The document provides an overview of recent legislative, regulatory, and policy developments that are impacting the financial services industry. Key points include: - The Economic Growth, Regulatory Relief, and Consumer Protection Act provides regulatory relief for smaller banks and raises various asset thresholds. - Recent speeches by Federal Reserve officials emphasize transparency in regulatory policies and balancing pre-positioning of capital with flexibility. - The OCC Comptroller is urging banks to meet consumers' short-term small dollar credit needs. - The presentation discusses the implications of these changes for regulatory burden, competition between large and small banks, and issues for banks' boards of directors to consider.

1. Impact of Legislative and Regulatory Reform
Webinar for Financial Institution Directors
Presented by:
Christine Edwards
Jerry Loeser
June 18, 2018

2. What We Will Cover
• New Regulatory Reform Legislation
• Recent Federal Reserve Speeches
• Comptroller of the Currency Developments
• Community Reinvestment
• Recent Noteworthy Actions of the New York Department of
Financial Services
• New Beneficial Ownership Rule
• What Might Be Expected from New Chair of FDIC
2

3. Economic Growth, Regulatory Relief, and
Consumer Protection Act (“EGRRCPA”)
• Signed by the President May 24, 2018
• Contents
• Tailoring Regulation for Certain Bank Holding Companies
• Regulatory Relief
• Capital Formation
• Mortgage Credit
• New Consumer Protections
• Student Loans
3

4. Tailoring Regulation of Bank Holding Companies
• Enhanced Prudential Supervision
• Raises threshold from $50 billion to $250 billion
• Requires tailoring of supervision
• Raises the threshold for requiring a risk committee from $10 billion in
assets to $50 billion in assets
• Requires that FRB and company stress tests only include severely
adverse, and not merely adverse, scenarios
4

5. Tailoring Regulation of Bank Holding Companies
• Eliminates the requirement that company stress tests be
conducted either semi-annually or annually and, instead,
provides that they shall be conducted “periodically”
• Raises the threshold for the limit of a 15 to 1 debt to equity
ratio from $50 billion in assets to $250 billion
• Effective immediately as to BHCs under $100 billion in
assets; otherwise effective November 24, 2019
• This does not affect FRB treatment of foreign banks with
more than $100 billion in assets or the requirement that they
establish intermediate holding companies
5

6. Tailoring Regulation of Bank Holding Companies
• Supplementary Leverage Ratio for Custodial Banks
• Funds deposited by a custodial bank in a government’s central bank
shall not be taken into account when calculating the custodial bank’s
supplemental leverage ratio.
• Only funds “linked to” fiduciary, custodial, and safekeeping accounts.
• Q: Does this put custody departments of non-custodial banks at a
competitive disadvantage?
6

7. Tailoring Regulation of Bank Holding Companies
• Treatment of Certain Municipal Obligations
• For purposes of liquidity coverage ratio rules, bank regulators are to
treat municipal obligations that are liquid, readily marketable, and of
investment grade as “high-quality liquid assets.”
• Characterized by some as, for capital markets, the most significant
change in the legislation
7

8. Board Perspective on These Changes
• Directors should consider asking the CFO whether the
company intends to change its investment perspective on
municipal bonds.
• Directors may also ask whether this legislation will have an
impact on municipal bond markets generally and, if so, how
that may impact the company.
8

9. Regulatory Relief
• Capital Simplification for Community Banks (Assets of Less
than $10 billion)
• Bank regulators are to adopt rules providing for a “Community Bank
Leverage Ratio” of not less than 8 percent and not more than 10
percent.
• Meeting that standard shall be deemed to satisfy all community
bank capital requirements.
• Including Prompt Corrective Action requirements
9

10. Additional Regulatory Relief
• Reciprocal deposits in a bank that places deposits through a
reciprocal deposit placement network of banks in amounts that are
less than or equal to the amount of FDIC insurance (e.g. CDAR
participants) will not be considered brokered deposits so long as the
amount does not exceed the lesser of $5 billion or 20 percent of
liabilities of the bank.
• Exemption from the Volcker Rule for firms in banking organizations
with less than $10 billion in assets
• Loosening of name restriction in investment adviser client exception in
Volcker Rule
• Simplifying call reports for banks holding less than $5 billion in assets
• Option for federal savings associations to elect rights and duties of
national banks
• Q: Effect on parent holding companies? 10

