relating to Internet payday lending was understandable,” including some DOJ
memoranda disparaging payday lending and emails indicating that “some of the attorneys ...
working on Operation Choke Point may have viewed Internet payday lending in a negative
light.”260 The review “did not find evidence of an effort to improperly pressure lawful
businesses,” although it did find that “attorneys at one point did enclose with ... subpoenas ...
regulatory guidance from federal regulators, including one document that contained a footnote
listing businesses that the FDIC had described as posing an ‘elevated risk.’ 261 The review
concluded OCP did not compel banks to terminate their relationship with legitimate businesses.262
In addition, an audit by the FDIC’s Inspector General found that the “FDIC’s involvement in
Operation Choke Point to have been inconsequential to the overall direction and outcome of the
initiative.”263
(...continued)
Choke Point”: Illegally Choking Off Legitimate Businesses?, Staff Report, 113th Cong., 2nd sess., May 29, 2014, pp. 18.
255
Federal Deposit Insurance Corporation, Office of Inspector General, The FDIC’s Role in Operation Chokepoint,
Report no. AUD-15-008, September 2015, p. ii, https://www.fdicig.gov/reports15%5C15-008AUD.pdf.
256
U.S. Congress, House Committee on Oversight and Government Reform, The Department of Justice’s “Operations
Choke Point”: Illegally Choking Off Legitimate Businesses?, Staff Report, 113th Cong., 2nd sess., May 29, 2014, pp. 18.
257
U.S. Congress, House Committee on Oversight and Government Reform, The Department of Justice’s “Operation
Chokepoint”: Illegally Choking Off Legitimate Businesses, 113th Cong., 2nd sess., May 29, 2014.
258
G. Bradley Weinsheimer, OPR Inquiry Regarding Operation Choke Point, U.S. Department of Justice - Office Of
Professional Responsibility, July 7, 2015, pp. 4-5.
259
Ibid, at 40-41.
260
Ibid, at 41.
261
Ibid. According to the review by the Department of Justice Office of Professional Responsibility, there was
evidence that “that the attorneys had a legitimate reason for including such regulatory guidance.”
262
G. Bradley Weinsheimer, OPR Inquiry Regarding Operation Choke Point, U.S. Department of Justice - Office Of
Professional Responsibility, July 7, 2015, pp. 4-5.
263
Federal Deposit Insurance Corporation, Office of Inspector General, The FDIC’s Role in Operation Chokepoint,
(continued...)
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To address concerns raised by Congress and the financial services industry about OCP, FDIC
issued new guidance and removed the list of examples of merchants categories that were
considered high risk. Further, FDIC has established dedicated email, and a toll-free number for
the Office of the Ombudsman for institutions to address any concerns raised by FDIC supervised
institutions about OCP.264
CBO’s cost estimates for H.R. 766 determined that the legislative proposals would have no effect
on the federal budget.265
Capital Issuance
Banks face regulations surrounding how they can raise capital from investors, and what rights are
conferred to investors. Capital can take various forms depending on the ownership structure of
the institution. For example, publicly-held banks issue stock that can be traded on exchanges.
Disclosure requirements and investor protections may better inform investors about the risks that
they are assuming, but can make it more costly for institutions to raise capital, and those costs
might be passed on to customers in the form of higher fees or interest rates charged. While some
view these existing regulatory requirements as important safeguards that ensure that investors are
protected from fraud, others see them as unnecessary red tape that makes it too difficult for banks
to raise the capital needed to expand or remain healthy.
Holding Company Registration Threshold Equalization (H.R. 37
and S. 1484/S. 1910)266
The Promoting Job Creation and Reducing Small Business Burdens Act (H.R. 37) passed the
House on January 14, 2015. Title III of H.R. 37 and Section 601 of S. 1484 (Section 971 of S.
1910) would raise the exemption threshold on the Securities and Exchange Commission’s
(SEC’s) registration for thrift holding companies to match the current exemptions for bank
holding companies (BHCs).
