CUNA Summary of the Dodd-Frank Wall Street Reform and Consumer

Protection Act

H.R. 4173 Public Law Number 111-203

August 2, 2010

CUNA Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173; Public Law Number 111-203)

August 2, 2010

SELECTED DEFINITIONS................................................................................ Error! Bookmark not defined. TITLE I—FINANCIAL STABILITY.......................................................................................................................1 TITLE II—ORDERLY LIQUIDATION AUTHORITY............................................................................................7 TITLE III—TRANSFER OF POWERS TO THE COMPTROLLER OF.............................................................11 THE CURRENCY, THE CORPORATION, AND THE BOARD OF GOVERNORS..........................................11 TITLE IV—REGULATION OF ADVISERS TO HEDGE FUNDS AND OTHERS .............................................14 TITLE V—INSURANCE....................................................................................................................................14 TITLE VI— IMPROVEMENTS TO REGULATION OF BANK AND SAVINGS ASSOCIATION HOLDING COMPANIES AND DEPOSITORY INSTITUTIONS.........................................................................................14 TITLE VIII—PAYMENT, CLEARING, AND SETTLEMENT SUPERVISION....................................................19 TITLE IX—INVESTOR PROTECTIONS AND IMPROVEMENTS TO THE REGULATION OF SECURITIES20 TITLE X—BUREAU OF CONSUMER FINANCIAL PROTECTION .................................................................24 TITLE XII—IMPROVING ACCESS TO MAINSTREAM FINANCIAL INSTITUIONS .......................................41 TITLE XIII—PAY IT BACK ACT .......................................................................................................................41 TITLE XIV—MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT.............................................42 TITLE XV—MISCELLANEOUS PROVISIONS ................................................................................................62 TITLE XVI—SECTION 1256 CONTRACTS (I.E. SWAPS AND MARK-TO-MARKET ACCOUNTING) ..........62 APPENDIX A: CFPB RULEMAKINGS IN DODD-FRANK TITLE X .................................................................63

SELECTED DEFINITIONS

• Definitions (§ 2):

Credit Union—The term "credit union" means a Federal credit union, State credit union, or State-chartered credit union, as those terms are defined in section 101 of the Federal Credit Union Act. (12 U.S.C. § 1752). A credit union is not a “depository institution” as that term is defined in Dodd-Frank.

“Federal Banking Agency” & “Primary Financial Regulatory Agency”—The terms “federal banking agency” and “primary financial regulatory agency” as used in Dodd-Frank do not apply to the National Credit Union Administration (NCUA).

‘‘Federal depository institution,” ‘‘insured depository institution,” and numerous other terms have the same meanings as in section 3 of the Federal Deposit Insurance Act, (12 U.S.C. § 1813), meaning that references to “depository institutions” and “insured depository institutions” in Dodd-Frank do not apply to credit unions.

TITLE I—FINANCIAL STABILITY

• Subtitle A – Financial Stability Oversight Council

o Financial Stability Oversight Council established (§ 111):

The Financial Stability Oversight Council (Council):

• Voting members include: the Treasury Secretary (Chairperson), and the heads of the Federal Reserve Board of Governors (Fed), OCC, CFPB, SEC, FDIC, CFTC, FHFA, NCUA, and an independent insurance expert appointed by the President for a 6-year term.

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• Non-voting members include the: Director of the Office of Financial Research, Director of the Federal Insurance Office, a state insurance commissioner, a state banking supervisor, and a state securities commissioner.

The Council may obtain assistance from technical and professional advisory committees and other federal agencies. Government employees may be detailed to the Council.

o Council authority (§ 112):

The responsibilities of the Council are to:

• Identify risks for financial market stability of the U.S., including any distress, large market participants, and non-financial companies,

• Promote market discipline, and

• Respond to any emerging threats to financial market stability.

The Council may:

• collect information,

• provide direction,

• monitor the financial services marketplace,

• monitor regulatory proposals,

• facilitate information sharing and coordination,

• recommend to member agencies,

• identify gaps in regulation,

• require supervision of systemically important nonbank financial companies,

• make recommendations to the Fed about capital,

• identify systemically important financial market utilities (e.g. payments system),

• make recommendations to financial regulatory agencies about liquidity, credit, or other problems,

• review accounting principles,

• provide a forum for discussion, and report and

• testify to Congress on the activities of the Council.

The voting members of the Council have to make statements before Congress that justify their deliberation.

The Council may collect data and receive information from other agencies about the financial stability of both domestic and foreign institutions. Such data will remain confidential.

If the Council is not able to determine the financial stability implications of a nonbank financial company, the Fed is authorized to conduct an examination to determine if such nonbank financial company should be supervised by the Fed.

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o Authority to require supervision and regulation of certain nonbank financial companies (§ 113):

The Council may place a nonbank financial company under Fed supervision if such company poses a threat to financial stability to the U.S. This authority also extends to foreign nonbanks with U.S. operations.

Application to credit unions? The definition of “nonbank financial company” can theoretically apply to credit unions, although it is unlikely that the Council would place any credit union under Fed supervision both because NCUA is on the Council and because it is factually unlikely that a credit union would present a systemic threat to the greater financial system.

• Exemption Authority: Pursuant to Dodd-Frank section 170 (see below), the Fed and the Council are to develop regulations exempting classes of “nonbank financial companies” from the Fed’s jurisdiction over systemically risky institutions. This rulemaking could be used to clarify that credit unions are not eligible for Fed supervision as systemically risky institutions but are instead regulated by NCUA for safety and soundness purposes in all cases.

2/3 of the voting members of the Council must affirmatively vote for Fed supervision of a nonbank financial company, including the Chair (i.e. the Secretary of the Treasury).

Factors the Council must consider include the institution’s leverage, off-balance-sheet liabilities, the scope, size, scale, concentration, interconnectedness, or mix of activities of the company, as well as other factors.

There is additional authority for the Fed to supervise and regulate a company that is set up to evade these provisions. The Council should report to Congress on this determination. The Fed may require such a company to create an intermediate holding company for its financial activities.

There are additional details on an opportunity for a hearing, notice, final determination, judicial review, an emergency exception, international coordination, the Council consultation with the primary financial regulator, and the applicability to only financial activities.

o Council funding (§ 118):

Any expenses of the Council will be treated as expenses of, and paid by, the Office of Financial Research. See § 155 (“Funding”), below.

o Resolution of supervisory jurisdictional disputes among member agencies (§ 119):

The Council will resolve a dispute among two or more member agencies if there are disagreements over jurisdiction. This authority is most likely to apply to disputes between CFPB and prudential regulators since CFPB will have overlapping jurisdiction with agencies such as NCUA, OCC, FDIC, and the Fed.

o Additional standards applicable to activities or practices for financial stability purposes (§ 120):

The Council may provide a recommendation for more stringent regulations to the primary financial regulator, based on financial stability concerns. There are details for implementation, a report to Congress, and any rescission.

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o Mitigation of risks to financial stability (§ 121):

If the Federal Reserve Board determines that a Bank Holding Company (BHC) with assets over $50 billion or a nonbank financial company that poses a “grave threat to the financial stability of the United States,”—and 2/3rds of the voting members of the Council agree—the Fed may take actions to limit, restrict, and terminate one or more activities of the company. In extreme cases, the company may be required to sell or transfer assets.

As noted above, 2/3rds of the voting members of the Council must affirmatively vote in favor of the Fed’s enhanced authority over a specific institution. The institution subject to this action has 30 days within which to request an oral or written hearing to contest this decision before the Federal Reserve Board of Governors, “in consultation with the Council.”

• Subtitle B – Office of Financial Research

o Office of Financial Research established (§ 152):

The Office of Financial Research within the Department of the Treasury will have a Director that is appointed by the President, with the advice and consent of the Senate.

o Purpose and duties of the Office (§ 153):

The purpose is to support the Council with data collection and methods, research, developing tools, performing other related services, making such results available to financial regulatory agencies, and assisting member agencies.

The Office has rulemaking authority. The Director has to report to and testify before Congress. The Office may issue subpoenas, with a written finding by the Director

o Funding (§ 155):

The Office of Financial Research will fund the operations of the Council as well as the operations of the Office

The Office and the Council will have permanent self-funding two years after enactment by levying assessments on BHCs with assets over $50 billion and systemically-important nonbank financial companies supervised by the Fed.

The Fed will provide interim funding for the first two years after enactment.

There will be a Financial Research Fund in which assessments will be placed. The Fund can invest in Treasury securities and other investments guaranteed by the United States.

o Prohibition against management interlocks between certain financial companies (§ 164):

A management official of a nonbank financial company supervised by the Fed may not act as a management official of any BHC with assets over $50 billion or other nonaffiliated nonbank financial company supervised by the Fed.

For the purposes of the Depository Institutions Management Interlocks Act, a nonbank financial company supervised by the Fed shall be treated as a BHC.

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o Enhanced Supervision and Prudential Standards for Nonbank Financial Companies Supervised by the Board of Governors and Certain Bank Holding Companies (§ 165):

The Fed will have more stringent prudential standards for BHCs with assets equal or greater than $50 billion or supervised nonbank financial companies that pose a risk to financial stability. There will be differentiation among institutions, based on the consideration of their capital structure, riskiness, complexity, financial activities, size, and any other risk-related factors.

The prudential standards include: 1) risk based capital; 2) liquidity requirements; 3) overall risk management; 4) resolution plan and credit exposure; and 5) concentration limits. There are other details for additional standards, foreign financial companies, consultation, and an annual report to Congress.

Contingent Capital: The Fed may issue regulations on contingent capital, which is debt that is convertible to equity in times of economic stress.

There will be periodic reports for the resolution plan and credit exposure, along with a notice of any deficiencies. There are additional details for divestiture, no limiting effect on a bankruptcy court, no private right of action, and other rules.

Credit Exposure Limit – No more than 25% percent of capital for credit exposure to any unaffiliated company, which includes all extensions of credit, repurchase agreements, guarantees, purchases of or investment in securities, counterparty credit exposures with derivatives, and any other similar transaction. This will be effective three years after the date of enactment. There may be enhanced periodic disclosures.

• FHLB Exemption: Federal Home Loan Banks (FHLBs) are exempt from this credit exposure limit.

• Fed Exemption Authority: The Fed may exempt transactions from this credit exposure limit by regulation or order.

Fed Authority to Limit Short-Term Credit—The Fed may also issue regulations that limit short term debt—such as commercial paper—based on a percentage of capital determined by the Fed. Short term debt does not include insured deposits.

Risk Committee for Publicly Traded BHCs, Etc.

• Publicly traded BHCs with assets over $10 billion or publicly traded supervised nonbank financial companies must have a risk committee to have oversight of enterprise-wide risk management, with a number of independent directors, and at least one risk management expert with experience. The Fed may also require smaller BHCs with assets less than $10 billion to have a risk committee depending on risk management practices.

• There will be a rulemaking not later than one year after the transfer date, to take effect no later than 15 months after the transfer date.

Stress Testing of Systemically Risky BHCs, etc.

• There is required annual stress testing for supervised nonbank financial companies, BHCs, and other financial companies with assets greater than $10 billion, to determine if capital levels are sufficient. The tests will be

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determined by each Federal financial regulatory agency in coordination with the Fed.

• There will be at least three sets of conditions for the stress tests: baseline, adverse, and severely adverse.

Leverage Limits for Systemically Risky BHCs, etc.

• The leverage limit cannot be greater than a 15 to 1 debt to equity ratio (an approximately 6.67% net worth ratio). “Equity” in this calculation will be defined by regulation.

• This applies only to systemically-risky (as determined by the Fed and the Council) BHCs with assets over $50 billion and nonbank financial companies..

• FHLB Exemption: FHLBs are exempt from this leverage limit.

• Inclusion of Off-Balance Sheet Activities in Computing Capital for Systemically Risky BHCs, etc.: Off-Balance Sheet items, including derivatives, will be included for the purposes of capital requirements, for BHCs with assets equal or greater than $50 billion or supervised nonbank financial companies that pose a risk to financial stability.

o Avoidance of Duplicative Regulations (§169): The Fed is not supposed to create regulations under this systemic risk authority which would duplicate regulatory requirements already applicable to BHCs or nonbank financial companies.

o Safe Harbor from Fed Supervision (§ 170): The Fed and the Council shall develop regulations exempting classes of nonbank financial companies from possible Fed supervision under the systemic risk provisions. Since credit unions likely fall within the definition of “nonbank financial companies,” section 170 could serve as a vehicle to exempt credit unions from any possible oversight by the Fed. There is no specific timeframe for issuance of these rules.

o Leverage and risk-based capital requirements (§ 171):

The appropriate Federal banking agencies should establish both minimum leverage capital and risk-based capital requirements on a consolidated basis for insured depository institutions, depository institution holding companies (e.g., bank holding companies as well as thrift holding companies), and nonbank financial companies supervised by the Fed. The term “depository institution” does not apply to credit unions in this context.

These requirements should not be any less stringent than the current capital requirements. The capital standards must consider risks to the institution, external public and private stakeholders, and the financial system. There are additional details such as investments in financial subsidiaries, effective dates, implementation details, debt or equity instruments of smaller institutions, foreign bank organizations, exceptions, and a study on small institution access to capital.

Phase-In For Thrift Holding Companies: Depository institution holding companies not supervised by the Fed as of May 19, 2010—such as OTS supervised thrift Holding Companies—have a five year phase-in of these holding company leverage and capital requirements.

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o Examination and enforcement actions for insurance and orderly liquidation purposes (§ 172):

Section 172 amends the Federal Deposit Insurance Act to grant FDIC examination, enforcement, and liquidation authority over the nonbank financial companies that are supervised by the Fed.

o Access to United States financial market by foreign institutions (§ 173):

Section 173 amends the International Banking Act of 1978 and the Securities and Exchange Act of 1934 to extend the provisions of this systemic risk title to foreign financial institutions which are active in the U.S. and pose a risk to U.S. financial stability.

o Study of Holding Company Capital Instruments (§ 174): Section 175 requires the GAO, OCC, the Fed, and FDIC to perform a study of bank holding company and nonbank financial holding company capital requirements, particularly with respect to hybrid debt-equity capital instruments (e.g., trust preferred shares) and the capital requirements of foreign institutions..

TITLE II—ORDERLY LIQUIDATION AUTHORITY

o Dodd-Frank Title II sets forth the criteria for the FDIC’s new authority to liquidate systemically-risky financial companies. These provisions are similar in many respects to the liquidation regimes in Title II of the Federal Credit Union Act and in the Federal Deposit Insurance Act. This liquidation authority will not likely apply to credit unions.

o Judicial review & Studies (§ 202):

FDIC Petition for Liquidation Order: Unless the financial company consents to being liquidated, FDIC must petition the relevant U.S. District Court for the District of Columbia to obtain an order permitting the liquidation. This procedure would presumably take place after the Fed and FDIC make the “systemic risk determination” required by section 203 (see below).

• The District Court’s decision may be appealed to the U.S. Court of Appeals for the District of Columbia and then to the U.S. Supreme Court; the courts must also set forth rules providing for expedited review procedures in these cases.

• Section 202 also specifies that the Bankruptcy Code and other insolvency laws do not apply to institutions being liquidated by FDIC under this authority. This section also requires GAO and the Administrative Office of the U.S. Courts to produce a report regarding how the Bankruptcy Code could be modified to better apply to insolvent financial companies.

The time limit on this receivership authority is three years from the date of FDIC’s appointment as receiver. There is a possibility of a one year extension if the Chair of the FDIC determines that such extension is necessary and requests this authority from the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House.

Studies: Section 202 also requires GAO to perform studies regarding:

• Bankruptcy and orderly liquidation for financial companies;

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• International coordination relating to the bankruptcy process for financial companies; and

• Prompt Corrective Action (PCA) regulations of the “federal banking agencies” (i.e. OCC, FDIC, and the Fed because this term, as used in Dodd-Frank, does not include NCUA).

o Systemic risk determination (§ 203):

In general, at least 2/3rds of the members of the Federal Reserve Board, and 2/3rds of the board of directors of the FDIC must vote that institution to be liquidated constitutes “systemic risk.” A formal written recommendation is required.

Securities Broker-Dealers: In cases that involve brokers or dealers, however, there must be an affirmative vote from at least 2/3rds of the Federal Reserve Board of Governors, and 2/3rds of the Commissioners of the SEC, in consultation with the FDIC.

Insurance Companies: In cases that involve insurance companies, there must be an affirmative vote from at least 2/3rds of the Federal Reserve Board of Governors, as well as the approval of the Director of the Federal Insurance Office, in consultation with the FDIC.

Who May Request the Determination: The Secretary of the Treasury may request a systemic risk determination or the Fed, FDIC, SEC, and/or the Federal Insurance Office may make a systemic risk determination on their own initiative.

Basis for Systemic Risk Determination: The agencies must evaluate the financial company, its default or danger of default situation, effects on different stakeholders, and why the Bankruptcy Code is not appropriate.

Triggering Insolvency Events: A financial company shall be considered to be in default or in danger of default if one of these conditions are met: 1) a case has been or will likely be commenced under the Bankruptcy Code; 2) has incurred or will likely incur losses that exceed substantially all of its capital, and there is no reasonable prospect for the company to avoid such a depletion; 3) assets are likely less than obligations; or 4) the company is not able to pay its creditors in the normal course of business.

o Orderly liquidation of covered financial companies (§ 204):

The purpose of the orderly liquidation authority is to liquidate failing financial companies that pose a significant risk to U.S. financial stability in a manner that mitigates risk and minimizes moral hazard. The goals are to: 1) let shareholders and creditors bear the losses; 2) not retain management of the financial company; and 3) have the FDIC consider the interests of all affected parties.

