©2012 Morrison & Foerster LLP | All Rights Reserved | mofo.com The Dodd-Frank Act July 16, 2013 Presented by Anna Pinedo NY2 721279
©
2012 M
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ison &
Foers
ter
LLP
| A
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ights
Reserv
ed | m
ofo
.com
The Dodd-Frank Act
July 16, 2013
Presented by Anna Pinedo
NY2 721279
This is MoFo. 2
• Dodd-Frank overview and status report
• Systemic regulation and oversight
• Institutions
• Prudential supervision
• Resolution
• Capital
• Activities
• Derivatives
• Volcker Rule
• Securitization
• Ratings
• Markets
• Payment, clearing, and settlement
Agenda
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Overview and Status Report
This is MoFo. 4
Rulemaking Progress
This is MoFo. 5
Dodd-Frank Act
• Quite a number of the required rulemakings have been finalized (or
nearly so), including, for example: • Many of the Title IX securitization and ratings requirements
• Many of the mortgage related provisions (ability to pay, QM)
• Much of the Title VII framework (including swap dealer registration)
• Living will requirements and the OLA framework
• Many of the capital requirements
• But, then again, many of the most important issues to be addressed
are still to come: • Margin requirements
• Volcker Rule
• Risk retention requirements
• Lincoln (“push out”) amendment
This is MoFo. 6
Key Provisions Capital Rules for Banks
More stringent capital rules
Limits on leverage
Elimination of trust preferred securities
Contingent capital?
Volcker Rule
Limits proprietary trading
Regulates investments in hedge funds and private equity funds – 3% limit (3% of bank Tier 1 capital cap / 3% of fund capital cap)
Banks may engage in “permitted” activities
New Agencies
Consumer Financial Protection Bureau
Financial Stability Oversight Council
Federal Insurance Office (Treasury)
New Office of Minority and Women Inclusion
Investor Advisory Committee
Office of Investor Advocate (SEC)
Office of Credit Ratings (SEC)
Credit Rating Agency Board (SEC)
Office of Financial Literacy
Office of Financial Research (Treasury)
Office of Housing Counseling (HUD)
Office of Fair Lending and Equal Opportunity (Fed)
Office of Financial Protection for Older Americans (Fed)
Derivatives
Central clearing and exchange trading Swaps push-out provision Capital and margin requirements
Rules to Protect Consumers & Investors
Consumer Agency Deposit insurance permanently
increased to $250,000 Mortgage regulations Investment advice standards of care Requires hedge fund and private
equity fund advisors to register with SEC
Securitization “Skin in the Game” Rules
Regulations affecting Credit Rating Agencies
Corporate governance and executive compensation restrictions
Insurance Office
Enhanced Prudential Standards
Discourages excessive growth and complexity
Council can impose 15:1 debt-to-equity ratio
Concentration limits for non-affiliates
Living wills
Risk committees
This is MoFo. 7
Notes:
1 No phase-out of trust preferred securities for Bank Holding Company subsidiaries of foreign banking organizations. Instead, they will receive full credit for inclusion in Tier 1 Capital for a 5
year period, after which they will be excluded.
