Both houses of Congress have now passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) and the Act is scheduled to be signed by the president shortly. The Act is intended to address some of the causes and implications of the recent distressed conditions in financial markets and the economy generally. The 2,000 plus page Act contains significant changes to the regulation of depository institutions and financial services companies generally. Highlights of the Act, particularly as they pertain to depository institutions regulation, are described in this alert.

Systemic Risk

The Act establishes a Financial Stability Oversight Council (Council) chaired by the Secretary of the Treasury and made up of representatives of nine federal financial regulatory agencies and an appointed independent member with insurance expertise. Nonvoting advisory members representing state regulators will also be appointed.

The Council’s general responsibility is to identify, monitor and respond to emerging risks to the U.S. financial system. The Council will also make recommendations to the Federal Reserve Board (the FRB) and other appropriate regulators regarding the regulation and supervision of systemically significant financial companies, activities and payment, clearing and settlement operations. Its functions include determining, based on factors such as size, leverage and systemic interrelationships, which non-bank financial companies (including non-U.S. financial companies that do business in the U.S.) could threaten the stability of the U.S. financial system should they fail. Such companies will be subject to strengthened prudential regulation and supervision by the FRB, including risk-based capital requirements, leverage and liquidity requirements and limits on concentrations. Depository institution holding companies with at least $50 billion in assets will also generally be subject to such heightened regulation.

Regulated systemically significant companies are also required to prepare and submit resolution plans (so-called living wills) covering procedures for their “rapid and orderly dissolution in the event of material financial distress or failure.” Such companies could also be ordered to divest assets or cease activities in severe cases.

In an effort to address “too big to fail,” the Act creates a mechanism for the Federal Deposit Insurance Corporation (the FDIC) to act as receiver to resolve failing financial companies where the failure would cause risk to the U.S. financial system. Such companies would include depository institution holding companies or other systemically significant financial companies. The mechanism is modeled after the existing scheme for FDIC receivership of insured depository institutions. The Secretary of Treasury, the FRB and either the FDIC or another specified regulator, depending upon the type of company, would have to agree to put a company into the “orderly liquidation” process. The Act provides for a confidential district court review if the company involved contests the appointment.

The FDIC has authority to borrow from the Treasury to facilitate such resolutions and funds expended would be recovered through (i) a clawback on creditors of the liquidated company who received more under the orderly liquidation procedures than they would have received in a liquidation under bankruptcy laws and (ii) an assessment on depository institution holding companies of at least $50 billion in assets and regulated systemically significant non-bank companies, to the extent necessary.

FDIC-insured depository institutions remain subject to existing FDIC receivership structure, and insurance companies remain subject to state liquidation laws rather than the new orderly liquidation authority.

Bank and Thrift Regulatory Structure

The Act restructures the existing regulatory regime for FDIC-insured depository institutions. The Office of Thrift Supervision (the OTS) will be merged into the Office of the Comptroller of the Currency (the OCC) over a one year transition period (subject to a possible six month extension by the Secretary of the Treasury). Contrary to earlier legislative proposals, the federal savings association charter is preserved, but federal thrifts will be regulated by the OCC, along with national banks and federal branches and agencies of foreign banks. Presumably in an effort to reassure federal thrifts regarding their status at the OCC, the Act creates a position of Deputy Comptroller of the Currency for thrifts. State-chartered savings associations will transition to having the FDIC as their primary federal regulator rather than the OTS; however, the rulemaking authority for all savings associations will be transferred to the OCC. State-chartered banks will continue to have either the FRB or FDIC as their primary federal regulator depending upon whether or not they are Federal Reserve members.          

The FRB will continue to supervise all bank holding companies and will assume jurisdiction over savings and loan holding companies. The Act codifies the FRB’s existing “source of strength” policy that holding companies act as a source of strength to their insured institution subsidiaries by providing capital, liquidity and other support in times of distress.        

