Published: July 23, 2010
Author: Laura S. Peck

On July 21, 2010, President Obama signed in to law the Restoring American Financial Stability Act (RAFSA), his landmark financial reform package. Although it has been dubbed “Wall Street” reform, the effects of the 2,300 pages of legislation will be felt far beyond New York City. In fact, community banks here in Wisconsin will see wide-reaching changes in both the short and long term. This article explains a few of the changes that community banks and the businesses that rely on them for financing can expect.

Consumer Financial Protection Bureau
A cornerstone of the legislation is the creation of a new Consumer Financial Protection Bureau (CFPB or “the Bureau”). The CPFB has broad authority to write and enforce rules protecting consumers from what it determines to be “unfair, deceptive, or abusive acts and practices and from discrimination.” § 1021. [1]

This new body could fundamentally restructure many consumer financial transactions. The specific impact of the legislation may not be known for some time, however, because the actual substance of the law will in large part be written by federal regulators. Harvard Law Professor Elizabeth Warren, who is credited with initially proposing the Bureau [2] and whom some would like to see serve as its first head [3], supports using its rule-making authority to create new disclosure requirements in consumer credit markets, including those for mortgages and credit cards. [4] The Bureau also has authority to impose restrictions on, or even prohibit, mandatory, pre-dispute arbitration agreements between banks and consumers if it finds the regulations would be “in the public interest and for protection of consumers.” § 1028. [5]

Now that the bill is passed, advocates on all sides of the issue already moved their lobbying efforts from the halls of Congress to the federal agencies that will ultimately shape the final rules. Community banks will need to closely monitor the multitude of rules and regulations the new Bureau will produce in order to comply and avoid litigation down the road.

In addition to its rule-making powers, the CPFB will consolidate authority from the existing mass of independent bureaucracies that currently oversee financial companies. Eventually, much of the regulatory authority currently housed in the Office of the Comptroller of the Currency, the FDIC, the Federal Reserve, the National Credit Union Administration and others will be transferred to the CPFB.

While all banks are required to comply with CPFB rules, the Bureau will only have enforcement authority for banks with over $10 billion in assets. Banks at or below the $10 billion threshold will continue to be examined by their existing prudential regulator. Although the Bureau’s enforcement authority only extends over larger financial institutions, the CFPB’s authority to demand reporting extends to every financial institution. Specifically, the CPFB may require information from any size bank that it deems necessary to:

• Enforce federal consumer financial law
• Examine whether institutions are complying with federal law on a “sampling” basis and in conjunction with the appropriate prudential regulator
• Detect and assess “risks” to consumers and the consumer financial markets generally [6]

The new law further empowers state attorneys general to bring civil lawsuits to enforce the Bureau’s rules. § 1042. [7]

Deposit Insurance
The RAFSA makes a number of changes to federal deposit insurance. [8] The new law permanently increases the deposit insurance maximum for banks, thrifts and credit unions to $250,000 per depositor, with the increase retroactive to January 1, 2008. It also changes the assessment base for premiums from domestic deposits to “assets minus tangible equity.” According to the Independent Community Bankers Association, this change is expected to save community banks $4.5 billion over the next three years. [9]

The law also changes the deposit insurance fund (DIF) reserve ratio from 1.15 to 1.35 and exempts banks under $10 billion from the premium increases this provision will entail. In raising the reserve ratio, the law also eliminates dividends whenever the DIF exceeds 1.35 percent of insured deposits and eliminates the hard cap of 1.50 percent of the size of the fund. Some industry groups speculate that the increase in the DIF level to 1.35 percent is a prelude to using premiums to support unrelated government spending. [10] We will have to monitor future congressional action to ascertain any such impact on the fund’s integrity.

The RAFSA extends for two years the FDIC’s Transaction Account Guarantee Program. This program offers unlimited insurance for noninterest-bearing transaction accounts. The purpose of this extension is to ensure that small businesses’ payroll and other operational accounts are secure.

Debit Interchange Rate Setting Authority
The bill allows the Federal Reserve to set “reasonable” debit interchange rates for issuers over the $10 billion threshold, while exempting issuers under $10 billion from the regulations. § 920. [11] The concern for community banks is that although they are exempt from rate mandates, debit transaction market share will flow to the lowest-priced products. Additionally, merchants will be allowed to discriminate among methods of payment, enhancing the importance of the comparative costs of transactions in cash, credit, checks and other payment methods. Community bankers worry the new authority will ultimately either make small debit card issuers uncompetitive or force them to reduce their own interchange rates to compete with the Federal Reserve standard, ultimately consolidating debit card market share in the largest issuers. The Independent Community Bankers Association projects the change will lead to a “significant reduction” in community banks’ debit interchange revenue. [12]

The Federal Reserve has 90 days from the enactment of the law to establish rules governing debit interchange rates.

Partial Sarbanes-Oxley Exemption
The RAFSA exempts public companies with less than $75 million in market capitalization from the auditor attestation requirement of Sarbanes-Oxley 404(b). 404(b) requires companies and their auditors to publicly report on the effectiveness of their internal control over financial reporting. The Securities and Exchange Commission (SEC) previously granted a number of temporary deferrals from 404(b) compliance for companies under the $75 million threshold. In addition to making the exemption permanent, the law also requires the SEC to study compliance burdens for companies whose market capitalization is between $75 and $250 million.

Preserving the Federal Thrift Charter
There had been efforts to eliminate the federal thrift charter, which would have impacted a number of Wisconsin institutions. Ultimately, the RAFSA maintained the federal thrift charter. The Office of Thrift Supervision was eliminated, however, and the majority of its authorities were transferred to the Office of the Comptroller of the Currency.

Additional Federal Efforts to Free Up Credit
A separate bill making its way through Congress aims to help community banks make more loans to small businesses. The Small Business Lending Fund, a component of broader legislation, HR 5297, would allow the Treasury to purchase up to $30 billion in preferred stock or other financial instruments in institutions with $10 billion or less in assets. Banks applying for the program must provide a plan to the Treasury describing how they would direct the money toward small business loans. The bill would also require community banks to advertise the loans to local minority-run businesses. Banks with assets between $1 billion and $10 billion would be eligible for investments of up to 3 percent of “risk weighted” assets, while banks under $1 billion would be eligible for up to 5 percent of such assets. The Treasury “investment” would need to be repaid within 10 years, with dividend rates varying from 1 percent to 7 percent, depending on the extent to which banks actually increase their small business lending.

At this point, the bill passed through the House but faces an uncertain future in the Senate. Republicans have withheld support in protest of Senate leadership’s refusal to allow amendments to the proposal, but recent remarks by Senate GOP leadership suggest Republicans may still support the measure. The bill is a priority of President Obama.

Summary
Over the long term, the Restoring American Financial Stability Act carries wide-ranging implications for community banks, and presents both challenges and opportunities. In order to avoid litigation, and continue their essential mission of keeping capital flowing to local consumers and small businesses, community bankers need to find effective and efficient ways to understand and comply with the mass of new regulations that are coming in the near future.

For more information on the Restoring American Financial Stability Act’s effect on Wisconsin community banks, contact Laura Peck at 608.283.6729 or lpeck@axley.com. Special thanks to Jon Horne, a summer law clerk at Axley Brynelson, for his assistance with this article.