$15 BN
(Small Banks)
¨ No phase - out of trust preferred securities: effectively grandfathered permanently
¨ Primary federal regulator is OCC (National Banks/Thrifts) or FDIC (State Banks/Thrifts)
¨ No requirement for “risk committees” if size is less than $10BN
$15 - 50BN
(Medium Sized Banks)
¨
>$50BN
(Large Banks)
¨ Trust preferred securities will be phased-out1
¨ Costs of unwinding failing firms will be borne by large banks
¨ Required to submit resolution plans (living wills)
¨ Regulated by Federal Reserve (holding companies) and OCC
Systemically
Importa nt Institutions
(> … BN)
¨ Financial Stability Oversight Council can impose 15:1 debt-to-equity ratio
¨ Requires stress testing
¨ Subject to new Orderly Liquidation Authority provisions
¨ Systemically Important Financial Institutions to be defined
Impact Relative to Bank Size
Primary federal regulator is OCC (National Banks/Thrifts) or FDIC (State Banks/Thrifts)
This is MoFo. 8
Key Impacts for Banks The legislative changes will have a substantial impact on banking institutions
Capital Requirements
¨ Higher capital requirements for systemically important banks (>$50bn) – Council can impose a 15:1 debt-to-equity
limit
¨
al requirements for activities such as derivatives trading and securitization
Mix of Capital
¨ G reater emphasis on common equity given desired focus on s impler, more transparent , loss absorbing capital
¨ E limination or phasing out of some non - common equi ty components of Tier 1 capital
Business Mix
¨ Creation of the Consumer Financial Protection Bureau and the associated administrative burden / costs likely to result
in increased emphas is of commercial banking business going forward
¨ Transition away from higher risk activities such as prop rietary trading and derivatives trading
Returns
¨ Increased capital requirements, de - emphasis on risk - taking, and higher administrative costs ( Consu mer Financial
Protection Bureau , elevated FDIC assessments, etc.) will dilute shareholder returns
¨ Impact on debit card interchange fee along with Reg E impact on overdraft fees will further impair profits
Valuation ¨ Lower shareholder return s and growt h profile will result in banks trading at lower price/book multiple s
M&A
¨ Will see increased divestitures of business es
/
investments that may ultimately receive unfavorable capital treatment
– Minority interests, financial firm investments, PE/he dge fund investments
¨ Large cap M&A less prominent given heightened scrutiny on systemically important institutions; more likely to see
more regional/ bolt - on acquisitions
Regulatory Oversight
¨ Increased oversight given creation of Financial Sta bility Oversight Council, Consumer Financial Protection Bureau ,
Office of Credit Ratings, Office of Housing Counseling , etc.
¨ Federal Reserve to have heightened regulatory power/authority
¨ Legislation does not, however, address FNMA and FHLMC
Higher capit
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Specific Provisions in Detail Provision / Area Details
Federal Reserve Board
(“Fed”)
In addition to current authority, the Fed would oversee large, systemically-important nonbank institutions, be responsible for setting
and enforcing stricter standards for disclosure, capital, and liquidity, and be authorized to break up large companies with Council
approval
Covered BHCs and nonbank financial companies designated as Covered Nonbank Companies1 shall be subject to the Fed’s
heightened prudential standards
The Senate agreed to the House provision authorizing the GAO to conduct a one-time audit of the Fed’s 2008 emergency lending
program and to provide ongoing audits of discount window and open market operations with a two-year lag
The President will not have authority to appoint the president of the New York Federal Reserve Board
Financial Stability
Oversight Council
(“Council”)
Led by the Treasury Department, the ten-member Council shall include regulators from the Fed, Securities and Exchange
Commission (“SEC”), Federal Housing Finance Agency, Commodity Futures Trading Commission and other agencies. State
securities, insurance and banking regulators and credit unions lobbied for and won non-voting seats.
The Council shall determine whether a nonbank financial company be subject to stricter prudential standards for financial stability
standards depending on a number of factors.
With a 2/3 vote, the Council can impose higher capital requirements on lenders or place broker-dealers and hedge funds under the
authority of the Fed
The Council shall have authority to force companies to divest holdings if their structure poses a “grave threat” to U.S. financial stability
The Council would be able to overrule the Consumer Financial Protection Bureau
Consumer Financial
Protection Bureau
(“Bureau”)
The Bureau, which serves as a consumer “watchdog,” shall be located within the Fed as an autonomous entity with an independent
budget led by a presidentially appointed director
The Bureau shall write consumer-protection rules for firms that offer financial services or products and enforce those rules for banks
and credit unions with more than $10 billion in assets. Bank regulators will continue to examine consumer practices at smaller
financial institutions
The Bureau is authorized to regulate credit cards and mortgages, but not auto dealers who make auto loans
1 Covered BHCs are BHCs with $50 billion or more in total consolidated assets. Covered Nonbank Companies are nonbank financial companies whose failure would pose a
grave threat to U.S. financial stability
This is MoFo. 10
Specific Provisions in Detail (cont’d) Provision / Area Details
Too Big to Fail:
Orderly Resolution
Process and Funding
The Act grants the FDIC, which already has authority to liquidate failed commercial banks, power to unwind large failing financial firms
whose collapse would threaten U.S. financial stability
The House agreed to Senate language that grants the FDIC a line of credit with the Treasury Department to pay for the up-front costs
of breaking up troubled firms, but the government would have to establish a “repayment plan”
The House dropped its bid to create a $150 billion resolution fund. Instead, conferees agreed to follow the Senate measure where
the costs of unwinding failing firms will be borne by financial firms with more than $50 billion in assets through fees imposed after a
collapse.
