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114th Congress     }                                 {       Report
                        HOUSE OF REPRESENTATIVES
 2d Session        }                                 {        114-870

======================================================================



 
   TAKING ACCOUNT OF INSTITUTIONS WITH LOW OPERATION RISK ACT OF 2015

                                _______
                                

 December 12, 2016.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 2896]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 2896) to require the Federal financial 
institutions regulatory agencies to take risk profiles and 
business models of institutions into account when taking 
regulatory actions, and for other purposes, having considered 
the same, report favorably thereon without amendment and 
recommend that the bill do pass.

                          PURPOSE AND SUMMARY

    H.R. 2896 directs the federal financial institutions 
regulatory agencies to tailor their rulemakings in 
consideration of the risk profiles and business models of 
institutions that would be subject to such rules. H.R. 2896 
also directs such agencies to annually report to Congress and 
testify regarding the specific actions taken to tailor their 
regulatory actions.

                  BACKGROUND AND NEED FOR LEGISLATION

    The growing weight and complexity of regulation for 
community financial institutions affects their ability to 
provide the products and services necessary to allow small 
businesses to grow and consumers to access credit to realize 
their financial and personal goals. The regulatory burden falls 
into three major categories: (1) additional operational costs 
associated with compliance; (2) restrictions on fees, interest 
rates, or other revenue; and (3) unintentional barriers to 
offering a service due to regulatory complexity.
    Smaller institutions are disproportionately affected by 
increased regulation because they are less able to absorb 
additional costs.
    Although many financial regulations are designed and 
intended for large, complex U.S. financial institutions, they 
are also being applied to small community financial 
institutions, often in the form of bank examiners identifying 
those regulations as ``best practices'' that should be followed 
by institutions regardless of their size. Federal Reserve Board 
Governor Daniel Tarullo acknowledged this concern in a May 8, 
2014 speech, stating:

          ``Even where regulatory frameworks try to place a 
        lesser burden on smaller banks, there may be some risk 
        of supervisory trickle-down, where supervisors 
        informally, and perhaps not wholly intentionally, 
        create compliance expectations for smaller banks that 
        resemble expectations for larger institutions.''

    H.R. 2896 requires the federal financial institution 
regulatory agencies (the Federal Reserve, Federal Deposit 
Insurance Corporation, Office of the Comptroller of the 
Currency, National Credit Union Administration, and Consumer 
Financial Protection Bureau) to tailor any regulatory action 
occurring after enactment to appropriately apply to banks and 
credit unions. The agencies would be required to consider the 
risk profile and business model of the institutions and 
determine the necessity, appropriateness, and impact of 
applying such regulatory action to those institutions.
    By allowing the federal regulators to weigh the compliance 
impact, cost, liability risk, and the unintended consequences 
of regulations in the aggregate, community financial 
institutions will be allowed to focus their time and resources 
on the communities they serve.
    In a letter of support for H.R. 2896 dated July 7, 2015, 
the Independent Community Bankers of America wrote:

          A primary challenge facing community banks today is 
        the sharply increasing burden of compliance with 
        regulations intended for larger, more complex, and 
        riskier banks. These regulations disproportionately 
        burden community banks because they don't have 
        dedicated legal and compliance departments and they 
        have a smaller asset base over which to spread 
        compliance costs. Tiered regulation would ensure that 
        rules are calibrated to the size, risk profile, and 
        complexity of a bank.

                                HEARINGS

    The Committee on Financial Services' Subcommittee on 
Financial Institutions held a hearing examining matters 
relating to H.R. 2896 on October 21, 2015.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
March 2, 2016, and ordered H.R. 2896 to be reported favorably 
to the House without amendment by a recorded vote of 34 yeas to 
22 nays (recorded vote no. FC-97), a quorum being present.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 34 yeas to 22 nays 
(Record vote no. FC-97), a quorum being present.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 2896 
will reduce regulatory burden on main street job creators by 
providing for regulators to tailor their regulations to 
specific financial institutions.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        COMMITTEE COST ESTIMATE

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 CONGRESSIONAL BUDGET OFFICE ESTIMATES

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, July 6, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2896, the TAILOR 
Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Sarah Puro.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

