The Senate recently passed its financial services regulatory reform legislation (Senate Bill) by a vote of 59-39. The Senate Bill now must be reconciled with the financial services reform bill passed by the House of Representatives (House Bill) last December. Although much of the Senate Banking Committee’s original bill (Committee Bill) was adopted by the full Senate, there were some floor amendments affecting depository institutions that are worthy of particular note.

The Senate Bill retains versions of the measures that were in the original Committee Bill proposed by Senator Dodd, most of which were originally proposed by the Obama Administration. Those include creating a systemic risk council made up of regulators that would be charged with identifying and responding to risks to the U.S. financial system, establishing the Federal Reserve Board as supervisor of the systemically significant financial services companies and providing the Federal Deposit Insurance Corporation (FDIC) with authority to act as receiver or conservator for failed or failing financial companies where failure would cause systemic risk. Those measures are discussed in more detail in the Kilpatrick Stockton Legal Alert dated March 22, 2010 

Attempts to alter materially the Committee Bill’s creation of a separate bureau to administer, implement and enforce federal consumer and fair lending laws were defeated. As was envisioned in the Committee Bill, the Senate Bill places the consumer bureau in the Federal Reserve Board but with various safeguards built in to assure the bureau’s independence. That differs from the House Bill, which contemplates that the consumer agency would be an independent entity. The bureau would have broad regulation-writing authority, including authority to prohibit “unfair deceptive or abusive” practices. All banks, thrifts and credit unions would be subject to the bureau’s regulations but institutions with less than $10 billion in assets would continue to be examined for compliance with consumer and fair lending laws by their federal prudential regulator rather than the new consumer bureau. The bureau’s jurisdiction would extend far beyond depository institutions to various non-bank financial companies such as mortgage originators and servicers, debt collectors and consumer reporting agencies.

The Senate Bill would merge the Office of Thrift Supervision into the Office of the Comptroller of the Currency which would be primary regulator for both national banks and federal thrifts. The Senate Bill, like the Committee Bill, would terminate the federal thrift charter but grandfather existing charters. An amendment that would have preserved the federal thrift charter, as does the House Bill, did not come to the Senate floor prior to the termination of debate. State savings associations would have the FDIC as their primary federal regulator. The Committee Bill would have made the Federal Reserve Board regulator of only the largest bank holding companies and the FDIC the primary federal regulator for all state banks including member banks. The full Senate amended the Committee Bill to preserve the Federal Reserve Board as primary federal regulator of state member banks and all bank holding companies. All savings and loan holding companies will also be regulated by the Federal Reserve Board under the Senate Bill. A floor amendment was adopted that provides for FDIC assessments to be imposed based on assets (less tangible capital) rather than deposits.

Federal preemption for national banks and federal thrifts was also the subject of an amendment to the Committee Bill, primarily sponsored by Senator Carper. The amendment more clearly preserved the current standard for federal preemption as to national banks set forth in the Supreme Court’s 1996 Barnett Banks decision, including preemption as to state consumer laws. However, the Senate Bill continues to allow state attorneys general to enforce applicable consumer laws against national banks and federal savings associations through civil actions. The Senate Bill adopts the Committee Bill’s position that preemption does not apply to non-bank subsidiaries or affiliates of national banks or federal savings associations.

An amendment primarily sponsored by Senator Durbin requires the Federal Reserve Board to set interchange fees (so-called swipe fees) for debit cards according to the “reasonable and proportional cost” for each transaction. There is an exemption for small issuers. The amendment also prevents networks from prohibiting retailers from steering customers to particular credit and debit cards or payment methods (such as cash) and authorizes the setting of minimum and maximum credit card transactions.

Senators Dodd and Lincoln (of the Senate Agriculture Committee) added language that essentially requires that derivatives trading be “pushed out” of insured depository institutions. There are no size limitations on the amendment, so community banks and thrifts that use derivatives to hedge risk would be affected as well as larger banks. The amendment contained other significant provisions, such as imposing registration requirements and fiduciary duties on swap dealers under certain situations, requiring mandatory clearing and exchange trading in certain cases and giving regulators new authority to impose margin or capital requirements for existing contracts. The Senate Bill also contains a version of the so-called “Volcker Rule” which requires regulators to promulgate regulations prohibiting depository institutions and their holding companies and affiliates from proprietary trading or investing in or sponsoring hedge funds and private equity funds. The regulations must also limit relationships with such funds.

Senators Merkley and Klobuchar sponsored an amendment that restricts the manner in which mortgage brokers and originators can be compensated. Yield spread premiums would be eliminated and compensation based on the terms of a loan (other than principal amount) would be prohibited. Mortgage lenders would be required to obtain “verified and documented small issuers information” demonstrating that the borrower has a reasonable ability to repay the loan according to its terms, plus taxes, insurance and assessments.

Another significant amendment was the so-called Collins Amendment sponsored by Senator Collins of Maine. That amendment requires the Federal Reserve Board to establish consolidated regulatory capital requirements for depository institution holding companies and specifies that the components of capital for such institutions be as stringent as those applicable to insured depository institutions. The amendment has three important effects. It would necessitate consolidated capital requirements for all bank holding companies including those of $500 million or less in total assets, which are currently exempt. It would require that capital requirements be imposed on all savings and loan holding companies, which are not currently subject to such requirements. And, because cumulative preferred stock (including TARP cumulative preferred) and trust preferred securities are not includable as Tier 1 capital at the institution level, it would eliminate such instruments from Tier 1 capital for purposes of the bank holding company capital requirements. The Collins Amendment, by its terms, provides neither a grandfather of existing issuances nor a phase-out schedule.

Senators Landrieu and Crapo separately amended the Committee Bill’s “skin in the game” requirement to provide that institutions that securitize loans retain a portion of the risk. The substance of those amendments was to give the regulators authority to lower or eliminate the retention requirement for mortgages that meet specified underwriting requirements or for other asset classes that meet standards of credit risk to be set forth in the regulations.

The Senate Bill now moves to a Conference Committee where the differences with the House Bill will be reconciled. Banking industry trade groups have indicated their belief that certain provisions of the Senate Bill are seriously flawed and will be seeking changes in conference. Those include the Durbin and Collins Amendments, the derivatives “push out” provisions and the termination of the federal thrift charter. Senate Banking Committee Chairman Dodd and House Financial Services Committee Chairman Frank have reportedly indicated a desire to get final legislation on the President’s desk by July 4, 2010.

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