The FDIC will be the Receiver and will consult with other financial regulatory agencies, the Securities Investor Protection Corporation (SIPC), consultants, and outside experts, for the purposes of an orderly liquidation.

If the FDIC provides funds that are necessary or appropriate for the liquidation, it will receive a priority of claims. This includes providing direct funds, loan guarantees, liens, a sale or transfer of assets, and payments.

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o Orderly liquidation of covered brokers and dealers (§ 205):

In the case of a liquidation of a securities broker-dealer, the SIPC will be the Trustee and the FDIC will be the Receiver. There will be a rulemaking on this issue by the SEC and FDIC, in consultation with the SIPC.

o Mandatory terms and conditions for all orderly liquidation actions (§ 206):

In order to use this liquidation authority, the FDIC has to determine that the liquidation is necessary for financial stability.

The FDIC is also required to consider the interests of the shareholders, creditors, management, and members of the board of directors.

The FDIC is not permitted to take an equity interest in the institution or become a shareholder.

o Powers and duties of the Corporation (§ 210):

Powers and exceptions (§ 210(a)) – The FDIC has broad powers under this liquidation authority.

• The FDIC will be a Successor to the covered financial company.

• The FDIC will operate the company during the liquidation process.

• There are other powers and incidental powers as a Receiver.

• The FDIC may organize a bridge financial company and may use other private sector resources.

• There are other provisions for shareholders, transfers, claims, preferences, recovery, setoff, injunctive relief, contracts, accounting, and other records.

Subsections 210(b)-(e) address: Priority of Expenses and Unsecured Claims; Provisions relating to Contracts Entered Into Before Appointment of Receiver; Valuation of Claims in Default; and the Limitation on Court Action.

Liability of Directors and Officers (§ 210(f)):

• A director or officer of a covered financial company may be held personally liable for monetary damages in any civil action where the FDIC is a receiver either under state laws (e.g., for breach of fiduciary duty under applicable state law standards) or, pursuant to section 210(f), for gross negligence or willfully malicious conduct.

Damages (§ 210(g)):

• Damages include principal and appropriate interest.

Bridge Financial Companies (§ 210(h)):

• Bridge companies may assume liabilities, purchase assets, and perform other temporary functions. There may be bridge brokers or dealers. A bridge company may obtain unsecured credit and issue unsecured debt.

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Sharing Records (§ 210(i)):

• Other federal regulators should share any information for the covered financial company.

There are other details in sections §§ 210(j)-(m) that include: Foreign Investigations; Prohibition on Entering Secrecy Agreements and Protective Orders; and Liquidation of Certain Covered Financial Companies or Bridge Financial Companies.

Orderly Liquidation Fund (§ 210(n)):

• The Orderly Liquidation Fund will reside in the Treasury.

• The fund will cover the costs of this title, including:

o The orderly liquidation of covered financial companies (although such expenses are likely to be limited because institutions subject to this authority will presumably not have federally-insured deposits, so FDIC can likely void the claims of unsecured creditors and satisfy the claims of secured creditors with the collateral in question),

o Payment of administrative expenses,

o The payment of principal and interest by the Corporation on certain obligations and

o Pay for expenses under certain other FDIC authorities.

• There will be a repayment plan for authorized funds by the Treasury.

• The FDIC may not incur obligations that would be greater than 10 percent of the total consolidated assets of the company. There will be a rulemaking between the FDIC and the Secretary of the Treasury, in consultation with the Council.

Assessments (§ 210(o)):

• Risk-Based Assessments: There are risk based assessments on BHCs or other financial companies with total consolidated assets that are greater than or equal to $50 billion and any other nonbank company supervised by the Fed.

o Credit Unions: No credit union currently meets the $50 billion asset threshold. Further section 210(o) instructs FDIC to “take into account” whether an institution is a federally-insured credit union when determining its risk-based assessment matrix, presumably to reduce or eliminate any assessment that a credit union would face it if has more than $50 billion in assets.

• The assessments will cover the difference between the FDIC’s payment of claims and the value of the company from the proceeds of liquidation.

• The assessments will also depend on factors such as economic conditions, and any affiliates of a financial company that include an insured credit union.

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• The risk-based assessment considerations include a matrix of factors such as the impact and risks to the financial system.

• Section 210(o) requires FDIC to issue regulations governing risk-based assessments in consultation with the Treasury. No deadline for this rulemaking is provided in the statute.

There are other details in sections §§ 210(p)-(r) regarding:

• FDIC’s powers to void contracts (such as employment contracts or derivatives contracts);

• Exempting FDIC and its activities, etc., under this authority from state and federal taxation; and

• Prohibiting the transfer of assets from an institution in FDIC receivership to entities which have defaulted on more than $1,000,000 in obligations to the institution being liquidated, committed fraud, or have been convicted of specified federal felonies.

Clawback: Recoupment of Compensation from Senior Executives and Directors (§ 210(s)): The FDIC, as a receiver, may recover from senior executives and directors who were “substantially responsible” for the institution’s failure any compensation paid during a 2 year period prior to the date of appointment as a receiver. In the case of fraud, however, FDIC may recover compensation paid prior to 2 years ago as well. FDIC will do a rulemaking to set forth the details for use of this authority.

TITLE III—TRANSFER OF POWERS TO THE COMPTROLLER OF THE CURRENCY, THE CORPORATION, AND THE BOARD OF GOVERNORS

• Subtitle A – Transfer of Powers and Duties

o OTS functions will be transferred (§§ 311 - 319):

The functions of the Office of Thrift Supervision (OTS) will be transferred to the Office of the Comptroller of the Currency (OCC). The existing rights of the OTS—such as with respect to supervisory agreements and so forth—will not be affected, and will be transferred to the OCC.

Federal Thrifts: All functions and regulations of federal thrifts will be under the OCC.

Thrift Holding Companies: All functions and regulations of thrift holding companies will be under the Fed.

State-Chartered Thrifts: Some functions related to the state charted thrifts will be transferred to the FDIC.

This transfer will occur one year after enactment, unless the Secretary of the Treasury, in consultation with the banking regulators, decides to extend it.

• Subtitle C – Federal Deposit Insurance Corporation

o New FDIC Assessment Base Using Total Assets (§ 331): FDIC’s new assessment base will be based on the total assets of FDIC-insured institutions, rather than on insured deposits. This change in assessment base will not necessarily alter FDIC reserve levels per

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se, which will still be measures relative to insured-deposits (although a reserve ratio relative to total assets also will be calculated).

Discrimination Based on Size Allowed: FDIC will now be permitted to levy higher or lower assessment based on an institution’s assets size; previously all assessments had to be uniform regardless of whether the institution was large or small. Under section 334, below, FDIC is instructed to reduce the impact of its assessments on institutions with fewer than $10 billion in assets.

Total Assets Definition: The definition of “total assets” will be the average consolidated total assets of the insured depository institution with the subtraction of average tangible equity and other adjustments.

o FDIC Authority to Restrict DIF Dividends (§ 332): Section 332 authorizes FDIC to suspend dividends at its discretion from the Deposit Insurance Fund (DIF) when the DIF exceeds a reserve ratio of 1.35%, unless its reaches its maximum reserve ratio of 1.50% (in which case a dividend will presumably be required). (Note: at least in theory—since the DIF currently has negative equity and is not expected to be restored to its normal operating level until at least 2017—the DIF’s must be restored to its new operating level, which will be 1.35% of insured deposits by the year 2020.) FDIC is required to do a rulemaking on this new authority.

o Enhanced “Consultation” Authority (§ 333): Section 333 authorizes FDIC to require “additional consultations” with FDIC-insured institutions (likely meaning on-site examinations) at is discretion. This is presumably intended to address situations where, in the past, OCC and OTS have denied FDIC access to the books and records of institutions which were primarily examined by OCC or OTS (such as WaMu, prior to its failure).

o Ratio requirements to reflect new assessment base (§ 334):

Minimum Reserve Ratio: Increases the DIF’s normal operating reserve ratio to 1.35% relative to insured deposits or, presumably at FDIC’s discretion, a comparable reserve ratio relative to total assets. FDIC must publish reserve ratios relative to both insured deposits and total assets for at least five years.

Offset for Small Institutions: When setting assessments, FDIC is instructed to “offset” the impact of the new reserve requirement on institutions with fewer than $10 billion in assets.

1.35% DIF Reserve Ratio by 2020: FDIC is required to raise the DIF’s reserve ratio to 1.35% of insured deposits by September 30, 2020. Presumably the DIF will not need to actually operate near the 1.35% reserve ratio level until either 2020 or the completion of its restoration plan (which may conclude as soon as 2017). Currently, the DIF has negative equity.

o Permanent increase in deposit and share insurance (§ 335):

Bank and thrift deposit insurance will be permanently increased to $250,000. The increase in deposit insurance also applies to institutions that were under FDIC receivership or conservatorship from January 1, 2008 to October 3, 2008.

Credit union NCUSIF insurance will also be permanently increased to $250,000. The NCUSIF deposit insurance level increase will not receive any retroactive application (i.e. none prior to the October 3, 2008 “temporary” increase to $250,000 which has now been made permanent).

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o CFPB Director on FDIC Board of Directors ex officio (§ 336):

The Director of CFPB will replace that Director of OTS as an ex officio member of the FDIC Board of Directors.

• Subtitle D – Other Matters

o Thrift Branching Grandfather Clause (§ 341):

For thrifts which convert to commercial banks, the institution may continue to operate its current branches and establish, acquire, or operate additional branches in the states where any of its current branches are located, even if the Federal Deposit Insurance Act, Bank Holding Company Act, and/or state law would not typically permit such an arrangement.

o Office of Minority and Women Inclusion (§ 342):

Each federal financial regulatory agency, including NCUA, will be required to establish an Office of Minority and Women Inclusion which will be responsible for promoting diversity in the federal agency’s management, employment, and business activities, including with respect to contracts with that agency (e.g., encouraging NCUA to make contracts with minority-owned and women-owned businesses). NCUA and other agencies must establish these offices within 6 months of passage. Each agency’s office will have a Director.

Each agency’s office will submit an annual report to Congress.

The agencies in question include the Departmental Offices of the Treasury, FDIC, FHFA, Federal Reserve Banks, the Federal Reserve Board, NCUA, OCC, SEC, and the CFPB.

o Insurance of transaction accounts (§ 343):

Non-interest-bearing NCUSIF-insured credit union transaction accounts—e.g., share draft accounts which do not pay dividends—are fully insured (i.e. without a maximum amount of deposit insurance) from approximately July 21, 2010 (the date of enactment of Dodd-Frank) to January 1, 2013. There does not appear to be any requirement that such non-interest bearing transaction accounts be for business purposes, meaning that this unlimited deposit insurance can likely apply to any non-interest bearing share draft account insured by the NCUSIF.

There are similar provisions for FDIC-insured transaction accounts, but the FDIC provisions will be in effect from December 31, 2010 until January 1, 2013.

• Subtitle E – Technical and Conforming Amendments

o Federal Credit Union Act (§ 362):

References to the OTS and the Federal Savings and Loan Insurance Corporation have been removed.

o FIRREA Minority-Owned Depository Institutions Report Now Applies to NCUA (§ 367):

Background: One provision of 1989’s FIRREA, 12 U.S.C. § 1463 note, requires an interagency annual report to Congress on the efforts of federal banking regulators to preserve the existence of minority-owned depository institutions.

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NCUA: Section 367 amends 12 U.S.C. § 1463 note from FIRREA to make NCUA one of the agencies which must consult each other on the minority-owned institutions preservation issue and jointly issue this report. Section 367 also removes references to the OTS in this authority.

TITLE IV—REGULATION OF ADVISERS TO HEDGE FUNDS AND OTHERS

• Tile IV eliminates the “private adviser” exemption of the Investment Advisers Act of 1940 and establishes new reporting and examination requirements for hedge funds.

TITLE V—INSURANCE

• Title V establishes a Federal Office of Insurance and sets new rules for reinsurance and nonadmitted

insurance.

TITLE VI— IMPROVEMENTS TO REGULATION OF BANK AND SAVINGS ASSOCIATION HOLDING COMPANIES AND DEPOSITORY INSTITUTIONS

o Short title and Definition (§§ 601 – 602):

A “commercial firm’’ is defined as having the annual gross revenues derived by the company and all of its affiliates from activities that are financial in nature (as defined in section 4(k) of the BHC Act of 1956, such as “lending”), “and if applicable, from the ownership or control of one or more insured depository institutions, represent less than 15 percent of the consolidated annual gross revenues of the company.”

• In other words, a “commercial firm” is one which derives 85% or more of its gross revenue from non-financial business activities.

o Moratorium and study on Certain Non-Bank Banks (§ 603):

Section 603 establishes a moratorium on deposit insurance for an industrial bank (a/k/a an industrial loan company), a credit card bank (i.e. a bank which does credit card lending as its only business activity), or a trust bank that is directly or indirectly owned or controlled by a commercial firm after November 23, 2009.

Under current law, a company may own one of these institutions without becoming subject to the Bank Holding Company Act and that Act’s restrictions on non-financial activities. For example, the retailer Target Corporation owns both a credit card bank (Target National Bank, which issues Target credit cards) and an Industrial Bank (Target bank, which has Utah industrial bank charter and primarily does credit and debit card processing for Target).

This moratorium also applies to changes in control as well as to de novo charters, except with respect to supervisory mergers, acquisitions of an entire commercial firm, and some other situations.

Sunset Provision: The moratorium will end three years from the date of enactment.

GAO Study: There will be a GAO study on these institutions, which will also study the potential effects of making the Bank Holding Company Act apply to savings and loan holding companies (especially with respect to the few remaining unitary thrifts which remain in existence under grandfathered authority).

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o Reports and examinations of holding companies; regulation of functionally regulated subsidiaries (§ 604):

The Fed will have authority to regulate functionally regulated subsidiaries of BHCs and thrift holding companies, likely meaning subsidiaries which provide lending or other financial services (such as a mortgage company subsidiary of a bank holding company). The Fed will use existing reports and can examine such institutions, and can work with other regulators such as the CFTC and SEC.

o Assuring consistent oversight of permissible activities of depository institution subsidiaries of holding companies (§ 605):

A nondepository institution subsidiary of a depository institution holding company (whether a bank holding company, a thrift holding company, or another type of holding company owning an FDIC-insured institution) will be examined under standards similar to those which apply to the activities of the lead insured depository institution of the depository institution holding company.

o Requirements for financial holding companies to remain well capitalized and well managed (§ 606):

Amends the Bank Holding Company Act to require to insert “well capitalized and well managed.”

o Standards for interstate acquisitions (§ 607):

The BHC Act of 1956 is amended for bank acquisitions and the FDIC Act for interstate mergers to replace “adequately capitalized and adequately managed” with “well capitalized and well managed.”

o Enhancing existing restrictions on bank transactions with affiliates, and eliminating exceptions for transactions with financial subsidiaries (§§ 608 - 609):

The Federal Reserve Act is amended so that the definition of a covered transaction for affiliate transactions has been expanded to include transactions with credit exposure to the affiliate, repurchase, securities, and other derivatives.

o Lending limits applicable to credit exposure on derivative transactions repurchase agreements, reverse repurchase agreements, and securities lending and borrowing transactions (§ 610):

The lending limits for national banks will also include and account for these transactions and other derivatives, one year after the transfer date.

o Consistent treatment of derivative transactions in lending limits (§ 611):

The lending limits for state banks will also include and account for derivatives in the same manner as national banks, 18 months after the transfer date.

o Restriction on conversions of troubled banks (§ 612):

A national bank may not convert to a state bank or state thrift if there is a cease and desist order or a memorandum of understanding with the OCC. There are some limited exceptions if the federal banking regulator receives a notice from the bank to address the concern, and does not object. There are similar provisions for

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conversions from state banks and conversions of thrifts to state banks, with similar conditions, with certain exceptions.

o De novo branching into States (§ 613):

National Banks: National banks may now branch into a state where it does not have operations if “the law of the State in which the branch is located, or is to be located, would permit establishment of the branch, if the national bank were a State bank chartered by such State.”

State Non-Member Banks: Section 613 adds virtually identical language to the Federal Deposit Insurance Act, 12 U.S.C. § 1828, which will allow interstate branching on virtually the same grounds as national banks to state-chartered banks which are not members of the Federal Reserve System.

• Liberalization of Bank Interstate Branching: Since presumably all states have state banking acts allowing institutions chartered by the state in question to establish branches within that home state, it seems likely that section 613 will significantly liberalize both national bank and state-chartered non-member bank interstate branching.

o Lending limits to insiders (§ 614):

The definition of an extension of credit in the Federal Reserve Act with respect to insider lending limitations has been broadened to include derivative transactions repurchase agreements, reverse repurchase agreements, and securities lending and borrowing transactions.

o Limitations on purchases of assets from insiders (§ 615):

An FDIC-insured depository institution may not purchase or sell assets to insiders, unless the transaction is on “market terms,” is in an amount less than 10% of the institution’s capital stock and surplus, and a majority of uninterested directors approve the transaction in advance.

o Regulations regarding capital levels (§ 616):

Congressional Mandate of Countercyclical Capital Regulations: Section 616 amends the Bank Holding Company Act and the Home Owners Loan Act to order the federal banking regulators (particularly the Fed) to revise their capital requirements for holding companies so that capital requirements for BHCs and thrift holding companies should be countercyclical, consistent with safety and soundness. This also applies to FDIC-insured depository institutions under the International Lending Supervision Act of 1983; OCC and the FDIC will presumably be part of this aspect of the rulemaking.

Source of strength – The BHC or thrift holding company will be considered the source of strength for any subsidiary of the BHC or thrift holding company that is a depository institution.

