Legal Alerts

The Dodd–Frank Wall Street Reform and Consumer Protection Act: How Will It Impact the Charter and Regulatory Environment of Community Banks?


Although the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”) did not change the structure of federal bank regulatory agencies as much as originally proposed, the Act nevertheless made many significant changes to federal regulatory jurisdiction and to the powers of banks and thrifts.  Community banks and small bank holding companies avoided some of the more draconian measures and generally preserved existing regulatory relationships, but pending changes will impact these institutions and the value of the community bank charter.  

What happened to thrifts and thrift holding companies?

Sections 311 through 313 of the Act abolish the OTS one year after the date of enactment of the Act (subject to an extension of up to six months).  Supervisory and rulemaking authority over federal thrifts will be transferred to the OCC, while OTS’ supervisory (but not rulemaking) authority over state-chartered thrifts will be transferred to the FDIC.  The Federal Reserve will assume supervisory and rulemaking authority over thrift holding companies, resulting in a supervisory split familiar to most community banks, but new to thrift institutions.  Current OTS regulations remain in effect, as will all orders and supervisory agreements, to be enforced by the successor agency.

Although the federal thrift charter is maintained, the Act continues the recent trend of eliminating some of the advantages of the thrift charter and conforming thrift laws to banking counterparts.  There are substantial new penalties imposed upon thrifts that fail to meet their qualified thrift lender (“QTL”) test, adding further incentive to convert to a commercial bank charter.

What about the non-bank competitors?

The Act will most drastically impact financial institutions that had not previously been subject to the full scope of banking regulation and supervision.  This is particularly the case with the larger institutions now subject to the Financial Stability Oversight Council, charged with overseeing the financial services industry and minimizing systemic risk.  In certain circumstances, the Act’s coverage of “nonbank financial companies” will extend to insurance companies, securities broker-dealers and a variety of asset management firms and funds.  These institutions will have to adjust to a regulatory environment already familiar to banks.

Smaller financial institutions and community banks that may not directly compete with the nonbank financial companies may still benefit from the Act’s three year moratorium on “non-bank banks.”  Section 603 of the Act prohibits the FDIC from approving any application for deposit insurance filed after November 23, 2009 by an industrial bank (such as the WalMart proposal), credit card bank, or a trust bank that is controlled by a company that derives less than 15% of its consolidated annual gross revenues from banking and financial services.   Furthermore, with limited exceptions, federal banking agencies may not approve a change in control that would give a commercial company control of a non-bank bank.  During this time, the GAO is directed to prepare a report and recommendations regarding the definition of “bank” under the Bank Holding Company Act.

Were there any changes to branch banking?

While community banks may avoid additional competition from nonbank banks during the moratorium, they may encounter increased competition from out-of-state banks.  Section 613 of the Act eliminates the Riegle-Neal “opt-in” requirement for interstate branching and permits the FDIC and the OCC to approve applications by out-of-state banks to establish de novo branches in locations permitted for banks chartered by such state.  Before the change, banks seeking to enter a state that had not expressly opted in to permit de novo interstate branching were required to acquire a bank charter in the state.  State laws that restrict branches by local banks, such as Minnesota’s “home office protection” statute, would still apply to restrict entry by out-of-state banks.  Although this means that interstate branching by banks is somewhat more restrictive than that permitted to thrifts, it is another instance where the relative advantages of the thrift charter have been reduced.

For community banks considering expansion across state lines, the change to interstate branching will mean they will no longer have to adopt complicated relocation or acquisition strategies to have locations on both sides of the border.

How did the Act affect the advantages of a national bank charter?

The Act continues the current trend to narrow the differences between national and state bank powers and restrictions.  One important advantage enjoyed by national banks—federal preemption—has been significantly limited.  The OCC may not preempt state consumer protection laws unless the application of the law would have a discriminatory effect on national banks or federal thrifts, or the state law prevents or significantly interferes with the exercise of bank powers, or the state consumer protection law is preempted by a provision of federal law.  On the other hand, the Act expressly preserves the right of national banks to “export” interest rates and fees under 12 U.S.C.§85.

Should my bank or thrift consider converting its charter?

Thrifts that convert to a bank charter are permitted to continue to operate existing branches and agency offices, and establish additional offices in states where the thrift operated a branch prior to charter conversion, provided such branching is permissible for banks chartered in that state.  This is presumably intended to remove potential barriers to charter conversions by thrifts.  However, the Act generally prohibits institutions from changing charters if they are in trouble with their current regulator.  Section 612 of the Act codifies the FFIEC Statement on Regulatory Conversions (July 1, 2009), and provides that an insured depository institution that is subject to a formal or informal enforcement action, such as a cease and desist order, memorandum of understanding or supervisory agreement “with respect a significant supervisory matter” may not change its charter form, unless the institution proposes a plan to address the deficiencies that is acceptable to both the existing and proposed regulatory agencies.  Note that while the Act technically would not prohibit a state member bank from dropping its Fed membership and thereby changing its primary federal bank regulator from the Fed to the FDIC, the Policy Statement more broadly restricts any change in primary federal bank regulators.

How has the Act affected regulation of small bank holding companies?

Our previous Legal Update pointed out impacts that the Act is likely to have on capital matters for small bank holding companies, and several ways in which small bank holding companies were able to preserve certain existing advantages over larger bank holding companies.  The Act also formally codifies the Federal Reserve’s “source of strength doctrine”, the long-standing position of the Federal Reserve that bank holding companies must serve as a source of strength to their subsidiary banks.  Section 616 of the Act further extends the doctrine to thrift holding companies, and requires holding companies to provide periodic reports to federal banking agencies regarding their ability to act as a source of strength to their subsidiary banks.  Neither the Act nor the doctrine, however, grant authority to regulatory agencies to require controlling persons who are not “companies” to contribute capital.

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