11. Additional Regulatory Relief
• Increase applicability of FRB’s Small BHC and SLHC Policy
Statement (permitting acquisition debt) from firms with $1
billion in assets to firms with $3 billion in assets
• For banks with $3 billion in assets or less, examination cycle
is lengthened from every 12 months to every 18 months
(previously 18-month cycle was only for banks with assets
under $1 billion)
• Requires Treasury, FRB, and the Director of the Federal
Insurance Office to support increased transparency at global
insurance standard-setting forums
• Limiting higher capital requirements for certain high-volatility
commercial real estate (“HVCRE”) loans for acquisition,
development, or construction loans secured by real estate
11

12. Board Perspective on These Changes
• Potential Board Inquiry: Has management considered
whether the exemption of community banks from the Volcker
Rule:
• Creates a competitive challenge for the company by having an
increasing number of competitors not subject to the same rules; or
• Presents a business opportunity for the company to provide the
proprietary trading and investment needs of community banks?
12

13. Capital Formation
• Requires the SEC to assess, and disclose actions it intends to take
promptly on, recommendations of its annual government-business
forum on capital formation
• Venture capital funds with less than $10 million in capital may have up
to 250 investors without being deemed an “investment company”
• Requires the SEC to increase from $5 million to $10 million the
aggregate sales price, as part of an offering under an employee
benefit plan, in excess of which an issuer must deliver additional
disclosure
• Requires the SEC to expand the exemption for small offerings to
include such offerings by publicly held companies
• Requires the SEC to adopt rules permitting closed-end investment
companies to use securities offering and proxy rules available to
publicly held firms, including provisions available to “well-known
seasoned issuers” 13

14. Board Perspective on These Changes
• Potential Board Inquiry: What impact will these changes have
on the capital markets generally and will these changes
enhance access to capital, or have the potential for crowding
out capital transactions?
14

15. Mortgage Credit
• Creates a safe harbor under the “ability to repay”
requirement for certain loans originated and retained by
banks that are part of organizations with less than $10 billion
in assets if the loan
• Is not resold,
• Does not penalize prepayment,
• Does not have negative amortization,
• Is based on consideration of debt, income, and financial resources
of the consumer.
15

16. Mortgage Credit
• Eliminates the appraisal requirement for loans secured by
rural real property where a bank has contacted at least three
appraisers and none are available in five business days, if
the transaction value is less than $400,000
• Limitations on sale of such loans
16

17. Mortgage Credit
• Exempts from certain, but by no means all, of the reporting
requirements in the Home Mortgage Disclosure Act
(“HMDA”) banks that originate fewer than 500 closed-end
mortgage loans or 500 open-end lines of credit if such banks
have a satisfactory or better Community Reinvestment Act
(“CRA”) rating.
17

18. Mortgage Credit
• Requires the BCFP to exempt from the requirement that an
escrow account be established, first-lien loans by a bank on
principal dwellings if:
• The bank has assets of $10 billion or less,
• The prior calendar year, the bank originated 1,000 or fewer such
loans,
• The first lien is on property in a rural or underserved area,
• The bank and its affiliates normally do not maintain such escrow
accounts, and
• The loan is not a “higher-priced mortgage loan.”
18

19. Board Perspective on These Changes
• Potential Board Inquiry: Should management of larger banks
consider curtailing residential mortgage loans in geographic
areas served by community banks—particularly when they
have the cost advantage of being exempted from consumer
protection regulations?
• Potential Board Inquiry: Should larger banks aggressively
advertise the fact that they provide consumer protections that
smaller banks will not offer?
19

20. New Consumer Protections
• The legislation is not an unalloyed blessing.
• The regulatory relief bill, besides relieving banks of some
regulatory burdens, contains a title that imposes a number of
new regulatory burdens.
• Title III (“Protections for Veterans, Consumers, and
Homeowners”) imposes a number of new legal obligations on
banks and other regulated firms.
20