• Other Holding Companies: Commercial enterprises which own depository institutions but which are not bank holding companies or thrift holding companies (e.g., Target Corporation) must also backstop its depository institution subsidiaries as a source of strength.

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o Elimination of elective investment bank holding company framework (§ 617):

The Exchange Act of 1934 is amended to eliminate the “investment bank holding company” authority. These investment bank holding companies—which prior to 2008 included Lehman Brothers and Bears Sterns, as well as Goldman Sachs, Morgan Stanley, and Merrill Lynch—were regulated for safety and soundness by the SEC. Unlike the Fed, OCC, OTS, and FDIC, the SEC eliminated an absolute leverage ratio for this type of holding company under Basel II.

o Securities holding companies (§ 618):

The Fed-supervised “securities holding company” is intended to replace the SEC-supervised “investment bank holding company.” The Fed may supervise Securities Holding Companies and prescribe capital adequacy and other risk management standards, and also examine these companies. Such companies must register with the Fed.

o Prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds (§ 619):

A banking entity or a supervised nonbank financial company may not engage in “proprietary trading” or having an ownership interest in a hedge fund or private equity fund. There are limited circumstances where a supervised bank may sponsor a hedge fund or private equity, and illiquid funds.

“Proprietary trading” is a broadly defined term and includes transactions to purchase or sell, or otherwise acquire or dispose of, any security, any derivative, any contract of sale of a commodity for future delivery.

Study: The Financial Stability Oversight Council will conduct a study on proprietary trading and bank relationships with hedge funds, etc.

Rulemaking: Nine months after the study, the Fed, OCC, FDIC, SEC, and CFTC will conduct a rulemaking to precisely define what “proprietary trading” is and how “proprietary trading” and certain types of hedge fund relationships are prohibited.

Effective Date: The effective date is the earlier of either 12 months after the adoption of final regulations or two years from the date of enactment. Financial institutions that are affected will have two additional years to divest their holdings and the Fed may grant an extended exemption up to five years.

De minimus exception – A bank may invest no more than three percent of its Tier 1 capital in hedge funds and private equity. There are other restrictions, and such investments may not be greater than three percent of the total ownership interests of the hedge funds or private equity.

o Study of bank investment activities (§ 620):

There will be a joint Fed-OCC-FDIC study on the types of activities that U.S. banking entities engage in and the risks that these activities present to the financial system. The agencies must issue this report not later than 18 months after enactment of Dodd-Frank, with a report the Council and Congress.

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o Conflicts of interest (§ 621):

The SEC must issue regulations prohibiting securities underwriters and other entities from having material conflicts of interest with investors.

o 10% Concentration limits on large financial firms (§ 622):

Section 622 prohibits any financial company from controlling more than 10% of the aggregate liabilities of the U.S. financial sectior.

A financial company—such as a bank holding company or a bank, etc.—may not merge or consolidate with, acquire all or substantially all of the assets of, or otherwise acquire control of, another company, if the total consolidated liabilities of the acquiring financial company would exceed 10 percent of the aggregate consolidated liabilities of all financial companies.

• This 10% of liabilities limitation would not apply in the case of a supervisory merger and similar situations.

The Council must conduct a study and rulemaking to implement this authority.

This 10% of liabilities prohibition does not appear to affect the pre-existing prohibition on a bank holding company controlling more than 10% of FDIC-insured deposits in the U.S. See 12 U.S.C. § 1842(d)(2).

o Interstate merger transactions (§ 623):

The FDIC Act, the BHC Act of 1956, and the Home Owner’s Loan Act are amended so that an interstate merger with depository institutions that are in default or in danger for default would have an exception to general limit of 10% of the total deposits of the U.S.

o Qualified thrift lenders (§ 624):

Restrictions on Dividends: If a federal thrift fails to become or remain a qualified thrift lender (QTL), it may not pay dividends, with some exceptions.

QTL Test Background: The QTL test generally requires a federal thrift to maintain at least half of its assets in real estate and consumer loans (other than auto loans) or, if the thrift has a holding company, two-thirds of its assets in real estate or consumer loans (other than auto loans).

QTL Test Relationship to Interstate Branching: Prior to Dodd-Frank, the primary sanction on a federal thrift for failing the QTL test was a restriction on its interstate branching authority (since the principal advantage of the federal thrift charter over the national bank charter was more liberal interstate branching rules). This provision appears intended to increase the importance of the QTL test for federal thrifts, even as Dodd-Frank is also liberalizing the interstate branching rules for national banks and state banks to give those banks interstate branching parity with federal thrifts.

o Treatment of dividends by certain mutual holding companies (§ 625):

Notice Prior to Declaring a Dividend: The Home Owner’s Loan Act is amended so that each subsidiary of a mutual holding company that is a savings association shall give notice to the appropriate Federal banking agency and the Fed, not later than 30

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days before the date of a proposed declaration of a dividend. If there is no notice, the dividends are invalid.

Mutual Holding Company’s Right to Waive A Dividend (so that the dividend may go to stockholder): A mutual holding company may waive the right to receive any dividends declared by its subsidiary if certain conditions are met, such as no insider holding of stock, notice, resolution, and other standards. In such a scenario, the dividends will presumably go to stockholders in a related stock thrift holding company (which would generally be owned by the mutual holding company as part of a three-tiered mutual holding company structure). Generally, the Federal banking agency will consider waived dividends to determine the appropriate exchange ratio in the event of a full conversion to stock form.

o Unitary Thrift Intermediate Holding Companies (§ 626):

Unitary Thrift Background: Prior law allowed a commercial company to own a single thrift—known as a unitary thrift—without being subject to the Bank Holding Company Act or the usual rules for thrift holding companies. Authority for new unitary thrifts was eliminated in the 1990s but several unitary thrifts continue to exist (e.g., GE Money Bank, owned by General Electric) under a grandfather clause.

Fed May Require an Intermediate Holding Company: Section 626 amends Home Owner’s Loan Act so that the Fed may require a grandfathered unitary thrift to establish or conduct all or a portion of its financial activities in an intermediate holding company. Nonfinancial activities and internal financial activities are excluded from the intermediate holding company. The commercial company which ultimately owns the intermediate holding company and the grandfathered unitary thrift will be required to backstop the intermediate holding company as a source of strength.

o Interest-bearing transaction accounts authorized (§ 627):

Interest may be paid on all FDIC-insured demand deposit accounts. Similar amendments will be made in the FDIC Act, the Federal Reserve Act, and the Home Owner’s Loan Act to eliminate the existing prohibition on payment of interest on demand deposit accounts in those laws.

o Credit card bank small business lending (§ 628):

The BHC Act of 1956 is amended to allow credit card banks (which only issue credit cards, and which Dodd-Frank section 603 has placed a moratorium on) to issue credit cards to small businesses without their holding companies (e.g., Target Corp.) being subject to the Bank Holding Company Act. Formerly, a credit card bank could only issue credit cards to consumers.

TITLE VIII—PAYMENT, CLEARING, AND SETTLEMENT SUPERVISION

• Systemically Important Payments System Institutions (§§ 802, 803, 804, 805):

o Uniform Risk-Management for Payments, Clearing, and Settlement: In effort to mitigate systemic risk in the financial system and promote financial stability, the Fed must issue rules to promote uniform standards for the management of risks by systemically important financial market utilities and for the conduct of systemically important payment, clearing, and settlement activities by financial institutions. The Fed will have an enhanced role in the supervision of risk management standards for systemically important payment, clearing, and settlement activities by financial institutions.

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o “Systemically Important:” A “systemically important” payment, clearing, or settlement activity is one in which a disruption to or the failure of could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.

o Corporate Credit Unions: Although this authority does not specifically address corporate

credit unions, it is conceivable that at least some corporate credit unions could be designated as systemically important payments systems utilities and be subject to these Fed regulations and possibly Fed supervision to some degree.

TITLE IX—INVESTOR PROTECTIONS AND IMPROVEMENTS TO THE REGULATION OF SECURITIES

• Subtitle C—Improvements to the Regulation of Credit Rating Agencies

o Generally (§§ 931-932):

Findings of Congress: Congress finds that the activities and performances of

credit rating agencies (CRAs) are matters of public interest because of the systemic importance of, and reliance placed on, credit ratings. The activities of CRAs are fundamentally commercial in character and should be subject to the same standards of liability and oversight as for auditors, securities analysts, and investment bankers.

Office of Credit Ratings: Creates a new Office of Credit Ratings within the SEC to

administer the Nationally Recognized Statistical Rating Organization (NRSRO) rules for determining accurate ratings and to ensure ratings are not unduly influenced by conflicts of interest.

• Examinations: This office will be required to examine each NRSRO at least

annually.

NRSRO Fair Dealing Requirement: Requires SEC to set forth rules to prevent the sales and marketing considerations of a NRSRO from influencing the ratings it produces. NRSROs will need to:

• Publicly disclose information on initial and subsequent ratings for each type

of obligor, security, and money market instruments. This will allow ratings-users to evaluate accuracy and compare performance among different NRSROs.

• Disclose the procedures and methodologies used, including: underlying

assumptions; data relied on; uncertainty of the rating; and any conflicts of interest.

• Maintain a board of directors; at least half of which is independent of the

NRSRO.

o Additional Requirements of Subtitle C (§§ 933, 934, 935, 936, 938, 939):

Duty required regarding civil liability: A CRA can be held liable in a civil action for knowingly or recklessly failing to either: (1) conduct a reasonable investigation of the rated security with respect to the facts it relied on; or (2) to obtain reasonable verification of such facts.

NRSRO Employee Accreditation: Any person employed by a NRSRO to perform

credit ratings must: (1) meet standards of training, experience, and competence necessary to produce accurate ratings; and (2) be tested for knowledge of the credit rating process.

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NRSRO Internal Controls: Each NRSRO must establish, maintain, and enforce

written policies and procedures that: (1) assess the probability that an issuer will default or fail to make timely payments; (2) define and disclose the meaning of any symbol used by the NRSRO to denote a rating; and (3) apply such symbols consistently.

Non-Issuer Sources of Information: NRSROs must consider information from

sources other than the issuer when assigning credit ratings.

Duty to Report Criminal Fraud: An NRSRO must report evidence of criminal fraud by an issuer to “appropriate law enforcement and regulatory authorities . . .”

NCUA Must Establish Its Own Credit Ratings: Within one year of enactment,

“each Federal agency”—likely including NCUA as well as all other federal agencies—must review any of its regulations that require an assessment of the credit-worthiness of a security, and then it must substitute a standard of credit-worthiness established by that agency.

• NCUA Current Credit Ratings Usage: NCUA rules currently use NRSRO

credit ratings with respect to permissible natural-person FCU investments in private-label mortgage-backed securities and permissible corporate credit union investments.

SEC Study: Requires an SEC study on: (1) the rating process for asset-backed

securities and the conflicts of interest associated with the issuer-pay and subscriber-pay models; (2) the feasibility of establishing a system in which a public or private entity assigns NRSROs to determine the ratings of asset-backed securities; and (3) an alternative means for compensating NRSROs that would create incentives for accurate ratings.

• Subtitle D—Improvements to the Asset-Backed Securitization Process (ABS)

o Regulation of Credit Risk Retention and Disclosures for Asset-Backed Securities (§§

941, 942, 946):

Application of Risk-Retention Rules to Credit Unions: These rules will likely apply to credit unions as “originators” and possibly also as “securitizers” given the broad definition of “securitzer” even though credit unions do not generally issue securities. The exact definitions will be promulgated via a joint rulemaking involving SEC, OCC, the Fed, FDIC, HUD, and FHFA. NCUA will not be involved in this rulemaking.

• FDIC-Insured Institutions: OCC, FDIC, and the Fed, with SEC, will set special rules for FDIC-insured institutions.

• Credit Unions: Credit unions will likely be subject to the general risk-retention rules for non-FDIC-insured institutions, however, as discussed below, most credit union originated mortgages will likely fall within the exemption for “qualified residential mortgages.”

Risk-Retention: These agencies must issue regulations requiring each securitizer to retain an economic interest in a portion of the credit risk of any:

• Asset that the securitizer, through the issuance of an ABS, transfers, sells,

or conveys to a third party; and

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• Residential mortgage asset that the securitizer, through the issuance of an ABS, transfers, sells, or conveys to a third party.

Regulations: These regulations must:

• Require a securitizer to retain at least 5% of the credit risk of certain assets;

• Establish standards for retention of an economic interest with respect to

collateralized debt obligations (CDOs), securities collateralized by CDOs, and similar instruments collateralized by other ABS; and

• Exemption for FHA and VA Guaranteed Mortgages: Totally or partially

exempts the securitization of an asset issued or guaranteed by the U.S. or a U.S. agency, as appropriate in the public interest and for the protection of investors. This should apply to mortgages guaranteed by the Federal Housing Agency and the Veterans Administration, as well as possibly other guarantee programs.

o Not Applicable to Fannie and Freddie: The exemption for

guarantees by the U.S. or a U.S. agency does not apply to Fannie Mae and Freddie Mac, however, most if not all Fannie and Freddie securitized loans will likely fall within the exemption for “qualified residential mortgages” discussed below.

Exemption for “Qualified Residential Mortgages:” “Qualified residential mortgages,” as defined in Title XIV of Dodd-Frank, below, are to be exempted from the risk retention requirements. In defining “qualified residential mortgage,” the Federal agencies must take into consideration underwriting and product features that historical loan performance data indicate result in a lower risk of default.

• GSE Conforming Loans: It is likely that most, if not all, mortgages sold to government sponsored enterprises (GSE) such as Fannie Mae, Freddie Mac, and Ginnie Mae (to which the exemption for FHA and VA guaranteed loans, above, would apply as well) will be “qualified residential mortgages” which will be exempt from the risk-retention requirements.

• Other Qualified Residential Mortgages: Other residential mortgages which meet the TILA § 129C definition of “qualified mortgages” (see below) would also presumably be exempt from the retention requirements. These “qualified mortgages” would generally have relatively low interest rates (but could be either fixed rate or adjustable) and would either not have prepayment penalties or would have prepayment penalties which would phase out in a relatively short period of time.

• Credit Unions: It is likely that most credit union originated mortgages will fall under the “qualified residential mortgage” risk-retention exemption.

SEC Regulations: The SEC must issue regulations requiring each issuer of ABS to disclose, for each tranche or class of security, information regarding the assets backing that security. These regulations must:

• Set standards for the format of the data provided by issuers of an ABS,

designed to facilitate comparison of such data across securities in similar types of asset classes; and

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• Require issuers of ABS, at a minimum, to disclose asset-level or loan-level data, if such data are necessary for investors to independently perform due diligence. This will presumably apply to consumers’ FICO scores, which SEC regulations did not require ABS securitizers to disclose to investors.

ABS Definition: An “asset-backed security” is a fixed-income or other security

collateralized by any type of self-liquidating financial asset that allows the security holder to receive payments that depend primarily on cash flow from the asset.

Securitizer Definition: The overly broad statutory definition of a “securitizer” is: (1)

an issuer of an ABS; or (2) a person who organizes and initiates an ABS transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuer. It is likely that the regulation will narrow the definition of “securitizer” to some degree, thereby possibly excluding credit unions.

Originator Deinfiton: An “originator” is a person who: (1) through the extension of

credit or otherwise, creates a financial asset that collateralizes an ABS; and (2) sells an asset to a securitizer.

• Subtitle E—Accountability and Executive Compensation (§§ 951, 952, 953, 954, 956):

o Credit Union Executive Compensation Reporting to NCUA (§ 956): Of this subtitle, only

the “enhanced compensation structure reporting” requirements in section 956 will apply to credit unions, and then only to credit unions with more than $1 billion in assets. This title will likely apply to privately-insured credit unions with more than $1 billion as well as to federally-insured credit unions above that threshold.

Reporting Requirements: Large credit unions, BHCs, banks, and certain other financial institutions must provide the relevant federal regulator with executive compensation information sufficient to allow that agency to determine whether the compensation:

• is “excessive” or

• could lead to “material financial loss to the financial institution.”

Rulemaking Within 9 Months: Section 956 requires a joint rulemaking to define the reporting requirements and the standards for “excessive” or dangerous compensation structures which will be done by NCUA, the Fed, OCC, FDIC, OTS (for a short period before OTS is merged into OCC), SEC, and FHFA within 9 month of Dodd-Frank’s passage.

Small Institutions Exempted: This reporting provision and associated rules will not apply to covered financial institutions—including credit unions—with assets of less than $1 billion.

o Shareholder Vote on Public Company Executive Compensation Disclosures : Requires any proxy statement for public companies, subject to SEC rules, which seeks shareholder approval of acquisitions, mergers, consolidations or proposed sale of all or substantially all of a company’s assets to include:

(1) a disclosure regarding agreements by the person soliciting proxies to make “golden parachute” payments to the named executive officers of the company or the acquirer; and

(2) a separate nonbinding resolution subject to shareholder vote to approve such agreements, unless previously voted on.

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o Public Company Compensation Committees: The SEC must issue rules that require each issuer of securities to have fully independent compensation committees, based on new independence standards that require consideration of the source of compensation for the director and whether the director is affiliated with the issuer.

o Public Company Disclosure on Executive Compensation vs. Results: Requires each

issuer of securities to disclose in their annual proxy statements the relationship between executive compensation actually paid and a company’s financial performance, taking into account any change in the value of the company’s stock and dividends and other distributions.

