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Posted by: Kathryn Edge on Nov 16, 2010

Journal Issue Date: Dec 2010

Journal Name: December 2010 - Vol. 46, No. 12

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) promises to be the most comprehensive piece of financial reform legislation since " well, since ever. Its 2,319 pages dwarf prior Congressional attempts to regulate the banking and financial sectors. By comparison, the Federal Reserve Act (1913) was only 31 pages; the Glass-Steagall Act (1933), only 37 pages; and the Sarbanes-Oxley Act (2002), 61 pages. Ironically, the authors of Dodd-Frank tell us that the legislation is "only a framework" and that various regulatory agencies, some existing and some created by Dodd-Frank, will be charged with promulgating regulations to flesh out the law. The American Bankers Association estimates that more than 5,000 pages of regulations will come out of Dodd-Frank, keeping regulatory counsel happily occupied for some time.

While Dodd-Frank has sweeping consequences, much of what it will do will evolve over the next 12 to 24 months. Here's some of what we know now:

Consumer Financial Protection Bureau

Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) as an independent agency that is housed in and funded by the Federal Reserve. The director of the agency will be appointed by the president and confirmed by the Senate for a five-year term. The Obama Administration's apparent choice for the initial directorship is Harvard professor and consumer advocate Elizabeth Warren, who currently serves as a special advisor to the president while they figure out how to get her confirmed. Dr. Warren may be too liberal even for the Democrats.

The CFPB will serve as a consolidated source for all consumer financial protection rules and regulations. The agency will have strong enforcement powers, including the ability to require recission or reformation of contracts, refunds or return of property, restitution, compensation for unjust enrichment, and civil money penalties. It will have the authority to define certain acts and practices as unfair, deceptive and/or abusive. None of those terms are defined in Dodd-Frank. The CFPB will have the authority to tag along on examinations of financial institutions of $10 billion or less in total assets, but the primary responsibility for examining compliance with consumer protection laws and regulations for these "smaller" companies will remain with their prudential regulators. The CFPB will have direct authority over companies of more than $10 billion in assets and certain large nonbank companies.

The reach of the CFPB will include not only banks but other financial services companies, including credit unions, money transmitters (like Western Union), mortgage companies, check-cashing companies and other nondepository lenders. Title X of Dodd-Frank does not supersede any state law unless the state law is inconsistent with Dodd-Frank, and state law will not be deemed to be inconsistent if the state law provides consumers with greater protection.

Attorneys who represent depository financial institutions predict that, while the CFPB will not take an active role in the actual examination of banks under $10 billion in assets, the "trickle-down effect" will soon be evident. New regulations will be promulgated by the CFPB that will apply across the board to large and small companies, and the prudential regulators, not to be outdone, are likely to beef up their examination efforts. Time will tell whether most Tennessee banks will see material changes in the way they do consumer lending, but we can only hope that in an effort to strictly regulate, Congress has not helped to further constrict credit to consumers " a sure way to delay economic recovery.

Financial Stability Oversight Council

Dodd-Frank also created the Financial Stability Oversight Council (FSOC), comprised of 10 voting members and five nonvoting members. FSOC was created to identify systemic risks to the financial stability of the United States; to promote market discipline by dispelling the notion that any financial company is "too big to fail"; and to respond to emerging threats to the stability of the United States' financial system. There are promises of transparency and open meetings (most of the time).

The voting members include the Secretary of the Treasury (the chairman); the Chairman of the Federal Reserve; the Comptroller of the Currency; the Director of the CFPB; the Chairman of the FDIC; the Chairman of the SEC; the Chairman of the National Credit Union Administration Board; the Chairman of the Commodity Futures Trading Commission; the Chairman of the Federal Housing Finance Agency; and an independent person who has insurance expertise, appointed by the President. Relegated to the back of the room are the non-voting members, including the Director of the Office of Financial Research; the Director of the Federal Insurance Office; a state insurance commissioner; a state banking commissioner; and a state securities commissioner.

