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Preparing for Changes Under the Dodd-Frank Financial Services Law

Thursday, July 01, 2010 - Frank Gonzalez,CPA / CFF

Frank Gonzalez

The debate on financial services reform has ended, and community banks and other financial institutions are waiting to see how the historic 2010 law will impact their lending, deposit gathering, other operations and prospects for long-term profitability.

President Obama on July 21 signed the Dodd-Frank Wall Street Reform and Consumer Protection Act HR 4173. Most of the law's provisions took effect the following day. Federal regulators have deadlines, in most cases one year from the signing of the bill, to implement rules for new regulatory agencies and programs. Congress approved the bill on July 15, following debate and a series of revisions that began last year.

The law's major changes that will impact community banks include:

  • Making permanent the $250,000 maximum FDIC deposit insurance coverage.
  • Extending the Transaction Account Guarantee (TAG) program until January 1, 2013.
  • The changing of the Federal Deposit Insurance Corporationfrom a deposit-based system to an asset-based system for determining the premiums that banks pay for deposit insurance.
  • Eliminating Tier 1 Capital treatment for new issues of Trust Preferred Securities, while grandfathering in that treatment on previous issues of those securities for bank holding companies with less than $15 billion in assets.
  • Creating a new Bureau of Consumer Financial Protection.
  • Establishing a new series of financial industry-wide residential mortgage lending rules which in some cases are the same as current requirements for FDIC-insured institutions.

Here are details of some of the law's significant sections:

$250,000 Insurance Coverage

Effective immediately, the law permanently sets the standard maximum deposit insurance amount at $250,000. In a series of prior decisions, the FDIC had temporarily raised that coverage limit from $100,000 to $250,000 through December 31, 2013. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

Representatives of the banking industry sought the permanent change, viewing it as a means to help reinforce consumer confidence and to help community banks retain full amounts of many of their customers' larger deposits.

Transaction Account Guarantee (TAG) Program

The law extends the Transaction Account Guarantee (TAG) program through December 31, 2012.

Under TAG, the FDIC provides unlimited deposit insurance coverage on qualifying noninterest-bearing transaction accounts and qualifying Negotiable Order of Withdrawal (NOW) accounts. The FDIC implemented TAG in October 2008, with a plan to eventually reduce the insurance coverage on those accounts to a maximum of $250,000.

In its last action on TAG prior to passage of the Dodd-Frank law, the FDIC extended the program from July 1, 2010 to December 31, 2010. Since it implemented TAG, the FDIC has said one of the goals of the program is to help community banks retain their larger business checking accounts

New FDIC Insurance Assessment System

The FDIC will change the calculation of deposit insurance assessments from the current system based on a bank's deposits to a system based on its assets.

Banks now make quarterly payments to the FDIC Deposit Insurance Fund (DIF) based on a percentage of their total domestic deposits.

Under a new system that the FDIC will implement, the assessment will be based on a bank's average consolidated total assets during the assessment period minus the average tangible equity of the bank during the assessment period.

The FDIC will determine new ratios of premiums to assets, with banks with higher safety and soundness ratings continuing to have lower ratios.

Many members of Congress who supported the change viewed it as a means to shift part of the cost of deposit insurance from small and mid-sized banks that rely heavily on deposits for their funding to large banks that often have multiple sources of funding and liabilities.

Trust Preferred Securities

The law also makes major changes in the treatment of trust preferred securities (TruPS) as capital, with an important exemption for bank holding companies with less than $15 billion in assets as of December 31, 2009.

Holding companies have been permitted to treat proceeds from TruPS as Tier 1 Capital. TruPS are otherwise treated as debt instruments, with investors receiving interest payments. Under the new law, TruPS issued on or after May 19, 2010 cannot be counted as Tier 1 Capital by any banks.

Bank holding companies with less than $15 billion in assets can retain Tier 1 treatment for TruPS issued on or before May 19, 2010. For bank holding companies larger than that size, Tier 1 treatment of previously issued TruPS will be phased out incrementally over three years beginning on January 1, 2013. The change will result in TruPS proceeds being treated as Tier 2 Capital.

The law also requires federal banking regulators to establish minimum leverage capital requirements and minimum risk-based capital requirements for insured depository institutions and their holding companies, as well as for non-bank financial companies supervised by the Federal Reserve.

The law states that the requirements "shall not be less than the generally applicable requirements" for insured depository institutions prior to the enactment of the law. For classification as "Well Capitalized," the FDIC requires banks to have minimum ratios of 5.0 percent for leverage, or Tier 1 Capital to total assets, 6.0 percent for Tier 1 Capital to risk-based assets and 10.0 percent for total capital to risk-based assets. To be "Adequately Capitalized," the minimums are 4.0 percent for leverage, 4.0 percent for Tier 1 Capital to risk-based assets and 8.0 percent for total capital to risk-based assets.

Since Congress began its debate on financial reform, some bankers and economists have expressed concerns that establishment of higher capital standards for banks could result in a contraction of commercial lending and other lending.

Consumer Protection Bureau

The law creates a Bureau of Consumer Financial Protection, within the Federal Reserve. The new bureau will coordinate the regulation and supervision of mortgage loans, credit card loans and other loans offered to consumers by FDIC-insured institutions, credit unions and many other financial companies. Banks are waiting for enactment of regulations that will determine the requirements and expected costs of compliance with new system.

Mortgage Lending Standards

The law's section on mortgage lenders includes a large series of requirements for originators and for businesses and individuals that assist in the residential mortgage process. Many of the requirements are identical to those that FDIC-insured banks must follow under long-standing laws and regulations. One highly publicized section of the law is the establishment of parameters under which lenders and affiliated parties must determine if borrowers can repay loans.

The law's section on mortgage lending is Title XIV. That section and other sections are contained in the law's text, for which a link is provided at the beginning of this article.

MBAF will issue Financial Institutions Services Advisories when federal regulators issue rules that implement significant requirements under the new law.

The purpose of this newsletter is to provide general information on tax, audit and other issues related to the financial services industry. The information contained herein may not apply to all institutions or organizations and their specific circumstances. Financial services organizations are encouraged to consult directly with an accounting expert before making tax and accounting decisions.