Background. Historically, under the Securities Act of 1933,267 banks and BHCs, similar to
nonfinancial firms, generally were required to register securities with the SEC if they had total
assets exceeding $10 million and the shares were held (as per shareholders of record) by 500
shareholders or more. Banks and BHCs also were allowed to stop registering securities with the
SEC, a process known as deregistration, if the number of their shareholders of record fell to 300
shareholders or fewer.
(...continued)
Report no. AUD-15-008, September 2015, p. ii, https://www.fdicig.gov/reports15%5C15-008AUD.pdf.
264
U.S. Congress, House Committee on Financial Services, Subcommittee on Oversight and Investigations, The
Federal Deposit Insurance Corporation’s Role in Operation Choke Point, Statement of Martin J. Gruenberg, 114th
Cong., 1st sess., March 24, 2015, http://financialservices.house.gov/uploadedfiles/hhrg-114-ba09-wstate-mgruenberg20150324.pdf.
265
CBO, Congressional Budget Office Cost Estimate H.R. 766 Financial Institution Customer Protection Act of 2015,
September 4, 2015, https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/costestimate/hr766.pdf.
266
This section was authored by Gary Shorter, specialist in Financial Economics.
267
P.L. 73-22.
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Title VI of the Jumpstart Our Business Startups Act (JOBS Act)268 raised the SEC shareholder
registration threshold from 500 shareholders to 2,000 shareholders and increased the upper limit
for deregistration from 300 shareholders to 1,200 shareholders for those banks and nonfinancial
firms. In other words, the JOBS Act made it easier for banks and BHCs to increase the number of
their shareholders while remaining unregistered private banks and, if already registered, to
voluntarily deregister while also adding more shareholders.269 The provision went into effect
immediately upon the enactment of the JOBS Act on April 5, 2012.
These changes made by the JOBS Act did not apply to savings and loan holding companies
(SLHCs). H.R. 37/S. 1484 /S. 1910 would amend the Securities Exchange Act of 1934270 by
extending the higher registration and deregistration shareholder thresholds in the JOBS Act for
banks and BHCs to SLHCs. Savings and loans (also known as thrifts and savings banks) are
similar to banks in that they take deposits and make loans, but their regulation is somewhat
different. Over time, the differences between banks and savings and loans have narrowed.271
Under the provision, an SLHC would be required to register with the SEC if its assets exceed $10
million and it has 2,000 shareholders of record, up from the current requirement of 500
shareholders of record. SLHCs that want to deregister from the SEC would have to have no more
than 1,200 shareholders of record, an increase over the current 300 or fewer shareholders.
Policy Discussion. Generally speaking, the central perceived benefit of SEC registration is to
enhance investor protection by ensuring that investors have access to significant financial and
nonfinancial data about firms and the securities they issue. The cost of SEC registration is the
regulatory burden on the firm issuing securities associated with complying with SEC
requirements, which potentially raises the cost of capital and reduces how much capital a firm can
raise. For small firms, the regulatory burden of registration is thought to be greater than for larger
firms.272
Policymakers attempt to reach the optimal trade-off between costs and benefits of SEC
registration by exempting firms below a certain size from registration requirements. The JOBS
Act raised this threshold for banks, modifying the balance between costs and benefits.
Reports indicate that after passage of the JOBS Act, a number of privately held banks and BHCs
took advantage of Title VI’s reduction in shareholder ownership registration triggers by raising
capital from additional shareholders without having to register with the SEC.273 Some banks also
have taken the opportunity to deregister from the SEC.274 One of the few studies on changes to
268
P.L. 112-106.
This section largely derives from: Katherine Koops, “The JOBS Act and SEC Deregistration: New Thresholds and
Special Considerations for Banks and Bank Holding Companies,” Bank Bryan Cave Law Firm, June 8, 2012, at
http://www.bankbryancave.com/2012/06/the-jobs-act-and-sec-deregistration-new-thresholds-and-specialconsiderations-for-banks-and-bank-holding-companies/.
270
P.L. 73-291.
271
See CRS Report R42572, The Consumer Financial Protection Bureau (CFPB): A Legal Analysis, by David H.
Carpenter.
272
See Independent Community Bankers of America (ICBA), “ICBA Statement on Senate Passage of JOBS Act,”
press release, March 22, 2012, at http://www.icba.org/news/newsreleasedetail.cfm?ItemNumber=123582.
