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Summary of H.R. 4173

Title I: Creates Financial Services Oversight Council to identify, monitor and regulate large (> $50 billion in total assets) institutions and activities that pose a “systemic risk” to the financial system. These firms will be subject to stricter 'safety and soundness' standards.

Importantly, the Council will have some ability to comment on FASB proposals about an existing or proposed accounting principle, standard, or procedure that will impact large financial firms.

Note: This title also eliminates Oklahoma's restrictions on de novo interstate branching and imposes a nationwide deposit cap of 10 percent. In addition, it authorizes GAO audits of the Federal Reserve's monetary policy decisions.

Note too: The prohibition on paying interest on corporate checking accounts is repealed one year after the bill is enacted.

The Federal Reserve is given broad authority to regulate these entities. It can:

  • Mandate risk-based and leverage capital requirements, including off-balance sheet exposures;
  • Impose enhanced liquidity requirements and restrictions on concentration limits;
  • Subject them to prompt corrective action requirements and self-resolution plans (a “living will” plan); and
  • Impose overall risk-management requirements on any large entity.

The Fed may also require issuance of long-term convertible debt; prohibit trading of proprietary securities and limit the amount of debt as a percentage of capital.

Systemic Dissolution Fund: Financial firms with more than $50 Billion in total assets will be assessed to prefund a “Systemic Dissolution Fund” of $150 Billion. This is on top of their normal FDIC assessments. Farm Credit System entities are exempt from this requirement.

Systemic Dissolution Authority: A new FDIC subsidiary is authorized by the bill to “resolve” the formerly “too-big-to-fail” firms if sufficient special circumstances are found to exist. The Secretary of the Treasury in consultation with the President makes the call. In receivership the Authority can sell assets, make loans to the entity, guarantee obligations of the firm, or dispose of all or part of the company.

Haircut for Secured Creditors in Resolution: Secured claims in any resolution (other than those of the federal government or security interests relating to a debt with an original term of 30 days or more) can be reduced by 10 percent by the receiver. Federal Home Loan Bank advances are also excluded.

FDIC Assessments: The assessment base is changed from total domestic deposits to average total assets minus average tangible equity. Off-balance sheet exposure must be considered by the FDIC when considering the rate to be set and the FDIC is authorized to suspend or limit the mandatory dividend requirement under current law when the DIF ratio exceeds 1.50 percent of insured deposits. The requirement under existing law that dividends be paid when the DIF ratio exceeds 1.35 percent is eliminated.

Preservation of the Thrift Charter: The thrift charter is preserved with various changes to allow for mutual national banks. The definition of a “bank” in the Bank Holding Company Act is amended to include savings associations and savings banks, except for savings associations that are controlled by insurance companies. Mutual savings and loan holding companies are also preserved. The functions of the Office of Thrift Supervision are transferred to the OCC.

Risk-Retention, or “Skin in the Game” Requirement: Appropriate regulations are to be drafted that will require a creditor to retain an economic interest in a material portion (5 percent) of the credit risk of any loan it makes, if the loan is sold or transferred. Importantly, the agencies writing the rules may require that risk retention be held by an entity that is securitizing the loan instead of or in addition to the originator under appropriate circumstances.

Title II: Compensation Issues – shareholders in publicly-traded companies would be allowed a non-binding vote on compensation for the company's top five executives. Publicly-traded companies must have a compensation committee made up of independent (outside) directors.

Title III: Over-the-Counter Derivatives are given significantly enhanced oversight and supervision, and new capital standards are imposed on swap dealers and participants.

Title IV: Creates the Consumer Financial Protection Agency with sweeping new regulatory, rulemaking, supervision and enforcement authority that will govern every aspect of a financial institution's relationship with its customers, except investment products and services regulated by the SEC and the CFTC and general insurance products. This includes the ability to create rules prohibiting “unfair, deceptive and abusive” acts or practices.

Most consumer protection laws except the Community Reinvestment Act will be transferred to the new Agency. Merchants, retailers, and other sellers of non-financial products and are not engaging in financial activities are exempt from the CFPA's provisions. So too are real estate brokers, tax preparers, accountants, pawnbrokers and attorneys. Farm Credit Service entities are exempt

Small banks are not exempt from its rules; rather, examination authority has been delegated to the primary banking regulatory agency for any bank or credit union with less than $10 Billion in total assets. The CFPA retains the right to include one of its examiners on the examination team.

