With the relief offered by the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), signed by President Donald Trump on May 24, 2018, some small depository institutions and credit unions with consolidated total assets of less than $10 billion now have more flexibility to determine what is appropriate for their operations. At the same time, however, bank management should consider whether continuing to adhere to some of the lifted requirements makes good business or risk management sense.
Protiviti has published a Flash Report highlighting major changes that will result from certain provisions of the Act, as well as some of the risk management implications of those changes. Key provisions affecting small institutions include:
Ability to Repay (ATR) — The Act relaxes ATR requirements, making it easier for mortgages originated by small banks and credit unions to receive qualified mortgage status under the Truth in Lending Act (TILA).
Protiviti Commentary: Prudent bankers understand the importance of ATR in mitigating exposure to credit risk from nonperforming mortgage loans.
Home Mortgage Disclosure Act (HMDA) Reporting — Institutions originating fewer than 500 closed-end mortgages or 500 open-end lines of credit (counted separately) will be exempt from the new, more granular HMDA demographic reporting requirements that went into effect in January 2018.
Protiviti Commentary: While reporting of the expanded data elements is not required, small lenders with robust fair lending compliance programs will collect, monitor and evaluate the data points to ensure they proactively assess their ability and success in providing capital to minorities and their communities.
Mandatory Escrow — Institutions that originated fewer than 1,000 first-lien mortgages in the prior calendar year will be exempted from mandatory escrow requirements for certain higher-priced mortgage loans.
Protiviti Commentary: Escrow accounts benefit both the borrower and the lender. Escrow is essential borrower protection, an arrangement that prominently identifies the full cost of a mortgage loan for a prospective homebuyer and reduces the likelihood of losing a home due to an unpaid tax lien or subjection to expensive, force-placed insurance. For higher-priced mortgages, it may be prudent for small lenders to consider continuing to require — or at least to encourage — escrow accounts.
Closing Disclosure — The three-day waiting period under the TILA/Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule (TRID) is lifted when a creditor provides a consumer with a second offer of credit with a lower annual percentage rate (APR).
Protiviti Commentary: Even though the changes, in this case, would be in the borrower’s favor, it is still a best practice for a lender offering a lower APR with other changed terms to provide an updated closing disclosure. Highlighting or disclosing new terms sufficiently far in advance of closing provides consumers the opportunity to make informed decisions regarding the changes.
Risk-Based Capital — Small institutions with tangible equity capital of at least 8 to 10 percent of total consolidated assets are exempt from complex, risk-based capital rules.
Protiviti Commentary: Relaxed capital rules and leverage requirements allow institutions to put more of their capital to work and may even provide consumers with more access to credit. But liquidity rules are still an important framework for reducing the risk of insolvency during economic stress. A well-managed bank will continue to employ a two-tiered approach — meeting the requirements of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) — to manage the risk of short- and longer-term stress scenarios. Maintaining a capital cushion capable of absorbing potential losses is not only prudent but also remains a regulatory expectation.
The Act also includes several other provisions not aimed at smaller institutions, such as:
- Raising the threshold for “systemically important financial institutions” (SIFI) subject to enhanced prudential standards from $50 billion to $250 billion.
- A comprehensive report from the Secretary of the Treasury assessing the threat of cyber attacks on U.S. financial institutions.
- Increased protections for veterans, consumers, homeowners and students regarding credit reporting, predatory lending, defaults and foreclosed properties.
Generally speaking, the Act is a relatively straightforward yet measured shift from a post-crisis focus on consumer protection to an idea that economic growth will be stimulated through regulatory relief. As outlined above, however, financial institutions should carefully consider which elements of their current risk and compliance practices continue to make good business sense, even if they are not formally required.
For a more detailed analysis, you can download our Flash Report here.
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