273
For example, see ICBA, “Key JOBS Act Provision Must Be Addressed to Benefit Thrifts,” press release, September
13, 2012, at http://www.icba.org/files/ICBASites/PDFs/test091312.pdf.
274
For example, see Jeff Blumenthal, “100-plus Banks Deregister Stock since JOBS Act,” Philadelphia Business
Journal, February 15, 2013, at http://www.bizjournals.com/philadelphia/print-edition/2013/02/15/100-plus-banksderegister-stock-since.html; Brian Yurcan, “Small Banks Deregister in Droves Due to JOBS Act,” Bank Tech, May 30,
2012, at http://www.banktech.com/compliance/small-banks-deregister-in-droves-due-to-jobs-act/d/d-id/1295425.
269
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the financial health of banks that took advantage of the JOBS Act threshold changes to deregister
found that the act was generally, but not entirely, financially beneficial to banks. For example, it
found that, on average, the legislation resulted in $1.31 in higher net bank income and $3.28
lower pretax expenses for every $1.00 of bank assets and was responsible for $1.54 million in
increased assets per bank employee.275 The study did not attempt to estimate the costs to investors
of reduced disclosure under the changes made by the JOBS Act.
In potentially expanding the exemption threshold on SEC registration for thrift holding
companies, there are two main points to consider. First, should exemption levels from SEC
registration requirements be different for thrifts and savings and loans than for banks? Current
law makes it more difficult for small thrifts to raise capital than for small banks. Second, are the
costs and benefits of registration requirements for small banks better balanced at the higher
thresholds enacted for banks in the JOBS Act or the lower thresholds in current law for thrifts?
Mutual Holding Company Dividend Waivers (S. 1484/S. 1910)276
Section 113 of S. 1484 (Section 914 of S. 1910) addresses the issue of how dividends are
allocated among the shareholders of mutual holding companies or their subsidiaries.
Mutual Holding Companies (MHCs). Section 107 of the Competitive Equality Banking Act of
1987277 provided for the formation of Mutual Holding Companies (MHCs). MHCs are savings
and loan holding companies in mutual form, some of which own mutually held federally insured
savings and loan associations, and state-chartered mutual savings banks. Most banks in the
United States are held either publicly or privately by shareholders. In contrast, a mutual company
or mutual savings bank (association) is one that is owned by its members. In the instance of a
mutual savings bank, the members are the financial institution’s depositors.278 A mutual savings
bank can reorganize itself into an MHC by transferring all of the assets and liabilities to a newly
formed stock institution, the majority shares of which are owned by the MHC. The remaining
minority shares are sold to equity investors, with depositors afforded the right to buy minority
equity interest before it is made available to the public.279
The Dodd-Frank Act transferred authority over savings and loan holding companies regulated by
the Office of Thrift Supervision (OTS) to the Federal Reserve280 and included a specific provision
which requires a MHC to follow certain procedures in order to waive receipt of any dividend
declared by a subsidiary.281 Dividends are distribution of earnings (profits) to shareholders, which
are usually declared and paid quarterly. The board of directors determines the amount of
dividends. If the MHC waives the right to receive dividends, depending upon the specifics of an
institution’s dividend arrangements, dividends may be distributed among the other equity holders
or retained by the bank subsidiary.
275
Joshua Mitts, Did the JOBS Act Benefit Community Banks? A Regression Discontinuity Study, April 25, 2013, at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2233502.
276
This section was written by Raj Gnanarajah, analyst in Financial Economics.
277
P.L. 100-86.
278
The discussion surrounding Mutual Holding Companies (MHC’s) in this report are from the perspective of an MHC
that has a bank as a subsidiary. U.S. Securities and Exchange Commission, “Mutual-to-Stock” Conversions: Tips for
Investors, October 6, 2011, http://www.sec.gov/investor/pubs/mutualconversion.htm.
279
The Securities and Exchange Commission, Mutual to Stock Conversions: Tips for Investors, October 6, 2011,
http://www.sec.gov/investor/pubs/mutualconversion.htm.
280
The Office of Thrift Supervision ceased to exist as of 2011.
