Category Archives:Dodd-Frank

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.

TBA Files Freedom of Information Act Request with CFPB

The Texas Bankers Association (TBA) announced on its website that it has filed a Freedom of Information Act (FOIA) Request with the CFPB to obtain all documentation the CFPB requested from bank software processors on the overdraft activity of their bank customers.

In a memo, dated June 2nd, to state banking associations, the American Bankers Association raised concerns about the costs to industry of the CFPB’s use of its expansive authority to gather information under Section 1022 of the Dodd-Frank Act. The ABA stated in the memo that one of the processors had informed its clients that it may pass on to them the processor’s costs in responding to the CFPB’s order. The memo encouraged the Bureau to seek all relevant information before engaging in rulemaking, insist that the Bureau fund its data collection efforts, and support the introduction of legislation to address Section 1022 of the Dodd-Frank Act.

In its announcement, the TBA states that it was informed by its members that one of the processors would be billing its client banks for the cost of producing the information sought by the CFPB regarding overdraft checking programs. The TBA commented that it “objects to this third-party data search on both legal and customer privacy grounds” and is “concerned about the breadth of this data sweep and why the CFPB’s information requirements could not be satisfied with a representative cross-sampling rather than a demand request apparently sent to every major processor in the banking industry.”

According to the TBA, in addition to seeking “copies of all factual and analytical surveys and investigations conducted by the CFPB, or on its behalf by third parties,” its FOIA request also seeks “access to any legal analysis relied upon by way of supporting the CFPB’s legal authority for the issuance of the information orders.”

FDIC's Advisory Committee on Community Banking Scheduled to Meet

The Federal Deposit Insurance Corporation (FDIC) has announced that its Advisory Committee on Community Banking will meet on Friday, July 10. Staff will provide an update on a number of issues, including examination frequency and offsite monitoring; call report streamlining; the cybersecurity assessment tool; and recent rulemakings. There also will be discussions about high volatility commercial real estate loans and review of banking regulations under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA).

The meeting is open to the public and will be held from 9:00 a.m. to 3:00 p.m. EDT in the FDIC Board Room on the sixth floor of FDIC headquarters located at 550 17th Street, NW, Washington, D.C. The meeting also will be webcast live. The agenda for the meeting and a link to the webcast are available at

Yellen Responds to Basel III Letter

Federal Reserve Chairman, Janet Yellen, declined to pursue a policy change that would solve a tax liability problem for Subchapter S shareholders should the bank’s capital levels fall below the Basel III capital conservation buffer. Basel III’s capital conservation buffer prevents banks from making distributions to shareholders when capital falls below a threshold — but because federal tax liability passes through a Sub S bank to individual shareholders, Sub S shareholders can face tax liability even when they have not received a distribution. This puts Sub S banks subject to the buffer at a disadvantage to C corporation banks, which pay any taxes due directly out of the bank’s income.

The Subchapter S Bank Association has sent letters and advocated for a solution to this along with many other banking associations. Yellen said, in a response to a letter sent in October 2014 from several House members urging a solution, that the Fed “continues to believe that the capital conservation buffer should be applied equally to all banking organizations.” In addition, “By holding more than 1.25 percent capital above the minimum regulatory capital requirement, a state member bank can distribute up to 40 percent of eligible retained earnings as dividends,” she wrote. “As a result, shareholders should be able to pay their tax liabilities under most circumstances.” Unfortunately, going forward the Federal Reserve plans on monitoring the effects of the revised capital rule throughout its implementation.


Federal Agencies Approve Risk Retention Rule

Six federal agencies (The Board of Governors, HUD, FDIC, FHFA, OCC, and SEC) approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions. The final rule implements the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of asset-backed securities (ABS) to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.

As required by the Dodd-Frank Act, the final rule defines a “qualified residential mortgage” (QRM) and exempts securitizations of QRMs from the risk retention requirement. The final rule aligns the QRM definition with that of a qualified mortgage as defined by the Consumer Financial Protection Bureau. The final rule also requires the agencies to review the definition of QRM no later than four years after the effective date of the rule with respect to the securitization of residential mortgages and every five years thereafter, and allows each agency to request a review of the definition at any time. The final rule also does not require any retention for securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting.

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.

Credit Risk Retention Final Rule – PDF (PDF Help)

Kennedy Sutherland to Speak at Merger & Acquisition Conference

Kennedy Sutehrland LLP’s managing partner, Patrick J. Kennedy, will present at the 3rd Annual Strategic Opportunities – Merger & Acquisition Conference at the JW Marriott New Orelans Hotel on November 12-14, 2014. This year’s conference features an array of prominent bank leaders and advisers from throughout the region. Leaders of successful banking organizations will explain the approaches their banks are taking to build shareholder value. Banker panelists and industry experts will also provide current surveys of M&A activity and pricing trends as well “best practice” guidance on managing strategic and regulatory challenges while optimizing operational efficiency.