Similarly, the appropriate federal banking agency has primary authority to take consumer related enforcement actions against depository institutions with total assets of $10 billion or less. The CFPA may recommend that the primary agency take an enforcement action, and if such action is not taken, the CFPA may proceed with the enforcement proceeding on its own.

A consumer complaint system is to be established. If the CFPA hears from consumers and has “reasonable cause” to believe that small banks are in violation of its rules it may directly investigate and take enforcement actions against any such institution. In addition, the CFPA may conclude on its own that a banking regulatory agency has failed to adequately conduct consumer compliance examinations of a small (less than $10 Billion) bank and may revoke its delegation of examination authority.

CFPA Funding: Initially CFPA is funded by transferring 10 percent of the Federal Reserve System's total system expenses to the new Agency, and by fees assessed on financial institutions and other “covered persons.” The amount of fees charged will be based on the “size and complexity of risk posed by the “covered person” and its compliance record. Banks under $10 Billion in total assets will not be assessed by the new Agency. Banks and credit unions with greater than $10 billion in assets would be assessed for the cost of their supervision by the CFPA

Compliance Requirements: The bill includes new consumer information access obligations, new HMDA reporting standards, including reports on small business lending, and new requirements for reporting deposit data. In addition, the CFPA would be expressly empowered to gather information from banks and service providers about their organization, business conduct, and practices. There is at this point no limit on the amount or the kinds of information that could be required.

Preemption: Provides that state consumer laws that “prevent, significantly interfere with, or materially impair” the ability of national banks to engage in the business of banking may be preempted by the Comptroller's office. This same preemption standard does not apply to operating subsidiaries of national banks.

Note: This language doesn't fix a problem contained in the body of the legislation dealing with the right of state attorneys general to “visit” national banks and enforce both federal and state consumer laws. This language includes the possibility of bringing a private right of action for damages on behalf of Oklahomans against national banks, not just out-of-state banks doing business in Oklahoma. This language is a serious problem and goes far beyond the recent Supreme Court decision in the Cuomo case that merely permitted state Attorneys General to go to court to enforce non-preempted state laws without allowing for monetary rewards. At least no private right of action is conferred by the bill.

Title V: This is the section that deals with credit rating agencies and hedge fund advisors. It also imposes a duty of care on broker-dealers and investment advisors.

Title VI: Creates within the Treasury Department a Federal Insurance Office charged with the responsibility of monitoring all aspects of the insurance industry. Within 12 months it is to report to Congress on ways to modernize and improve insurance regulation across the nation.

Title VII: This title creates loan origination standards for mortgage and predatory lending purposes. It also bans yield spread premiums, creates new lender liabilities, bans mandatory arbitration provisions in mortgage loans, lowers the HOEPA trigger and makes several changes in mortgage servicing and appraisal requirements.

The standards are to be developed by banking regulators. They will require full disclosures about the specific lender involved (its unique indentifying number or name required under registration laws in the various states) as well as some sort of demonstration that a borrower has a documented ability to repay the loan. The standards will also require a demonstration that the loan is free of “predatory” characteristics” and clarification that a borrower receives a “net tangible benefit” from the transaction.

In addition, the bill gives consumers a right to rescind a loan for violation of the “ability to repay” and/or “net tangible benefit” standards that are to be imposed. In addition, consumers would have the right to recover attorney's fees. Mandatory arbitration is banned, prepayment penalties are severely limited, single-premium credit life insurance is prohibited, and HOEPA triggers are lowered.

  • A first mortgage is “high cost” if the APR exceeds by more than 6.5 percentage points the yield on Treasury securities having a comparable maturity.
  • A junior or subordinate mortgage is high cost if the APR exceeds by more than 8.5 percentage points the yield on treasury securities having a comparable maturity.
  • The section also includes in the definition of high cost mortgage any mortgage where the points and fees exceed 5 percent in the case of transactions for $20,000 or more, or in the case of transactions for less than $20,000 the lesser of 8 percent or the transaction amount or $1,000.

Banks and other lenders will be required to establish an escrow account for the payment of taxes and hazard insurance, ground rents, and any other required periodic payments or premiums associated with a mortgage loan.

Title VIII: This title deals with making TARP funds available to a program established and run by HUD to provide emergency mortgage assistance in the form of loans to borrowers who are late on their mortgage payments due to job loss, so long as the borrower has a “reasonable” prospect of resuming full mortgage payments.



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