21. New Consumer Protections
• A credit reporting agency’s (“CRA”) obligation to provide a fraud
alert in a consumer’s file upon a consumer’s request is extended
from 90 days to one year.
• A CRA,
• At a consumer’s or protected person’s (an individual under the age of 16 or
an “incapacitated” person) request is to place, free of charge, a security
freeze on his or her credit report;
• Confirm that to the consumer or protected person;
• Remove, free of charge, the freeze on request of the consumer or
protected person (in one hour if the request is by phone or electronic
means);
• Provide consumers a form of notice of the right to obtain a security freeze;
and
• Establish a webpage allowing freezes and fraud alert requests and opting
out of use of information to send solicitations of credit or insurance. 21

22. New Consumer Protections
• No CRA may make any consumer report containing:
• Any information related to a veteran’s medical debt (medical
collections owed to a non-health care provider submitted to the VA
for health care authorized by the VA) if the date on which the
services were rendered antedates the report by less than one year;
and
• Any information related to a fully paid or settled veteran’s medical
debt.
• A CRA shall delete all information relating to a veteran’s
medical debt and notify the furnisher of that deletion if the
CRA receives notice and documentation from a veteran that
the VA is in the process of making payment. 22

23. New Consumer Protections
• A loan to a veteran that is being refinanced as a non-cash-
out loan may not be guaranteed by the VA unless:
• The lender provides the VA with a certification of the recoupment
period for fees, closing costs, and expenses,
• Those costs are to be recouped in 36 months,
• The recoupment is calculated through lower monthly payments, and
• The original loan has been seasoned for at least 210 days.
• FNMA and FHLMC may not condition purchase of a loan on
a credit score unless the credit score is derived from a model
approved by FNMA or FHLMC, respectively.
23

24. New Consumer Protections
• A CRA shall provide free credit monitoring to active duty
military consumers that request such monitoring.
24

25. Student Loans
• With respect to private student loans, creditors may not
declare a default on the sole basis of the bankruptcy or death
of a cosigner.
• The holder of a private student loan shall release any
cosigner in the event of death of the student.
• Private student loan lenders are to provide the students an
option to designate someone to act in the event of the death
of the student.
• A consumer may request a financial institution to remove
from a credit report a private student loan default if it offers a
loan rehabilitation program, approved by the Federal
Reserve, that is met by the borrower.
25

26. What This Means for the Regulatory Environment
• Since President Trump issued his early Executive Orders for
regulatory reform, the federal bank regulators have been
selectively reducing regulatory burden.
• Simplification of capital rules
• Exemptions from Comprehensive Capital Analysis and Review process
• Zero percent countercyclical buffer
• Increased transparency in Federal Reserve stress-testing expectations
• Extended examination cycles
• Elimination of certain director responsibilities
• Exemptions from appraisal requirements
• The EGRRCPA continues and possibly accelerates that trend.
26

27. What This Means for Competition
• Smaller banks will have distinct competitive advantages over
larger banks.
• Lower regulatory compliance costs
• Quicker loan approvals
• Lower capital costs
• Custodial banks will have lower capital costs
• Advantages over custody departments of larger banks
• Regional banks are freed of
• Enhanced prudential supervision
• 15 to 1 limit on debt to equity ratio
27

28. What This Means for Competition
• Larger community banks need not have risk committees
• Smaller community banks
• Lower capital costs
• Exemption from Volcker Rule
• Simplified call reports
• Acquisition debt
• Less frequent examinations
• Exemption from “ability to repay” rule
• Exemption from appraisal requirements on real estate loans
• Exemption from certain HMDA reporting requirements
• Exemption from escrow account requirement 28

29. Recent Federal Reserve Speeches
• FRB Chairman Jerome Powell – May 25, 2018, to Swedish
Central Bank Conference
• Transparency and accountability in regulatory and financial stability
policies
• Pre-Crisis – manage crises as they arose
• Post-Crisis – prevention
• Capital and liquidity buffers
• Stress tests
• Transparent results
• Resolution planning
• Risk management
29

30. Recent Federal Reserve Speeches
• FRB Chairman Jerome Powell – May 25, 2018, to Swedish Central
Bank Conference
• Transparency and accountability in regulatory and financial stability policies
• During Crisis – extraordinary actions were taken that were difficult to explain
to skeptical public
• Erosion of public trust
• Independence is necessary
• Requires transparency
• Necessary for accountability and democratic legitimacy
• Improves effectiveness of policy
o E.g. first post-Crisis stress tests
 Restored public confidence
• Stress testing and resolution planning pose particular transparency
challenges
30

