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The rules of the road for the financial industry changed dramatically on Thursday as the Senate joined the House in passing the Dodd-Frank Wall Street Reform and Consumer Protection Act by a vote of 60-39, sending the bill to President Barack Obama to sign into law. The legislation eliminates the Office of Thrift Supervision, creates a new Consumer Protection Bureau housed within but independent from the Federal Reserve, and preserves the dual banking system. One provision of the bill would establish a council to identify and address systemic risks posed by large, complex companies, products and activities; state banking, securities and insurance regulators will have non-voting seats on this council.  FDIC would be given new mechanisms for unwinding failing systemically significant financial companies, and the Federal Reserve would be given new authority and oversight.

CSBS President and CEO Neil Milner said, "Congress once again made the deliberate decision to reject proposals that threatened to do away with the dual-banking system by creating a single federal regulator. The consensus remains: the state supervisory structure is vital to our country's financial system, and it is here to stay," Milner added that the "historic bill recalibrates the balance of power between state and federal regulators and ushers in a new era of collaboration and cooperation between the two entities in safety and soundness as well as consumer protection regulation." He added that banks deemed critical to the financial system still enjoy funding advantages over other institutions. "Until this differential between institutions is eliminated, then the implications of having 'too big to fail' banks will be a financial system driven not by market forces, but by the unequal application of an implied government guarantee of a handful of banks." More Information

Federal Reserve Chairman Ben Bernanke issued a statement upon the bill's passage. "It strengthens the consolidated supervision of systemically important financial institutions, gives the government an important additional tool to safely wind down failing financial firms, creates an interagency council to detect and deter emerging threats to the financial system, and enhances the transparency of the Federal Reserve while preserving the political independence that is crucial to monetary policymaking."

FDIC Chairman Shelia Bair said, "Today represents a significant milestone in the history of financial regulation in the United States. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a meaningful framework is now in place that addresses many of the weaknesses in our financial system that led to the financial crisis."

CSBS also enumerated issues of significance to state bank regulation and the dual banking system:

�         State-chartered banks continue to have a choice in their federal prudential regulator, as the Federal Reserve's role as a supervisor of state member banks is preserved.

�         An effort to impose national bank lending limits on state-chartered banks was defeated, preserving for states the authority to set and interpret legal lending limits for state-chartered institutions.

�         States with state-chartered institutions seeking to engage in derivatives transactions will need to include such exposures in their legal lending limits.

�         Banks will have de novo interstate branching authority on par with thrifts.

�         The thrift charter survives, and OTS will be merged into the OCC.

�         Bank holding companies with $15 billion and under will have permanent grandfathering of capital treatment for existing trust-preferred securities.

�         The 10% nationwide deposit cap from the Riegle Neal Interstate Branching Act will apply equally to banks and thrifts.

�         The Federal Reserve will now be responsible for conducting bank-like examinations for non-bank subsidiaries of bank holding companies engaged in bank-like activities. Where those subsidiaries are state-chartered/licensed, the Fed will be required to coordinate with state regulators and may do joint and alternating exams with the States.

�         State banking commissioners (along with state insurance and securities regulators) will have non-voting seats on the Financial Stability Oversight Council.

�         Consumer Bureau must propose rules which combine TILA and RESPA disclosures into a single document.

�         The Bureau will be required to coordinate with state regulators in various aspects of its responsibilities, including supervision and registration.

�         Should the Bureau choose to pursue registration of covered entities, the Bureau will be required to coordinate and consult with the states.

�         The state-federal balance with regard to national bank preemption has been significantly re-balanced with a new requirement that preemption for national banks may only occur on a case-by-case basis and according to the Barnett decision's "prevent or significantly interfere" standard.

�         State AGs will have the authority to enforce the Bureau's rules against national banks.

�         Small banks with $10 billion or less in assets are carved out from the Bureau's supervision and enforcement, both of which are left to prudential regulators.

On Thursday, the Senate Banking Committee held a confirmation hearing on President Obama's nominees for seats on the Federal Reserve Board of Governors. Senators heard testimony and questioned the nominees, Janet L. Yellen, Peter A. Diamond and Sarah Bloom Raskin. Yellen, (nominated for a four-year term as vice chair) has served as president and CEO of the Federal Reserve Bank of San Francisco. She previously served as a member of the Federal Reserve Board from 1994-1997. "Through this service, I have gained experience in every one of the Federal Reserve's areas of responsibility, including monetary policy, banking supervision and regulation, consumer and community affairs, and the operation of the payments system," she said.

