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Article of Interest

Implementing Dodd-Frank, Where Are We Now?
By: Alyssa J. Long

Just over one year ago on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Dodd-Frank”)¹.   Since the enactment date, proposed rules and rulemaking dominated the financial reform discourse. According to the American Bankers Association Dodd-Frank Tracker website, as of August 4, 2011, there were 2,964 (“and counting”) pages of Dodd-Frank proposed regulations and 1,273 (“and counting”) pages of Dodd-Frank final regulations and guidance.²  Also according to the financial reform tracking website of the law firm Morrison & Foerster, as of July 1, 2011, out of Dodd-Frank’s 400 required rulemakings, only 38 were in final form (26 rules missed their deadlines, 121 rules were proposed, and 215 had a future deadline).³  A May 2, 2011 Wall Street Journal article reported that the Dodd-Frank Act’s rulemaking “growing paper trail” is “20 times taller than the Statue of Liberty, 15 times longer than Moby Dick and would take the average reader more than a month to read, even if you hunkered down with it for 40 hours a week.”⁴  

Dodd-Frank shifted and bolstered the landscape of financial regulators. Dodd-Frank created the new Financial Stability Oversight Council (“FSOC”), attempting a comprehensive approach to regulating systemically important financial institutions. The FSOC is comprised of an interagency team of ten voting and five nonvoting members from federal and state financial regulators and an insurance expert appointed by the President. According to the Department of the Treasury’s website, the FSOC is charged with “identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system.”⁵   The FSOC held six meetings before the first anniversary of Dodd-Frank and there are still two empty ex officio positions -  the Comptroller of the Currency and the Director of the Consumer Financial Protection Board (“CFPB”) (Richard Cordray has been appointed as the head of the CFPB with his confirmation hearing set for September 6, 2011).⁶   Dodd- Frank granted the FSOC the authority to designate systemically important non-bank institutions and once designated, those institutions will be regulated by the Federal Reserve. Both the FSOC and the Federal Reserve are in the middle of proposed rules to designate and regulate said institutions.

Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) to be part of the Federal Reserve. The Dodd-Frank Act anniversary date of July 21, 2011 was the transfer date in which the CFPB assumed authority over already existing federal consumer protection laws and for other regulatory supervision over “large depository institutions.” The CFPB has supervisory authority over depository institutions with $10 billion in assets as well as other enumerated non-depository entities (e.g., mortgage originators, servicers, mortgage modification services, payday lenders, and private education lenders). The CFPB proffered notice of a forthcoming proposed rule to solicit comments on the definition of “larger participant” with the initial rule to be issued no later than July 21, 2012, one year after the date of transfer to the CFPB.⁷  In addition, on July 19, 2011, the CFPB released a report on the variations on credit scores used by banks and lenders.⁸

Other new offices created by the Dodd-Frank Act include the Department of the Treasury’s Office of Financial Research and the Federal Insurance Office (also interesting because the purview of insurance regulation has heretofore always been almost exclusively with the states).  The Securities and Exchange Commission (“SEC”) is also required to create the Office of Credit Ratings, which has not yet been established.

Several financial institutions saw changes in their overseeing regulatory agencies. On the July 21, 2011 anniversary date, the responsibility for regulation of Savings and Loan Holding Companies transferred from the Office of Thrift Supervision (“OTS”) to the Federal Reserve. Subsequently, the OTS is set to be officially abolished on October 19, 2011. The Office of the Comptroller of the Currency (“OCC”) is now responsible for the supervision of all federally chartered savings associations and savings banks with rulemaking authority over both state and federally chartered savings associations.  Finally, the Federal Deposit Insurance Corporation (“FDIC”) now has supervision over state-chartered savings associations with their rulemaking authority confined to state-chartered thrifts.

Two Dodd-Frank Act changes have a direct impact to consumers - the implementation of the Durbin Amendment and confirmation of the increased depository amounts eligible for FDIC insurance. First, on July 12, 2011, the Federal Reserve issued its final rule (effective October 1, 2011), Regulation II, Debit Card Interchange Fees and Routing.⁹  This rule attempts standards “for reasonable and proportional interchange transaction fees for electronic debit transactions” and other standards for debit card transactions and payment card networks, and in effect, caps interchange fees, or the fees that banks charge each other to accept debit transactions.¹⁰  The rule applies to issuers of debit cards, who along with their affiliates have assets of more than $10 billion.  Banks argued that interchange fees are necessary to maintain expenses and the costs of transactions, thus it appears that certain common banking features such as “free checking” or debit rewards, might give way to the implementation of the Durbin Amendment.¹¹  In a consumer “win,” the FDIC confirmed that it would make permanent an increased $250,000 limitation (from $100,000) on depository insurance.¹²

The securitization limitations imposed by Dodd-Frank and the proposed rules are under intense scrutiny. The current rule proposal requires that banks retain at least 5% of the loans that they securitize. In dozens of comment letters that came before the August 1, 2011 comment deadline, banks argued that securitization markets will be significantly disrupted and also that the proposed rule does not properly distinguish between asset classes.¹³  Banks also argued that the risk retention requirements should be less for those asset classes or types of loans with higher credit requirements, and the true focus of the proposed rule should be on riskier asset classes.¹⁴  Others argue that that if banks have limits on the loans they securitize, this could mean greater difficulty in obtaining mortgages or other loans and impact an already suffering housing market.