281
Sec. 625 of P.L. 111-203, adding 12 U.S.C. §1467a(o)(11).
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The Federal Reserve issued Regulation MM, implementing its authority over MHCs282 and
included in it a subsection, 12 C.F.R. 239.8(d), implementing the statutory requirements
permitting MHCs to waive the right to receive dividends declared by a subsidiary of the MHC.
Under the Federal Reserve regulations,
an MHC may waive the right to receive any dividend declared by a subsidiary... if (i) no
insider of the MHC, associate of an insider, or tax-qualified or non-tax-qualified
employee stock benefit plan of the MHC holds any share of the stock in the class of stock
to which the waiver would apply, or (ii) the MHC gives written notice to the ... [Federal
Reserve] of the intent of the MHC to waive the right to receive dividends ... and the
283
[Federal Reserve] Board does not object.
The regulation specifies what must be included in the notice of waiver, including documentation
of the MHC’s conclusion that a waiver would be consistent with the fiduciary duties of the board
of directors of the MHC.
The Dodd-Frank Act and the Federal Reserve regulation include a streamlined approval process
for dividend waivers by certain “grandfathered MHC’s.” Under the statute, the Federal Reserve
may not object to a proposed waiver of dividends for an MHC that waived dividends prior to
December 1, 2009, (grandfathered MHC’s) provided “the waiver would not be detrimental to the
safe and sound operation of the ... [mutual savings bank]”; and, the MHC’s board “expressly
determines the waiver to be consistent with its fiduciary duties to the mutual members of the
MHC.”284 For MHCs that do not meet the criteria for grandfathering, Regulation MM specifies
conditions under which the Federal Reserve will not object to a waiver of dividends for nongrandfathered MHCs. Among them are a vote of the members of the MHC approving the waiver
of dividends; a determination that the mutual savings bank is operating in a safe and sound
manner, which will not be jeopardized by the waiver; and an affirmation that the MHC is able to
meet any obligations in connection with any loan for which the MHC has pledged the stock of the
subsidiary mutual savings bank.285
Section 113 of S. 1484 (Section 914 of S. 1910) authorizes all MHCs to waive the “receipt of
dividends declared on the common stock of their bank or mid-size holding company” without
having to comply the Federal Reserve’s regulation regarding “Mutual Holding Company
Dividend Waivers.”286
Policy Discussion. In prior circumstances, the Federal Reserve identified a number of issues
related to dividend waivers by the holding company. One of the reasons for retaining dividends is
so the MHC could serve as a source of strength to its subsidiary bank. If the MHC retains the
dividend payments from the subsidiary, then an MHC can transfer its excess capital to the
subsidiary when the subsidiary might need a capital infusion.287 If there is no requirement for a
282
The Board of Governors of the Federal Reserve System, “Savings and Loan Holding Companies,” 76 Federal
Register 56511-56513, September 2011.
283
The Board of Governors of the Federal Reserve System, “Savings and Loan Holding Companies,” 76 Federal
Register 56508, 56521, September 2011.
284
12 U.S.C. §1467a(o)(11)(D).
285
12 C.F.R. §239.8(d)(4).
286
Section 113 of S. 1484 refers to 12 C.F.R. §239.63 “or any successor thereto.” The successor to 12 C.F.R. §239.63
is 12 C.F.R. §239.8(d).
287
Federal Reserve Bank of St. Louis, Order Approving Formation of a Holding Company and Acquisition of
Nonbanking Subsidiaries - Northwest Bancorp, MHC., Federal Reserve Bulletin, December 1994, pp. 1131-1133.
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mandatory vote of MHC shareholders, the waiver would rest exclusively with the board or of the
MHC, who may have a financial interest in the waiver as minority shareholders in the bank.