With respect to dividend waivers by mutual savings and loan holding companies, the Act provides that the FRB “may not” object to such a waiver (i) if it would not be detrimental to safety and soundness, (ii) the board of directors of the mutual holding company determines that the waiver is consistent with its fiduciary duties and (iii) the mutual holding company had been formed, engage in a minority stock offering and waived dividends prior to December 1, 2009. It remains to be seen whether, notwithstanding the referenced language, the FRB objects to dividend waivers as it has done in the past.        

The Act gives the FDIC discretion to charge institutions that it examines the cost of such examinations. The Act requires the FRB to charge depository insitution holding companies with greater than $50 billion in consolidated assets and supervised systemically significant non-bank financial companies for the cost of their supervision. Neither the FDIC nor the FRB currently impose examination fees.


Deposit Insurance

The Act revises the FDIC’s deposit insurance assessment system to require that it be based on average consolidated assets minus tangible equity capital over the assessment period rather than the existing deposit-based system. That will effectively shift more of the burden to those larger institutions, which tend to employ other forms of liabilities, in addition to deposits, as funding sources. The FDIC also is required to increase the Deposit Insurance Fund reserve ratio to at least 1.35 percent of estimated insured deposits (or the comparable percentage of the new asset and assessment scheme) by September 30, 2020, (compared to the current target minimum of 1.15 percent of estimated insured deposits) and, the Act eliminates the existing ceiling of a 1.5 percent ratio. The Act requires the FDIC to offset the cost resulting from the increased ratio on institutions of less than $10 billion in assets. That requirement will place a greater burden on large institutions since they will effectively bear the cost of increasing the fund’s ratio.      

The Act makes permanent the $250,000 deposit insurance limit that was scheduled to expire on December 31, 2013. It also effectively extends the Transaction Account Guarantee Program (by which non-interest bearing transaction accounts receive unlimited insurance) through 2012, but without providing an opt out as currently exists under the FDIC program.

Capital Requirements   

Another significant provision is the so-called "Collins Amendment", originally sponsored by Senator Collins. That provision requires the FRB 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 for insured depository institutions. Under existing regulatory guidelines, cumulative preferred stock and trust preferred securities are not includable in tier one capital by subsidiary institutions. As a result, contrary to existing FRB policy, such instruments may not be included in a holding company’s tier one capital once the Collin’s Amendment is implemented.

The Collins Amendment originally provided neither a grandfather of existing issuances or a phase-in schedule. However, the conference committee adopted various changes to facilitate the transition. In particular, the Act grandfathers instruments issued prior to May 19, 2010, by holding companies of less than $15 billion in total assets and mutual holding companies and provides a five-year transition period for other companies. Instruments owned by the United States, such as TARP cumulative preferred stocks, were exempted, meaning that such instruments can continue to be included in tier  capital at the holding company level. The original Collins Amendment was also revised to preserve the FRB’s Small Bank Holding Company policies, so that bank holding companies with less than $500 million in assets would not be subject to the consolidated capital requirements.

Separate provisions in the Act require the regulators to seek to make both depository institution and holding company regulatory capital requirements countercyclical so that they increase or decrease depending upon whether the economy is expanding or contracting.


The Act contains a number of provisions designed to regulate the derivatives market. Included is a version of an amendment sponsored by Senator Lincoln which essentially requires that derivatives trading be “pushed out” of insured depository institutions. However, the push out does not apply to hedging or risk mitigation activities related to the institution’s own business. There is also an exception for swaps involving rates, currencies, or other assets that are permissible investments for national banks.

Risk Retention 


The Act contains a so-called “skin in the game” provision that requires the banking agencies and the SEC to jointly issue regulations that require a “securitizer” to retain a portion of the credit risk for any asset that the securitizer transfers to a third party through an asset-backed security. The Act generally prohibits the securitizer from hedging or transferring the required retained risk.       

