March 23, 2018

MBAF's Frank Gonzalez discusses the recent changes made to the Dodd-Frank Act with Accounting Today.

Accountants could see some extra business from the Senate’s recent passage of legislation rolling back some of the provisions of the Dodd-Frank Act to exempt smaller financial institutions from some of the requirements, according to one expert.

Last week, the Senate passed the Economic Growth, Regulatory Relief and Consumer Protection Act by a vote of 67 to 31. It exempts the vast majority of banks and credit unions from a number of the requirements imposed by the 2010 legislation after the financial crisis, which aimed to prevent taxpayer bailouts of so-called “too big to fail” banks. The legislation has yet to be reconciled with a much more far-reaching bill passed last year by the House known as the Financial CHOICE Act, and the prospects for an agreement are looking uncertain. But if lawmakers can reach an agreement, it could have significant implications.

“It’s definitely going to have an impact on banks and financial institutions,” said Frank Gonzalez, principal in charge of the audit department and leader of the Financial Institutions and SEC practices at MBAF, a Top 100 Firm. “The way they’ve broken it out is second tier type banks, banks they consider to be SIFI, systemically important financial institutions. Those were mostly banks greater than $50 billion in assets. They’ve shifted part of the regulatory burden on them and increased it to banks with over $250 billion in assets. A lot of the middle-tier banks are going to get some relief in terms of some of the regulatory burdens. It’s going to be a significant change. Before, you had approximately 38 banks that fit into that category. Now, throughout the U.S., it’s probably going to go down to about 12 banks.”

However, that means even some prominent financial services providers, such as American Express, BB&T, SunTrust and Key Bank, would be exempted from requirements, such as stress testing by the Federal Reserve.

“Those types of institutions are going to have less burden in terms of the regulatory environment,” said Gonzalez. “If the Federal Reserve wanted, they can always place whatever restrictions they want, no matter the size of the banks.”

Community banks would be freed from even more requirements under the bill. “Local community banks that are considered for the most part to be banks that are under $10 billion in assets are receiving some relief, which is a good thing in terms of sprucing up the economy and helping a lot of the small business entrepreneurs and small business owners,” said Gonzalez. “For those types of banks, it’s going to now exclude banks that originate fewer than 500 mortgages. They’re going to have less reporting requirements, based on these revisions. They would also be exempt from some of the Dodd-Frank underwriting standards as long as they don’t sell the mortgages. That’s going to give them an incentive to be able to produce more mortgages and not have to go through all the regulatory requirements in terms of reporting and the underwriting standards. They’re also going to be exempt from the Volker Rule, which affected banks under $10 billion. Some of the financial reporting requirements that fell under Dodd-Frank for some of the smaller community banks are also proposed to be going away. That should help them in terms of lowering the cost burden of being in compliance, which has affected a lot of institutions.”

He believes that will open up opportunities for accounting firms. “It should increase the services for accounting firms to be able to provide to these types of companies across the board, whether it’s audit or tax compliance work, consulting work, or even internal control type work in helping these companies grow,” said Gonzalez. “I think it’s something that will impact across the board, not just banking and financial institutions, but basically all the companies that deal with them on the whole.”

There have been complaints about the bill from some Democrats in Congress, including Senator Elizabeth Warren, D-Mass., who have said the legislation is going to make it easier for banks to fail since they would be subject to less stringent oversight and could eventually need to be bailed out by taxpayers because there won’t be as much transparency. There have also been complaints about how the banks won’t have to report as many details on their loans so much so it will be harder to find patterns of discriminatory lending.

But Gonzalez believes the bill is mostly beneficial on the whole. “I think the bill is going in the right direction,” he said. “After we had the financial crisis in 2008 and 2009, the Dodd-Frank Act came as a response to address some of those issues. But a lot of the problems that surfaced were predominantly faced by bigger banks and large institutions, which are still covered for the most part by the Dodd-Frank Act. Some of the middle-tier and smaller institutions didn’t have as many issues regarding this as the larger institutions. I think the relief is definitely necessary. Even though you could have issues in terms of less stringent type of lending, the regulatory bodies are still going to do their examinations and they can still classify banks depending on their risk.”

The Financial CHOICE Act passed by the House last year went even further, rolling back some of the auditing requirements under the Sarbanes-Oxley Act for internal controls at smaller institutions, as well as making changes in the Dodd-Frank Act and the JOBS Act.

“Originally on the CHOICE Act you had some loosening of the requirements with regards to Sarbanes-Oxley,” said Gonzalez. “It was going to be less burdensome from a compliance standpoint.”

The Senate would still need to reconcile the two bills with the House version, and there are indications that may not happen. House Republicans would essentially need to pass the same legislation that the Senate just passed or else risk losing the support of Senate Democrats if they try to push the exemptions further.

Thomson Reuters released a Checkpoint special report last week about the Financial CHOICE Act, examining the bill’s potential impact.

“The Financial CHOICE Act of 2017 raises uncertainties for businesses in the critical realms of capital-raising and financial regulations,” said Salim Sunderji, managing director, Checkpoint, with the Tax & Accounting business of Thomson Reuters, in a statement. “While the future of the bill remains unknown, this report provides helpful context and raises important questions to help tax and accounting professionals consider its implications and to begin preparations on behalf of their clients if that is the prudent course.”

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