In issuing the regulations implementing the Dodd-Frank dividend waiver provisions, the Federal
Reserve also noted that dividend waiver by the MHC without corresponding waiver by the
minority (i.e., non-member) shareholders poses an “inherent conflict of interest” because it might
result in unequal distribution of equity between mutual owners of the MHC and minority
shareholders. In essence, it could result in a transfer of equity from mutual owners to minority
shareholders.288
Supporters of S. 1484 cite similar reasons as those that opposed the implementation of Regulation
MM’s dividend waiver requirements in 2011.289 They fear that the Fed will erroneously block
waivers under Regulation MM, thereby harming MHCs and discouraging capital formation. They
assert that if the MHC waives the dividends, greater capital is retained by the subsidiary, which
would enhance the safe and sound operation of the subsidiary savings bank. Further, they state,
waiving dividends for majority shareholders while retaining them for minority shareholders may
be necessary in order to offer the latter a market rate of return. Lastly, the supporters state that
when the MHC receives the dividends from the subsidiary it must pay taxes on the dividends
received, thereby reducing the overall franchise value.290
The supporters of S. 1484 also state that by distinguishing between grandfathered MHCs and the
rest of the MHCs lead to different classes of MHCs. They also assert that the cost of obtaining the
vote of the members could be cost prohibitive and lead to additional unnecessary administrative
and financial costs.291
Previously, in similar circumstances, the banking regulators have allowed waiver of dividends by
the MHC and those dividends to be retained by the bank. In such instances, the regulators
required specific accounting procedures to allocate the value of those dividends to the members
of the mutual institution. This process helped delineate the increase in value of the MHC to be
properly apportioned between the members and minority shareholders.292
288
The Board of Governors of the Federal Reserve System, “Savings and Loan Holding Companies,” 76 Federal
Register 56512, September 2011.
289
America’s Mutual Holding Companies, FAQ’s America’s Mutual Holding Companies,
http://www.americasmutualholdingcompanies.com/faq.html.
290
Luse Gorman Pomerenk & Schick, Comments on Section 239.8(d) of Regulation MM of the Interim Final Rule
Regarding Dividend Waivers by Mutual Holding Companies - Docket No. R-1429; RIN No. 7100 AD80, November 1,
2011, http://www.luselaw.com/publications/2011/
Ltr%20to%20FRB%20re%20public%20comments%20to%20Regulation%20MM%20%2800093534%29.PDF.
291
Ibid.
292
Federal Reserve, Order Approving Formation of a Holding Company and Acquisition of Nonbanking Subsidiaries Northwest Bancorp, MHC., Federal Reserve Bulletin, December 1994, pp. 1131-1133.
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Appendix A. Indexing of Bank Regulatory Relief
Provisions for GDP Growth
Certain provisions of S. 1484/S. 1910 with exemptions based on size are indexed by “such
amount is adjusted annually…to reflect the percentage change for the previous calendar year in
the gross domestic product of the United States, as calculated by the Bureau of Economic
Analysis of the Department of Commerce.” Indexing reduces the number of firms that “graduate”
from the exemption over time as they grow in size, in nominal or real terms. Nominal price
increases are caused by inflation, while real price increases refer to those in excess of the inflation
rate. Table A-1 summarizes those provisions that apply to banks.
Table A-1. Provisions Indexed for GDP Growth
Current and
Proposed
Threshold
(billions)
Section of
S. 1484
Section of
S. 1910
110(a)
911(a)
Exemption from swap clearing requirements for banks, savings
associations, farm credit system institutions, and credit unions below
the threshold
$10
110(b)
911(b)
Depository institutions and credit unions above the threshold subject
to CFPB supervision
$10 to $50
110(c)
911(c)
Exemption from security-based swap clearing requirements for
banks, savings associations, farm credit system institutions, and credit
unions below the threshold
$10
110(d)
911(d)
Exemption from debit interchange fee restrictions for issuers below
the threshold (“Durbin Amendment”)
$10
110(e)
911(e)
Offset of increased deposit insurance assessments for banks below
the threshold
$10
110(f)
911(f)
Exemption from executive compensation standards for depository
institutions, broker-dealers, credit unions, investment advisors,
Fannie Mae, Freddie Mac, and other financial institutions designated
by regulators below the threshold
$1
115
916
Exemption from Volcker Rule for banks below the threshold
$10
201
931
Exemption from enhanced prudential regulation for bank holding
companies below $50 billion, eligible for designation if between $50
billion and $500 billion, automatically subject to enhanced prudential
regulation if above $500 billion
$50, $500
202
932
Risk committee requirements apply to publicly-traded bank holding
companies above the threshold
$10 to $50
202
932
Company-run stress test requirements apply to banks above the
threshold
$10 to $50
n/a
928
Grants regulators discretion to exempt banks below the threshold
from certain regulations
$10
Topic
Source: CRS analysis.
