House Committee to Mark Up Regulatory Reform Bill; MBA Outlines Support, Concerns

The House Financial Services Committee began consideration of a sweeping bill that would repeal large sections of the Dodd-Frank Act and restructure the Consumer Financial Protection Bureau. Ahead of the vote, the Mortgage Bankers Association sent a letter outlining its views on the bill.

H.R. 5983, the Financial CHOICE Act of 2016 (http://financialservices.house.gov/uploadedfiles/091316_fc_memo.pdf), is championed by Financial Services Committee Chairman Jeb Hensarling, R-Texas. Among its many provisions are measures to end “too big to fail” provisions under Dodd-Frank; restructure Consumer Financial Protection Bureau leadership with a five-person commission (replacing the current single director); repeal specific command-and-control powers conferred on federal regulators by Dodd-Frank; repeal the “Volcker Rule;” and impose enhanced penalties on Wall Street firms for financial fraud and deception. The bill also encompasses a number of other Republican-led reform efforts, including those addressing manufactured housing and ability to repay provisions.

The MBA letter noted support of many elements of H.R. 5983; its comments focused primarily on capital requirements, commercial/multifamily real estate, key changes to the structure of the CFPB and regulatory relief measures previously considered by the Financial Services Committee.

MBA Senior Vice President, Legislative and Political Affairs Bill Killmer said MBA generally agrees with the sentiment expressed in the bill that U.S. bank regulators have enacted regulations and constraints that were initiated by the Basel Committee, noting that various countries represented on Basel have unique banking structures, economic structures and regulatory needs.

“One size fits all simply does not work when designing bank regulatory regimes,” the letter said. “MBA believes the bill should also require regulators to fix what is currently wrong with the regulatory regime.”

Commercial & Multifamily Real Estate

MBA offers the following comments with respect to regulatory issues affecting the commercial and multifamily real estate sector:

–Exclude Commercial/Multifamily Loans from HMDA Reporting. MBA noted historically, the Home Mortgage Disclosure Act collects data primarily to single-family mortgage lending. “We continue to believe that HMDA, as a consumer lending disclosure requirement, should not apply to commercial real estate, including multifamily real estate,” MBA said.

–High Volatility Commercial Real Estate Exposures. MBA called the final HVCRE final rule issued by bank regulators “highly problematic.” Since January 2015, MBA has provided six submittals to the agencies in support of needed modifications to conform the final rule to customary and prudent operational practices of banks. “As written, the HVCRE final rule is unworkable,” MBA said. “Consequently, MBA strongly supports the Financial CHOICE Act’s suspension of Basel III capital requirements in this regard.”

–Liquidity Coverage Ratio. The LCR is a supplementary rulemaking to Basel III that creates a new bank liquidity measure, intended to ensure that large banks hold sufficient stock of “high quality liquid assets” to survive a specified liquidity stress scenario. BA noted while the final rule was responsive to MBA’s comment letters by eliminating the highly detrimental treatment of Special Purpose Entities, and provided important clarifications regarding the unfunded portions of commercial real estate development loans and acquisition credit facilities, it continues to oppose the LCR treatment of commercial mortgage-backed securities and has recommended that CMBS no longer on a bank’s balance sheet be excluded from the LCR calculation. MBA strongly supports the Financial CHOICE Act’s suspension of Basel III liquidity requirements in this regard.

–Net Stable Funding Ratio. The Net Stable Funding Ratio requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities. MBA is concerned that Net Stable Funding Ratio represents another regulatory regime that could hinder capital formation. MBA strongly supports the Financial CHOICE Act’s suspension of Basel III liquidity requirements in this regard.

–Step-in Risk. This involves the risk that a bank may provide financial support to an entity beyond or in the absence of any contractual obligations, should the entity experience financial stress. The Proposal calls for a new capital regime to address step-in risk. MBA strongly opposes this Proposal because step-in risk is, among other things, adequately addressed by existing accounting rules the Proposal will not be considered by U.S. regulators until after it has been finalized by the Basel Committee. MBA strongly recommends that H.R. 5983 require the suspension of the consideration of the step-in risk proposed rule by U.S. regulators.

–Fundamental Review of the Trading Book. MBA said FRTB rules could negatively impact securitized products. If adopted by U.S. regulators, this approach would dramatically increase capital requirements for bank trading book activities for CMBS and other structured securities. MBA recommended that the Financial CHOICE Act suspend the consideration of the FRTB proposal by U.S. regulators.

–Federal Regulation of Insurance Companies. The Federal Reserve has issued for comment a proposed new regulatory regime for insurance companies that have been designated as systemically important insurance companies or are part of a banking enterprise. MBA raised concerns that these regimes would potentially conflict with the state level regulation of the insurance industry, which has been the regulatory authority for insurance companies. The CHOICE Act should limit the ability of the federal regulatory agencies to regulate insurance companies that are currently state regulated.

–Risk Retention for Commercial Real Estate. Although the Risk Retention final rule was responsive to many of MBA’s concerns and provided for additional risk retention flexibility, there are areas of the final rule where MBA continues to seek modification, particularly with Single-Asset Single Borrower CMBS (MBA said such classification should be exempt).

–Horizontal Risk Retention Holders. MBA said flexibility would be enhanced by also permitting a senior/subordinate structure for purchasers of the horizontal residual interest).

–Underwriting Standards for Zero Risk Retention. MBA remains concerned that the underwriting metrics for zero risk retention for commercial and multifamily loans specified in the final rule remain unduly restrictive. We recommend enhanced flexibility of underwriting parameters for a “qualified commercial real estate loan” for multi-property CMBS.

Killmer said while the bill is likely to clear the committee, its future on the House floor is uncertain; and no companion bill exists in the Senate, which makes it unlikely that a final bill would reach President Obama’s desk this year.