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Financial Regulatory Reform: Banking Provisions

Publisher: Day Pitney Alert
July 16, 2010
Day Pitney Author(s) Robert M. Taylor III

On July 15, 2010, the Senate approved the conference report for H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act").  The House approved the conference report on June 30.  The bill is scheduled for signature by the president next week.  The Act includes a number of important provisions of interest, which we will address in a series of Alerts to our Banking Clients.  This Alert addresses measures related to the thrift charter, risk retention for asset-backed securities sales, deposit insurance and business checking accounts.  A summary of these new changes includes the following:

Thrift Charter

  • The Act abolishes the Office of Thrift Supervision (the "OTS") and transfers oversight authority of thrifts to the Office of the Comptroller of the Currency (the "OCC").  The Federal Reserve would supervise savings and loan holding companies as well as state-chartered banks.
  • The Act creates a Deputy Comptroller for Thrifts at the OCC and clarifies branching authority of thrifts that convert to banks.
  • The thrift charter is preserved, thus grandfathering all currently existing thrifts.  No new thrift charters will be granted.
  • The merger of the OTS into the OCC is scheduled for one year from the date of enactment of the legislation, although the treasury secretary may elect to postpone the merger for up to six additional months.

Risk Retention

  • The Act requires lenders that deal in asset-backed securities retain at least a 5 percent stake in the debt they package and sell.
  • Issuers may retain less than 5 percent of the credit risk for non-qualified residential mortgages sold or transferred through an asset-backed security if the originator of the asset meets heightened underwriting standards.  These standards include verification of:

(i) the residual income of the mortgagor after all monthly obligations;
(ii) the ratio of housing payments to the monthly income of the mortgagor; and
(iii) the ratio of total monthly installment payments to the income of the mortgagor.

  • Issuers are not required to retain any part of the credit risk if all the assets that collateralize the asset-backed security are qualified residential mortgages.  This exemption does not apply if the packaged mortgages contain features that increase risk, such as negative amortization, interest-only payments and balloon payments.
  • The risk retention provision exempts loans guaranteed by the Federal Housing Administration, the U.S. Department of Agriculture and the U.S. Department of Veterans Affairs.

Deposit Insurance

  • The Act makes permanent bank and credit union deposit insurance up to $250,000 for insured accounts of the National Credit Union Share Insurance Fund and Federal Deposit Insurance Corporation.  This increase also applies to noninterest-bearing transaction accounts at FDIC-insured institutions.
  • A similar insurance structure also will be established for credit union share business accounts.
  • This increase is retroactive to January 1, 2008.

Business Checking

  • The Act repeals the Federal Reserve Act prohibition on banks paying interest on business demand deposit accounts.
  • This provision would take effect one year after the date of the enactment of the Act.
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