The Act explicitly bars the use of taxpayer funds to rescue failing financial companies
Thrift Charter
The Office of Thrift Supervision shall be abolished with its authority relating to Federal savings associations, State savings
associations, and savings and loan holding companies will be transferred to the Office of the Comptroller of the Currency, the FDIC,
and the Fed, respectively
The Thrift Charter has been preserved, thereby preventing insurance companies that own thrifts from being transformed into bank
holding companies and subject to the Volcker Rule
Capital Standards:
Leverage The Council will impose a 15-to-1 maximum leverage ratio on firms that pose a “grave threat” to the national economy where
imposition of such a leverage limit would mitigate risk
Risk Retention
Requirements for
Securitized Debt
Banks that package loans will be subject to a 5% risk retention requirement, thus affecting credit card debt, auto loans, mortgages,
and other securitized debt
Loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture, and the U.S. Department of Veterans
Affairs will be exempt from this requirement
Regulators will have flexibility to tailor risk-retention rules to specific products (e.g., setting underwriting standards as a form of risk
retention)
Broker-Dealer’s and
Investment Advisor's
Standard of Care
The SEC will conduct a six-month study and then issue rulemaking under its existing authority
The SEC will implement rules within the parameters laid out in the House bill, which allows brokers to offer clients services associated
with principal trading
“Pay It Back” To fund the cost of the Act, (1) the TARP Program shall end one year early to raise $10 billion, and (2) the FDIC premium ratio shall
be increased to 1.35 from 1.15 to raise $9 billion
This is MoFo. 11
Systemic Regulation
and Oversight
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The New Regulatory Environment • How we arrived here
• Nature and tenor of historic bank regulation: prudentially-oriented but
disaggregated
• Perceived failings of the existing regulatory structure: no effective means to “see
the whole picture”
• The Dodd-Frank approach to bank and financial services supervision: reconfigure
bank regulatory structure to —
• Create a scheme of systemic regulation
• Create the tools to regulate “connectivities” in the financial markets
• Reduce “moral hazard”
• Increase the level and scope of regulation in key areas
• Impose activities limitations in perceived “high-risk” areas
This is MoFo. 13
The New Regulatory Environment (cont’d)
• What has and has not changed in financial services regulation?
• What has changed:
• SIFI regulatory scheme for BHCs
• Systemic (“connectivity”) regulatory authorities
• An expanded and enterprise-level resolution scheme for important financial
services firms
• A regulatory scheme for “risky” activities across classes of financial institutions
• Consolidated and focused consumer regulatory regime
• A new class of nonbank financial institutions (nonbank SIFIs) that is subject to
Federal, bank-focused financial supervision (FRB)
This is MoFo. 14
The New Regulatory Environment cont’d)
• What has and has not changed in financial services regulation? • What has not changed:
• Historic prudential focus of financial supervision remains in place
• With one exception (OTS), the same regulatory agencies remain responsible
for financial supervision
• Historic legal and supervisory tools of the financial regulatory agencies are all
still in place
• Historic regulatory attitudes, and institutional differences among regulators; in
fact, there may be a trend back to historic attitudes
This is MoFo. 15
SIFIs
• SIFIs under U.S. law
• Bank holding companies and FBOs with $50 billion or more in
consolidated assets
• Approximately 34 U.S. companies
• Approximately 99 FBOs
• Nonbank financial companies designated by the Financial Stability
Oversight Council
• “Material financial distress”
• “Nature, scope, size, scale, concentration, interconnectedness, or mix of
activities”
• Must be “predominantly engaged” in financial activities—an issue for the
Federal Reserve
This is MoFo. 16
The New Regulatory Environment (cont’d)
• The elements of the SIFI regulatory regime
• Enhanced supervisory and prudential standards (sections 115 and 165)
• Comprehensive early action, enforcement and resolution authority (sections 121,
165(d), 162, 166 and 172; Title II)
• More intrusive reporting requirements (section 116 and 161)
• Activities standards and limitations (sections 120, 163, 164 and 173)
• Nonbank SIFI organization and regulation (section 167)
• Regulation of systemically important payments clearance and settlement facilities
(Title VIII)
This is MoFo. 17
The New Regulatory Environment (cont’d)
• The challenges of the SIFI regime
• The SIFI regulatory regime is nominally directed at an identified class of important
financial services firms. It could, however, apply to a potentially large universe of
organizationally and financially diverse financial services firms with very different
business lines and risk postures.
