President Trump Signs Financial Services Regulatory Reform Legislation

On May 24, 2018, President Donald Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). The Act is effective immediately except as otherwise stated in certain provisions.

The Act makes many significant modifications to the postcrisis financial regulatory framework, although it leaves the core of that framework intact.

One major consequence of the Act may be an increased potential for mergers, acquisitions and organic growth among regional and midsize banks, as well as community banks, because of provisions that increase the thresholds that must be met before various financial regulatory requirements apply.

Volcker Rule Provisions

The Act makes two changes to the Volcker Rule. The first, in Section 203, provides broad relief from the Volcker Rule for community banks and other small banking organizations. The definition of “banking entity” now excludes insured depository institutions (and their parent companies and affiliates) if (i) the institution has less than $10 billion in total consolidated assets and (ii) the institution’s trading assets and liabilities are less than 5 percent of its total consolidated assets. If the direct or indirect parent company of an insured depository institution itself exceeds either of those thresholds, the exclusion is not also available.

Second, Section 204 provides relief from the name-sharing restrictions of the Volcker Rule (both in the definition of “sponsor” and in the asset management exemption). It will allow an investment adviser that is a banking entity to share the same name (or a permutation of the same name) with a covered fund if (i) the investment adviser is not itself an insured depository institution, a direct or indirect parent company of an insured depository institution or a foreign banking organization treated as a bank holding company, (ii) the investment adviser does not share a name (or permutation of a name) with any such entity and (iii) the name of the investment adviser does not include the word “bank.”

Brokered Deposit Exemption

Section 202 of the Act amends the Federal Deposit Insurance Act to exempt deposits placed through a network of Federal Deposit Insurance Corporation-insured depository institutions from treatment as brokered deposits, subject to certain detailed conditions. Under Section 202, deposits received by a depository institution will be exempt from such treatment if (i) the deposits have the same maturity (if any), and are in the same aggregate amount, as deposits placed by the depository institution through the network, (ii) the deposits do not exceed the maximum deposit insurance amount, (iii) the deposits are not originated by a deposit broker and (iv) the depository institution is well capitalized and has received an outstanding or good composite exam rating (or meets certain alternative criteria). The exemption is available to a depository institution for deposits in an aggregate amount that equals the lesser of (i) $5 billion and (ii) 20 percent of the depository institution’s total liabilities.

Initiating Online Banking Services

Section 213 of the Act authorizes insured depository institutions and insured credit unions (and their respective affiliates) to accept, in connection with an individual consumer’s request to open an account or obtain a service, a scanned driver’s license or identification card issued by a state or local government. The scanned document information may be used to verify the authenticity of the document, to verify the identity of the individual, to comply with record retention requirements and to comply with the federal anti-money-laundering laws. However, the scanned image must be deleted after serving such purposes, although there is not a requirement to delete the underlying information (e.g., the driver’s license number). Section 213 preempts conflicting state law.

Identity Fraud Database

Section 215 of the Act directs the Commissioner of the Social Security Administration to develop a database that can be used by financial institutions, with consumer consent, to validate a combination of a consumer’s name, Social Security number and date of birth. The database is intended to reduce incidents of identify fraud. Financial institutions would be permitted to submit queries to the database to verify information in their possession regarding consumers. A financial institution could submit a query only in connection with a credit transaction (e.g., a credit card loan application) or in a circumstance that is covered by the list of permissible purposes in the Fair Credit Reporting Act. The Social Security Administration is required to fully recover its costs from the financial institutions that use the database, and it may not begin development of the database until 50 percent of the startup costs (as determined by the Commissioner) have been collected from prospective users.

Fair Credit Reporting Act Changes

Sections 301 and 302 of the Act modify the Fair Credit Reporting Act. Section 301 gives consumers a new federal right to request a “freeze” of their credit files, prohibiting access to those files by new creditors. Previously, state laws have addressed credit freezes, and the new federal requirement preempts those state laws. The new provision requires that the national consumer reporting agencies honor consumer requests with no charge, and it provides additional protections for credit freezes on credit files of minors. Consumer advocates have complained that the new federal consumer right is weaker than the state laws that it preempts. Section 302 provides a special provision for removing records of veterans’ medical debts from credit files.

Student Lending

The Act also adds several new provisions relating to student loans. Section 601 amends the Truth in Lending Act to provide that on newly originated private student loans, (i) the lender cannot accelerate a debt based on the death or bankruptcy of a cosigner and (ii) the lender must release any cosigner from liability if the student borrower dies. Section 602 amends the Fair Credit Reporting Act to allow a student loan borrower to request removal of default information from his or her credit file after participating in a loan rehabilitation program. The new provision confirms that removal of such default information will not result in inaccurate information reporting under the Fair Credit Reporting Act.

Other Changes

The Act made numerous other changes to the postcrisis financial regulatory framework. Although those changes are beyond the scope of this Sidley Update, they include the following:

  • raising the size thresholds for bank holding companies that are subject to enhanced prudential standards from $50 billion to $250 billion of assets
  • providing relief for many bank holding companies from stress testing requirements
  • easing capital and liquidity requirements and providing capital relief to community banks
  • adjusting some of the postcrisis requirements imposed on consumer mortgage lending
  • increasing the size threshold for the Federal Reserve’s policy statement on small bank holding companies from $1 billion to $3 billion
  • creating a right of savings associations with under $20 billion of assets to receive regulatory treatment more aligned with national banks