• Subtitle I—Including Provisions on NCUA and Other Federal Agency Inspectors General

o Amendment to Definition of FDIC Material Loss for FDIC Inspector General Reviews

(§987): Section 987 makes amendment to the Federal Deposit Insurance Act with respect to FDIC insurance losses which are substantially similar to those in section 988 relating to the NCUSIF (below)—such as requiring a semi-annual review of all FDIC losses—except that the threshold for FDIC material loss reviews is higher, as follows, but becomes lower over time:

FDIC “Material Loss” 1/1/10-12/31/2011: more than $200 million

FDIC “Material Loss” 1/1/12-12/31/13: more than $150 million

FDIC “Material Loss” after 1/1/14: more than $100 million

o Amendment to definition of material loss and nonmaterial losses to the NCUSIF for purposes of NCUA Inspector General reviews (§ 988):

Increase of “Material Loss Review” Threshold: Section 988 raises one of the two prongs for the “material loss review” threshold under the FCUA, from $10 million to $25 million. If a NCUSIF loss is “material,” the NCUA inspector general (IG) must perform a “material loss review” and submit it to the NCUA Board.

• Definition of a Material Loss: a loss to the NCUSIF is “material” if it is:

o (1) more than $25 million; and

o (2) more than 10% of the credit union’s total assets at the time NCUA initiated emergency assistance under FCUA § 208 or was appointed liquidating agency.

NCUA IG Semi-Annual Report on All NCUSIF Losses: Section 988 amends the FCU Act to require the NCUA IG to review any losses (material or non-material) to the NCUSIF and issue a semi-annual report to Congress and GAO. In addition, the GAO must review the IG report for any such losses and make recommendations to improve the supervision of insured credit unions.

TITLE X—BUREAU OF CONSUMER FINANCIAL PROTECTION

• Definitions (§ 1002):

o The following consumer laws are transferred to the jurisdiction of the Bureau of Consumer

Financial Protection (CFPB):

Alternative Mortgage Transaction Parity Act of 1982; Consumer Leasing Act of 1976;

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Electronic Fund Transfer Act; Equal Credit Opportunity Act; Fair Credit Billing Act; Fair Credit Reporting Act; Home Owners Protection Act of 1998; Fair Debt Collection Practices Act; Federal Deposit Insurance Act (§§ 43(b)–(f)); Gramm-Leach-Bliley Act (§§ 502–509); Home Mortgage Disclosure Act of 1975; Home Ownership and Equity Protection Act of 1994; Real Estate Settlement Procedures Act of 1974; S.A.F.E. Mortgage Licensing Act of 2008; Truth in Lending Act; Truth in Savings Act; Omnibus Appropriations Act (§ 626); and Interstate Land Sales Full Disclosure Act.

• Subtitle A—Bureau of Consumer Financial Protection

o Establishment of the Bureau of Consumer Financial Protection (§ 1011):

The CFPB is an independent body established in the Federal Reserve System, tasked with regulating consumer financial products or services under Federal consumer financial laws.

The President will appoint and the Senate will confirm the Director of the CFPB. The Director must be a U.S. citizen and will serve a five-year term.

o Executive and Administrative Powers (§ 1012):

The CFPB is authorized to establish general policies regarding its executive and administrative functions, including: implementing the consumer financial laws through rules, orders, guidance, interpretations and statements of policy, examinations, and enforcement actions.

The Fed generally may not intervene in any matter before the Director, and no rule or order of the CFPB will be subject to approval or review of the Fed.

o Administration (§ 1013):

The Director may set the number of, and appoint and direct, all employees of the CFPB.

The CFPB must appoint an ombudsman to act as a liaison between the CFPB and anyone with an issue related to the CFPB resulting from its regulatory activities.

The Director must establish certain units and offices, including: research unit; community affairs unit; collection of complaints unit; Office of Fair Lending and Equal Opportunity; Office of Financial Education; and Office of Financial Protection for Older Americans.

Regarding the collection of complaints, the CFPB must share consumer complaint information with prudential regulators, the FTC, and other Federal and State agencies.

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o Consumer Advisory Board (§ 1014):

The Director must establish a Consumer Advisory Board to advise the CFPB in its activities; the Board must meet at least twice a year.

Board members should include experts in: consumer protection, financial services, community development, fair lending, and civil rights. In addition, the Board should include representatives of depository institutions that primarily serve underserved communities and representatives of communities that have been significantly impacted by higher-priced mortgage loans.

o Coordination (§ 1015):

The CFPB must coordinate with the SEC, CFTC, FTC, and other Federal agencies and State regulators to promote consistent regulatory treatment.

o Appearances Before and Reports to Congress (§ 1016):

The CFPB must provide Congress with a report twice a year on the significant problems faced by consumers in obtaining financial products, the significant rules and orders adopted by the CFPB, analysis of complaints about financial products, and any public supervisory and enforcement actions the CFPB was involved in.

o Funding; Penalties and Fines (§ 1017):

Annual funding for the CFPB will come from the combined earnings of the Federal Reserve System. The exact amount will be determined by the Director but cannot exceed approximately 10% of the total operating expenses of the Federal Reserve System. If the amount provided is insufficient, the Director can request up to an additional $200 million each year through 2014 from the Treasury’s General Fund.

A separate “Civil Penalty Fund” will be established. The Fund will be funded by any civil penalties the CFPB obtains against any covered persons for violation of Federal consumer financial laws. Payments from the Fund will be made to the victims of such violations.

• Subtitle B—General Powers of the Bureau

o Purpose, Objectives, and Functions (§ 1021):

The primary functions of the CFPB are: to collect, investigate, and respond to consumer complaints; supervise for compliance with Federal consumer financial law, and take enforcement action for violations; and issue rules, orders, and guidance implementing consumer financial law.

o Rulemaking Authority (§ 1022):

The CFPB is authorized to exercise its authorities under consumer financial law to

administer, enforce, and otherwise implement the provisions of the Federal consumer financial law.

The CFPB must consult with the appropriate prudential regulators or other Federal

agencies prior to proposing a rule and during the comment process regarding consistency with prudential, market, or systemic objectives administered by such agencies.

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The CFPB may exempt any class of covered persons or products from any provision of this title as the CFPB determines necessary to carry out its purposes and objectives, taking into consideration: total assets of covered persons; volume of transactions involving consumer financial products in which the class of covered persons engages; and existing provisions of law which are applicable to the consumer financial project and the extent to which such provisions provide consumer adequate protections.

The CFPB has exclusive authority to prescribe rules subject to those provisions of

law.

The CFPB may gather and compile information from a variety of sources, including: examination reports concerning covered persons, consumer complaints, and review of available databases.

The CFPB will have access to any report of examination made by a prudential

regulator or other Federal agency.

A prudential regulator, a State regulator, or any other Federal agency having jurisdiction over a covered person will have access to any report of examination made by the CFPB.

The CFPB must review each significant rule or order it adopts, and must allow for

public comment prior to publishing a report of its assessment.

o Review of Bureau Regulations (§ 1023):

On petition of a member agency of the Financial Stability Oversight Council (Council), the Council may set aside a final regulation prescribed by the CFPB if the Council decides the regulation would put the safety and soundness of the banking system or the stability of the financial system at risk.

A stay will be issued upon a 2/3 affirmative vote of the Council.

o Supervision of Nondepository Covered Persons (§ 1024):

The CFPB has exclusive examination and enforcement authority for Federal

consumer financial laws of a nondepository covered person who meets any of the following:

• Originates or services certain real estate loans, or provides loan

modification or foreclosure relief services;

• Is a “larger participant” of a market for other consumer financial products or services (in determining activity levels activities of affiliated companies [other than insured institutions or credit unions] must be aggregated);

• For whom the CFPB has reason to believe is engaged in conduct that poses risks to consumers;

• Provides private education loans; or

• Provides payday loans.

A service provider to depository institutions described in this section is subject to the authority of the CFPB under this section.

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o Supervision of Very Large Banks, Savings Associations, and Credit Unions (§ 1025):

The CFPB has exclusive examination and enforcement authority for Federal consumer financial laws of depository institutions with more than $10 billion in total assets.

The CFPB must coordinate its supervisory activities with those of the prudential

regulator and the State bank regulatory authorities, including with respect to examination schedules.

The CFPB must consider any concerns raised by any Federal agency, and if the

CFPB does not act on a recommendation regarding enforcement within 120 days, the other agency may initiate an enforcement proceeding.

A service provider to depository institutions described in this section is subject to the

authority of the CFPB under this section.

If the proposed supervisory determinations of the CFPB and a prudential regulator are inconsistent with each other, the depository institution may require a joint statement of coordinated supervisory action. The CFPB and the prudential regulator must provide the joint statement within 30 days of the request.

o Other Banks, Savings Associations, and Credit Unions (§ 1026):

Federally-insured credit unions and depository institutions with $10 billion or less in

total assets are exempt from most CFPB examinations as well as CFPB enforcement. The Director may require reports as necessary to support the CFPB in implementing Federal consumer financial law. In addition, the CFPB may include examiners on a sampling basis of the examinations preformed by the prudential regulator to assess compliance with consumer financial law.

The prudential regulator must provide all reports, records, and documents related to

the examination process to the CFPB on a continual basis. In addition, the prudential regulator must involve the CFPB in the entire examination process.

The prudential regulator (NCUA in the case of a federally-insured credit union) will

retain enforcement authority.

If the CFPB has reason to believe an entity described in this section has engaged in a material violation of a Federal consumer financial law, the CFPB must notify the prudential regulator and recommend appropriate action.

A service provider to an entity described in this section is subject to the authority of

the CFPB under this section.

o Authority to Restrict Mandatory Pre-Dispute Arbitration (§ 1028):

The CFPB must conduct a study regarding the use of arbitration agreements for arbitration of any future disputes between covered persons and consumers in connection with consumer financial products.

The CFPB may prohibit or limit the use of such agreements if it finds this action to

be in the public interest and for the protection of consumers.

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• Subtitle C—“Specific CFPB Authorities”

o Prohibiting Unfair, Deceptive, or Abusive Acts or Practices (§ 1031):

The CFPB may take any action authorized under its enforcement powers to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction for a consumer financial product or service.

The CFPB may prescribe rules to prohibit unfair, deceptive, or abusive practices.

“Unfairness” Definition – The CFPB may not declare an act as unfair or unlawful unless the CFPB has a reasonable basis to conclude the act is 1) likely to cause substantial injury to consumers, and is not reasonably avoidable by consumers, and 2) such substantial injury is not outweighed by benefits to consumers or protection.

“Abusive” Definition – The CFPB may not declare an act abusive, unless such act: (1) materially interferes with the consumer’s ability to understand the consumer financial product or service; (2) takes unreasonable advantage of lack of understanding of the consumer of material risks, costs, or conditions of the product or service; (3) there is an inability of consumer to protect the interests of the consumer in selecting such product or service; and (4) reasonable reliance by consumer on a covered person to act in interests of the consumer.

The CFPB shall consult with other federal agencies when appropriate.

A creditor may consider seasonal income with respect to extensions of credit secured by residential real estate or a dwelling in underwriting.

o Disclosures (§ 1032):

Generally, the CFPB may prescribe rules to ensure that financial products or services have accurate disclosures.

Model Disclosure – Model forms with clear and succinct language may be used, if applicable. Model forms should be validated with consumer testing.

Basis for Rulemaking – CFPB should consider all available evidence and costs and benefits of consumer products and services.

There is a safe harbor for a covered person that uses a model form.

The CFPB may permit a covered person to conduct a trial program to provide disclosures to consumer. CFPB may provide a safe harbor to the covered person for such program, and there may be limited public disclosures of some aspects of such trial programs.

Not later than 1 year after designated transfer date, for mortgage loan transactions, CFPB shall issue for public comment rules and disclosures to combine the required disclosures under the Truth in Lending Act and Sections 4 and 5 of RESPA.

o Consumer Rights to Access Information (§ 1033):

In general, covered persons should provide, upon request, to consumers detailing the consumer financial product or service, including information to the transaction, series of transactions, or to the account, including costs, charges, and usage data.

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Exceptions include information that is confidential and commercial, collected to prevent fraud, money laundering, or potentially unlawful conduct; required to be confidential by law; or not retrievable in the ordinary course of business.

There is no duty for covered person to maintain or keep records about customers.

The CFPB should prescribe standardized formats for information to consumers.

The CFPB shall consult with other federal banking agencies and the FTC when appropriate, to ensure that rules are substantially similar for covered persons, the rules account for covered persons doing business within and outside of the U.S, and do not require or promote a specific technology for compliance.

o Response to Consumer Complaints and Inquiries (§ 1034):

The regulator should have timely response to consumers, which include response to a complaint, response received from covered persons, and any follow-up action.

Covered persons should provide a timely response to the CFPB, financial prudential regulators, and any other agency with jurisdiction. A covered person should provide steps to respond to the inquiry, responses received from the consumer, and any follow-up action.

A covered person should provide information concerning the consumer financial product or service to consumers, with these exceptions: confidential and commercial, collected to prevent fraud, money laundering, or potentially unlawful conduct, required to be confidential by law; or any nonpublic or confidential information including confidential supervisory information.

The CFPB may enter into a Memorandum of Understanding (MOU) with other federal regulators that have jurisdiction over the covered person, including the Secretaries of HUD and Education.

o Private Education Loan Ombudsman (§ 1035):

The Ombudsman in the CFPB will provide timely assistance to borrowers of private education loans.

The availability and functions of the Ombudsman should be made publicly available to borrowers and other entities involved in private student loans.

The Ombudsman should:

• Receive, review, and attempt to resolve informally complaints from borrowers, and attempts to resolve such complaints with the Department of Education, and other entities involved in private student loans;

• Not later than 90 days after designated transfer date, establish a memorandum of understanding with the student loan ombudsman established under 141(f) of the Higher Education Act of 1965, to coordinate and provide assistance to borrowers;

• Compile and analyze data on borrower complaints on private student loans;

• Make appropriate recommendations to the Director of the CFPB, Secretary of the Treasury, Secretary of Education, Committee on Banking, Housing,

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and Urban Affairs, and the Committee on Health, Education, Labor, and Pensions of the Senate, and the Committee on Financial Services and the Committee on Education and Labor of the House of Representatives; and

• Provide Annual Reports that describe the activities and evaluate the effectiveness of the Ombudsman during the preceding year. Should submit this report to the Secretary of the Treasury, Secretary of Education, Committee on Banking, Housing, and Urban Affairs, and the Committee on Health, Education, Labor, and Pensions of the Senate, and the Committee on Financial Services and the Committee on Education and Labor of the House of Representatives.

o Prohibited Acts Under CFPB (§ 1036):

A covered person or service provider :

• May not offer a product or service that is not in conformity of federal consumer financial laws, or commit an act or omission that violates such laws, or engaging in any unfair, deceptive, or abuse act or practice;

• May not fail or refuse to provide any access to information in federal consumer financial law for consumers, establish or maintain records, or to make reports or provide information to the CFPB.

Any person:

• May not assist a covered person or service provider to violate the provisions of federal consumer financial law, or they will be in violation to the same extent as the person to whom assistance is provided.

• Subtitle D—“Preservation of State Law”

o Relationship of H.R. 4173 to State Laws Generally (§ 1041):

H.R. 4173 is not intended to preempt state consumer protection laws which provide “greater protection,” as defined by the bill.

However, H.R. 4173 is not intended to alter the preemptive effect of the existing “enumerated consumer laws” that CFPB will now have jurisdiction over.

o “State Action” Prompting CFPB Rulemaking: If a majority of states adopt resolutions asking CFPB to modify existing CFPB rules or establish new regulations, CFPB must issue a notice of proposed rulemaking or publish a notice in the Federal Register explaining why a proposed rule is not appropriate, based on the following considerations (§ 1041):

Whether the possible regulation would afford greater protection to consumers;

The relative costs and benefits (or lack thereof) to consumers of the possible regulation; and

Whether federal banking regulators (not including NCUA) think that the possible rule would be unsafe and unsound.

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o State Enforcement of H.R. 4173 (§ 1042):

Permits state attorneys general to bring civil actions to enforce the consumer protection provisions of H.R. 4173 and its regulations in federal or state court, if the relevant state attorney general also informs CFPB (CFPB can also join the case as a party).

State regulators may similarly sue state-chartered institutions to enforce H.R. 4173, also subject to informing CFPB, as well as bringing an administrative proceeding against state-chartered institutions.

There are special rules regarding national banks and federal thrifts, stating that state attorneys general can only sue these institutions to enforce CFPB regulations, not the underlying statutory provisions of H.R. 4173. This is likely because of the provisions in sections 1044-1047 setting forth special rules applicable to national banks and federal thrifts regarding preemption of state laws by regulation (these provisions do not apply to federal credit unions).

Federal credit unions are not specifically addressed, but likely are subject to the general civil action authority of the state attorneys general, rather than the special rules for national banks and federal thrifts.

o National Bank & Federal Thrift State Law Standards (§§ 1044–1047):

These provisions limit OCC’s ability to preempt state laws for national banks, federal thrifts, and subsidiaries thereof.

These provisions do not apply to federal credit unions.

OCC will likely be required to employ formal rulemaking (i.e. a trial-type administrative hearing presided over by the Comptroller of the Currency or an administrative law judge at which members of the public may introduce evidence) in order to preempt state consumer protection laws, under the following standards of judicial deference:

• Factual: “substantial evidence.”

• Legal: a “persuasiveness” deference standard modeled on Skidmore v. Swift & Co., which is less deferential to the agency than Chevron (i.e. “reasonableness”) deference.

OCC must review its preemption determinations at least once every 5 years and must periodically publish a list of all preemption determinations remaining in force.

This does not affect the ability of national banks and federal thrifts to effectively “export” the usury rate of the state in which a loan is originated to borrowers across state lines (this legal principle does not apply to federal credit unions, which have a usury limit established by the Federal Credit Union Act).

