Senate Passes Regulatory Reform Bill - 05/21/10

The Senate voted 59-39 on Thursday to approve their version of financial reform S. 3217 - Restoring American Financial Stability Act of 2010 - with both Illinois US Senators Richard Durbin and Roland Burris voting for the bill. This bill is the most significant banking legislation since the Great Depression and would enact sweeping changes to the financial system. The House of Representatives passed their version of financial reform legislation H.R. 4173 - Wall Street Reform and Consumer Protection Act - last December. Technically, the Senate passed the contents of S. 3217 in lieu of the House version of financial reform which means that the issue is now headed for a conference committee to work out the differences between the two chambers. POLITICO is reporting that the Democrats are hoping to get the legislation to the President's desk for his signature by July 4th.

This legislation contains hard fought victories, disappointments and remaining challenges for community banks. The positive results of this legislation would not have been possible without the tireless efforts of the Independent Community Bankers of America (ICBA), the critical involvement and support of the Community Bankers Association of Illinois (CBAI), and the grass roots advocacy of community bankers in Illinois and all across the nation. The process is not over and community banker involvement will remain critical if we are to achieve a final product that results in positive financial reform that does not negatively affect community banks.

The ICBA has completed a thorough analysis of successes, problems, and issues not addressed in the senate bill that we have attached for your information.

Many Critical Community Bank Successes

The legislation includes an ICBA/CBAI amendment sponsored by Sens. Jon Tester (D-Mont.) and Kay Bailey Hutchison (R-Texas) to expand the FDIC assessment base, which will save the nation's community banks $4.5 billion in assessments over the next three years. The amendment, which would base FDIC assessments on assets minus tangible capital, not on domestic deposits, will allow the FDIC to lower assessment rates on community banks approximately 37 percent and still collect the same amount of money. Instead of paying 30 percent of total assessments collected by the FDIC as they do under the current assessment base, community banks under $10 billion would pay 20 percent of total assessments, resulting in billions of dollars in savings for the industry.

ICBA was the only national financial trade association to endorse the amendment which Wall Street adamantly opposed.

Lawmakers also approved an ICBA/CBAI-advocated amendment sponsored by Sens. Hutchison and Amy Klobuchar (D-Minn.) to preserve the Federal Reserve's authority to examine state-chartered community banks and small bank holding companies. The amendment also eliminates harmful provisions from the bill that likely would have resulted in payments from the FDIC's Deposit Insurance Fund to subsidize the exam costs of megabanks.

Additionally, the Senate approved an ICBA/CBAI-supported amendment sponsored by Sens. Mary Landrieu (D-La.), Johnny Isakson (R-Ga.) and Kay Hagan (D-N.C.) to exempt safe residential mortgage loans from the bill's 5-percent risk-retention requirement. In a joint letter and e-mails, ICBA/CBAI voiced support for the amendment, which would create a category for carefully defined, fully documented and properly underwritten residential mortgage loans exempt from the requirements. The exemption will require lenders to either adopt the highest lending standards or retain the additional credit risk required under the bill.

Community bankers scored another victory with Senate passage of an ICBA/CBAI-backed amendment sponsored by Sen. Olympia Snowe (R-Maine) to provide community banks with relief from new paperwork burdens related to the proposed CFPB. The amendment removes Section 1071 of the bill, which included provisions requiring banks to maintain records on the number and dollar amount of customer deposit accounts and ATM transactions, geo-code customer transactions, and make annual disclosures of this information.

Much-Needed Changes Before Bill Goes to President

While S. 3217 included several top ICBA/CBAI priorities, a handful of harmful provisions were added to the bill during the amendment process. ICBA/CBAI continues working with lawmakers to overturn these policies, which would have a negative impact on community banks, their customers and their communities.

Impact of Collins Amendment on Tier 1 Capital

ICBA/CBAI continues working with lawmakers on an amendment sponsored by Sen. Susan Collins (R-Maine) that passed by unanimous consent after little debate that could have unintended consequences on community banks. The amendment would require the banking agencies to establish minimum leverage capital requirements and risk-based capital requirements on a consolidated basis for banks, bank holding companies and those nonbanks covered by the new bill. The amendment states that these minimum requirements are to be not less than those that currently apply to banks.

The intent of the amendment was ensure that large banks and bank holding companies would have to meet capital standards at least as strict as those that apply to small banks and bank holding companies. Unfortunately, it is worded broadly enough so that it could exclude capital instruments such as trust preferred securities from the consolidated Tier 1 capital of bank holding companies.