• The SIFI regime must be tailored to take into account the different business
operations, geographic locations, market/counterparty exposures and risk
management systems of affected SIFIs.
• In addition, SIFI activities and risk profiles will be dynamic resulting in
increases and decreases in SIFI risk profiles.
• In short, the SIFI regime is unlikely to be a “one size fits all” regime.
This is MoFo. 18
The New Regulatory Environment (cont’d)
• The implications of the SIFI regime for non-SIFI institutions
• The more stringent prudential standards that may be developed for “risky” activities
(Section 120) at the SIFI level may also “trickle down” to a broader range of
banking organizations.
• Notwithstanding some of the new legal authorities given by Dodd-Frank, the basic
framework of the financial regulatory system and its operation has not changed
(other than to become more intense and more prescriptive).
This is MoFo. 19
Enhanced Prudential Standards
Statutory requirements
• Enhanced prudential standards include:
• Risk-based capital and leverage;
• Liquidity;
• Risk management;
• Resolution plans and credit exposure reports;
• Concentration limits;
• Short-term debt limits; and
• Stress testing.
• Requirements for stress testing and for risk committees apply to bank holding
companies with $10 billion or more in consolidated assets.
Confidential/Subject to Attorney Client Privilege 20
Resolution and Liquidation • Resolution planning
• U.S. requirements – rapid and orderly liquidation under bankruptcy code
• Orderly Liquidation Authority
• Criteria
• FDIC appointed as receiver
• $50 billion line of credit
• OLA institutions not synonymous with SIFIs
• Non-SIFI could, at the time, present material risk
• SIFI could be resolved in bankruptcy
Confidential/Subject to Attorney Client Privilege 21
Orderly Liquidation Authority
Confidential/Subject to Attorney Client Privilege 22
Orderly Liquidation Authority (cont’d) • The utility of the OLA approach will depend in large measure on
international coordination
• The US and UK have been working together on a common approach
• Also, bank holding companies would have to have sufficient assets at
the BHC level
• Banking agencies have been discussing a new senior debt requirement at the BHC
level
This is MoFo. 23
Activities
This is MoFo. 24
Derivatives
Confidential/Subject to Attorney Client Privilege 25
Title VII Overview • Objectives of Title VII
• Reduce systemic risk posed by the swaps market to the U.S. financial system
• Increase transparency of the swaps market, particularly as to both pre and post
execution pricing
• Enhance the integrity of the swaps market and improve the conduct of major
market participants
Confidential/Subject to Attorney Client Privilege 26
• Regulates products • Swaps
• Security-based swaps (SBSs)
• Regulates entities • Swap dealers
• Security-based swap dealers
• Major swap participants (MSPs)
• Major security-based swap participants
• Derivatives Clearing Organizations (DCOs)
• Swap Execution Facilities (SEFs)
• Swap Data Repositories (SDRs)
• Splits regulation between CFTC and SEC • CFTC regulates swaps, swap dealers and major swap participants
• SEC regulates security-based swaps, security-based swap dealers and major security-based swap participants
Title VII Overview (cont’d)
This is MoFo. 27
Volcker Rule
Confidential/Subject to Attorney Client Privilege 28
Volcker Rule • Two broad prohibitions:
• No proprietary trading.
• No ownership interest in or sponsorship of a private equity fund or a hedge fund.