H.R. 2896--TAILOR Act

    Summary: H.R. 2896 would require the federal banking 
regulators--the Federal Deposit Insurance Commission (FDIC), 
the Office of the Comptroller of the Currency (OCC), the 
National Credit Union Administration (NCUA) and the Federal 
Reserve Bank--to tailor their regulatory actions to the 
specific risk profile and business model of financial 
institutions subject to regulation. That requirement would 
apply to any new regulatory action and also would require the 
federal banking regulators to review and revise regulatory 
actions from the last five years, including those written 
pursuant to the Dodd Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act). The provision requiring review 
of previously adopted regulations would probably require 
additional work by the Securities and Exchange Commission (SEC) 
and the Commodity Futures Trading Commission (CFTC).
    CBO estimates that enacting the legislation would increase 
direct spending by $20 million in 2017, although spending over 
the 2017-2026 period would be insignificant. CBO also estimates 
that enacting H.R. 2896 would reduce revenues by $24 million 
over the 2017-2026 period. Because enacting the bill would 
affect direct spending and revenues, pay-as-you-go procedures 
apply. Finally, CBO estimates that reviewing rules issued by 
the SEC and the CFTC would cost $10 million over the 2017-2021 
period; such spending would be subject to the availability of 
appropriated funds.
    CBO estimates that enacting the legislation would not 
increase net direct spending or on-budget deficits by more than 
$5 billion in any of the four consecutive 10-year periods 
beginning in 2027.
    H.R. 2896 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local or tribal governments.
    CBO expects that the financial regulators (FDIC, OCC, NCUA, 
and SEC) would increase premiums or fees to offset the costs of 
implementing the additional regulatory activities required by 
the bill. Doing so would increase the cost of the existing 
mandate on entities required to pay those assessments. Based on 
information from the federal banking regulators and the SEC, 
CBO estimates that the incremental cost of the mandate would 
fall well below the annual threshold established in UMRA for 
private-sector mandates ($154 million in 2016, adjusted for 
inflation).
    Estimated cost to the Federal Government: The estimated 
budgetary effect of H.R. 2896 is shown in the following table. 
The spending effects of this legislation fall within budget 
function 370 (advancement of commerce).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  By fiscal year, in millions of dollars--
                                                   -----------------------------------------------------------------------------------------------------
                                                     2017    2018    2019    2020    2021    2022    2023    2024    2025    2026   2017-2021  2017-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     INCREASES OR DECREASES (-) IN DIRECT SPENDINGa
 
Estimated Budget Authority........................      20      10     -10     -10      -5      -3      -2       *       *       *         5          *
Estimated Outlays.................................      20      10     -10     -10      -5      -3      -2       *       *       *         5          *
 
                                                                  DECREASES IN REVENUES
 
Estimated Revenues................................      -2      -3      -3      -3      -2      -2      -2      -2      -2      -2       -12        -24
 
                                  NET INCREASE OR DECREASE (-) IN DEFICITS FROM CHANGES IN DIRECT SPENDING AND REVENUES
 
Impact on Deficit.................................      22      13      -7      -7      -3      -1       *       2       2       2        17         24
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: * = between zero and $500,000; components may not sum to totals because of rounding.
aIn addition, CBO estimates that implementing H.R. 2896 would have a net discretionary cost of $10 million over the 2017-2021 period.

    Basis of estimate: H.R. 2896 would require the federal 
banking regulators to consider the risk profile and business 
model of financial institutions when deciding which 
institutions are subject to regulatory action and to tailor 
regulations to the characteristics of individual financial 
institutions. The agencies would be required to review all 
regulations adopted during the last five years, apply the 
requirements in H.R. 2896, and revise those regulations if 
necessary.
    Costs incurred by the FDIC, the NCUA and the OCC are 
recorded in the budget as increases in direct spending. Those 
agencies are authorized to collect premiums and fees from 
insured depository institutions to cover administrative 
expenses. CBO expects that, over time, they would do so to 
recover any costs associated with the administrative costs of 
enacting the bill. Costs to the Federal Reserve System reduce 
remittances to the Treasury (which are recorded in the budget 
as revenues). To develop this estimate, CBO consulted with the 
federal financial regulators about the number of people needed 
to review and revise regulations and the number of regulations 
adopted over the past five years.