The definition of the term “securitizer” includes not only issuers of asset-backed securities but anyone who organizes and initiates an asset-backed security transaction by selling or transferring assets to the issuer. The Act specifies that the retention requirement must be at least five percent of the credit risk transferred unless all of the assets collateralizing the asset-backed security are “qualified residential mortgage assets,”  as that term will be defined by regulation (presumably to reflect conservative underwriting practices), which need not have a risk retention requirement. The forthcoming regulations must specify the permissible forms of risk retention and the duration and the allocation of risk sharing between originators and securitizers. The Act also provides for differentiation between asset classes and the establishment of underwriting standards that specify the terms, conditions and characteristics of loans within specified asset classes that reflect low-risk and allows for the imposition of less than a five percent requirement for assets that meet those underwriting standards. The regulations are also required to address, with respect to commercial mortgages, the effects of a third-party purchase of a first loss position adequate underwriting standards, adequate representations and warranties and related enforcement mechanisms.

Volcker Rule

The Act also contains a version of the so-called “Volcker Rule” which requires regulators to promulgate regulations prohibiting depository institutions and their holding companies (including non-U.S. companies treated as bank holding companies) and affiliates from “proprietary trading” (generally defined as securities transactions as principal for one’s own trading account i.e., an account used for acquiring or taking positions in securities principally for the purposes of short-term sales) or investing in or sponsoring hedge funds and private equity funds. The Act establishes an effective date of two years from enactment, subject to possible extensions by the FRB. These are several exceptions, including transactions on behalf of customers, risk-mitigating hedging activities and activities conducted outside the United States by non-U.S. companies. A banking entity may organize and invest in a private equity or hedge fund that is offered in connection with bona fide trust or investment advisory activities. There is also an exception for a seed money investments to a fund established by the banking organization, subject to an aggregate three percent of tier one capital cap, a regulatory capital charge and a requirement that the investment be reduced to a de minimis level (defined as three percent of the total ownership of the fund) within a year, with possible extension by the FRB.


The Act contains a number of provisions that affect depository institution powers. For example, the payment of interest on demand deposits of businesses is authorized, effective one year from enactment. Also, national and state banks are authorized to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. That increases interstate de novo branching authority for such institutions over current law, which requires that a state opt into interstate de novo branching. The Act also provides that a savings association that converts to a bank charter may continue to operate all branches that it has immediately prior to the charter conversion.

A provision in previous bills that would have imposed on all state charted banks the loan to one borrower limits applicable to national banks was dropped in the Conference Committee.

Consumer Bureau

The Act establishes a “Bureau of Consumer Financial Protection” (Bureau or BCFP). The BCFP was nominally placed within the FRB, but the Act contains provisions designed to assure that the Bureau will operate independently. The head of the Bureau will be a director appointed by the president and confirmed by the Senate for a five-year term. The BCFP will have a dedicated budget under the FRB (with backup appropriations if the FRB contribution is insufficient) but the FRB is prohibited from intervening in the CFPB’s affairs or directing or removing any of its employees.   

The BCFP will assume responsibility for implementation and enforcement of federal laws and regulations directed at consumer protection in the financial services area (for example, Truth in Lending, Real Estate Settlement Procedures, Electronic Fund Transfers) and those aimed at fair lending (for example, Equal Credit Opportunity). With respect to depository institutions, the transfer of responsibility will come on a date designated by the Secretary of Treasury, which will be between 180 days and 12 months of enactment (subject to extension to 18 months under certain circumstances). However, jurisdiction over the Community Reinvestment Act, will remain with the federal depository institution regulators. The BCFP also has broad regulation-writing authority, including authority to prohibit “unfair, deceptive or abusive” practices, but its regulations can be overturned by a vote of at least two-thirds of the Council if determined to present a risk to the financial system.

The Bureau’s jurisdiction extends far beyond depository institutions. The Bureau’s primary function is the supervision of “covered persons” for compliance with applicable federal laws and regulation. The term “covered person” is broadly defined to include any person offering or providing a consumer financial product or service (and any affiliate of that person if the affiliate acts as a service provider to that person). A “consumer product or service” means any financial product or service offered or provided for use by consumers primarily for personal, family or household purposes. Representative activities listed in the Act include, among others, extending and brokering credit and finance leases, real estate settlement and appraisals, deposit-taking, funds transmission, providing stored value or payment instruments, cashing or collecting checks, providing payment and financial data processing to consumers, consumer financial advisory services (to the extent not already regulated by the SEC or a state securities regulator), credit counseling and debt management and debt collection. However, the Act expressly excludes the business of insurance from the BCFP’s jurisdiction.