• Note that entities with a bank functioning solely in a trust or fiduciary capacity are
exempt from these prohibitions.
This is MoFo. 29
Volcker Rule (cont’d) • Proprietary trading means:
• Engaging as principal
• For the trading account
• Of the “covered banking entity”
• In the purchase or sale of one or more “covered financial positions.”
• A “covered financial position” includes a swap.
• A “covered banking entity” includes an insured depository institution and any affiliates or holding companies.
• A trading account is an account in which positions are held in order to realize gains from short-term price appreciation.
• Generally, positions held for 60 days or less are deemed to be traded positions and are subject to Volcker restrictions.
• Positions held for more than 60 days generally are exempt
This is MoFo. 30
Volcker Rule (cont’d)
Several exemptions
• Proprietary trading
• Market making
• Risk-mitigating hedging
• Underwriting
• Trading outside the U.S.
• Trading in the U.S., state, and local government debt. No exemption for non-U.S.
sovereign debt.
• Hedge funds and private equity funds
• Customer funds, but firm’s investment limited to 3% of fund’s capital one year after
fund is established.
• Fund activity outside the U.S.
This is MoFo. 31
Compliance and reporting • Structure of Required Compliance Program
• The proposed rules would create compliance and reporting requirements to assure
that (i) covered banking entities comply with the substantive requirements of the
Volcker Rule and implementing regulations, and (ii) the financial regulatory
agencies can monitor and supervise such compliance
• These requirements broadly include:
• A compliance program that is reasonably designed to assure and monitor
compliance with proprietary trading and covered fund activities and
investments
• Reporting and recordkeeping requirements for covered trading and covered
fund activities
This is MoFo. 32
• Structure of Required Compliance Program
• Certain banking entities that are actively and substantially engaged in trading
activities would be subject to more stringent and detailed compliance and reporting
requirements that are imposed on a tiered basis, depending on the quantitative
level of these activities
• All of these requirements, by all accounts, will be costly and burdensome for many
banking entities to implement
Compliance and reporting (cont’d)
This is MoFo. 33
• Compliance Program – Required Minimum Elements for all Banking
Entities (Section 20)
• Internal written policies and procedures
• System of internal controls
• Management framework that clearly delineates responsibility and accountability for
Volcker Rule compliance
• Independent testing of compliance program effectiveness
• Training for trading personnel/managers and other appropriate personnel
• Making/keeping records sufficient to demonstrate compliance, which must be
provided to a banking entity’s regulatory agency on request and maintain for a
period of not less than 5 years
Compliance and reporting (cont’d)
This is MoFo. 34
• Compliance Program – Enhanced Requirements for Certain Banking
Entities (Section 20 and Appendix C)
• Affected banking entities (“Appendix C banking entities”) are:
• Those that engage in proprietary trading and have total worldwide trading
assets and liabilities of either (i) equal or greater than $1 billion, or (ii) 10% or
more of total assets, measured on a average gross sum basis as determined
on the last day of each of the four prior calendar quarters.
• Those that invest in or have relationships with covered funds where (i)
aggregate investments in covered funds, or (ii) average total assets of covered
funds sponsored or advised by the banking entity, are equal or greater than $1
billion, measured as of the last day of each of the four prior calendar quarters
Compliance and reporting (cont’d)
This is MoFo. 35
• Enhanced Requirements for Appendix C Banking Entities
• Significantly more detailed requirements for covered trading activities, covered
fund activities or investments
• Program requirements
• Internal policies and procedures
• Internal controls
• Accountability requirements
• Independent testing
• Training
• Recordkeeping
• These requirements are similar but not identical for proprietary trading and covered
fund activities (and therefore are discussed separately below)
Compliance and reporting (cont’d)
This is MoFo. 36
• Compliance Program – Conditional Exclusion
• Conditional exclusion for banking entities “to the extent” not engaged in “activities
or investments prohibited or restricted” by the proprietary trading or covered fund
rules
• Existing compliance policies and procedures must be designed to prevent the
banking entity from engaging in covered activities, and require a banking entity
to develop the required compliance program before engaging in covered
activities
• Some questions regarding the practical impact and utility of this conditional
exclusion
• Trading in exempted instruments
• Investment portfolio purchases
• Impact of high risk activities/systemic risk requirements
Compliance and reporting (cont’d)
This is MoFo. 37
Volcker Rule Regulatory developments
• Proposed rule published by banking agencies and SEC on Nov. 7, 2011.
