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From Banking and Finance Law Daily, December 2, 2015

Legislators reach deal on highway bill, banking riders included

By Mark S. Nelson, J.D.; John M. Pachkowski, J.D.

Conferees from the House and Senate have reached agreement on a longer-term highway funding bill that also puts a spotlight on tweaks to capital formation, swaps, and banking laws sought by members who seek to ease Dodd-Frank Act limits and to further enhance innovations debuted in the Jumpstart Our Business Startups (JOBS) Act. The conference report must still be approved by each chamber, but the House already has plans to take up the measure this week before current transport funding expires.

A statement by leaders of the Conference Committee emphasized the importance of the legislation. “A safe, efficient surface transportation network is fundamentally necessary to our quality of life and our economy, and this conference report provides long-term certainty for states and local governments, and good reforms and improvements to the programs that sustain our roads, bridges, transit, and passenger rail system.”

The core of the Fixing America’s Surface Transportation (FAST) Act contains a five-year, fully paid plan to broadly deal with U.S. roads and bridges, public transportation, car and truck safety, and railroads. A summary offers a quick tour of the transport-specific provisions. The legislation also re-authorizes the Export-Import Bank, one of the Act’s most fiercely contested provisions.

But tucked away near the end of the measure are 20 securities and banking provisions covering a range of topics. The conferees’ Joint Explanatory Statement noted that the Senate concurred in the fifteen bills added last month to the House version of the transport bill by Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee. Yet, the final agreement adds five new securities and banking provisions.

Banks. Division G of the FAST Act contains a number of provisions for banks, including Title LXXV, which would amend the Gramm-Leach-Bliley Act to ease annual disclosure notice requirements. Under Title LXXVII, changes to the Low Income Housing Preservation and Resident Homeownership Act of 1990 would permit the owners of some government-subsidized multifamily developments to tap income from these developments.

Title LXXXII would update the Federal Home Loan Bank Act to allow privately insured credit unions to become members of a federal home loan bank. Under Title LXXXIII, the Federal Deposit Insurance Act would be revised to increase the threshold amounts applicable to the 18-month on-site exam cycle.

Lastly, the Helping Expand Lending Practices in Rural Communities Act of 2015, a new add-on contained in Title LXXXIX, would require the Consumer Financial Protection Bureau to create an application process by which a person can ask to have an area designated as a rural area. This title would update an existing Dodd-Frank Act provision.

Funding. In order to adequately fund transportation projects, the FAST Act looked at a number of revenue sources to close any funding gaps. Two of these new revenue sources would encroach upon decades-old practices at the Federal Reserve Board and have disappointed many in the banking industry.

Originally, Section 32202 of the FAST Act would have liquidated the Federal Reserve surplus account and required remittance of funds to the U.S. Treasury. The amendment would also have dissolved the existence of the surplus account on a go-forward basis. Finally, the amendment would have ensured future net earnings of the Federal Reserve, in excess of dividends paid, were remitted to the U.S. Treasury. This amendment was offered by the Chairman of the House Subcommittee on Financial Institutions and Consumer Credit, Rep. Randy Neugebauer (R-Texas), and the Chairman of the Monetary Policy and Trade Subcommittee, Rep. Bill Huizenga (R-Mich).

The Conference Committee agreed to cap the Fed’s surplus account at $10 billion. Any amounts which exceed the cap will be remitted to the U.S. Treasury.

The more controversial funding mechanism would reduce the dividend paid on Federal Reserve stock to member banks. Originally, section 32203 of the FAST Act would have reduced the interest rate from 6 percent to 1.5 percent on capital paid into the Federal Reserve System by member banks with consolidated assets over $1 billion.

In its final version, section 32203 retains the 6 percent dividend for member banks with consolidated assets of $10 billion or less, indexed to inflation. For member banks with consolidated assets greater than $10 billion, the Conference Committee agreed to establish a floating dividend based on the smaller of: the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of a dividend, and 6 percent.

blog posting by Ryan Tracy of The Wall Street Journal noted that a reduction in the dividend would cost the country’s four largest banks—Bank of America Corp., Citigroup, Inc., J.P. Morgan Chase and Co., and Wells Fargo & Co.—$484.5 million in lost revenue during 2016.

Reaction. Following the Conference Committee’s approval, Hensarling commented on the use of the Fed’s surplus account. He stated, “As a stand-alone bill, I would not support using the Federal Reserve’s surplus account to pay for transportation funding. However, I voted for it in the House because it was the preferable alternative to the Senate’s new taxes. And that’s the key point not reflected in the conference report: the House approved it only as an alternative, not as an addition to the Senate’s bad pay-for. We started off with two bad pay-fors from the Senate unrelated to transportation and, regrettably, we ended up with two bad pay-fors unrelated to transportation despite the commendable efforts of Chairmen Neugebauer, Huizenga and an overwhelming bipartisan majority of the House.”

Independent Community Bankers of America® (ICBA) president and CEO Camden R. Fine also issued a statement on the Conference Committee’s action.

Fine noted, “ICBA opposes using the banking sector to pay for the highway bill and has rallied community bankers nationwide to stop this bad precedent. The conference report released today exempts community banks with less than $10 billion in assets from a backdoor tax hike on members of the Federal Reserve System, sparing many community banks and Main Street communities from the impact of this ICBA-opposed policy. It will also provide that banks over $10 billion in assets will receive a floating dividend rate on Fed stock based upon the 10-year Treasury rate with a maximum of 6 percent.”

He continued, “ICBA and community bankers continue to oppose any change in this century-old agreement. ICBA and the nation’s community bankers have repeatedly said that requiring the banking industry to pay for the Highway Trust Fund by ending a 100-year agreement between the Fed and its member banks is haphazard policymaking that sets a dangerous precedent. ICBA strongly supported a House-approved amendment to remove the 75 percent cut to dividends paid on Federal Reserve Bank stock.”

Rob Nichols, American Bankers Association president and CEO, called the reduction in the dividend “extremely bad public policy.” He noted, “Rewriting a significant portion of the Federal Reserve’s charter and siphoning off a bank dividend payment to pay for highway infrastructure sets a bad precedent that should give other industries serious cause for concern. This proposal is misguided and undermines a key agreement that has underpinned the U.S. banking system for a century.” Nichols added, “Banks shouldn’t be used like an E-ZPass to pay for highways.”

Companies: American Bankers Association; Bank of America Corp.; Citigroup, Inc.; Independent Community Bankers of America; J.P. Morgan Chase and Co.; Wells Fargo & Co.

MainStory: TopStory BankingOperations CommunityDevelopment FederalReserveSystem Mortgages OversightInvestigations PrudentialRegulation SecuritiesDerivatives

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