• Subtitle E—CFPB Enforcement Powers

o Investigations and Administrative Discovery (§ 1052):

The CFPB may conduct a joint investigation when appropriate, which includes matters related to fair lending, Secretary of HUD, or the Attorney General of the U.S.

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The CFPB may issue subpoenas. A court may issue an order for a person to appear in court, after proper notice and service. A person that fails to obey an order of the court will be held in contempt of the court.

If the CFPB has reason to believe that a person has possession, control, or custody of any documentary material that is relevant under proceedings of federal consumer law, an investigator may demand such information from this person, to produce, submit, file written reports, or give oral testimony on such material, or furnish a combination of such demands.

o Hearings and Adjudication Proceedings (§ 1053):

The CFPB is authorized to conduct hearings and adjudication proceedings to enforce provisions under these rules or any other federal law that CFPB is authorized.

There are other details for: Special Rules for Cease and Desist, Special Rules for Temporary Cease and Desist Proceedings, and Special Rules for Enforcement of Orders.

o Litigation Authority (§ 1054):

The CFPB may commence a civil action against such person to impose a civil penalty or seek all appropriate legal and equitable relief including a permanent or temporary injunction, as permitted by law.

The CFPB may act in its own name and through its own attorneys. The CFPB may compromise or settle any action if approved by the court.

The CFPB will provide notice to the Attorney General, and if applicable, the prudential financial regulator. The CFPB should provide notice concerning any other action, suit, or proceeding in which CFPB is a party. The CFPB should coordinate with the Attorney General to avoid conflicts and promote consistency not later than 180 days after the designated transfer date. Nothing should limit the authority of the CFPB under this paragraph to interpret federal consumer financial law. There are other rules for the appearance before the Supreme Court, and Forum.

Except as otherwise permitted by law or equity, CFPB may not bring actions more than 3 years after the date of discovery of the violation to which an action relates.

An action under this title does not include claims arising solely under enumerated consumer laws. In actions arising solely under enumerated laws, the CFPB may commence, defend, or intervene. In actions that were transferred under subtitles F and H, CFPB may commence, defend, or intervene.

o Relief Available–CFPB Enforcement Remedies (§ 1055):

Relief includes:

• Administrative Proceedings or Court Actions: Any appropriate legal or equitable relief.

• No exemplary or punitive damages. • The CFPB, State attorney General, or State regulator may recover costs in

connection with prosecution if they prevail. • Civil Money Penalties in Court and Administrative Actions.

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Penalty Fees:

• First Tier – Generally, the penalty may not exceed $5,000 per day. • Second Tier – For reckless behavior, the penalty may not exceed $25,000 a

day. • Third Tier – For knowing behavior, the penalty may not exceed $1 million a

day. • Mitigating Factors include size of financial resources, good faith, gravity of

violation, severity of risks of losses to consumer, history or previous violations, and such other matters as justice may require.

The CFPB may modify, compromise, or remit the penalty. The CFPB must provide

notice and hearing before a civil penalty may be assessed.

o Referrals for Criminal Proceedings (§ 1056):

The CFPB may refer evidence that person, domestic or foreign, has engaged in conduct that violates federal criminal law, to the Attorney General of the U.S.

o Employee Protection (§ 1057):

A covered person or service provider may not terminate or discriminate against a covered employee if such employee has provided information, testified, filed a proceeding, or refused to participate in an act, where the employee has a reasonable belief that such act is a violation of a provision under the jurisdiction of the CFPB.

Definition of a “covered employee” – Any individual performing tasks related to the offering or provision of the consumer financial product or service.

Procedures and Timetables:

• A person who believes he or she has been discharged in violation of employee protection must file within 180 days with the Secretary of Labor with the allegations. The Secretary of Labor must notify and write such person abut the filing of the complaint, allegations in the complaint, substance of evidence supporting the complaint, and opportunities that will be afforded to such person. The Secretary of Labor will investigate not later than 60 days after the receipt of the complaint.

• There are additional details for a Notice of Relief Available, a Request for Hearing, not later than 30 days after the date of receipt of notification of a determination by the Secretary of Labor that the person alleged to have committed the violation or complainant may file objections to the findings or preliminary order or both, Grounds for Determination of Complaints, Issuance of Final Orders; Review Procedures; Failure to Comply with Order and Unenforceability of Certain Agreements.

• Subtitle F—Transfer of Functions and Personnel; Transitional Provision

o Transfer of Consumer Financial Protection Functions (§ 1061):

The CFPB will assume NCUA’s consumer financial protection functions as of the day before the designated transfer date.

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NCUA, as a prudential regulator, may enforce compliance with the requirements imposed under this rule or any order prescribed by the CFPB.

o Designated Transfer Date (§ 1062):

Not later than 60 days after the date of enactment.

o Savings Provisions (§ 1063):

NCUA’s existing rights, duties, and obligations are not affected.

NCUA’s lawsuits that have already been filed before the designated transfer date with respect to any consumer financial protection function will not be affected.

o Transfer of Certain Personnel (§ 1064):

Both the CFPB and the NCUA Board will jointly determine the number of NCUA employees who are necessary to perform or support the consumer financial protection of the NCUA to be transferred to the CFPB, and the NCUA Board should identify the specific employees that will be transferred in an equitable way. Such employees with retain their status and tenure in the government system.

o Incidental Transfers (§ 1065):

The Director of OMB and the Secretary of the Treasury shall make decisions regarding other incidental transfers.

o Interim Authority of the Secretary (§ 1066):

The Secretary of the Treasury is authorized to perform the functions of the CFPB until the Director is confirmed.

o Transition Oversight (§ 1067):

CFPB should submit an annual report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives that includes the transition plans

• Subtitle G—“Regulatory Improvements”

o Small/Women/Minority Business Loan Data Collection (§ 1071):

Amends the Equal Credit Opportunity Act to require lenders (including credit unions) to gather information regarding loan applications from small businesses (as well as any women-owned and minority-owned businesses) and make that information available to the CFPB and “any member of the public, upon request . . . .”

The CFPB will also make this information available to the public, likely in non-aggregate form (as well as possibly also in aggregate form).

An institution will need to either: (a) forbid loan underwriters and officers from having access to this information, or (b) must give the consumer a disclosure informing the consumer that the loan underwriter or officer had access to this information.

Exemption authority: CFPB may exempt “any financial institution or class of financial institutions . . .” from these data collection requirements.

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Information collected and submitted to CFPB must include the following itemized information regarding each small/women/minority business loan application:

• Date of application and its “number;” • Type and purpose of the loan; • Amount of credit applied for; • Whether the loan was granted or not; • The Census tract of the loan applicant; • The business’s gross annual revenue; • “The race, sex, and ethnicity of the principal owners of the business;” and • Additional data specified by CFPB by rule.

o Remittance Transfers (§ 1073):

Requires institutions—including credit unions—which conduct consumer cross-border electronic funds transfers to provide consumers with disclosures including the amount of money the consumer will receive (after fees and foreign exchange rates) and makes institutions liable for errors and “actions of agents” under some circumstances.

These requirements will likely apply to credit union products using WOCCU’s IRnet and other systems using money transfer organizations such as Western Union.

Two exemptions will likely exempt credit union wire and ACH transfers from the disclosure requirements (and therefore, to a large degree, also from the liability requirements since liability under this section is largely dependent on application of the disclosure requirements):

• (a) Exemption for transactions initiated from a deposit account at a federally-insured credit union are exempt from the disclosure requirements for at least 5 years, possibly extended by CFPB for another 5 years. The statute requires this exemption to expire after 10 years (unless the legislation is later amended to extend this exemption).

• (b) Exemption for international transfers where “a recipient nation does not legally allow, or the method by which transfers are made in the recipient country do not allow, the amount of currency that will be received . . .” because of, e.g., wire transfer fees, etc. This second exemption does not expire and will presumably apply to most, if not all, wire transfers (as well as ACH transfers meeting this test) including those initiated by privately-insured credit unions, subject to a CFPB rulemaking.

Safe Harbors: In addition, CFPB is required to do rulemakings within 18 months regarding when an institution is liable for: (a) error resolutions; and (b) “actions of agents.” It is likely that these regulations will establish express and/or de facto safe harbors from liability for credit unions and other institutions, so long as the credit union complies with the requirements of the regulations.

Amends the Federal Credit Union Act, 12 U.S.C. § 1757, to authorize federal credit unions to offer remittances to persons within the field of membership (notwithstanding the FCUs were already authorized to provide international and domestic electronic funds transfers to persons within the field of membership, of which “remittances” are a subset). The amendment, however, also preserves FCUs’ authority to offer “international and domestic electronic funds transfers” to persons within the field of membership.

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Directs NCUA and the federal banking agencies to issue guidance to financial institutions “regarding the offering of low-cost remittance transfers and no-cost or low-cost basic consumer accounts . . .”

o Regulation of Interchange Fees (§ 1075):

Directs the Fed to write rules within nine months to ensure interchange fees in connection with electronic debit cards transactions are reasonable and proportional to the cost incurred by the issuer (the consumer’s financial institution). The rules must take effect within 12 months.

Credit unions and other issuers with assets of less than $10 billion are exempt from the “reasonable and proportional” provisions in the rule but will nonetheless be affected. Also exempt are government-administered payment programs and reloadable prepaid cards.

The Fed must consider the similarities between electronic debit transactions and checks that clear at par as well as distinguish between the incremental costs incurred by an issuer for authorization, clearance, and settlement of a particular debit transaction, which costs can be considered, and other costs incurred by the issuer that are not specific to a particular transaction which the Fed cannot take into account.

Debit interchange fees may allow adjustments for issuers’ fraud prevention costs, as long as the issuer complies with fraud-related standards set by the Fed.

The fraud-related adjustments must take into account reimbursements, including chargebacks from consumers, merchants or payment card networks and issuers will be required to “take effective steps” to reduce fraud in debit transactions.

The Fed must also consider:

• The type of fraud and the extent to which the fraud depends on authorization based on signature, PIN or other means;

• Fraud prevention and data security costs expended by each party involved in debit transactions;

• The costs of fraudulent transactions absorbed by each party; • The extent to which interchange fees have in the past reduced or increased

incentives for parties to reduce fraud; and • Such other factors as the Fed considers appropriate.

The Fed may require any issuer to provide information regarding debit transactions; the Fed must disclose with the new rule and twice a year thereafter, an aggregate of the debit transaction costs and fees incurred by issuers and payment networks.

Merchants may provide a discount for the use of cash, checks, debit cards or credit cards but the incentive cannot differentiate on the basis of the issuer or the network. Merchants may also set a minimum dollar value up to $10 for credit card purchases, as long as it does not differentiate between issuers or networks. (The Fed may by rule increase the dollar value.)

Payment networks or issuers may not restrict the number of payment networks on which a transaction may be processed to 1 network or 2 or more networks that are owned or operated by networks affiliated with the issuer. Issuers or networks cannot restrict merchants from directing the routing of debit transactions over a payment card network.

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An “Honor All Cards” provision was included that clarifies that merchants are not allowed to discriminate between debit cards within a payment network, or credit cards within a payment card network, on the basis of the issuer.

o Financial Institution Fraud/Securities Fraud (§ 1079B):

Directs the Federal Sentencing Commission to reconsider its sentencing guidelines for financial institution fraud and securities fraud, presumably to make such guidelines less lenient. Also extends the statute of limitations for prosecution of securities fraud under federal criminal law to 6 years.

o Credit Reports (§ 1076):

Amends the Fair Credit Reporting Act, 15 U.S.C. § 1681m, to require lenders to provide consumers with “a numerical credit score . . . used by [a lending institution] taking any adverse action based in whole or part on any information in a consumer report . . .” and also provide numerical credit scores under other circumstances (such as likely with respect to risk-based pricing of loans).

o Housing Assistance for Economically Vulnerable Persons (§ 1072):

Expands certain financial education and counseling programs for prospective homebuyers to also apply to “economically vulnerable individual and families” without regard to whether those individuals intend to purchase a home.

o Reverse Mortgages (§ 1077):

The CFPB shall conduct a study regarding reverse mortgages and—if CFPB determines it is necessary after conducting the study—CFPB may propose rules to regulate reverse mortgages to “protect borrowers” and regarding the “suitability” of reverse mortgages with respect to certain individuals.

o Other Studies and Reports: Other studies and report required by this subtitle include:

A Treasury Department study and report concerning options for ending the Fannie Mae and Freddie Mac conservatorships and reforming the GSE system. (§ 1074)

An interagency study and report regarding private student loans. (§ 1078)

A CFPB study and report concerning credit scores. (§ 1079)

A CFPB report concerning “exchange facilitators” who facilitate tax-exempt exchanges of residential real properties (which are usually only taxable to the extent that the transaction includes “boot,” i.e. the exchanged real properties are either not equal in value and/or the transaction also includes an exchange of cash or securities, etc.). (§ 1079A)

o New Home Mortgage Disclosure Act (HMDA) Disclosure and Reporting (§ 1094): Section 1094 amends HMDA’s disclosure and reporting requirements to require HMDA disclosures to reflect information required by Title XIV of Dodd-Frank, known as the “Mortgage Reform and Anti-Predatory Lending Act,” below.

Effective Date: These new reporting requirements will not take effect until “the first January 1 that occurs after the end of the 9-month period beginning on the date on which regulations are issued by [CFPB] in final form . . .”

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Required Disclosures and Reporting: The following information—subject to rules written by CPFB in consultation with NCUA and other regulations—will need to be included in the new HMDA disclosure and also reported to NCUA:

• The value of the home to be mortgaged;

• The number of months which an introductory interest rate, if any, will be in effect;

• Whether the mortgage allows interest-only payments, negative amortization, or other types of payments whereby the loan will not be fully amortized;

• The duration of the mortgage loan in months;

• “the channel through which the loan was made, including retail, broker, and other relevant categories;”

• The originator’s SAFE Mortgage Act identifying number;

• A “universal” loan identifier, if required by CFPB;

• The parcel number of the home to be mortgaged, if required by CFPB;

• The mortgage applicants’/mortgagors’ FICO scores; and

• Any other information required by CFPB.

TITLE XI—FEDERAL RESERVE SYSTEM PROVISIONS

• Federal Reserve Act Amendments on Emergency Lending Authority (§ 1101):

o Limitation on Emergency Discount Window Lending to non-Banks/non-CUs: Section 1101 repeals the Fed’s broad authority to open its discount window emergency lending facility to any “individuals, partnerships or corporations” in “unusual or exigent circumstance”—which the Fed used to lend to non-depository institutions such as like Bears Sterns during the financial crisis—unless such lending occurs in conjunction with a program or facility with “broad-based” eligibility.

o New Regulations on Emergency Lending: Section 1101 requires the Fed to establish regulations regarding the policies and procedures governing emergency lending. They must be designed to ensure that any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid a failing financial company, and that the security for emergency loans is sufficient to protect taxpayers from losses and that any such program is terminated in a timely and orderly fashion. The procedures must prohibit borrowing from programs and facilities by borrowers that are insolvent.

o Report to Congress: The Fed must provide to the Chairman or Ranking Members of the

House Financial Services and Senate Banking Committees within seven days of authorizing any financial assistance, a report that includes: (1) the justification for the assistance; (2) the identity of the recipients; (3) the date and amount of the assistance; and (4) the material terms of the assistance.

o 24 Month Termination of Emergency Credit Facilities: Dodd-Frank section 1103 requires

Fed emergency lending facilities to terminate within 24 months of inception.

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• Audit of the Fed (§ 1102): Section 1102 authorizes GAO to audit the Federal Reserve System including Federal Reserve Banks and Fed credit facilities.

• Public Disclosure of Fed Info (§ 1103): Section 1103 requires the Fed to post the audit required by section 1102 on the Fed’s website, and also required the Fed to publish—no more than 1 year after the emergency credit facility is terminated, or sooner if doing so is in “the public interest”—detailed information about emergency borrowers. This information will be exempted from the Freedom of Information Act (although GAO must do a study regarding whether this FOIA exemption will be appropriate). Information which the Fed must disclosure includes:

o The name of the borrower, counterparty, etc.

o The amount of funds borrowed;

o The applicable interest rate; and

o The “types and amounts” of any collateral pledged.

• Emergency Financial Stabilization Facilities for FDIC-Insured Institutions and BHCs (§§ 1105 - 1106):

o FDIC Guarantee Fund Authorized After a “Liquidity Event:” If a liquidity event under

Dodd-Frank section 1104 (see below) occurs, FDIC must create a widely available program to guarantee obligations of solvent insured depository institutions/ holding companies during times of severe economic distress.

Equity Investments Prohibited: FDIC may not provide any form of equity to an institution under this authority.

Credit Unions Not Eligible: Credit unions will not likely be eligible to participate in such a facility. This is because the term “depository institution,” as used in Dodd-Frank, only applies to banks, thrifts, and other depository institutions eligible to be insured by FDIC.

o Treasury Approval; Congressional Involvement: Treasury (in consultation with the

President) must determine the maximum amount of debt outstanding that FDIC may guarantee (there does not appear to be any statutory limitation on this amount). A joint resolution of Congress, pursuant to procedures set forth in section 1105, would purportedly authorize an increase of the amount of guaranteed debt beyond the amount authorized by the Treasury.

o Fees to Pay for Guarantee Fund: The FDIC must charge fees and other assessments to all

participants in the stabilization program, in such amounts as are necessary to offset projected losses and administrative expenses. FDIC may borrow funds from Treasury and issue obligations for amounts borrowed; these obligations must be repaid in full with interest through the fees and charges.

o Special Assessment to Recover Losses: If the funds collected are insufficient to cover

any losses, FDIC must impose a special assessment solely on participants of the stabilization program to cover such losses.

o Upon enactment, the FDIC is generally prohibited from establishing any widely available

debt guarantee program.