• CFTC published substantively identical rule on Feb. 14, 2012.
• Comments on proposed rule
• Approximately 18,000 comments filed.
• Unprecedented number of comments from foreign regulators.
• All issues covered, but particular focus on market making exemption.
• Agencies currently reviewing comments to determine what questions must be
answered in order to produce a final rule or to re-propose a rule.
• Official action seems unlikely until the fall of this year at the earliest.
• Effective date of statute remains July 21, 2012.
• Board has stated that conformance deadline is July 21, 2014, but possible that
recordkeeping and reporting requirements will take effect earlier.
This is MoFo. 38
Volcker and Lincoln • The implementation of the Volcker Rule and the Lincoln Amendment,
including any revisions to these provisions, are likely to have a
significant impact on the development and structure of the derivatives
market, both in the U.S. and globally
• The state of play on the Volcker Rule has been very hard to assess
• The agencies are still trying to develop the final rule, which they hope to have out
later this year, maybe even later this spring or this summer.
• The expectation is that what is developed will be materially different from what was
proposed, but there is no good insight as to the nature of these differences
• Seems clear that the agencies are having a hard time coming to consensus on
what the final rule should look like and are being deliberately very close-mouthed
at the stage
This is MoFo. 39
• Regarding the Lincoln Amendment
• In January 2013, the OCC published guidance notifying federally-chartered insured
depository institutions that the OCC was prepared to grant applications to delay
compliance with Section 716 (the “Swaps Pushout Rule”) for up to two years.
• The Swaps Pushout Rule will become effective on July 16, 2013.
• According to media reports, several banks were granted the additional two years.
• There are legislative proposals that also would address the Swaps Pushout Rule.
• The original “drafting error” (as acknowledged by Senators Dodd and Lincoln)
regarding the treatment of U.S. branches of foreign banks was only recently
resolved
Volcker and Lincoln (cont’d)
Confidential/Subject to Attorney Client Privilege 40
Securitization
This is MoFo. 41
Dodd-Frank Securitization Perspective
In the mind of Congress in mid-2010, securitization was a major contributing factor, if not cause, of financial crisis and thus one of the principal reasons for the enactment of D-F
Relatively few D-F provisions specifically target securitization, but securitization-related concerns permeate the entirety of D-F
Also, many securitization issues were already being addressed by regulators and accounting profession before Congress “caught up” by enacting D-F
This section of the presentation will address the status of: D-F provisions specifically addressing securitization (“core” D-F securitization
provisions)
Generally applicable D-F provisions that significantly impact securitization (“non-core” D-F securization provisions)
Significant non-D-F legal, regulatory and accounting developments affecting securitization
This is MoFo. 42
Securitization
Core D-F Securitization Provisions
Section 941: Risk Retention and Definition of “Qualified Residential Mortgage”
(QRM)
Section 942:
Exchange Act §15(d) Reporting
Disclosure
Section 943: Representations, Warranties and Repurchase Provisions
Section 945: Issuer Due Diligence
Section 621: Conflicts of Interest
This is MoFo. 43
Securitization (cont’d)
Non-Core D-F Provisions Title II: “Orderly Liquidation Authority” (OLA) Provisions
Section 619: Volcker Rule
Title VII: Derivatives
Section 939A: References to Credit Rating Agencies (CRAs)
Market Risk Capital Rule
ICA Rule 3a-7
Related Issue: ICA §3(c)(5)(C)
Section 939F: Franken Amendment
Section 939G: References to CRAs in Prospectuses
Sections 1411 and 1412: Ability to Repay; “Qualified Mortgage” (QM) Definition
This is MoFo. 44
Non-Dodd-Frank Reforms
Accounting – FAS 167/167
FDIC Sale Rule
Regulation AB II
Bank Capital Rules
Rule 17g-5
CRD Article 122a
This is MoFo. 45
Core Dodd-Frank Reforms
Risk Retention – D-F § 941
Joint regulatory proposal
5% of credit risk must be retained
Applies to both public and private ABS transactions
Permissible forms: horizontal, vertical, L-shaped
Cash premium over par value must be placed in a “premium capture cash reserve
account” (PCCRA)
No hedging or transfer of risk
Exception for “qualified residential mortgage” (QRM) –hotly debated
Comment period ended 8/1/11; still no final rule
46
Establishment of CFPB • Consumer Financial Protection Bureau was established under the Dodd-
Frank Act and began operation on July 21, 2011
• The jurisdiction of the bureau includes banks, credit unions, securities
firms, payday lenders, mortgage-servicing operations, foreclosure relief
services, debt collectors and other financial companies, and its most
pressing concerns are mortgages, credit cards and student loans.