Register online

2:00 – 5:15 PRE-CONFERENCE WORKSHOP (Registration is limited to 75. Register early to reserve your seat)


Remaining independent by design, not chance — tapping internal resources to support capital and shareholder liquidity
Joseph M. Ford, Conference Chairman, Senior Partner, Fenimore, Kay, Harrison & Ford, Austin


The fine art of playing the hand you have been dealt

James D. Goudge, Chairman of the Board & CEO, Broadway Bancshares, San Antonio
Mike Calvin, Principal, Level 5, Houston
David R. “Jude” Melville, President & CEO, Business First Bancshares, Baton Rouge
Mark L. Russell, CEO, Great Plains Bancshares, Elk City

Is Sub S still the best choice for your bank? How to capture the Sub S premium for your shareholders upon sale
Patrick J. Kennedy, Jr., Managing Partner, Kennedy Sutherland, San Antonio

Techniques for planning succession of ownership and management
Ken Derks, Managing Consultant, Equias Alliance, Plano
J. Scott Petty, Partner, Chartwell Partners, Dallas




Learning from your peers and leading advisers — where andhow to look.
Joseph M. Ford, Conference Chairman

8:45 – 10:00 M&A 1.01 FOR BANK LEADERS
Key deal management skills for buyers and sellers.
Curtis Carpenter, Managing Director, Sheshunoff & Co. Investment Banking, Austin
Chet A. Fenimore, Managing Partner, Fenimore, Kay, Harrison & Ford, Austin
Dennis R. James, Director of Mergers & Acquisitions, Bank of the Ozarks, Little Rock
Steve Wagner, Senior Manager, Crowe Horwath, Dallas

Finding expansion opportunity in neighboring banks.
Moderator: Tom Mecredy, Senior Vice President, Vining Sparks, Austin
C.T. “Tommy” Head, President & CEO, Goldthwaite Bancshares, Goldthwaite
James E. Lindemann, Chairman & CEO, Industry Bancshares, Central Texas
Jeffrey A. Wilkinson, President & CEO, Pioneer Bancshares, Austin

CEO perspectives on evaluating and implementing a successful M&A strategy.
Moderator: C.K. Lee, Managing Director, Commerce Street Capital, Dallas
Tyson Todd “Ty” Abston, Chairman & CEO, Guaranty Bancshares, Mount Pleasant
J. Patrick “Pat” Hickman, Chairman & CEO, Happy Bancshares, Texas Panhandle
George Martinez, Chairman of the Board, Allegiance Bancshares, Houston

12:15 – 1:15 LUNCHEON
Keynote Speaker: John W. Allison, Chairman of the Board, Home Bancshares, Conway, Arkansas

Opportunities for 2015.
Chris Murray, Principal, Sandler O’Neill + Partners, New York

Is there an IPO in your future? What you need to know.
Moderator: Chet Fenimore, Fenimore, Kay, Harrison & Ford, Austin
John D’Angelo, President & CEO, Investar Bancshares, Baton Rouge
Brian James, Principal, BankCap Partners, Dallas
Craig McMahen, Managing Director, Keefe, Bruyette & Woods, Austin

How today’s regulators and today’s deals are different.
Cynthia A. Dopjera, Assurance Shareholder, Harper & Pearson Company, Houston
Robert Ulrey, Managing Director, Stephens & Co, Little Rock
Patrick J. Kennedy, Managing Partner, Kennedy Sutherland, San Anotnio

Culture, technology and people.
Moderator: R. Clark Locke, Managing Director, Hovde Group, Austin
Randy Dennis, DD&F Consulting, Little Rock
Dennis R. James, Director of Mergers & Acquisitions, Bank of Ozarks, Little Rock
James E. Lindemann, Chairman & CEO, Industry Bancshares, Central Texas

Which numbers really matter and why.
Karen Kline, ASA, Managing Director Valuations, Sheshunoff & Co Investment Banking, Austin




The current legal and regulatory landscape for ALL community banks.
Moderator: Tom Perish, Partner, Andrews Kurth, Houston
B. Scott Daugherty, President/General Counsel, Compliance Alliance, Austin
Rusty N. LaForge, EVP & General Counsel, Southwest Bancorp, Oklahoma City
Charlotte Rasche, Senior EVP & General Counsel, Prosperity Bancshares, Houston