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• Liquidity Event Determination (§ 1104):

o “Liquidity Event:” Treasury may request the FDIC and Fed to determine whether a liquidity event exists that warrants use of the emergency financial stabilization guarantee program.

“Liquidity Event” Definition: A “liquidity event” is: (1) an exceptional and broad reduction in the general ability of financial market participants to (a.) sell financial assets without an unusual and significant discount, or (b.) borrow using financial assets as collateral without an unusual and significant increase in margin; or (2) an unusual and significant reduction in the ability of financial market participants to obtain unsecured credit.

Standard for Liquidity Event Determination: 2/3rds of the FDIC board of directors and 2/3rds of the Federal Reserve Board of Governors must find that:

• (1) a liquidity event exists;

• (2) failure to take action would have serious adverse effects on financial stability; and

• (3) emergency financial stabilization actions are needed to avoid or mitigate potential adverse effects on the financial system.

o Notification of Congress: Treasury must notify Congress within 30 days notify of a “liquidity event” determination in writing and include a description of the basis for the determination.

TITLE XII—IMPROVING ACCESS TO MAINSTREAM FINANCIAL INSTITUIONS

• Title XII authorizes the Secretary of the Treasury “to establish a multiyear program of grants,

cooperative agreements, financial agency agreements, and similar contract or undertakings” to promote low- and moderate-income individuals establishing deposit accounts in banks and credit unions.

• Eligible institutions for this program include federally-insured credit unions and Community Development Financial Institutions (likely including CDFIs which are CUSOs or privately-insured credit unions).

• Sections 1205 and 1206 authorize the Treasury to provide grants and other assistance to eligible institutions “to provide low-cost, small loans to consumer that will provide alternatives to more costly small dollar loans,” including:

o Grants for financial literacy education; and

o With respect to CDFIs or any partnership of CDFIs and federally-insured credit unions and/or banks, grants for loan loss reserves to help defray losses on small dollar loans, subject too a requirement that the institution(s) “shall provide non-Federal matching funds in an amount equal to 50 percent of the amount of any grant received . . .”

TITLE XIII—PAY IT BACK ACT

• Title XIII reduces the $700 billion TARP appropriation to approximately $475 billion, for deficit reduction purposes.

• In addition, Title XIII requires that proceeds from Treasury Department sales of Fannie Mae, Freddie Mac, and FHLB obligations and securities be used for deficit reduction.

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TITLE XIV—MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT

• New HMDA Disclosure: Section 1094 of Dodd-Frank—summarized above at the end of the Dodd-Frank Title X summary—establishes new Home Mortgage Disclosure Act (HMDA) disclosure requirements as well as reporting requirements. These requirements largely reflect the requirements of Dodd-Frank Title XIV, summarized below.

• Title XIV Administered by CFPB: Pursuant to Dodd-Frank section 1002, CFPB will likely have rulemaking jurisdiction over the below amendments to the Truth in Lending Act. However, it is likely that the Fed will be responsible for any provisions of this title which take effect prior to establishment of the CFPB, and any reader of the Dodd-Frank statutory text of Title XIV should be aware that the text generally refers to the “Fed” as the agency with regulatory jurisdiction over Title XIV. When read in context with Dodd-Frank section 1002, means that CFPB will ultimately be the responsible agency for these provisions).

• Subtitle A—Residential Mortgage Loan Origination Standards (§ 1401):

o Title XIV applies to virtually all residential mortgage loans, except for “a consumer credit transaction under an open end credit plan” (e.g., Home Equity Lines of Credit) or any loan related to a timeshare.

o Title XIV primarily amends the Truth in Lending Act (TILA) and entities covered by these amendments include virtually all mortgage loan originators, including credit unions, banks, mortgage companies, mortgage brokers, and so forth.

o New TILA § 129B (“Residential mortgage loan origination”) (§§ 1402 - 1405):

New TILA § 129B would establish a duty of care for mortgage originators be registered and/or licensed under the SAFE Mortgage Licensing Act and other applicable state and federal laws, as well as “include on all loan documents any unique identifier” required by the SAFE Act. (§ 1402)

• Special Rules for “depository institutions:” This section requires the CFPB to prescribe regulations requiring “depository institutions” and their subsidiaries to establish and maintain procedures designed to ensure compliance with this section.

o Application of “depository institution” Rules to Credit Unions? Depends on the Rulemaking: Whether these regulations will apply to credit unions is unclear because credit unions are considered “depository institutions” under the SAFE Act, see SAFE Act §§ 1503, 1507, 12 U.S.C. §§ 5102, 5106—which new TILA § 129B uses the term “depository institution” in reference to—but credit unions are not generally defined as “depository institutions” under Dodd-Frank (because Dodd-Frank defines “depository institution” to only mean FDIC-insured institutions). Whether these special rules apply to credit unions will therefore likely be determined as part of the rulemaking process.

Prohibition on Steering Incentives: In addition, new TILA § 129B(c) would prohibit “steering incentives,” meaning that no party to a mortgage origination may be paid “compensation that varies based on the terms of the loan (other than the amount of the principal)” which appear to be intended to prevent the payment of higher commissions and/or origination fees based on the loan having a high interest rate or frequent resets of an adjustable rate, etc. Regulations promulgated on this issue would likely apply to credit unions. (§ 1403)

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Expanded TILA Private Rights of Action: TILA § 129B(d) would expand TILA § 130 private rights of action against mortgage originators to apply “for any failure by a mortgage originator . . . to comply with any requirement under this section . . .” (TILA § 130 private rights of action currently apply only with respect to “creditors” as that term is defined in TILA.)

• Mortgage originator liability under this private right of action “shall not exceed the greater of actual damages or an amount equal to 3 times the total amount of direct and indirect compensation or gain accruing to the mortgage originator in connection with the residential mortgage loan involved in the violation, plus the costs to the consumer of the action, including a reasonable attorney’s fee.” (§1404)

UDAP: TILA § 129B(e) gives the CFPB “discretionary regulatory authority” to “prohibit or condition terms, acts or practices” related to mortgage loans which it finds to be “abusive, unfair, deceptive, necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers . . .” (§ 1405)

Exemption Authority: TILA § 129B(e) would also empower the CFPB “to exempt from or modify disclosure requirements, in whole or part, for any class of residential mortgage loans” if the CFPB determines that such an exemption or modification is in the interest of consumers and the public interest. (§ 1405)

o Study (§ 1406): Section 1406 requires HUD and the Treasury Department to do a study and report “to determine prudent statutory and regulatory requirement to provide for the widespread use of shared appreciation mortgages to strengthen local housing markets, provide new opportunities for affordable home ownership, and enable homeowners at risk of foreclosure to refinance or modify their mortgages.”

• Subtitle B—Minimum Standards for Mortgages

o New TILA § 129C (“Minimum standards for residential mortgage loans”) (§ 1411):

Ability to repay: Subject to a rulemaking, TILA § 129C requires mortgage lenders to make “a reasonable and good faith determination, based on verified and documented information” that the consumer has a reasonable ability to repay the loan as well as applicable taxes, insurance (including mortgage guarantee insurance), and assessments. More specifically:

• Multiple mortgage loans: TILA § 129C(a)(2) requires mortgage lenders to take into account the aggregate debt burden of all residential mortgage loans held by the borrower when underwriting a new mortgage.

• Basis for ability to pay determination: Using a fully amortized payment schedule, TILA § 129C(a)(3) states that the creditor must make the “ability to repay” determination taking into account the following factors (although TILA § 129C(b), summarized below, contains a safe harbor regarding “ability to pay” determinations):

o The consumer’s credit history;

o The consumer’s current income;

o The consumer’s reasonably expected future income;

o The consumer’s current debt obligations;

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o The consumer’s debt-to-income ratio or residual income after all debt payments;

o The consumer’s employment status; and

o The consumer’s other financial resources, not including any equity in the consumer’s property being secured by the new mortgage in question.

• Income verification: Creditors making mortgage loans must verify the consumer’s repayment ability—including “expected income or assets”—by:

o Consumer’s Records: Reviewing the consumer’s W-2, tax return, payroll receipts, financial institution records, or other “reasonably reliable” third-party documents; and

o IRS Tax Return Transcripts: In addition, the creditor must independently verify the consumer’s income via:

Requesting transcripts of the consumer’s tax returns from the IRS; or

“a method that quickly and effectively verifies income documentation by a third party subject to rules prescribed by the CFPB.”

o Seasonal income: The creditor may take into account the

“seasonality and irregularity” of a borrower’s seasonal income (if any) when making underwriting decisions.

• Exceptions: TILA § 129C(a)’s ability to repay requirements do not apply to certain refinancings of “loans made, guaranteed, or insured” by HUD/FHA, the Veterans Administration, the Department of Agriculture, or the Rural Housing Service.

• “Nonstandard Loans:” TILA § 129C(a)(6) provides special ability to repay calculation processes for interest-only loans, loans with negative amortization, and other variable rate loans that defer payment of any principle of interest.

• “Refinance of Hybrid Loans with Current Lender:” For refinancing of “hybrid loans” (i.e. adjustable rate mortgages with an initial fixed rate which later resets into a variable rate, such as a 2/28 mortgage) into “standard loans” which would “lead to a reduction in monthly payment and the mortgagor has not been delinquent on any payment,” the creditor may make conduct the refinancing based on consideration of the following factors:

o The borrower’s good standing on the existing mortgage;

o Whether “the extension of new credit would prevent a likely default should the original mortgage reset and give such concerns a higher priority as an acceptable underwriting practice;” and

o Whether the creditor is offering a “discount and other favorable terms to such mortgagor that would be available to new customers with high credit ratings based on such underwriting practice.”

• Reverse mortgage and bridge loans: The TILA § 129C ability to pay requirements do not apply to reverse mortgages or bridge loans.

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o Safe Harbor and Rebuttable Presumption of Borrower’s Ability to Repay (§ 1412): Loans which are “qualified mortgages” may be presumed to meet the “ability to repay” requirements.

Add/Subtract Criteria Authority: TILA § 129C(b)(3) empowers CFPB to “revise, add to, or subtract” from the below criteria for “qualified mortgages.”

Prepayment Penalties Prohibited Except on “Qualified Mortgages”: TILA § 129C(c) would prohibit prepayment penalties except with respect to certain prepayment penalties on “qualified mortgages.” (§ 1414).

“Average Prime Offer Rate” For Mortgages: TILA § 129C(b), (c) require CFPB to publish a new type of prime rate—i.e. not the Wall Street Journal prime rate—for residential mortgages, at least once a week.

• “Average Prime Offer Rate” is defined as the “average prime offer rate for a comparable transaction as of the date on which the interest rate for the transaction is set” as published by CFPB.

• CFPB may establish multiple “average prime offer rates” that would be

“based on varying types of mortgage transactions.”

• The “average prime offer rates” published by CPFB will be relevant to determining whether a mortgage is a “qualified mortgage” or a “high cost mortgage” within the meaning of TILA under some circumstances.

“Qualified mortgage:” Defined as any residential mortgage loan:

• Which does not involve negative amortization or “allow the consumer to defer repayment of principal” (except for certain balloon loans meeting standards which will be set by regulation);

• Does not result in a “balloon payment” that is “more than twice as large as the average of earlier schedule payments” (except for certain balloon loans meeting standards which will be set by regulation);

• Documented and Verified Income: The borrower’s income and “financial

resources relied upon” are “verified and documented;” is either:

o Fixed rate: Has a fixed rate and a fully amortized payment schedule; or

o ARM: Is an adjustable rate mortgage which was underwritten “based on the maximum rate permitted under the loan for the first 5 years” with a fully amortized payment scheduling taking into account all applicable taxes, insurance, and assessments.

• Debt-to-Income Ratio/Income After Monthly Debt Maintenance:

Complies with regulatory guidance or regulations concerning “ratios of total monthly debt to monthly income or alternative measures of ability to pay regular expenses” after the borrower pays all debts each month;

• Total Points and Fees: Total points and fees do not exceed 3 percent of the loan, as “points and fees” are defined by TILA § 103(aa)(4) (other than “bona fide third party charges not retained by the mortgage originator, creditor” or an affiliate thereof), but this “total points” determination can exclude either:

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o (a) up to 2 “bona fide discount points:” (i.e. points “paid by the consumer for the purpose of reducing, and which in fact result in a bona fide reduction of, the interest rate or time-price differential applicable to the mortgage” in a manner reasonably consistent with established industry norms and secondary-market practices); or

o (b) up to 1 “bona fide discount point:” if the mortgage’s interest rate “does not exceed by more than 2 percentage points” the average prime rate for mortgages as determined by the CFPB.

o “Smaller loans:” In addition, CFPB shall prescribe rules adjusting the 3 percent of the loan points and fees ceiling upwards for “lenders that extend smaller loans” can have their loans fall within the “qualified mortgage” safe harbor, such as with respect to residential mortgages in rural areas “and other areas where home values are lower.”

• 30 Years or fewer: Has a term of 30 or fewer years (except that some residential mortgages insured or guaranteed by the FHA, VA, Department of Agriculture, and the Rural Housing Service may possibly be made for more than 30 years under some circumstances, subject to a rulemaking); and

• Reverse mortgages: If the mortgage is a reverse mortgage, it can be a “qualified loan” if it meets standards prescribed by rule (with the caveat that the “ability to repay” provisions of TILA § 129C(a) would not usually apply to reverse mortgages).

• Prepayment Penalties: A “qualified mortgage” may not include prepayment penalties if it:

o Is an adjustable rate mortgage;

o Has an interest rate higher than 1.5% above the CFPB “average prime offer rate” if the loan is lower than the GSE conforming mortgage loan limit (i.e. it is not a jumbo loan);

o Has an interest rate higher than 2.5% above the CFPB “average prime offer rate” if it is a jumbo loan; or

o Has an interest rate higher than 3.5% above the CFPB “average prime offer rate” if it is a second mortgage.

• Prepayment Penalties Phase-Outs: If a qualified mortgage has prepayment penalties, the penalties must not be in excess of the following limitations:

o First year of mortgage: Not more than 3% of the outstanding balance.

o Second year of mortgage: Not more than 2% of the outstanding balance.

o Third year of mortgage: Not more than 1% of the outstanding balance.

o No prepayment penalties are permitted on a qualified mortgage after three years from the date the loan was “consummated.”

Single Premium Credit Insurance Prohibited: TILA § 129C(d) will prohibit creditors from financing single premium credit insurance and single premium debt cancellation contracts related to any residential mortgage (including open-end loans such as HELOCs), except for credit unemployment insurance with “reasonable”

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premiums where the premiums are not paid to the creditor or an affiliate and the creditor “receives no direct or indirect compensation” related to the credit unemployment insurance.

• TILA § 129C(d) expressly exempts “insurance premiums or debt suspension fees calculated and paid in full on a monthly basis . . .” from the single premium credit insurance prohibition.

Arbitration: TILA § 129C(e) prohibits pre-dispute “arbitration or any other nonjudicial procedure as a method for resolving any controversy or settling any claims arising out of the transaction” related to any residential mortgage.

• Post-Controversy: This section would not limit a consumer’s and creditor’s right to agree to arbitration after a controversy has already arisen.

• Statutory Cause of Action: A residential mortgage agreement may not

abridge the consumer’s statutory right to bring a TILA action in court. • Deeds of Trust?: This prohibition on arbitration or “other nonjudicial

procedure” does not appear to be intended to apply to deeds-of-trust, but this section could theoretically be interpreted to prohibit foreclosures via deeds of trust since a deed of trust allows a form of nonjudicial foreclosure (even though a foreclosure under a deed-of-trust can typically be reviewed and invalidated by a court after the foreclosure has occurred, under certain circumstances).

Negative Amortization: No creditor may make a residential mortgage with

negative amortization unless, prior to completing the transaction:

• The creditor provides the consumer with a statement that:

o The transaction will result in negative amortization;

o Describes “negative amortization” pursuant to a CFPB rulemaking;

o States that negative amortization increases the outstanding principle of the loan; and

o That negative amortization reduces the borrower’s equity in the residence.

• Homeownership Counseling: If the borrower for the negative amortizing mortgage is a first-time residential mortgage borrower and the loan is not a qualified mortgage, the borrower must present the lender with a certificate or other documentation that the borrower received “homeownership counseling” (as described later in the summary) prior to receiving the loan.

Anti-Deficiency Protection: TILA § 129C(g) is intended to protect borrower’s rights under state anti-deficiency laws (i.e. state laws which prohibit a creditor from suing a borrower in a “deficiency action” to recover the amount the borrower owed on the mortgage which was in excess of the value of the real estate collateral seized in foreclosure).

• All Loans: If a state anti-deficiency law applies, the creditor must provide the borrower with a notice informing the borrower that he or she will be protected by the anti-deficiency law. This disclosure must be made at the time of the loan’s “consummation.”

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• Refinancings with Loss of Protection: If a residential mortgage loan refinancing would end the protections of a state anti-deficiency law, the creditor must provide the borrower with a notice to that effect

. Policy Regarding Partial Payments: TILA § 129C(h) provides that, prior to

settlement or originating the loan (in the case of a refinancing), the creditor must disclose to the borrower its policies concerning:

• Acceptance of partial payments; and

• If partial payments are accepted, how such payments will be applied to such mortgage and whether such payments will be placed in escrow.

o TILA § 130(k) Defense to Foreclosure (§ 1413): This adds a new section (k) to TILA § 130. “Notwithstanding any other provision of law,” TILA § 130(k) provides a “defense to foreclosure” under certain circumstances “as a matter of defense by recoupment or setoff without regard for the time limit on a private right of action under” TILA § 130(e) (which is usually one year from when the first payment on the loan was due).

