Treasury Department Issues Sweeping Regulatory Reform Recommendations

The Treasury Department tonight issued a 150-page report making dozens of recommendations for how Congress and regulatory agencies can streamline bank regulation in a way that promotes economic growth. The report came in response to President Trump’s executive order outlining core principles of financial regulation and calling for a comprehensive review of the regulatory structure.

As the American Bankers Association has long urged, the report called for significant tailoring of regulatory requirements. “[N]early seven years after [Dodd-Frank], regulation has proven to be insufficiently tailored to depository institutions based on the size and complexity of their business models,” the report said. The report noted that economic growth and loan growth have been historically depressed during the current recovery, which Treasury attributed in part to the volume and structure of current regulations.

“Today’s Treasury report is an important step to refine financial regulations to ensure that they are supporting — not inhibiting — economic expansion,” said ABA President and CEO Rob Nichols. “We applaud Secretary Steven Mnuchin for recognizing that we need regulatory reform to boost economic growth, and we expect this report will serve as a catalyst in that effort.” ABA was an active participant in the Treasury’s process. It submitted 10 white papers to Treasury offering detailed feedback, and delegations of bankers representing all bank sizes took part in in-person meetings. The recommendations of the report are consistent to a large degree with recommendations made by ABA.

To promote better tailoring, Treasury recommended raising the stress test asset threshold from $10 billion to $50 billion, while calibrating to allow some banks with over $50 billion in assets to be exempt as well, and substantially streamlining the stress test process. It also called for tailoring the participation thresholds for the more intensive capital and resolution planning processes known as CCAR and living wills, while simplifying them and making them less frequent, and better calibrating the Liquidity Coverage Ratio. “We remain steadfast in our belief that arbitrary asset thresholds should not guide regulation,” added Nichols. “Rather, regulators should be empowered to ensure that rules are tailored to different risk profiles and business models.”

The report also recommended simplifying the capital regime for community banks by exempting banks with less than $10 billion from Basel III and addressing problematic treatment of mortgage servicing assets and commercial real estate loans. The report called for all banks with less than $10 billion in assets to be exempt from the Volcker Rule, while offering additional recommendations to tailor and limit its compliance impact for all banks.

While some of Treasury’s recommendations require congressional action, Mnuchin estimated that “70 to 80 percent” can be put into motion by regulators immediately through their independent rulemaking authority. Among them: streamlining the FDIC de novo application process, easing appraisal requirements in rural areas, increasing the threshold for small creditor Qualified Mortgage loans, revisiting the volume and nature of supervisory Matters Requiring Attention, running the living will process on a two-year cycle, more clearly defining the Consumer Financial Protection Bureau’s UDAAP standard, making the CFPB “no-action” letter policy more useful, and revisiting the 2013 interagency leveraged lending guidance.

The report also highlighted numerous mortgage rules that the CFPB could address on its own, including aligning the QM standard with GSE eligibility requirements, eliminating underwriting requirements that deny mortgages to qualified borrowers, modifying the ability-to-repay calculation to help banks meet the needs of self-employed and non-traditional borrowers, clarifying ongoing problems with the TILA-RESPA integrated disclosures, improving flexibility in the loan originator compensation rule and delaying the Home Mortgage Disclosure Act data expansion.

Included in the recommendations for structural reform was a call for the CFPB director to be removable for cause or replaced by a bipartisan commission, as well as for the bureau to be subject to congressional appropriations. It also called for the CFPB complaint database to be accessible only to federal and state agencies and for the CFPB to lose its supervisory authority. Nichols will discuss the Treasury report, along with legislative efforts on regulatory reform and other topics during a free member webinar Thursday at 2 p.m. EDT. ABA staff will continue to review the report and issue additional analysis for members in the days to come.