Financial Industry Alert | June.19.2017
On June 12, 2017, the U.S. Treasury Department released its report to the President, "A Financial System That Creates Economic Opportunities – Banks and Credit Unions," authored by Steven Mnuchin, Secretary, and Craig Phillips, Counselor to the Secretary. The report sets forth the Treasury Department's analysis and recommendations on a wide range of bank and credit union regulatory reform proposals, including the following with regard to certain lending and financing matters, which are set forth in a section of the report titled "Providing Credit to Fund Consumer and Commercial Needs to Drive Economic Growth."
The headline here is the call to "Repeal or Revise the Residential Mortgage Risk Retention Requirement," which is made in light of "other regulatory measures that improve credit standards and provide investor protections." Specific recommendations are also made to enhance PLS investor protections, including through increased transparency and standardization of documentation and data. The Treasury also calls for the CFTC to clarify the limits of assignee liability for secondary market investors, for capital rules to be reevaluated in order to make PLS investments more attractive and to streamline the data requirements of Reg AB II.
Mortgage Loan Originations
Recommendations are made to adjust and clarify the ATR/ QM rule and to clarify and modify TRID, among other measures intended to lower origination costs
There are several headlines here. First is the call for Congress to repeal the CFPB's supervisory authority. The report takes particularly sharp aim at the CFPB's exertion of supervisory authority over nonbank lenders: "'unjustified"; "a major shift in regulatory practice – with no clear benefits to justify the additional burdens." The second headline is the call to increase accountability by making the Director removable at will by the President or by creating a commission or a board in lieu of the single-Director structure.
To address what the report refers to as "ambiguity left in the definition of leveraged lending" in the 2013 leveraged lending guidance from the OCC, the Fed and the FDIC, and the uncertainty caused by the lack of clear penalties for noncompliance, the Treasury recommends that the 2013 leveraged lending guidance be reissued for public comment, and it also makes a recommendation to the banks themselves:
"Banks should be encouraged to incorporate a clear but robust set of metrics when underwriting a leveraged loan, instead of solely relying on a 6x leverage ratio discussed in the 2013 leveraged lending guidance. Encouraging banks to do so will help maximize the role that leveraged lending plays in the provision of capital to business."
The Treasury report notes only in passing the impact of nonbank lenders as competitors to banks and credit unions. One comment acknowledges the competition from nonbank lenders and the other suggests that such lenders are more aggressive than regulated bank lenders.
In the section on Community Financial Institutions:
"Community financial institutions' business models have come under pressure from a slow economic recovery and low interest rate environment, additional competition (e.g., internet banks and nonbank lenders), and added compliance costs from new regulations."
In the section on Leveraged Lending – Key issues with Regulatory Guidance:
"However, the reduction in leveraged lending by banks did not necessarily lead to a reduction in risk in the financial system. Instead, a recent Federal Reserve staff paper found that leveraged lending migrated to less regulated nonbanks – a dynamic which makes it far less clear that the guidelines actually diminished risks to financial stability, since nonbank lenders often originated leveraged loans using more aggressive and riskier credit structures. What is clear, however, is that the reduction in leveraged loans available from banks reduced access to credit by businesses."
Certain of the recommendations with regard to the Volcker Rule included in the section of the report titled "Improving the Efficiency of Bank Regulation" also impact lending and financing matters. These recommendations would create exemptions for small institutions and an off-ramp for highly capitalized institutions, clarify and simplify the proprietary trading prohibition and exemptions and, importantly, simplify covered funds restrictions.
Many of the Treasury's recommendations can be addressed by regulation, and many others will require action by Congress. It remains to be seen, of course, whether and how regulators and Congress will respond to the reports recommendations, and when.