When foreclosure defense may be asserted: In any judicial or nonjudicial (e.g., a deed of trust) foreclosure action, the TILA § 130(k) foreclosure defense may be asserted if:

• The creditor violated the steering incentives prohibition in TILA § 129B(c)(1), (2); or

• The creditor did not considering the borrower’s ability to pay as required by TILA § 129C(a).

Amount of Recoupment or Setoff: Generally, the amount of recoupment and setoff that a borrower could be entitled to in a successful foreclosure defense would be the amount the borrower could receive under TILA § 130(a)—in the case of violation of TILA §§ 129, 129B(c), 129C(a) (see Dodd-Frank § 1416(a)) the amount of recoupment or setoff can be “all finance charges and fees paid by the consumer,” but is more limited in other situations—“plus the costs to the consumer of the action, including a reasonable attorney’s fee.”

• Special Rule for Late-Filed Actions (more than three years since first payment): TILA § 130(k)(2)(B) provides a special rule for actions brought after the TILA § 130(e) time limit—which Dodd-Frank § 1416(b) extends to 3 years from when the first loan payment was due for TILA § 129, 129B, and 129C actions—limits the amount of potential recoupment and offset to not exceed the amount of finance charges and fees paid by the consumer “which the consumer would have been entitled to . . . for damages computed up to the day preceding the expiration of the applicable time limit.”

o Increased Civil Liability under TILA for Leases (§ 1416): Section 1416 increases the range of liability for TILA violations pertaining to a lease specified in TILA § 130(a)(2) from $100-$1000 to $200-$2000.

o Lender Rights in the Context of Deception (§ 1417): Section 1417 establishes a new subsection (l) to TILA § 130 which states that no creditor shall be liable pursuant to TILA § 130 “if the obligor, or co-obligor has been convicted of obtaining by actual fraud such residential mortgage.”

o Six-Month Notice Required Before Reset of Hybrid Adjustable Rate Mortgages (§ 1418): Section 1418 requires a six-month notice before any reset of rates on a hybrid ARM,

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as well as a list of alternatives consumers may pursue before adjustment including: refinancing; renegotiation of loan terms; payment forbearances; and pre-foreclosure sales.

o Required Disclosures (§ 1419): TILA § 128(a) is amended to add requirements for the disclosure of:

All Residential Mortgages: Required disclosures include:

• the aggregate amount of settlement charges;

• the aggregate amount of fees paid to the originator; and

• the total amount of interest that the consumer will pay over the life of the loan.

ARMs: With respect to variable rate residential mortgages, the disclosures must include the amount of the initial monthly payment for the loan—including all taxes placed in escrow, insurance, and assessments—as well as the amount of a “fully indexed” payment under the loan, also including taxes, insurance, and assessments.

o Disclosures Required In Monthly Statements For Residential Mortgages (§ 1420): TILA § 128 is amended to require creditors to send a monthly statement to the obligor stating the loan’s:

principal,

current interest rate,

date on which rate may reset,

any fees,

telephone or email for information, and

information for counseling agencies.

Does not Apply to Fixed-Rate Mortgages with a Coupon Book: This monthly statement requirement does not apply to a fixed rate residential mortgage where the obligor has a coupon book with all of this information.

o Report By The GAO (§ 1421): The GAO will conduct a study on the effects this Act will have on availability and affordability of credit for consumers and others. The study will look at the effect on the mortgage market for mortgages that are not within the “qualified mortgage” safe harbor and also look at the ability of prospective homebuyers to obtain financing. GAO must complete the report before the end of one year after implementation. Further examination by GAO related to certain credit risk provisions and analysis of credit risk retention provisions will also be conducted.

o State Attorneys General Enforcement Authority (§ 1422): TILA § 130(e) is amended to reflect that state attorneys general may bring civil enforcement actions to enforce these requirements. See Dodd-Frank § 1042, above.

• Subtitle C—High-Cost Mortgages

o Definitions Relating To High-Cost Mortgages (§ 1431): TILA § 103(aa) is amended by inserting new definitions:

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High Cost Mortgage Definition: A “High-Cost Mortgage” is a consumer credit transaction secured by the consumer’s principal dwelling which meets any of the following criteria:

• First Mortgage on Real Property Primary Dwellings: If the interest rate is more than 6.5 percentage points above the CFPB determined “average prime offered rate” for first mortgages (which is not the Wall Street Journal prime rate).

• First Mortgage on a Mobile Home or Similar Personal Property: If the interest rate is more than 8.5 percentage points above the CFPB determined “average prime offered rate” applicable to mortgages for “personal property” with a value less than $50,000, such as most mobile homes.

• Second Mortgages: If the interest rate is more than 8.5 percentage points above the CFPB determined “average prime offered rate.”

• Excessive Points and Fees: If total points and fees—not including bona fide third-party charges—exceed:

o Mortgage of $20,000 or More: 5 percent of the total transaction amount; or

o Mortgage Less than $20,000: The lesser of 8 percent of the total transaction amount or $1000 (or a higher amount determined by CFPB).

• Mortgage Insurance and Fees: The total points and fees shall exclude any premium provided by an agency of the Federal Government—such as FHA or VA—or an agency of the state, and also excludes “any amount” of private mortgage insurance which is less than the going FHA mortgage insurance rate, so long as the private mortgage insurance is refundable on a pro rata basis.

• CFPB Adjustment of Percentage Points: CFPB may later adjust the

number of percentage points which would result in a “high cost mortgage,” so long as those amounts are:

o First Mortgages on Real Property Primary Residences: no less

than 6 percentage points or greater than 10 in the case of a first mortgage on a borrower’s principle dwelling; and

o Mobile Homes: no less than 8 or greater than 12 in the case of a mobile home or similar personal property.

• Bona Fide loan discount points and prepayment penalties allowed for low-interest mortgages – Creditors may offer bona fide discount points in return for lower interest rates on the mortgage, but only if the interest rate is: (1) no more than 1 percent greater than the CFPB determined “average prime offered rate;” or (2) in the case of a mobile home, no more than 1 percent greater than the average interest rate on FHA-insured mobile home mortgages.

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o No Balloon Payments on High Cost Mortgages (§ 1432):

No balloon payments - No high cost mortgage may contain a scheduled payment that is more than twice as large as the average of earlier scheduled payments.

o Additional Requirements For High-Cost Mortgages (§ 1433):: TILA § 129 is amended to include:

Recommended Default Prohibited- No creditor may recommend or encourage a borrower to default on an existing loan or other debt prior to and in connection with the closing or planned closing of a high-cost mortgage that refinances all or any portion of such existing loan or debt.

Late Charges: No creditor may impose a late payment charge or fee in connection with a high-cost mortgage in an amount that is:

• in excess of four percent of the amount of the payment past due, unless the loan documents specifically authorize the charge or fee; or

• more than once with respect to a single late payment. (Further, a creditor may not charge late fees on late fees.)

• Case of Payments Applied to Past Due Principal Balance: If, however, the terms of the mortgage provide that any payment shall first be applied to any past due principal balance, the consumer fails to make an installment, and then resumes the installments, the creditor may impose a separate late payment charge for any principal due, until cured.

Acceleration of debt - No high-cost mortgage may contain a provision which permits the creditor to accelerate the indebtedness, except when repayment of the loan has been accelerated by default in payment.

Restriction on Financing Points and Fees for In-Portfolio Refinancings - No creditor may directly or indirectly finance, in connection with any high-cost mortgage, any prepayment fee or penalty payable by the consumer in a refinancing transaction if the creditor or an affiliate of the creditor is a noteholder of the note being refinanced.

Prohibitions on Evasions - TILA § 129 is amended to prohibit a creditor from structuring a high-cost mortgage as an open-ended credit plan in order to circumvent the application of these requirements and prohibitions.

Modification and Deferral Fees Prohibited - A creditor, successor in interest, assignee, or any agent of the above, may not charge a consumer any fee to modify, renew, extend, or amend a high-cost mortgage, or to defer any payment due under the terms of such.

Payoff Statement - TILA § 129 is amended by inserting:

• Payoff Statement Fees Prohibited: No creditor or service may charge a fee for informing or transmitting to any person the balance due to pay off the outstanding balance on a high-cost mortgage.

Pre-Loan Counseling Required for High-Cost Mortgages - TILA § 129 is amended to prohibit a creditor from extending credit to a consumer under a high-

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cost mortgage without first receiving certification from a counselor that is approved by the Secretary of HUD.

Safe Harbors for Corrections of Unintentional Violations: A creditor or assignee of a high-cost mortgage who, when acting in good faith, fails to comply with any requirement under this section will not be deemed to have violated such requirement if:

• Within 30 Days of Closing: This safe harbor applies to good faith errors discovered by anyone within 30 days of the loan’s closing. “Appropriate restitution” must be made to the consumer, likely to reimburse the consumer for any unlawfully charged interest or fees. This safe harbor does not apply if the mortgage is already subject to a court action under TILA. The creditor must notify the consumer and alter the terms of the loan to conform with one of these two options at the choice of the consumer:

o Modify the requirements of the high-cost loan to conform to the TILA requirements for “high cost” loans; or

o Modify the terms of the loan so that the loan is no longer subject to the “high cost” requirements.

• Within 60 Days of Creditor’s Discovery of Error: This safe harbor applies even after 30 days of closing, but only if the error is discovered by the creditor, not by the consumer. Like with the 30 days of closing safe harbor, “appropriate restitution” must be made to the consumer, likely to reimburse the consumer for any unlawfully charged interest or fees. This safe harbor also does not apply if the mortgage is already subject to a court action under TILA. The creditor must notify the consumer and alter the terms of the loan to conform with one of these two options at the choice of the consumer:

o Modify the requirements of the high-cost loan to conform to the TILA requirements for “high cost” loans; or

o Modify the terms of the loan so that the loan is no longer subject to the “high cost” requirements.

o Subtitle D—Office of Housing Counseling

Establishment of Office of Housing Counseling (§1442):

• Director: The Office of Housing Counseling at HUD will be headed by a Director who will be appointed by, and shall report to, the Secretary of HUD. Such position shall be a career-reserved position in the Senior Executive Service.

• Advisory Committee

o Members: This Secretary of HUD will appoint an advisory committee of up to 12 individuals, who “shall equally represent the mortgage and real estate industry, including consumers and housing counseling agencies certified by the Secretary of HUD.” Members will have 3 year terms and may be reappointed; initial appointments, however, will be four members for 1 year terms, four members for 2 year terms, and up to four members for 3 year terms.

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Counseling Procedures (§ 1443):

• Counseling Procedures: HUD certified counselors may offer:

o “Homeownership Counseling”—counseling related to homeownership and residential mortgage loans; and

o “Rental Housing Counseling”— counseling related to rental of residential property, which may include counseling regarding future homeownership opportunities and providing referrals for renters and prospective renters to entities providing counseling.

• Mortgage Software Systems: The Secretary of HUD shall provide for the certification of various computer software programs for consumers to use in evaluating different residential mortgage loan proposals.

• Foreclosure Rescue Education Programs: 10 percent of the Office of Housing Counseling’s budget will be used for foreclosure rescue education programs, primarily to help consumer avoid foreclosure rescue scams. This program requires the Office to send direct mailings to consumers in high foreclosure areas, including:

o Tips on avoiding foreclosure rescue scams;

o Tips on avoiding predatory lending mortgage agreements;

o Tips on avoiding for-profit foreclosure counseling services; and

o Information about local, HUD-certified counseling services.

Grants For Housing Counseling Assistance (§§ 1444-1445): HUD is authorized to issue grants to housing counseling organizations which use HUD-certified counselors. The counseling programs must also meet the requirements of section 1448, below.

• Warnings to Homeowners of Foreclosure Rescue Scams (§ 1452): 10 percent of any amount made available for HUD housing counseling grants, as discussed above, shall go to the Neighborhood Reinvestment Corporation for activities to promote foreclosure scam awareness for homeowners facing foreclosure.

Study of Defaults and Foreclosures (§ 1446): The Secretary of HUD shall conduct a study of the root causes of defaults and foreclosures.

Default and Foreclosure Database (§ 1447): The Secretary of HUD shall establish and maintain a database of information on foreclosures and defaults on mortgage loans for one- to four-unit residential properties and shall make such information publicly available, subject to privacy and confidentiality considerations.

Definitions for Counseling-related Programs: (§ 1448): A nonprofit organization: is organized under State or local laws; has no part of its net earnings inuring to the benefit of any member, founder, contributor, or individual; complies with standards of financial accountability acceptable to the Secretary; and has among its purposes significant activities related to the provision of decent housing that is affordable to low-income and moderate-income persons.

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• Credit Unions? This definition does not appear to be written so as to apply to state-chartered credit unions, however, it is conservable that state-chartered credit unions could possibly qualify depending on the HUD rulemaking to implement this section.

• CUSOs? A CUSO formed under state law for the purpose of providing housing counseling would presumably be eligible to qualify for HUD housing counseling grants and related programs, but the details regarding eligibility will depending on the HUD rulemaking.

Accountability and Transparency for Grant Recipients (§ 1449):

• Accountability for Recipients of Covered Assistance: The Secretary of HUD shall provide for the tracking of HUD funds.

• Misuse of Funds: If any counseling agency misuses HUD funds, the Secretary of HUD shall demand reimbursement and the agency shall be ineligible to apply for or receive any further covered assistance.

Updating and Simplification of RESPA Mortgage Information Booklet (§ 1450): Section 5 of the Real Estate Settlement Procedures Act of 1974 (RESPA) is amended to require the Director of the CFPB to prepare, and update at least once every five years, a booklet to help consumers applying for a “federally related mortgage loans” understand the loan’s nature and costs (such as information about prepayment penalties, “the trade-off between closing costs and interest rates over the life of the loan,” balloon payments, lending practices which are prohibited under TILA, a FAQ, and so forth).. These booklets will also be available through HUD-certified housing counselors. Dodd-Frank does not contain a time table for issuance of the booklet.

Home Inspection Counseling (§ 1451):

• HUD Home Inspection Documents for Consumers: HUD is required to produce four guidance documents for consumers regarding home inspections.

• Requirements for FHA-approved Lenders: Each mortgagee approved for participation in FHA mortgage insurance programs shall provide prospective homebuyers the HUD/FHA materials on home inspection.

• HUD Counselors: HUD-approved Counseling Agents shall be required to provide the same materials.

• Subtitle E—Mortgage Servicing

o Escrow and Impound Accounts Relating to Certain Consumer Credit Transactions (§ 1461): Chapter 2 of the TILA is amended by inserting after § 129C:

§129D Escrow and Impound Accounts Relating to Certain Consumer Credit Transactions: A creditor, in connection with the consummation of a consumer credit transaction secured by a first lien on the principal dwelling of the consumer—other than a consumer credit transaction under an open end credit plan or a reverse mortgage—shall be required to establish and escrow or impound funds for the payment of taxes and hazard insurance if:

o The escrow, impound, etc., is required by Federal or State law;

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o The loan is made, guaranteed, or insured by State or Federal governmental lending or insurance agency (e.g., FHA, VA);

o A first mortgage which is below the GSE conforming loan and which has an APR that will exceed the CFPB “average prime rate” (which is explained above in the summary of Dodd-Frank Title X) by more then 1.5 percentage points; or

o A “jumbo” first mortgage which exceeds the GSE conforming loan limit and which has an APR that will exceed the CFPB “average prime rate” by more than 2.5 percentage points.

• Exemptions: The CFPB, may, by regulation, exempt from the requirements a creditor that operates predominantly in rural or underserved areas, retains its mortgage loan originations portfolio, and meets any asset size threshold and any other criteria the CFPB may establish.

• Limited Exemptions for Loans Secured By Shares in a Cooperative or in Which an Association Must Maintain a Master Insurance Policy: This exemption appears to be intended to apply to housing cooperatives rather than to credit unions or other types of cooperatives.

• Administration of Mandatory Escrow or Impound Accounts: Except as otherwise provided in this title or by the CFPB, these accounts are to be established in a federally insured depository institution or credit union. Interest must be paid to the borrower on escrowed amounts if required by state or federal law.

• Voluntary Escrow Arrangements: This amendment is not intended to preclude a voluntary escrow arrangement when an escrow is not required under this provision of TILA.

• Required Disclosure: The creditor must provide the borrower with a disclosure regarding the escrow arrangement with the following information:

o That an escrow will be established for the loan;

o The amount initially required at closing to fund the escrow account;

o The amount of estimated taxes and hazard insurance (including flood insurance) and other required periodic payments based on either the property’s tax-assessed value or based on the property’s replacement cost;

o The estimated monthly amount which will be placed in escrow; and

o Other information which CFPB may require.

o Disclosure Notice Required For Consumers Who Waive Escrow Services (§ 1462): This section amends TILA § 129D to require a notice for consumers who waive escrow services.

o Real Estate Settlement Procedures Act of 1974 Amendments (§ 1463): The following provisions amend RESPA § 6. 12 U.S.C. § 2605.

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Limitations on Force-Placed Hazard Insurance: A servicer of a “federally related mortgage” shall not obtain force-placed hazard insurance unless there is a reasonable basis to believe the borrower has failed to comply with the contract’s requirements to maintain property insurance:

• Requirements for Force-placed insurance: A servicer shall not be construed as having a reasonable basis for obtaining force-placed insurance unless requirements have been met: written notice to borrower; sufficiency of demonstration (such as written confirmation of policy number and contact information for the insurance company or agent); termination of force-placed insurance within 15 days of receipt of borrower’s existing insurance coverage.

• Clarification with respect to Flood Disaster Protection Act: No provision of this section shall be construed as prohibiting a servicer from providing simultaneous or concurrent notice of a lack of flood insurance.