31. Recent Federal Reserve Speeches
• FRB Vice Chairman for Supervision Randal Quarles – May
16, 2018, to Harvard Law School
• “Trust Everyone – But Brand Your Cattle”
• The helpfulness of “ring-fencing” or “prepositioning” depends on
perspective of home or host regulator.
• Home regulator wishes to maximize efficient allocation of resources in
good times.
• Host regulator wishes to minimize loss in times of stress.
• Pre-Crisis emphasis was on maximizing efficient flow of capital across
globe.
• Post-crisis emphasis on minimizing cost of failure by mitigating
impediments to cross-border resolution.
• Single-point-of-entry
• Bail-in 31

32. Recent Federal Reserve Speeches
• FRB Vice Chairman for Supervision Randal Quarles – May
16, 2018, to Harvard Law School
• “Trust Everyone – But Brand Your Cattle”
• Need to balance certainty (prepositioning total loss absorbing capacity capital
at material entities) and flexibility to meet unanticipated losses (holding
contributable capital at parent)
• This issue applies to both capital and liquidity.
• Prepositioning can reduce damaging unpredictable seizures by local
regulator during times of stress.
• FRB may propose rules formalizing resolution capital and liquidity
requirements.
32

33. Recent Federal Reserve Speeches
• FRB Vice Chairman for Supervision Randal Quarles – May 4,
2018 to Hoover Institution Monetary Policy Conference
• “Liquidity Regulation and the Size of the Fed’s Balance Sheet”
• This illustrates the relationship between financial regulation and monetary
policy.
• A leverage capital requirement that is too high favors high-risk activities and
disincentivizes low-risk activities.
• Capital cost of each additional asset was the same, whether it was risky or safe, and
the riskier assets produce the higher return.
• Liquidity coverage ratio (“LCR”) requirements treat deposits that banks hold
at Reserve Banks as highly liquid assets meeting the requirements.
• That incents banks to hold such deposits and thereby increases the total assets of
the FRB.
• Today reserve balances of $2 trillion are many orders of magnitude higher than before the
Crisis. 33

34. Recent Federal Reserve Speeches
• FRB Vice Chairman for Supervision Randal Quarles – May 4,
2018, to Hoover Institution Monetary Policy Conference
• “Liquidity Regulation and the Size of the Fed’s Balance Sheet”
• The Federal Reserve’s process of balance sheet normalization is slowly
reducing reserve balances.
• As the FRB reduces its holdings of Treasuries, banks may convert reserve balances
to Treasuries if the return on Treasuries is higher than that on reserve balances.
(Both satisfy LCR requirements.)
• Reduction in FRB assets and drop in reserve balances could place upward pressure on
interest rates.
• A December 2017 FRB-NY survey of primary dealers and market participants
suggested that, by 2025, the level of reserve balance should be substantially lower,
but above the level that prevailed before the Crisis.
• Half estimated that the amount would drop from $2 trillion to between $400 billion and $750
billion.
• Retail deposits may be especially desired by banks because they receive the
most favorable treatment under LCR and also tend to be relatively low cost.
• However, rising interest rates may increase competition for retail deposits.
34

35. Board Perspective on These Speeches
• Board Takeaway: Regulators today are analyzing regulations
and their cost/effect very differently than prior appointees.
• Potential Board Inquiry: What regulation or exam result that
your company was not satisfied with could be addressed
more efficiently, and in a way consistent with the new
regulatory mindset?
35

36. Recent OCC Developments
• Comptroller Urges Banks to Meet Consumers’ Short-Term (2-
12 month) Small Dollar Credit Needs
• Millions borrow $90 billion annually in amounts from $300 to $5,000.
• May 23, 2018 OCC Bulletin encouraging offering such installment loans
• Including to consumers with weaker credit histories who have the ability to
repay
• And to consumers outside of a bank’s underwriting standards for credit
scores and repayment ratios
• Equal amortizing payments
• Discuss with OCC first
• Q: Conflict with BCFP payday lending rule?
• Covers loan with maturities shorter than 45 days or longer-term loans with
balloon payments
• To be reconsidered by the BCFP
• “OCC views unfavorably an entity that partners with a bank with the
sole goal of evading a lower interest rate established under the law of
the entity’s licensing state.” 36