• Consolidates responsibilities from various federal regulatory bodies,
including the Federal Reserve, the Federal Trade Commission, the
Federal Deposit Insurance Corporation, the National Credit Union
Administration and the Department of Housing and Urban Development.
• It writes and enforces bank rules, conducts bank examinations, monitors
and reports on markets, as well as collects and tracks consumer
complaints.
47
Consumer and Mortgage Lending Reform
• In January 2013, the Consumer Financial Protection Bureau issued the
Ability-to-Repay and Qualified Mortgage rule
• Amends Reg Z to require lenders to account for a borrower’s ability to repay
• Reg Z applies to all persons extending consumer credit to U.S. residents
• Final rule takes effect in January 2014
• Ability-to-Repay Requirement
• For residential mortgages, creditors must make a “reasonable and good faith
determination at or before consummation that the consumer will have a reasonable
ability to repay the loan according to its terms”
48
Consumer and Mortgage Lending Reform
(cont’d)
• Eight enumerated underwriting factors for creditors to consider, including:
• Borrower’s income or assets (excludes assets securing the loan)
• Borrower’s employment status
• Borrower’s expected monthly payment for the loan
• Borrower’s debt obligations
• Borrower’s credit history
49
• Qualified Mortgage (“QM”) definition
• Residential mortgage loan that meets the following criteria:
• No excess upfront points and fees
• No negative amortization
• Term not exceeding 30 years
• Consumer cannot defer repayment of principal
• No balloon payment (with a very narrow exception)
• Income and financial resources must be verified and documented
• Limits on debt-to-income ratios
• QMs provide compliance safe harbor or rebuttable presumption that
ability-to-repay requirements satisfied
Consumer and Mortgage Lending Reform
(cont’d)
50
• Consequences of the Ability-to-Repay and QM rule
• Complexity may create compliance challenges and litigation risks
• Restrictions may tighten access to credit
• Non-U.S. issuers not subject to these requirements may have an advantage over
other market participants
Consumer and Mortgage Lending Reform
(cont’d)
51
• In January 2013, the Consumer Financial Protection Bureau issued
new mortgage servicing standards focused on helping troubled
borrowers
• Final rules take effect in January 2014 and apply to all U.S. servicers
• Among other items, the new standards:
• Forbid servicers from “dual-tracking” (i.e. evaluating a consumer for loan
modifications at same time as preparing to foreclose)
• Require servicers to provide delinquent borrowers with direct and continuous
access to servicing personnel
• Prevent servicers from making a first foreclosure notice or filing until a mortgage is
at least 120 days delinquent
• Require servicers to provide written notice of loss mitigation options to borrowers
• Servicers that service less than 5,000 loans that they or an affiliate
either own or originated are exempted
Consumer and Mortgage Lending Reform
(cont’d)
Confidential/Subject to Attorney Client Privilege 52
Credit Ratings
This is MoFo. 53
Credit Ratings After Dodd-Frank
• Repeal of Rule 436(g)
• Removal of exemption from Regulation FD
• Removal of credit ratings from rules
• SEC oversight of credit rating agencies
• Liability reforms
• Required disclosures
• Prohibited activities
• Governance
• Conflicts of interest
This is MoFo. 54
Repeal of Rule 436(g) • Prior to repeal, Rule 436(g) exempted NRSROs from the requirement
to provide a consent if ratings were included in a Securities Act registration statement or prospectus
• Following the repeal, the SEC Staff provided interpretive guidance on situations where consents of credit rating agencies would not be required, such as when:
• Ratings are included in FWPs that comply with Securities Act Rule 433 and in term sheets or press releases that comply with Securities Act Rule 134
• Disclosure-related rating information is included in periodic reports (for example, disclosure relating to a change in a credit rating, liquidity of the issuer, or the terms of agreements that refer to credit ratings)
• Information is included or incorporated by reference in a registration statement on Form S-3 or F-3 that was declared effective prior to July 22, 2010
