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Recent Fed Actions Concerning the Dodd-Frank Act

Monday, October 1, 2012

The Fed issued final or proposed rules on the following Dodd-Frank Act initiatives during the previous four months.

Final Rules

Risk-based capital guidelines related to market risk capital rulesEffective Jan 1., 2013, the joint final rule revises risk-based capital guidelines to better capture positions for which the market risk capital rules are appropriate; reduce procyclicality; enhance the rules’ sensitivity to risks that are not adequately captured under current methodologies; and increase transparency through enhanced disclosures.  The final rule does not include all of the methodologies adopted by the Basel Committee for calculating the standardized specific risk capital requirements for debt and securitization positions due to their reliance on credit ratings, which is impermissible under the Dodd-Frank Act.  Instead, the final rule includes alternative methodologies for calculating standardized specific risk capital requirements for debt and securitization positions.

Debit interchange transaction fee allowance for fraud-prevention costsOn July 27, the Board approved a final rule amending the provisions in Regulation II (Debit Card Interchange Fees and Routing) that permit a debit card issuer subject to the interchange fee standards to receive a fraud-prevention adjustment. The final rule revises provisions that are currently in effect as part of the interim final rule, which the Board of Governors announced on Dec. 16, 2010, and became effective on Oct. 1, 2012.

Risk management standards for financial market utilities (FMUs) designated as systemically important by FSOC —This final rule implements two provisions of the Dodd-Frank Act related to supervision of FMUs designated as systematically important by the Financial Stability Oversight Council.  Specifically, the rule establishes risk-management standards for designated FMUs supervised by the Federal Reserve and requirements for advance notice of a proposed material change to its rules, procedures or operations.  The rule became effective on Sept. 14, 2012.

Two final rules with stress-testing requirements for certain BHCs, state member banks and SLHCs — The Federal Reserve will begin conducting supervisory stress tests under the final rules this fall for the 19 bank holding companies that participated in the 2009 Supervisory Capital Assessment Program and subsequent Comprehensive Capital Analysis and Reviews.  The final rules also require these companies and their state member bank subsidiaries to conduct their own Dodd-Frank Act company-run stress tests this fall, with the results to be publicly disclosed in March 2013.

In general, other companies subject to this stress testing will be required to comply with the final rule beginning in October 2013. Companies with between $10 billion and $50 billion in total assets that begin conducting their first company-run stress test in the fall of 2013 will not have to publicly disclose the results of that first stress test.  

The Fed will release the scenarios for this year's supervisory and company-run stress tests no later than Nov. 15, 2012.  As required by the Dodd-Frank Act, the scenarios will describe hypothetical baseline, adverse and severely adverse conditions, with paths for key macroeconomic and financial variables.  To help firms prepare to estimate their losses and revenues under the scenarios, the Federal Reserve also released historical data for variables likely to be used in the scenarios.  A revised version of these historical data, reflecting the latest information, will be published along with the scenarios.

Proposed Since June

Appraisal standards and disclosures for higher-risk mortgagesSeveral federal agencies (the Fed, CFPB, FDIC, NCUA and OCC) have proposed amendments to Regulation Z appraisal standards and disclosures for higher-risk mortgages.
Under the Dodd-Frank Act, mortgage loans are higher-risk if they are secured by a consumer's home and have interest rates above a certain threshold.  For higher-risk mortgage loans, the proposed rule would require creditors to use a licensed or certified appraiser who prepares a written report based on a physical inspection of the interior of the property.  The proposed rule also would require creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.

Creditors would have to obtain an additional appraisal at no cost to the consumer for a home-purchase higher-risk mortgage loan if the seller acquired the property for a lower price during the past six months.  This requirement would address fraudulent property flipping by seeking to ensure that the value of the property being used as collateral for the loan legitimately increased.

Capital Requirements

The Fed, FDIC and OCC issued joint proposals in June for revising the current regulatory capital standards.  The agencies also offered a regulatory capital estimation tool so that organizations can estimate the potential effects the on their capital ratios of the two proposals given below. 

The estimation tools are for banks, savings associations, bank holding companies, and savings and loan holding companies.  Keep in mind that the tool should not be relied on as an indicator of an institution’s actual regulatory capital ratios and that it is not part of the NPRs nor of any final rule(s) that the agencies may adopt.

  • Standardized approach for calculating risk-weighted assets — This proposes revisions to the general risk-based capital requirements for determining risk-weighted assets (that is, the calculation of the denominator of a banking organization's risk-based capital ratios).  The standardized approach proposal incorporates certain capital standards of Basel II and proposes alternatives to credit ratings for calculating risk-weighted assets for certain assets.  This proposal also includes a greater number of exposure categories for purposes of calculating total risk-weighted assets, provides for greater recognition of financial collateral, and permits a wider range of eligible guarantors.