• Limitations on force-placed insurance charges: All charges shall be bona fide and reasonable.

Servicer Prohibitions: A servicer of a “federally related mortgages” may not:

• charge fees for responding to valid qualified written requests;

• fail to take timely action to respond to a borrower’s requests to correct errors relating to allocation of payments, final balances for purposes of paying off the loan, or avoiding foreclosure, or other standard servicer’s duties; or

• fail to respond within 10 business days to a request from a borrower to provide the identity, address, and other relevant contact information about the owner or assignee of the loan.

Increase in penalty amounts: Penalty amounts in RESPA §6(f) are increased from

• Non-Class Private Rights of Action: The maximum amount of non-actual damages in a consumer action (other than a class action) for violations of RESPA § 6 is increased from $1,000 to $2,000;

• Class Actions: The maximum non-actual damages in a class action is increased from $500,000 to $1 million (but cannot exceed more than 1% of the servicer’s net worth).

o Escrows Included in Repayment Analysis (§ 1465): TILA § 128(b) is amended to require creditors to include escrow payments in underwriting repayment analyses.

• Subtitle F—Appraisal Activities

o Property Appraisal Requirements for “High-Risk Mortgages” (§ 1471): Section 1471 adds a new § 129H to TILA. TILA § 129H prohibits a creditor may from making a “higher-risk mortgage” to any consumer without first obtaining a written appraisal of the property.

o Fed Rulemaking: Unlike most other provisions of TILA—which will be under CFPB jurisdiction—TILA § 129H will remain be under the jurisdiction of the Federal Reserve Board. See Dodd-Frank § 1472(d).

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Definition of “Higher-Risk Mortgage:” A higher-risk mortgage means a residential mortgage loan, other than a reverse mortgage, that is:

• Not a “qualified mortgage;” and

• Has an annual percentage rate that exceeds the CFPB “average prime rate” by:

o 1.5 percentage points in the case of a first mortgage that does not exceed the GSE conforming loan limit;

o 2.5 percentage points in the case of jumbo loan which exceeds the GSE conforming loan limit; or

o 3.5 percentage points in the case of a second mortgage.

Property Visit: For “higher-risk mortgages,” a licensed or certified appraiser must make a physical property visit to the home.

Free Copy to Consumer: The creditor must provide the consumer with a free copy of the appraisal.

Second Appraisal if Home Being Flipped: A second appraisal is required if the purpose of a higher-risk mortgage is to finance the purchase or acquisition of a house within 180 days of the house being sold at a lower price.

• Second Appraisal Requirements: The second appraisal shall include an analysis of the difference in sale prices, changes in market conditions, and any improvements to the property. The cost of the second appraisal may not be charged to the applicant. A creditor shall provide one copy of each appraisal to the applicant without charge within 3 days of closing.

o Appraisal Independence Requirements (§ 1472): Section 1472 adds a new section 129E to TILA.

Fed Rulemaking: Unlike most other provisions of TILA—which will be under CFPB jurisdiction—TILA § 129E will remain be under the jurisdiction of the Federal Reserve Board. See Dodd-Frank § 1472(d).

TILA § 129E prohibits violations of “appraisal independence” by someone with an interest in the transaction, including doing or attempting to do any of the following:

• Appraising a property in which the appraiser has a “direct or indirect” interest;

• Compensating, bribing, colluding with, or “inducing” the appraiser;

• Coercing, extorting, or intimidating the appraiser;

• Instructing the appraiser;

• Mischaracterizing the property’s appraised value;

• Encouraging a “targeted value;” or

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• Withholding or threatening to withhold compensation to the appraiser which he or she has earned by completing an appraisal report.

Exceptions: These provisions will not apply when a party to the appraisal:

• Asks the appraiser to consider additional, appropriate property information;

• Provides further detail; or

• Corrects errors.

Mandatory Reporting of Violations: There are mandatory reporting requirements if any party suspects the appraiser is failing to comply with Uniform Standards of Professional Appraisal Practice or violating law. NCUA may issue joint rules, interpretive guidelines, and general statements of policy.

• Fines: There is a $10,000-per-day penalty for first time violators and $20,000-per-day penalty for subsequent violations.

Interim Rulemaking: The Fed/CFPB shall issue interim final regulations no later than 90 days after the date of enactment.

Portability Rulemaking: NCUA, the Fed, OCC, FDIC, FHFA, and CFPB may jointly issue regulations that address the issue of appraisal report portability.

Safe Harbor: Appraisers may charge a customary and reasonable fee, which may be higher than usual in connection with a complex assignment.

o Amendments Relating to Appraisal Subcommittee of FFIEC, Appraiser Independence Monitoring, Approved Appraiser Education, Appraisal Management Companies, Appraiser Complaint Hotline, Automated Valuation Models, and Broker Price Opinions (§ 1473):

Section 1473 makes several revisions to the responsibilities and requirements of the FFIEC Appraisal subcommittee and/or its member agencies (including NCUA), such as:

• Multi-Family Appraisals: Agencies, such as NCUA, which are members of the FFIEC must now seek CFPB’s “concurrence” regarding the value threshold below which an appraisal by a certified or licensed a appraiser for a “federally-related” mortgage transaction is not required.

• Annual Report: The FFIEC Appraisal Subcommittee must transmit an annual report to the Congress not later than June 15 of each year detailing the manner in which each function assigned to the Appraisal Subcommittee has been carried out during the preceding year.

• Rulemaking Power: Section 1473 gives the FFIEC Subcommittee on Appraisals power to make regulations after notice and comment, as well as the authority to hold hearings.

o Limited Subject Matter: FFIEC regulations under this authority are limited to the following functions: “temporary practice,” “national registry,” “information sharing,” and “enforcement.”

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o Advisory Committee: The subcommittee shall establish an advisory committee of industry participants to give opinions in connection with such rulemakings.

Appraisal Management Company Minimum Requirements: NCUA, the Fed, FDIC, OCC, FHFA, and CFPB may jointly by rule, establish minimum requirements to be applied by a State in the registration of appraisal management companies.

• NCUA and others shall jointly promulgate regulations for the reporting of the activities of appraisal management companies to the Appraisal Subcommittee in determining the payment of the annual registry fee.

• Minimum qualification requirements will be enforced by the Appraisal Subcommittee.

• Monitoring of appraiser certifying and licensing by state governments will be conducted by the Subcommittee.

• The Subcommittee can establish a national hotline for complaints about appraisal management companies.

• Section 1473 modified the fee structure for the database of state-certified and licensed appraisers operated under the auspices of state governments and FFIEC. See 12 U.S.C. § 3338.

Automated Valuation Models: Subject to a joint rulemaking by NCUA, the Fed, OCC, FDIC, FHFA, and CFPB—in consultation with the FFIEC Appraisal Subcommittee—automated valuation models used in mortgage underwriting shall adhere to quality control standards designed to:

• Ensure a high level of confidence in the estimates produced by automated valuation models;

• Protect against the manipulation of data;

• Seek to avoid conflicts of interest;

• Require random sample testing and reviews; and

• Account for any other such factor that the agencies determine to be appropriate.

Broker Price Opinions: Broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property.

o Equal Credit Opportunity Act Amendments (§ 1474): Subsection (e) of section 701 of the Equal Credit Opportunity Act is amended to require:

Appraisal Copies Furnished to Applicants Even if the Loan Application is Denied or Withdrawn: Within 3 days of closing on the loan, the creditor shall furnish to an applicant a copy of any and all written appraisals and valuations developed in connection with the applicant’s application for a loan that is secured, whether the creditor grants or denies the applicant’s request for credit or the application is incomplete or withdrawn.

• Waiver: The applicant may waive the three day requirement except where prohibited by law.

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• Reimbursement for Cost of Appraisal: The applicant may be required to pay a reasonable fee for the cost of the appraisal (but the consumer still gets a “free” copy, see below).

• Free Copy of Appraisal: Notwithstanding the reimbursement, the creditor shall provide a copy of each written appraisal or valuation at no additional cost to the applicant.

o RESPA § 4 Form Revision (§ 1475): The standard form required by RESPA § 4 must

disclose: (a) the fee paid to the appraiser; and (b) any related “administration fee” charged.

o GAO Study on the Effectiveness and Impact of Various Appraisal Methods, Valuation Models and Distribution Channels, and on the Home Valuation Code of Conduct and the Appraisal Subcommittee (§ 1476): Section 1476 requires GAO to do a study on the above issues within 12 months of enactment of Dodd-Frank, and also requires GAO to do an additional study within 18 months of enactment regarding whether FFIEC, NCUA, and other federal agencies’ appraisal regulations are effective.

• Subtitle G—Mortgage Resolution and Modification

o Multifamily Mortgage Resolution Program (§ 1481): The Secretary of HUD shall develop a program to ensure the protection of current and future tenants and at-risk multifamily properties, where feasible, based on criteria including:

• Creating sustainable financing of such properties, taking take into consideration:

o The rental income generated by such properties; and o The preservation of adequate operating reserves;

• Maintaining the level of Federal, State, and city subsidies in effect as of the

date of the enactment of this Act;

• Providing funds for rehabilitation; and

• Facilitating the transfer of such properties, when appropriate and with the agreement of owners, to responsible new owners and ensuring affordability of such properties.

Prohibition on Certain Felons: No person shall be eligible to receive assistance from the Making Home Affordable Program if the person has been convicted in the last 10 years of felony larceny, theft, fraud, or forgery; money laundering; or tax evasion.

o Home Affordable Modification Program Guidelines (§ 1482): The Secretary of the Treasury shall revise the guidelines of the Making Home Affordable Program to require each mortgage servicer participating in such program to provide each borrower whose request for a mortgage modification is denied with all borrower-related and mortgage-related input data used in any net present value analyses. Such input data shall be provided to the borrower at the time of the mortgage modification denial.

o Public Availability of Information of Making Home Affordable Program (§ 1483): Section 1483 requires the Secretary of the Treasury to post on treas.gov and regularly update the following information about Making Home Affordable Program (HAMP) mortgage modification requests, on a servicer-by-servicer basis, including:

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The number of HAMP mortgage modification requests made to each loan servicer;

The number of HAMP mortgage modification requests processed by each servicer;

The number of HAMP mortgage modification requests approved by each servicer; and

The number of HAMP mortgage modification requests denied by each servicer.

o Protecting Tenants at Foreclosure Extension and Clarification (§ 1484): The date of notice of a foreclosure shall be deemed to be the date on which complete title to a property is transferred to a successor entity or person as a result of an order of a court or pursuant to provision in a mortgage, deed of trust, or security deed.

Section 1484 appears intended to require creditors to begin the eviction process on a tenant only after the lender has completed a foreclosure on the landlord’s fee interest in the property in question. This change is likely intended to ensure that tenants receive proper notice prior to being evicted from the premises (since some landlords fail to inform their tenants about an impending foreclosure).

• Subtitle H—Miscellaneous Provisions

o Sense of Congress Regarding the Importance of Government-sponsored Enterprises Reform to Enhance the Protection, Limitation, and Regulation of the Terms of Residential Mortgage Credit (§ 1491): “In 1996 HUD required that 42 percent of Fannie Mae’s and Freddie Mac’s mortgage financing should go to borrowers with income levels below the median for a given area. In 2004 HUD revised those goals to 56 percent and additionally mandated that 12 percent of all mortgage purchases by Fannie and Freddie be ‘special affordable’ loans made to borrowers with incomes less than 60 percent of an area’s median income. In 1995, HUD authorized Fannie and Freddie to purchase subprime securities. After this, subprime and near-prime loans increased from 9 percent to 40 percent of securitized mortgages in 2006. The conservatorship of Fannie and Freddie has potentially exposed taxpayers to upwards of $5.3 trillion worth of risk. The hybrid public-private status is untenable and must be resolved.”

o GAO Study Report on Government Efforts to Combat Mortgage Foreclosure Rescue Scams and Loan Modification Fraud (§ 1492): The Comptroller General shall submit a report detailing the adequacy of financial resources that the Federal Government is allocating to:

Crackdown on loan modification and foreclosure rescue scams; and

The education of homeowners about fraudulent scams relating to loan modification and foreclosure rescues.

o Emergency Mortgage Relief (§ 1496): Effective October 1, 2010, there is made available to the Secretary of HUD such sums as necessary to provide $1 billion in assistance through “The Emergency Homeowners Relief Fund” to be established under the Emergency Housing Act of 1975. 12 U.S.C § 2706. There are numerous details regarding eligibility requirements which will likely be clarified by HUD guidance.

Amount of Transfer Payment to Debtor: The amount of assistance provided to a homeowner under this fund shall be an amount that the Secretary determines is reasonably necessary to supplement such amount as the homeowner is capable of contributing toward such mortgage payment, except that the aggregate amount of such assistance provided for any homeowner shall not exceed $50,000.

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o Additional Assistance for Neighborhood Stabilization Program (§ 1497): $1 billion is to be made available to the Secretary of HUD for assistance to state and local governments “for the redevelopment of abandoned and foreclosed homes . . .”

o Legal Assistance for Foreclosure-related Issues (§ 1498): The Secretary of HUD shall establish a program for making grants for providing a full range of foreclosure legal assistance to low- and moderate-income homeowners and tenants for the purpose of home ownership preservation. Funds shall be made available to state and local legal aid organizations. Section 1498 authorizes $35 million for this purpose in fiscal year 2011 and an additional $35 million for fiscal year 2012.

TITLE XV—MISCELLANEOUS PROVISIONS

• Title XV contains provisions regarding use of U.S. government funds by the International Monetary Fund, conflict minerals, reporting requirements for coal and other mines, “disclosure of payments by resource extraction issuers,” a GAO study on the independence and effectiveness of Inspector General offices at Federal agencies, and a FDIC study regarding core versus brokered deposits held by FDIC-insured institutions.

TITLE XVI—SECTION 1256 CONTRACTS (I.E. SWAPS AND MARK-TO-MARKET ACCOUNTING)

• Title XVI originally included authority for a financial crisis assessment on large banks, but this was removed. The current version of Title XVI only contains one section, § 1601, providing that interest rate swaps, currency rate swaps, and similar derivatives are not required to have marked-to-market prices for accounting purposes at the end of each tax year (as would otherwise be required by I.R.C. § 1256).

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APPENDIX A: RULEMAKINGS IN DODD-FRANK TITLE X AND § 941 Regulation Agency Date Dodd-Frank Wall Street Reform and Consumer Protection Act Limits on interchange fees: (Sec. 1075). • Any interchange fee must be “reasonable and proportional” to the

“actual” cost of the individual transaction. • It would be prohibited to consider the costs of building a payment

system, the costs of non-payment by consumers, the costs from fraud losses, or the need for any profit.

Federal Reserve Board

9 months after enactment

Limits on Securitizations: (Sec. 941) • Securitizers and originators, including credit unions, have to retain

at least 5% of the credit risk of any asset that is transferred through an asset-backed security.

SEC, Fed, FDIC, OCC, HUD, FHFA

270 days after enactment

CFPB Examination on Credit Unions with over $10 Billion in Assets: (Sec. 1025) • CFPB will require reports and examinations, as well as have

primary enforcement authority.

Consumer Financial Protection Bureau (CFPB)

After Enactment

More information collections about consumer loans: (Sec. 1022(c)(4) and 1026(b)) • Credit unions will be subject to extensive new information

collections. • CFPB may disclose nonconfidential information that it gets from

credit unions as it deems to be in the best interest of the public.

CFPB After enactment

Expanded HMDA disclosures: (Sec. 1093) • Credit unions would have to report at least 13 new items under the

Home Mortgage Disclosure Act based on the dollar amount and number of mortgage loans.

CFPB After enactment

Prohibition of mandatory arbitration clauses: (Sec. 1028(b)). • Prohibit mandatory arbitration clauses.

CFPB 180 days after regulation implemented

Rules on “unfair, deceptive, or abusive” practices: (Sec. 1031(b)) • CFPB is authorized to issue new rules regarding “unfair,

deceptive, or abusive” acts or practices.

CFPB After enactment

Disclosures to consumers about risks of a transaction: (Sec. 1032(a)) • Credit unions will have to make disclosures regarding the costs,

benefits, and risks, in light of the facts and circumstances of a given transaction, for every covered financial product or service (such as loans).

CFPB After enactment

New TILA and RESPA disclosure: (Sec. 1032(f)) • Publish new mandatory disclosures that combine requirements of

the Truth in Lending Act and the Real Estate Settlement Procedures Act.

CFPB Not later than 1 year after transfer date

Disclosures about existing customer transactions: (Sec. 1033(a)) • Issue rules requiring credit unions to provide information, including

cost, charges, and usage data. • To any customer who asks for it regarding any transaction with the

credit union. • Data are to be made available electronically and through

standardized formats, including machine-readable files, that the

CFPB After enactment

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CFPB will design. FTC Jurisdiction: (Sec. 1088) • Strips the FTC of some jurisdiction, but gives expanded authority

in other areas (such as litigation authority).

FTC After enactment

Contracts in violation of CFPB rules: (Sec. 1036) • Unlawful for a credit union to enforce, or attempt to enforce, any

agreement that does not conform to the CFPB rules.

CFPB After enactment

Burdens on remittance transfers: (Sec. 1073) • Credit unions that offer remittances will have to make disclosures,

updated daily, for sample transfers of $100 and $200 that show what the recipient would receive in the 3 currencies into which the dollars are most frequented converted by the bank.

• Additional disclosures would be required for each remittance. • The disclosures would have to be in all of the foreign languages

that are principally used by the credit union’s customers. • There are some exemptions and safe harbors applicable to wire

and ACH transfers, but one of these is set to expire as early as 5 years, but no longer than 10.

CFPB After enactment