Diamond is a professor of economics at the Massachusetts Institute of Technology. Diamond said the experience of the recent financial crisis and the financial reform legislation have underlined the multiple jobs the Fed has in working to fulfill the dual mandate of high employment and price stability, adding that the Fed will have major work to do to implement the tasks that the legislation is placing at the Fed.

FDIC adopted a revised memorandum of understanding with the primary federal banking regulators to enhance the agency's existing backup authorities for banks FDIC does not directly supervise. The agreement will improve the FDIC's ability to access information necessary to understand, evaluate and mitigate its exposure to banks, especially the largest and most complex firms. FDIC Chairman Sheila C. Bair said the agreement gives FDIC a more active on-site presence and greater direct access to information and bank personnel to evaluate the risks to the deposit insurance fund on an ongoing basis and to be prepared for all contingencies. The revised MOU gives the FDIC backup supervision authority under an expanded list of circumstances, including when the insurance pricing system suggests a bank might be at higher risk; when institutions are defined as "large" under international regulatory guidelines; or when large, interconnected bank holding companies are defined as "systemic" by the financial reform legislation just passed by Congress. At large, complex insured institutions, FDIC will establish an expanded continuous, full-time staff presence on-site. More Information

The Conference of State Bank Supervisors and federal financial regulatory agencies issued a statement this week to assist financial institutions and their customers affected by the Deepwater Horizon Mobile Offshore Drilling Unit explosion and oil spill in the Gulf of Mexico. The statement emphasized that financial institutions are encouraged to work with their customers and consider measures to assist creditworthy borrowers affected by the Gulf oil spill. Consistent with the regulators' longstanding practice of assessing the financial condition of institutions directly affected by natural and other disasters, examiners will consider the unusual circumstances of banks and credit unions in affected areas in determining the appropriate supervisory response to safety-and-soundness issues, the regulators said. They also pledged to work with the industry to respond to issues that arise in the aftermath of the Gulf oil spill and to minimize disruption and the burden on banks and credit unions in affected areas. Besides CSBS, the statement was released by FDIC, the Federal Reserve, the Office of Thrift Supervision, the Office of the Comptroller of the Currency and the National Credit Union Administration. More Information

A new Federal Trade Commission report concluded that the system for resolving consumer debt collection disputes is broken, and recommended significant litigation and arbitration reforms to improve efficiency and fairness to consumers. Some of the problems identified by the agency included: collectors failing to properly notify consumers of suits they have filed; collectors filing lawsuits based on insufficient evidence of indebtedness; courts granting default judgments against consumers who do not appear or defend themselves; collectors seeking to recover on debts beyond the statute of limitations; and banks freezing funds in bank accounts that are exempt from garnishment by law. FTC also identified problems with arbitration, such as bias and the lack of transparency in the proceedings. The report recommended that states take a number of actions, such as adopting measures to make it more likely that consumers will defend themselves in litigation and requiring collectors to include more information about the alleged debt in their complaints. More Information

The House of Representatives passed legislation on Thursday to reform and extend the National Flood Insurance Program for five years. The legislation would phase in actuarial rates for properties built before the effective date of the first Flood Insurance Rate Map for a community. Other provisions of the bill would raise maximum coverage limits, provide notice to renters about contents insurance and establish a flood insurance advocate, similar to the taxpayer advocate at the Internal Revenue Service. Currently, the program is authorized until Sept. 30, and has been subject to a number of temporary extensions. The bill's sponsor, Rep. Maxine Waters (D-Calif.) said the bill would restore stability to the program and would mitigate the financial burden on families located on properties that have been recently designated as special flood hazard areas. The legislation now goes to the Senate. More Information

Banking regulators closed banks in the states of Maryland, New York and Oklahoma on Friday, bringing the total for the year to 90.