Much discussion was held in the lead-up to the effective date of the Dodd-Frank Act concerning the Volcker Rule. The Volcker Rule is essentially a limit on a bank’s ability to engage in proprietary trading and enter into relationships with certain hedge funds and private equity funds – i.e., an attempt to prevent banks from engaging in certain risky investment activity with deposited funds. In a supposed answer to some of the risky investments that precipitated the financial crisis, it is an attempt to rebuild some of the walls that were initially built between banking and investing by the 1933 Glass-Steagall Act (and later deconstructed by Gramm–Leach–Bliley).¹⁵  Pursuant to the Dodd-Frank Act mandate, the FSOC released its study of the impact of the Volcker Rule on January 19, 2011.¹⁶  A final rule to further develop substantive provisions of the Volcker Rule is expected in the fourth quarter of 2011 and is highly anticipated as the Volcker Rule is set to take effect on July 21, 2012.¹⁷

Key strides have been made in implementing the executive compensation and corporate governance portions of the Dodd-Frank Act. Several other key areas of Dodd-Frank are still being developed through the rulemaking process including the overhaul of derivative and swaps regulation, as well as the protection of investors. Not surprisingly, the bulk of rules still yet to come from the Dodd-Frank Act are those coming from the SEC.¹⁸  Enhanced capital requirements for financial institutions will be instituted and phased in over a longer period of time as the new and repurposed regulatory agencies gain their footing as well as understand the application of certain global capital standards to US institutions (e.g., Basel III).¹⁹  
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¹Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

²American Banking Association Dodd-Frank Tracker, http://www.regreformtracker.aba.com (last visited August 23, 2011).

³Morrison & Foerster, Dodd-Frank: One Year Later, at 30, available at http://www.mofo.com/resources/regulatory-reform (last visited August 26, 2011).

⁴Jean Eaglesham, Overhaul Slows and Grows, WALL ST. J., May 2, 2011, available at http://online.wsj.com/article/SB10001424052748703346704576295873060349068.html (last visited August 23, 2011).

⁵U.S. Department of the Treasury, Financial Stability Oversight Council, http://www.treasury.gov/initiatives/fsoc/Pages/default.aspx (last visited August 23, 2011).

⁶Morrison & Foerster, supra note 3, at 4.

⁷Defining Larger Participants in Certain Consumer Financial Products and Services Markets, 76 Fed. Reg. 38059 (proposed June 29, 2011) (to be codified at 12 C.F.R. Ch. X).

⁸Consumer Financial Protection Bureau, The impact of differences between consumer- and creditor purchased credit scores, Report to Congress, July 19, 2011, available at http://www.consumerfinance.gov/the-bureau (last visited August 26, 2011).

⁹Debit Card Interchange Fees and Routing; Interim Final Rule, 76 Fed. Reg. 43478 (effective October 1, 2011) (to be codified at 12 C.F.R. pt. 235).

¹⁰Id.

¹¹See e.g., Zachs Equity Research, Wells Fargo Stops Debit Rewards, August 23, 2011, available at http://www.zacks.com/stock/news/59563/Wells+Fargo+Stops+Debit+Rewards (last visited August 23, 2011).

¹²Federal Deposit Insurance Corporation, Basic FDIC Insurance Coverage Permanently Increased to $250,000 Per Depositor, Press Release, July 21, 2010 available at http://www.fdic.gov/news/news/press/2010/pr10161.html (last visited August 26, 2011).

¹³See e.g., Donna Borak, Big Banks Fear Retention Rule Will Destroy Securitization Market, August 16, 2011, available at http://www.americanbanker.com/issues/176_159/retention-rule-cash-reserve-account-1041232-1.html (last visited August 23, 2011).

¹⁴Id.

¹⁵Morrison & Foerster, supra note 3, at 20.

¹⁶Financial Stability Oversight Council, STUDY & RECOMMENDATIONS ON PROHIBITIONS ON PROPRIETARY TRADING & CERTAIN RELATIONSHIPS WITH HEDGE FUNDS & PRIVATE EQUITY FUNDS, January 18, 2011, available at http://www.treasury.gov/initiatives/fsoc/Pages/meetings.aspx (last visited August 26, 2011).

¹⁷Morrison & Foerster, supra note 3, at 21.

¹⁸Jean Eaglesham, supra note 4.

¹⁹Morrison & Foerster, supra note 3, at 26.