37. Recent OCC Developments
• Issuance of Semiannual Risk Perspective
• May 24, 2018
• Highlights
• Eased loan underwriting
• Elevated operational risk
• Increasing severity of cyber threats
• Controls
• Originating through social engineering emails enabling access
• Poor authentication controls
• Use of unpatched or unsupported software and hardware
• Third-party connections
• Tested response plan needed
• Increasing concentration in a few large service providers
• Fraud attempts rising
37

38. Recent OCC Developments
• Issuance of Semiannual Risk Perspective
• Highlights
• Compliance risk
• Criminals may exploit new technological platforms
• Compliance function must be involved in new product offerings
• FinCEN’s new beneficial ownership rule
• Rapidly changing OFAC sanctions
• HMDA data fields have increased from 39 to 110.
• Military Lending Act’s 36% APR cap and a rising interest rate environment
38

39. Board Perspective on These Developments
• Potential Board Inquiry: Is a small-dollar lending program a
possible pipeline for newer, younger customers—that may be
upwardly mobile? What does your management know about
this market?
39

40. Community Reinvestment Act
• April 3, 2018
• Memorandum to federal bank regulators from Department of Treasury
• Update geographic assessment areas to account for changing technology
and customer behavior (e.g. mobile banking)
• Enable banks to pre-determine eligibility of investment
• Reduce subjectivity as to performance to improve consistency
• Reduce overemphasis on branch network
• Speech to American Bankers Association by Comptroller Joseph Otting
• Modify CRA to cut compliance costs and increase lending
• Impose a numerical measure of performance based on loans to low- and
moderate-income persons as a percentage of assets, deposits, or capital
• Expand types of loans that count
• Emphasize student and small business loans
40

41. Recent Noteworthy Actions of the New York
Department of Financial Services
• Chartering seven virtual currency firms (settlement, custody) after
considering:
• Anti-money laundering
• Anti-fraud
• Capitalization
• Consumer Protection
• Cybersecurity
• Fining insurance companies for providing through the National
Rifle Association:
• Liability insurance for acts of intentional wrongdoing and
• Legal services insurance for expenses for acts of self-defense by gun owners
charged with a crime
• Transitioned budget planners and premium finance companies to
the Nationwide Multistate Licensing System (“NMLS”), joining
money transmitters and mortgage providers 41

42. Board Perspective on These Actions
• Possible Board Inquiry: M&A transactions require a positive
CRA rating to be approved by the bank regulators. Does this
action by the OCC signal a more flexible approach to M&A
approval as well?
42

43. New Beneficial Ownership Rule
• Issued by the Financial Crimes Enforcement Network
(“FinCEN”) in the U.S. Treasury Department
• An anti-money laundering rule
• Compliance became mandatory May 11, 2018
• Covered financial institutions (banks, broker-dealers, mutual
funds, futures commission merchants)
• To establish procedures to identify and verify beneficial owners of new
legal entity customers
• Beneficial owners
• Each individual who, directly or indirectly, owns 25 percent or more of the
equity of the entity and
• Single individual with responsibility to manage the entity
43

44. New Chairman of FDIC Jelena McWilliams
• Former FRB staffer
• Former Senate Banking Committee staffer
• Former Fifth Third Bank Chief Legal Counsel
• Immigrated from Yugoslavia at 18
• Yugoslavia did not have deposit insurance and her parents’ savings were wiped out
when the local bank failed.
• Will focus on
• The regulatory burden on community banks
• De novo charters for community banks
• Replenish the number of banks that closed
• Cybersecurity
• Notice of breaches
• The effect of international Basel capital and liquidity standards on community banks
• Appreciates the need for cost-benefit analysis in adopting regulations
• Will ensure the FDIC fully executes the Community Reinvestment Act
44

45. Board Perspective on New Chairman
• Possible Board Inquiry: Since the President now has
appointed and his appointees are now confirmed on all
financial interagency panels, such as the FFIEC, are there
interagency issues that the company/the industry should
raise with policy makers? Chairman McWilliams may round
out the agencies and be a voice for reasonable regulation
and balancing of costs versus benefits.
45