Note: Threshold is based on total assets, unless otherwise noted.
Section 110 of S. 1484 (section 911 of S. 1910) indexes exemptions found in a few provisions of
existing law (all added by the Dodd-Frank Act) while making no other changes to those
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provisions, except 110(b), which also raised the threshold and is discussed in the section above
entitled “CFPB Supervisory Threshold.” The other exemptions are found within other sections of
the bills that make broader changes to current law. In addition, Section 108 of S. 1484 (Section
909 of S. 1910) indexed thresholds for exemptions from points and fees for manufactured
housing for inflation (as measured by the consumer price index) instead of GDP.
GDP is revised repeatedly and is not available on the first of the year, so regulators would have to
formulate a method for making this calculation. The bills do not specify whether regulators
should use the nominal or real GDP growth rate—nominal GDP growth is equal to real GDP
growth plus the inflation rate. If regulators used the real GDP growth rate, GDP in some years
could be negative or lower than the inflation rate. In most years, GDP grows faster than inflation,
so the thresholds would be increasing in real terms over the long run. Total assets of the financial
system also generally increase more rapidly than inflation, so indexing by GDP growth instead of
inflation would make it less likely that an increasing number of firms would not be subject to the
exemption over time.
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Appendix B. Provisions in the Financial Regulatory
Improvement Act Covered in this Report
Table B-1 lists the provisions in S. 1484, the Financial Regulatory Improvement Act, that are
covered in this report and the corresponding section in S. 1910, Financial Services and General
Government Appropriations Act, 2016, and related House bills.
Table B-1. Provisions in the Financial Regulatory Improvement Act Covered in this
Report
Subject
S. 1484
S. 1910
Related House Bill
Volcker Rule, Exemption
for Community Banks
Section 115
Section 916
Change to the “Collins
Amendment”
Section 123
Section 924
Capital Treatment of
Mortgage Servicing Assets
Section 116
Section 917
Thresholds for Enhanced
Regulation
Section 201
Section 931
EGRPRA Process
Section 125
Section 926
Manufactured Housing
Section 108
Section 909
H.R. 650
Points and Fees
Section 107
Section 908
H.R. 685
Rural Lending
Section 103
Section 904
H.R. 1259
Portfolio Qualified
Mortgage
Section 106
Section 907
H.R. 1210
Integrated Disclosure
Forms
Section 117
Section 918
H.R. 3192
Privacy Notifications
Section 101
Section 902
H.R. 601
Exam Frequency for Small
Banks
Section 109
Section 910
H.R. 1553
Exam Ombudsman and
Appeals Process
Section 104
Section 905
H.R. 1941
Call Report Reform
Section 119
Section 920
CFPB Supervisory
Threshold
Section 110
Section 911
Operation Choke Point
Section 126
Section 927
H.R. 766, H.R. 2578
Holding Company
Registration Threshold
Equalization
Section 601
Section 971
H.R. 37
Mutual Holding Company
Dividend Waivers
Section 113
Section 914
H.R. 1408
Source: Table created by CRS.
Notes: S. 1910, Section 928 (“Exemptive Authority”) is the only provision of S. 1910 discussed in this report
that was not originally part of S. 1484.
Congressional Research Service
51
“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress
Author Contact Information
Sean M. Hoskins, Coordinator
Analyst in Financial Economics
shoskins@crs.loc.gov, 7-8958
Edward V. Murphy
Specialist in Financial Economics
tmurphy@crs.loc.gov, 7-6201
Raj Gnanarajah
Analyst in Financial Economics
rgnanarajah@crs.loc.gov, 7-2175
Gary Shorter
Specialist in Financial Economics
gshorter@crs.loc.gov, 7-7772
Marc Labonte
Specialist in Macroeconomic Policy
mlabonte@crs.loc.gov, 7-0640
Congressional Research Service
52