Impact of new capital regulations, restructuring opportunities in acquisitions and asset valuation strategies.
Rick Childs, Partner, Crowe Horwath, Indianapolis
Stephen C. Raffaele, CEO & President, MSC Asset Management, Dallas
Debbie Scanlon, Partner, BKD

What are the bigger banks looking for?
Moderator: Kade Machen, Managing Director, Sterne Agee, Austin
Geoffrey “Geoff” D. Greenwade, President & CEO, Green Bank, N.A., Houston
George A. Makris, Chairman & CEO, Simmons First National Corp., Little Rock
James D. “Dan” Rollins, President & CEO, BancorpSouth Bank, Tupelo

Audience and panelists share their parting takeaways and predictions for another year.

Tyson Todd “Ty” Abston, CEO, Guaranty Bancshares
John W. Allison, Chairman, Home Bancshares
John D’Angelo, CEO, Investar Bancshares
Geoffrey “Geoff” D. Greenwade, CEO, Green Bank, N.A.
James D. Goudge, CEO, Broadway Bancshares
C.T. “Tommy” Head, CEO, Goldthwaite Bancshares
J. Patrick “Pat” Hickman, CEO, Happy Bancshares
Dennis R. James, Director of M&A, Bank of the Ozarks
Rusty N. LaForge, EVP/General Counsel, Southwest Bancorp
James Lindemann, CEO, Industry Bancshares
George Martinez, Chairman, Allegiance Bancshares
George A. Makris, CEO, Simmons First National Corporation
David R. “Jude” Melville, CEO, Business First Bancshares
Charlotte Rasche, EVP/General Counsel, Prosperity Bancshares
James D. “Dan” Rollins, CEO, BancorpSouth Bank
Mark L. Russell, CEO, Great Plains Bancshares
Jeffrey A. Wilkinson, CEO, Pioneer Bancshares

Federal Reserve Board Request Comment on Proposed Repeal of Regulation AA

The Federal Reserve Board (FRB) has requested comment on a proposal to repeal its Regulation AA, 12 CFR part 227, which was issued pursuant to its
rule writing authority under section 18(f)(1) of the Federal Trade Commission Act. Section 1092(2) of the Dodd-Frank Act repealed section 18(f)(1) of the FTC Act, thus
eliminating the Board’s authority to write rules that address unfair or deceptive acts or practices, which are contained in Regulation AA.  Regulation AA includes the Board’s “credit practices rule,” which prohibits banks from using certain remedies to enforce consumer credit obligations and from including these remedies in their consumer credit contracts.

In connection with the Fed proposal, interagency guidance was issued clarifying that the repeal of the credit practices rules applicable to banks, savings associations, and federal credit unions is not a determination that the prohibited practices contained in those rules are permissible. The regulators believe the practices described in the former credit practices rules could potentially violate the prohibition against unfair or deceptive practices under the Federal Trade Commission Act and Dodd-Frank Act, even in the absence of a specific regulation governing the conduct.

House to Hold Hearing on Impact of Dodd-Frank Act

Tomorrow, on Wednesday, July 23, 2014, the House Financial Services Committee will hold a hearing entitled “Assessing the Impact of the Dodd-Frank Act Four Years Later.” The hearing will explore a variety of specific provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203)—such as the Volcker Rule, the Orderly Liquidation Authority, and consumer financial protection provisions—and the cumulative effect that the legislation has had on the American financial services industry and the economy more generally over the four years since President Obama signed it into law. Most notably, the witness list includes former Congressman Barney Frank, who formerly chaired the Committee and for whom the Act is named (together with former Senator Chris Dodd).

The other witnesses scheduled to appear are:

  • Anthony J. Carfang, Partner, Treasury Strategies, Inc.
  • Thomas C. Deas, Vice President & Treasurer, FMC Corporation, on behalf of the Coalition for Derivatives End-Users
  • Paul H. Kupiec, Resident Scholar, American Enterprise Institute
  • Dale K. Wilson, Chairman, President, and Chief Executive Officer, First State Bank

On July 21, 2010, President Obama signed the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” into law (Pub. L. No. 111-203). Drafted in response to the financial crisis of 2008 and 2009, in which the federal government bailed out a number of large financial firms at taxpayer expense, the Dodd-Frank Act is a sprawling piece of legislation, numbering over 2,300 pages in length and requiring federal regulators to embark on some 400 rule-makings. The Dodd-Frank Act represents the most ambitious change in the regulation of financial institutions since the Great Depression, and its reach extends not only to every financial institution in the United States, but to virtually every corner of the U.S. economy as well.