Sen. Collins said when the amendment was introduced that it was not her intent for the amendment to affect the treatment of small bank holding companies as provided under the Federal Reserve's Small Bank Holding Company Policy Statement. That policy statement applies to bank holding companies with consolidated pro forma assets of less than $500 million and facilitates the formation of small bank holding companies by allowing holding company debt levels higher than would normally apply.

While Collins has indicated that she may modify her amendment to allow for a phase-out of trust-preferred securities as Tier 1 capital, this proposal does not adequately address concerns with her amendment. The amendment must at least grandfather community banks' use of trust-preferred securities in Tier 1 capital. ICBA/CBAI is working closely with Sen. Collins's office to change the legislation to minimize the impact that the amendment would have on trust-preferred securities.


The Senate also voted to approve an ICBA/CBAI-opposed amendment sponsored by Sen. Richard Durbin (D-Ill.) that gives broad latitude to merchants to pick and choose what credit and debit cards they accept. The amendment also directs the Federal Reserve to set debit interchange fees based on the cost of processing a debit transaction.

ICBA/CBAI vigorously opposed this amendment to reduce interchange fees through government regulation, which could lead to higher costs to consumers and fewer choices as community banks are forced to exit the market.

ICBA/CBAI will continue working to remove this language to protect the ability of community banks to offer debit and credit cards.

Unfinished Business

While lawmakers approved a variety of ICBA/CBAI-advocated amendments to benefit the nation's community banks, ICBA/CBAI will continue working with lawmakers to implement other priorities that were not acted upon.

Among the ICBA/CBAI-supported proposals that were not addressed were amendments to:

  • index the exemption to the CFPB for community banks; give exclusive enforcement authority over community banks to the prudential regulators; provide the prudential regulators concurrent rulemaking authority; and allow rules promulgated by the prudential regulators to preempt rules promulgated by the CFPB,

  • restrict proprietary trading at systemically dangerous banks,

  • preserve the ability of states to establish lending limits for small, state-chartered community banks,

  • allow new federal thrift charters,

  • permit the proposed CFPB to regulate payday lenders and other nonbank financial firms that would otherwise be exempt from new regulations,

  • exclude the Federal Home Loan Banks from a provision in the bill prohibiting institutions from lending an amount to any unaffiliated company that exceeds 25 percent of the capital stock and surplus of the lending institution, and

  • exclude small, publicly held companies, including many community banks, from the costly regulatory burden of complying with Section 404(b) of the Sarbanes-Oxley Act of 2002.

ICBA/CBAI will continue its efforts to enact these important policies.

Additional Amendments

Among the many other amendments offered, the Senate approved amendments:

  • dropping an ICBA/CBAI-supported $50 billion dissolution fund to finance the liquidation of failing, systemically dangerous financial firms,

  • allowing the Office of the Comptroller of the Currency to preempt state-level regulation of consumer-protection laws,

  • requiring the Government Accountability Office to conduct an audit of the Federal Reserve's use of emergency lending authority since Dec. 1, 2007,

  • requiring Treasury to conduct a study on Fannie Mae and Freddie Mac and make recommendations to Congress on how to proceed,

  • establishing a clearinghouse under the Securities and Exchange Commission to assign credit-rating agencies to issuers of debt,

  • removing all statutory references to credit-rating agencies,

  • exempting from Federal Reserve examinations commercial companies that earn less than 85 percent of their revenue from financial services,

  • clarifying that the Commodity Futures Trading Commission and Federal Energy Regulatory Commission retain their authority to review derivatives, and

  • converting inspectors general at several regulatory agencies to presidentially appointed positions.

The Senate voted against amendments to:

  • offer an alternative to the Consumer Financial Protection Bureau that would have implemented a Division of Consumer Protection within the FDIC,

  • limit growth and leveraging at the nation's largest financial institutions by imposing a 10 percent cap on any bank holding company's share of the nation's total insured deposits

  • allow states to enforce interest-rate caps on credit cards and other lending by out-of-state banks

  • limit the conservatorship of Fannie Mae and Freddie Mac to two years and dissolve the government-sponsored enterprises if they were still considered less than financially viable at the end of conservatorship, and

  • prohibit taxpayer bailouts of fiscally irresponsible state and local governments

We will continue to keep you informed as this legislation moves through the conference/reconciliation process.