FSOC, among other duties, will be the sole check on the power of the CFPB. FSOC can overrule any CFPB rule if six of its 10 voting members vote to do so. The likelihood of that happening is remote since the director of the CFPB is a member of FSOC. Still " Congress responded to the criticism that in early versions of the act, the CFPB had no checks and balances whatsoever. Many believe that this new agency has more unbridled power than any other agency of the federal government. Theoretically, the CIA has more oversight.

Why do we care about FSOC? The theory is that a body comprised of so many experienced financial experts might be able to predict the next big tsunami of economic threats to the country and head it off if all these chairmen and directors were just in the same room, talking to each other about potential threats rather than trying to protect and defend their own turfs. I hope so. There are a lot of billable hours in the room for nothing good to happen.

Other Issues Nonbanking Lawyers Might Care About

Dodd-Frank is all over the place. It amends a lot of other law, codifies some long-standing regulatory policies, and scares the daylights out of some of us.

De Novo Interstate Branching

Under Dodd-Frank, a bank may branch across state lines with the approval of its primary regulators. Under prior law, a bank could only branch de novo across state lines if the states had reciprocity with each other: The bad news for bank lawyers? Now there is nothing to figure out and no ingenious strategizing to help our clients get into states that had previously closed their borders. Economic Darwinism wins.

Source of Strength Doctrine

The Federal Reserve has long adhered to an internal policy that required a bank holding company to be a "source of strength" for its bank subsidiaries. Court cases have toyed with the legal authority of the Fed to enforce the policy, and lawyers have argued to the contrary, but until Dodd-Frank, Congress had not solidified the Fed's position by actually making it law. Now it is clear that if a bank gets in trouble, it is the responsibility of its parent company to bail it out " if it can.

Charter Conversions

Dodd-Frank codifies the long-standing policy of most state and federal banking regulators that if a bank is in trouble with its current regulator, it cannot convert to a different charter, thus escaping from the "unreasonable" agency in favor of a "better" one. I know of no state or federal banking regulator that would permit this kind of defection " no prudential regulator wants another broke bank on its books. Once the financial institution has sufficiently improved its condition, it can make application for a charter conversion. Nothing has changed here except the codification of good regulatory judgment.

Merger of OTS into OCC — Finally!

For as many years as I have practiced law, there have been promises that Congress would merge the Office of Thrift Supervision (which supervises savings and loan associations and savings banks) into the Office of the Comptroller of the Currency (which supervises national banks). Dodd-Frank finally signed the definitive agreement, but the two agencies are apparently fussing over the details. One of the great lies (I'll respect you in the morning ...the check is in the mail ...) is "nothing will change after the merger." But many things need to change after this merger of agencies to accomplish Congress' goal of reducing the number of federal banking regulators by one.


Capital used to be king. Now it is Ruler of the Banking Universe. The Collins Amendment to Dodd-Frank requires federal banking agencies to establish minimum capital levels for insured depository institutions, depository institution holding companies, and other "systemically important non-bank financial companies." Regulations implementing these new minimums must be issued no later than Jan. 21, 2011. While smaller companies are technically exempt from these new requirements, we believe that the "trickle-down effect" will eventually cause regulators to impose higher capital standards on all depository institutions. Capital, for a bank, is the cushion against losses, and that cushion just took on "Princess and the Pea" proportions.

In its 16 separate titles, Dodd-Frank deals with many other issues, too broad for this column, but for interested readers and insomniacs, there are many good summaries on various law firms' websites, including Shameless promotion, but I think we did a pretty good job.

Kathryn Reed Edge KATHRYN REED EDGE is a member of the regional firm of Miller & Martin PLLC in its Nashville office. She is chairman of the firm’s Commercial Department, head of its Financial Services Practice Group, and a member of the Miller & Martin Financial Reform Task Force. Katie is a former president of the TBA and a former member of the editorial board for theTennessee Bar Journal.