The Office of the Comptroller of the Currency closed Bay National Bank, Baltimore and Home National Bank, Blackwell, Okla. For Bay National, FDIC arranged the purchase of all deposits and assets by Bay Bank, FSB, Lutherville, Md. Bay National Bank had approximately $282.2 million in assets and $276.1 million in deposits. For Home National Bank, FDIC arranged for RCB Bank, Claremore, Okla., to purchase all the deposits for a premium of 0.22 percent and to purchase approximately $340 million of the assets. Home National Bank had approximately $644.5 million in assets and $560.7 million in deposits. In a separate transaction, FDIC arranged for Enterprise Bank & Trust, Clayton, Mo., to purchase approximately $260.8 million of Home National Bank's assets and entered into a loss-share transaction on that amount with the bank.

The Office of Thrift Supervision closed Ideal Federal Savings Bank in Baltimore, and FDIC arranged for the payout of insured deposits. FDIC arranged for insured funds in demand accounts, savings accounts, NOW accounts, insured certificates of deposit, and any other transactional accounts to be transferred to the Manufacturers and Traders Trust Company in Baltimore. Ideal Federal Savings Bank had approximately $6.3 million in assets and $5.8 million in deposits.

The New York State Banking Department closed USA Bank, Port Chester, and FDIC arranged the purchase of all the deposits and assets by New Century Bank (doing business as Customer's 1st Bank), Phoenixville, Pa. USA Bank had about $193.3 million in assets and $189.9 million in deposits. FDIC and New Century Bank entered into a loss-share transaction on $159.1 million of the failed bank's assets. More Information

Arizona: Payday lender Advance America announced it was closing its operations in Arizona in response to the expiration of a state law governing cash advances. The company will close 47 centers in Arizona and 55 centers in Washington and Colorado, which also recently changed their laws. Arizona Attorney General Terry Goddard said the announcement showed that the end of the law is working.

California: The California Department of Financial Institutions notified lenders in the state about a new law in Los Angeles that makes mortgage lenders responsible for maintaining their foreclosed properties. Under the law, lenders must clean up their foreclosed city properties to prevent further blight and nuisance. Lenders must begin to maintain the properties as soon as they issue a notice of default. Mortgage lenders also must register their inventory of homes in default with the city. The law allows the city to fine mortgage lenders $1,000 per day per violation, up to $100,000.

FCA: The Farm Credit Administration issued a proposal to lower the lending and leasing limit on loans and leases to a single borrower or lessee due to the growth of the system. The proposal would lower the current limit of 25 percent of an institution's lending and leasing limit base to no more than 15 percent of the base. The revised limit would apply to Farm Credit System institutions' long-, short- and intermediate-term lending authorities. The plan also would require system institutions to adopt written policies to measure, limit and monitor exposures to concentration risks caused by the institutions' lending and leasing activities. The proposal will first be reviewed by Congress for a 30-day period and then be open for public comments for a 60-day period. More Information

July 19 – Kenneth Feinberg, the Special Master for TARP Executive Compensation, is the featured speaker at this month's meeting of the Economic Club of Washington, D.C. – 8 a.m., Renaissance Mayflower Hotel.

July 20 - The House Financial Services' Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will hold an oversight hearing on the U.S. Securities and Exchange Commission. - 10 a.m., 2128 Rayburn House Office Building.

July 20 - The House Financial Services' Subcommittee on Domestic Monetary Policy and Technology will hold a hearing on the state of U.S. coins and currency. -  2:30 p.m., 2128 Rayburn House Building.

July 20-21 - CSBS and the Institute of International Bankers will hold a U.S. regulatory and compliance orientation program for recently arrived officers of international banks and representatives. The session will be held in New York City.

July 21 - The House Financial Services Committee will hold a hearing on H.R. 2267, Internet Gambling Regulation, Consumer Protection, and Enforcement Act - 1 p.m., 2128 Rayburn House Office Building.

July 22 - The House Financial Services Committee will hold a hearing on monetary policy and the state of the economy.

"We won't know the full results of what we have done until the very institutions we have created, the regulations we have suggested and provided for are actually tested. We can't legislate wisdom or passion. We can't legislate competency. All we can do is create the structures and hope that good people will be appointed who will attract other good people — people who will make careers and listen and see to it that never again do we go through what we have gone through." – Senate Banking Committee Chairman Chris Dodd (D-Conn.), speaking on the Senate floor Thursday following passage of the massive financial regulatory overhaul bill, as reported in today's Politico.