• Separate relief was provided for issuers of asset-backed securities
This is MoFo. 55
Removal from Regulation FD
• On September 29, 2010, the SEC adopted final rules amending
Regulation FD to eliminate an exemption for credit rating agencies
• The amendments to Regulation FD were made pursuant to Section
939B, and became effective on October 4, 2010
• As a practical matter, there was little impact on communications
between issuers and credit rating agencies, because most credit
rating agencies are already outside of the scope of Regulation FD
because they are no longer considered advisers
Confidential/Subject to Attorney Client Privilege 56
Markets
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• Title VIII Dodd-Frank Act
• Council can designate important payment, clearing and settlement activities
(“designated activities”) carried out by financial institutions and financial
market utilities (“FMUs”) engaged in such activities as being, or likely to
become, systematically important (§ 804 Dodd-Frank Act).
• Designation must be made by a 2/3 vote including an affirmative vote of the
Treasury Secretary.
• Rescission of designation also requires a 2/3 vote by Council, including an
affirmative vote of the Treasury Secretary.
• Systemically important means a situation where the failure of or a disruption
to the functioning of a FMU or the conduct of a designated activity could
create, or increase, the risk of significant liquidity or credit problems
spreading among financial institutions or markets, thereby threatening the
stability of the U.S. financial system.
Payment, Clearing & Settlement
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Designated Activities • “Payment, clearing, or settlement activity” means an activity carried out by one or more
financial institutions to facilitate the completion of “financial transactions.”
• Does not include any offer or sale of a security under the Securities Act of 1933, or any
quotation, order entry, negotiation, or other pre-trade activity or execution activity.
• Financial transactions are (§ 803 Dodd-Frank Act):
• Funds transfers;
• Securities contracts;
• Contracts of sale of a commodity for future delivery;
• Forward contracts;
• Repurchase agreements;
• Swaps;
• Security-based swaps;
• Swap agreements;
• Security-based swap agreements;
• Foreign exchange contracts; and
• Any similar transaction that the Council determines to be a financial transaction.
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Systemically Important
In determining whether a FMU or a designated activity is, or is likely to
become, systemically important the Council has to consider the
following factors:
• The aggregate monetary value of transactions processed by the FMU or carried
out through the designated activity;
• The aggregate exposure of the FMU or a financial institution engaged in a
designated activity to counterparties;
• The relationship, interdependencies, or other interactions of the FMU or the
designated activity with other FMUs or designated activities;
• The effect that the failure of or a disruption to the FMU or the designated activity
would have on critical markets, financial institutions, or the broader financial
system; and
• Any other factors that the Council deems appropriate.
Confidential/Subject to Attorney Client Privilege 60
Conclusion
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Systemic risk
Despite the systemic risk approach that is incorporated into the Dodd-
Frank Act, policymakers and critics have voiced a number of concerns:
• In the absence of international coordination, will U.S. efforts be effective? Will
certain businesses move offshore? Will the possibility for regulatory arbitrage
remain?
• Will regulators actually have the capability to review the massive amounts of data
required to be shared with them? Will they be able to use the data to identify
emerging threats?
• Are we creating new too-big-to-fail institutions, like CCPs?
• Will we diminish the utility of derivatives for risk mitigation?
• Will banks be able to generate shareholder returns?
• Without addressing the GSEs, have we addressed the housing finance system in
the U.S.?
• Will more business operations move to “non-banks”, resulting in more powerful,
potentially riskier non-bank entities?