Basel III Capital Rule for Subchapter S Banks

Kennedy Sutherland attorney, Patrick J. Kennedy, Jr., sent a letter to Chair Yellen, Comptroller Curry and Chairman Greenberg expressing continued concern regarding the unequal treatment depository institutions and their holding companies that elect to be taxed under Subchapter S of the Internal Revenue Code (IRC) receive compared to their peers taxed under Subchapter C, especially when considered in the context of the capital conservation buffer rules presently contained in Basel III and regulatory dividend restriction policy.

In addition to revisiting the dividend restriction rule contained in the Basel III Capital Conservation Buffer provisions, he encouraged the Agencies to support efforts to expand access to capital for Subchapter S banks by supporting an increase of the shareholder limit from 100 to 500 and permitting entities other than natural persons and trusts to hold shares of an S corporation. Finally, he encouraged the Agencies to support expansion of capital instruments for Subchapter S banks to include preferred stock.

These issues are of critical importance to one-third of the banks in the United States, 90% of which are under $1 billion in assets and serve as the essential credit back bone of smaller communities and their local businesses throughout the country.

In the letter Mr. Kennedy strongly urges the Agencies to embrace the Subchapter S bank community and undertake a concerted effort to promote their health and ability to raise capital and function as freely as possible in the best interest of their shareholders and communities. Mr. Kennedy further states that he believes this can only be achieved through discussion and policy-making that includes the needs and interests of Subchapter S banks at the outset of the process rather than as a mere afterthought.

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Mid Size Banks Stress Test

Three federal bank regulatory agencies (the Federal Reserve, the FDIC and the Comptroller of the Currency) issued a press release regarding final guidance describing supervisory expectations for annual stress tests. Financial institutions with total assets of $10 – $50 billion are required to conduct the stress tests annually under rules issued pursuant to Dodd-Frank Wall Street Reform (Section 165(i)(2)) and Consumer Protection Act. These firms are required to perform their first stress tests under the Dodd-Frank Act by March 31, 2014.

The final Guidance for Medium-Size Banks is outlined as follows:

  • Stress Test Timelines
  • Scenarios for Stress Tests : Medium-Size Banks must assess the potential impact of a minimum of three macroeconomic scenarios—baseline, adverse, and severely adverse—on their consolidated losses, revenues, balance sheet (including risk-weighted assets), and capital.The Federal Agencies will provide a description of any additional scenarios no later than Nov. 15 each calendar year.
  • Stress Test Methodologies and Practices : In conducting a stress test, Medium-Size Banks must estimate loss projections, PPNR, balance sheet and risk-weighted asset projections, estimates for immaterial portfolios, projections for quarterly provisions and ending allowance for loans and lease losses, and projections for quarterly net income for each scenario. Stress test methodologies and key practices should be commensurate with the bank’s size, complexity and sophistication. Key practices for stress tests include the appropriate use of data sources, data segmentation and model risk management. Medium-Size Banks may use partially validated risk models, provided that such banks have (1) made an effort to identify models based on materiality and highest risk and to prioritize validation activities accordingly; (2) applied compensating controls so that the output from models that are not validated or are only partially validated are not treated the same as the output from fully validated models; and (3) clearly documented such cases and made them transparent in reports to model users, senior management and other relevant parties.
  • Estimating the Potential Impact on Regulatory Capital Levels and Capital Ratios
  • Controls, Oversight and Documentation : Senior management must establish and maintain a system of controls, oversight and documentation, including policies and procedures designed to ensure that its stress-testing processes comply with Dodd-Frank requirements. Board of directors or a committee must then review and approve the stress-testing policies and procedures processes. In addition, the board of directors and senior management must receive a summary of the results of the stress test. The board of directors and senior management must consider the results of the stress test in the normal course of business and as part of the bank’s ongoing capital planning, assessment of capital adequacy and risk management practices.
  • Report to Supervisors : Medium-Size Banks must report the results of the stress test to the appropriate Federal Agencies by March 31 of each year.
  • Public Disclosure of Stress Tests : Medium-Size Banks must also publicly disclose a summary of the results of the stress test in the period beginning on June 15 and ending on June 30 of each year. A summary of the stress test results should also be included on the bank’s website.

The agencies’ stress test rules are flexible to accommodate different risk profiles, sizes, business mixes, market footprints, and complexity for companies in the $10 billion to $50 billion asset range. Consistent with this flexibility, the final guidance describes general supervisory expectations for these companies’ Dodd-Frank Act stress tests, and, where appropriate, provides examples of practices that would be consistent with those expectations.

The final guidance from the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency is similar to proposed guidance issued by the agencies last year. The agencies clarified certain aspects in response to comments received.

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