Making sense of leadership changes at the regulators

The US regulatory landscape is shifting—
and so is its leadership. Here’s what’s happening and how it might affect community banks.

By Kathryn Jackson Fallon

The June 2017 Treasury Report on financial regulation had some welcome recommendations where community bankers are concerned, but leadership vacancies at various government agencies could slow the process for putting these reforms in place.

Treasury’s recommended reforms include regulatory changes such as simplified capital rules, more flexible commercial real estate guidance, streamlined call reports and a more reasonable examination approach. Exempting community banks from Basel III capital requirements and going back to a much simpler method of assessing their capital adequacy is on every community bank’s wish list.

The FDIC, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board and the Federal Reserve community banker’s seat are or might soon be without a guide to spearhead reform. A holdover from the previous administration currently leads the Consumer Financial Protection Bureau.

At the moment, the prudential regulators don’t have significant pending regulations on which they must act. However, as Karen Thomas, ICBA senior executive vice president, government relations and public policy, explains, “The expectation is once we have new personnel in place at these agencies, there is a significant amount of regulatory relief that they could provide without legislation.” Yet the longer it takes to have new personnel in place at each agency, the longer the delay in the expected regulatory relief.

The prudential regulators jointly issue many regulations. It usually takes all three of these agencies—the OCC, Fed and FDIC—to implement changes. For example, regulatory capital rules are issued jointly by the OCC, Fed and the FDIC and can be amended without legislation. Currently, mortgage servicing assets are treated unfavorably, and high-volatility commercial real estate has a high risk-weight under the capital rules, Thomas explains. These are both areas for which agencies could provide relief. In fact, the agencies announced at the end of August that “they are developing a proposal that would simplify the capital rules to reduce regulatory burden, particularly for community banks. That proposal would simplify the capital rules’ treatment of mortgage servicing assets and other items.”

The OCC, Fed and FDIC each supervise different banks. The OCC oversees national banks; the Fed supervises state banks that are members of the Federal Reserve System; and the FDIC supervises state nonmember banks. “Each agency has an approach to examination and supervision that a change in personnel at the top of the agency could impact and influence,” Thomas says.

“Each agency has an approach to examination and supervision that a change in personnel at the top of the agency could impact and influence.”
—Karen Thomas, ICBA

There has been some movement in filling vacant posts. The Senate Banking Committee held confirmation hearings before Congress’s August recess and in September voted to approve both Randal Quarles as Fed vice chairman for supervision and Joseph Otting as head of the OCC. With Congress having faced many critical issues in September, timing on final confirmation is hard to predict.

Federal Reserve
President Trump nominated Quarles, a former undersecretary of the Treasury in the George W. Bush administration, to serve on the Federal Reserve Board as vice chairman of supervision. As such, Quarles will likely lead all of the regulatory changes affecting bank supervision. While the entire board of governors would vote on any regulatory changes, as vice chairman for supervision, Quarles will heavily influence the direction of the regulation and the supervisory approach.
Office of the Comptroller
of the Currency

Trump’s nominee for OCC head is Joseph Otting, former president and CEO of $12 billion-asset OneWest Bank, which Treasury Secretary Steven Mnuchin founded. As with Quarles, the Senate Banking Committee voted to advance Otting’s nomination to the floor for a full Senate confirmation.

Under the National Bank Act, the president has considerable leeway to appoint an acting comptroller of the currency when the office is vacant. In May, Washington banking lawyer Keith Noreika was appointed acting comptroller and will remain in the position until Otting’s confirmation by the Senate. Noreika recently said he was requesting public input about how to more precisely delineate what the Volcker Rule proscribes.

FDIC chair
Current FDIC Chairman Martin Gruenberg’s term ends in November. President Trump’s choice to head the agency, James Clinger, one-time chief counsel of the House Financial Services Committee, withdrew his nomination in July, citing family-related obligations. There have been other names mentioned, but as of this writing, nothing has solidified.

This setback is likely to delay Trump’s plan to pull back Dodd-Frank. Clinger was one of a triumvirate of nominees—Quarles as vice chairman for supervision at the Federal Reserve, Otting for comptroller of the currency and Clinger at the FDIC—that would have ensured a tapering of Dodd-Frank.

Fed community banker’s seat
Many potential candidates for this position have been stymied by requirements that the candidate and his or her immediate family divest themselves of all bank stock holdings. Many community banks are privately held and have been in the family for generations, so divesting is not an option.
As Thomas explains, the Fed’s community banker’s seat might make sense for someone who is leaving or near the end of their banking career or someone for whom bank stock doesn’t represent a significant portion of the net worth of themselves or their family. The law also allows someone who has community bank supervisory experience to qualify for the seat. Thus, a regulator, such as a current or former state banking commissioner, would qualify.

CFPB leadership
Perhaps the most contentious contender in this list is the Consumer Financial Protection Bureau, created under Dodd-Frank. Richard Cordray, appointed by President Barack Obama, is scheduled to remain in office until July 2018. The only way he can be let go before that is “for cause.” (There has been speculation that he’s considering a run for governor in Ohio, and if so, he would likely need to resign before the end of this year. So far, Cordray has dodged questions about this.)

The CFPB is working on rules that are nowhere close to becoming final, including debt collection rules that would apply to community banks and also section 1071 of Dodd-Frank, which mandates the collection of data on small-business lending. ICBA is working hard to repeal that authority for the CFPB, but it’s not likely that anything will become final before a new CFPB director is in place.

“Each agency has an approach to examination and supervision that a change in personnel at the top of the agency could impact and influence.”

While some would like to cut the agency’s funding or even vaporize it, it is unlikely that the CFPB will go away any time soon. Regarding its governance, Thomas says ICBA supports the CFPB being a commission rather than a single director and making it subject to the appropriations process.

ICBA also supports raising the asset size at which a bank becomes subject to supervision by the CFPB to at least $50 billion from the current $10 billion. As Thomas explains, this doesn’t mean that a bank is not subject to the rules CFPB writes. Instead, it’s a question of who examines it for compliance and who has supervisory jurisdiction over it. As of now, banks with less than $10 billion in assets are examined and supervised for consumer protection rules by the prudential bank regulators. The CFPB itself only examines banks with more than $10 billion in assets.

On the qualified mortgage rule, the CFPB could raise the asset size for what constitutes a small creditor under the qualified mortgage (QM) rule and liberalize the exception in that rule. It could also make permanent the temporary patch that considers any loans sold to Fannie Mae or Fanny Mac to be qualified mortgages.

A number of reforms would require legislation, and the challenge there is getting enough Senate votes. But community banks may see relief sooner as new agency heads fall into place,
because some items, like capital rules and the way certain assets are treated, do not require legislation.

Kathryn Jackson Fallon is a business and financial writer in New York.