Under the Act, the Bureau will not examine depository institutions with assets of $10 billion or less for compliance with applicable consumer protection and fair lending laws or enforce such laws. The federal depository institution regulators will perform that function, as they do now. However, depository institutions of greater than $10 billion in assets (and other covered persons) will be subject to direct examination and enforcement by the Bureau.

Federal Preemption

The law governing federal preemption of state financial consumer protection laws with respect to national banks, federal branches and federal savings associations is explicitly covered by the Act. The Act provides for three circumstances under which such a state consumer law will be preempted as to a national bank, federal savings association  (i) the application of the state law would have a discriminatory effect on national banks, federal branches or federal savings associations or federal brand compared to the effect on banks chartered by the state; (ii) as specified by the U.S. Supreme Court in the Barnett Banks case, 517 U.S. 25 (1996), the state law “prevents or significantly interferes” with the exercise by the national bank, federal branch or federal savings association of its authorized powers or (iii) the state law is preempted by a federal law other than the Act. Along with the courts, the OCC is authorized to determine by regulation or order, on a case by case basis and on the basis of “substantial evidence,” whether state consumer financial laws are preempted as to national banks, federal branches and federal savings associations under (ii) above, but must first consult with the BCFP and take that Bureau’s views into account.

The Act specifically provides that there is no preemption of state consumer laws as to nondepository subsidiaries and affiliates of national banks and federal savings associations. It also authorizes state attorneys general (but not state regulators) to enforce applicable laws and Bureau regulations (but not the Act itself) through court actions.

Swipe Fees

The Act contains an amendment primarily sponsored by Senator Durbin which requires the FRB to promulgate regulations ensuring that interchange fees (so-called "swipe fees") are “reasonable and proportional” to the cost incurred by the issuer for each transaction, taking into account protection against fraud. There is an exemption for small issuers (i.e., less than $10 billion in assets). The Act prohibits networks from preventing retailers from directing customers to particular payment methods (through discounts or other incentives); however, discrimination between issuers or networks in that context is impermissible. The Act also authorizes the setting of minimum credit card transactions not to exceed ten dollars.




The Act contains numerous reforms relating to the origination and servicing of residential mortgages intended to correct perceived abuses. For instance, the Act bans yield spread premiums by prohibiting a mortgage originator from receiving, or any person from paying, compensation based on the terms of the loan (other than the principal amount). An originator is also generally prohibited from receiving, from any person other than the consumer, any fee or charge, except bona fide third party charges not retained by the originator, creditor or an affiliate of either. Those restrictions are intended to prevent incentives for originators to steer borrowers to particular mortgage products. The Act permits compensation to be received by a creditor upon the sale of a consummated loan but table-funded loans appear subject to the restrictions.

The Act directs the BCFP to adopt regulations prohibiting originators from engaging in certain steering practices or other activity deemed abusive, including steering customers to loans that a consumer lacks a reasonable capacity to repay or that contains predatory characteristics. The Act also requires the Bureau to promulgate regulations prohibiting creditors from making residential mortgage loans unless a good faith determination is made, based on verified and documented underwriting information, that the consumer has a reasonable ability to repay the loan according to its terms (plus taxes, insurance and assessments). Certain “qualified mortgages” that need specified criteria will be presumed to meet the ability to repay requirement.

Many of the Act’s provisions require implementation through regulations. One industry trade group estimates that more than 5,000 pages of regulations will result. In the context of those regulations, the regulators will have the responsibility for interpreting statutory language and making policy judgments where the Act gives them discretion. Those interpretations and judgments will heavily influence the affects on depository institutions of the Act’s many provisions, whether positive or negative. The Notice and Comment rulemaking process for many of the required regulations will therefore be of paramount importance to institutions of all sizes.

Knowledge Center

Match our knowledge to your needs



Granted federal clemency for 14 pro bono clients by President Obama in 2016-2017.