Direct Spending and Revenues

    The financial regulators have completed more than 50 rules 
over the past five years, many of which are associated with the 
Dodd-Frank Act. The bill would require the financial regulators 
to review and possibly revise those rulemakings. In addition, 
CBO expects that H.R. 2896 could increase the amount of 
litigation that those regulators are subject to under the 
Administrative Procedures Act because regulated institutions 
would have additional grounds to challenge the application of 
financial regulations.
    CBO estimates that each of the financial regulators would 
need to increase its legal staff by 5 percent to 10 percent and 
other staff by 1 percent to 2 percent over the next few years 
to complete the additional rulemakings required by the bill. In 
total, the financial regulators have about 6,000 full-time 
equivalent employees in Washington D.C. CBO expects that 
staffing would increase by 100 to 200 employees over the 2017-
2020 period to review past actions.
    After 2020, CBO expects that spending by the financial 
regulators for rulemaking and litigation activities would be 
higher than we would expect under current law. Across the 
agencies, CBO expects that total staffing would increase by 25 
to 50 employees per year. However, CBO expects that the FDIC, 
the OCC, and the NCUA would eventually recover any costs 
associated with the bill's enactment by increasing assessments 
on the institutions they regulate. CBO estimates those 
assessments would total about $150 million over the 2018-2026 
period. Because those fees would be based on spending in the 
prior year, CBO estimates that enacting the legislation would 
increase net direct spending by $20 million in 2017 and by an 
insignificant amount over the 2017-2026 period.
    In addition, CBO estimates that H.R. 2896 would reduce the 
Federal Reserve's remittances to the Treasury, and therefore 
revenues, by $24 million over the 2017-2026 period.

Spending Subject to Appropriation

    Implementing H.R. 2896 would probably require the CFTC and 
the SEC to review regulations adopted under the Dodd-Frank Act. 
CBO estimates that each agency would need around a dozen 
additional employees over the 2017-2020 period. Under current 
law, the SEC is authorized to collect fees sufficient to offset 
its annual appropriation; therefore, we estimate that the net 
costs to the SEC would be negligible. CBO expects that costs to 
the CFTC would total $10 million over the 2017-2021 period; 
such spending would be subject to the availability of 
appropriated funds.
    Pay-As-You-Go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget-reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in outlays and revenues that are 
subject to those pay-as-you-go procedures are shown in the 
following table.

         CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 2896, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON MARCH 9, 2016
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   By fiscal year, in millions of dollars--
                                                    ----------------------------------------------------------------------------------------------------
                                                      2016   2017   2018   2019    2020    2021   2022   2023   2024   2025   2026  2016-2021  2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       NET INCREASE OR DECREASE (-) IN THE DEFICIT
 
Statutory Pay-As-You-Go Impact.....................      0     22     13      -7      -7     -3     -1      0      2      2      2        17         24
Memorandum:
    Changes in Outlays.............................      0     20     10     -10     -10     -5     -3     -2      0      0      0         5          0
    Changes in Revenues............................      0     -2     -3      -3      -3     -2     -2     -2     -2     -2     -2       -12        -24
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Components may not sum to totals because of rounding.

    Increase in long-term direct spending and deficits: CBO 
estimates that enacting the legislation would not increase net 
direct spending or on-budget deficits by more than $5 billion 
in any of the four consecutive 10-year periods beginning in 
2027.
    Estimated impact on state, local, and tribal governments: 
H.R. 2896 contains no intergovernmental mandates as defined in 
UMRA and would not affect the budgets of state, local or tribal 
governments.
    Estimated impact on the private sector: CBO expects that 
the financial regulators would increase premiums or fees to 
offset the costs of implementing the additional regulatory 
activities required by the bill. Any increase in premiums or 
fees would increase the cost of the existing mandate on 
entities required to pay those assessments. Based on 
information from the federal banking regulators and the SEC, 
CBO estimates that the incremental cost to comply with the 
mandate would amount to about $25 million in 2017 and fall in 
subsequent years. Those annual costs would fall well below the 
threshold established in UMRA for private-sector mandates ($154 
million in 2016, adjusted for inflation).
    Estimate prepared by: Federal costs: Sarah Puro; Revenues: 
Nathaniel Frentz; Impact on state, local, and tribal 
governments: Rachel Austin; Impact on the private sector: Logan 
Smith.
    Estimate approved by: H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    H.R. 2896 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    DUPLICATION OF FEDERAL PROGRAMS

    Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), 
the Committee states that no provision of H.R. 2896 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   DISCLOSURE OF DIRECTED RULEMAKING

    Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), 
the Committee states that H.R. 2896 contains a directed 
rulemaking. no directed rulemaking.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This section cites H.R. 2896 as the ``Taking Account of 
Institutions with Low Operation Risk Act of 2015'' or the 
``Tailor Act of 2015''.

Section 2. Regulations appropriate to business models

    This section directs federal financial institutions 
regulatory agencies to: take into consideration the risk 
profile and business models of institutions subject to 
regulatory action; determine the necessity, appropriateness, 
and impact of applying that action to such institutions; and 
tailor regulatory action so as to limit the burden of 
regulatory compliance as befits the risk profile and business 
model involved. This section also requires the federal 
financial institutions regulatory agencies to consider: the 
impact that their regulatory actions have upon the ability of 
institutions to flexibly serve evolving and diverse customer 
needs, the potential unintended impact of examination manuals 
or other regulatory directives that work in conflict with the 
tailoring of such regulatory actions, and the underlying policy 
objectives of the regulatory action and statutory scheme 
involved. Finally this section requires agencies to disclose 
how their rulemakings apply to this Act, and requires the FFIEC 
to report to Congress on the differences in regulation 
resulting from this bill.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    H.R. 2896 does not repeal or amend any section of a 
statute. Therefore, the Office of Legislative Counsel did not 
prepare the report contemplated by clause 3(e)(1)(B) of rule 
XIII of the House of Representatives.

                             MINORITY VIEWS

    H.R. 2896 represents a step backwards in the progress we 
have made in ensuring that our financial markets are stronger, 
more resilient, and more protective of consumers. If enacted, 
this bill would provide every bank and financial institution 
overseen by agencies like the Federal Deposit Insurance 
Corporation or the Consumer Financial Protection Bureau with an 
additional opportunity to challenge rulemakings in court if 
they felt a regulation was not ``uniquely tailored'' to their 
business needs.
    H.R. 2896 requires financial agencies to ignore the 
requirements of all other laws passed by Congress and subject 
all new regulations to a vague and impossible standard. This 
includes an undefined standard of ``appropriateness,'' a vague 
standard of ``ability to flexibly serve evolving and diverse 
customer needs'' as well as an evaluation of ``potential 
unintended impact.'' This set of standards not only applies to 
all future guidance and rulemaking, but also retroactively to 
all of the rulemakings under the Dodd-Frank Wall Street Reform 
and Consumer Protection Act. Moreover, the legislation includes 
no mandate that regulators consider the benefits of certain 
rulemakings, including the promotion of financial stability or 
the protection of consumers.
    The purpose of this bill is clear--by preempting all other 
financial law with this set of vague standards, proponents of 
H.R. 2896 are creating a system where every financial rule can 
potentially be challenged and overturned. That result would 
have an enormous impact on important aspects of financial 
regulation and consumer protection.
    For example, under this law banks could challenge the 
minimum capital requirements put in place under section 171 of 
the Dodd-Frank Act--meaning capital requirements would have to 
be set on a bank-by-bank basis. Banks could argue under this 
law that they should not be subject to fair lending or 
Community Reinvestment Act rules. This bill also undermines the 
ability of the CFPB to regulate consumer markets on a product 
basis, as an institution could argue that consumer protection 
standards for payday loans or mortgages are ``not appropriate'' 
for their business model, or their ``ability to flexibly serve 
evolving and diverse customer needs.''
    Additionally, we are concerned that this level of 
institution-by-institution tailoring could result in a severe 
weakening of the nation's anti-money laundering and bank 
secrecy act rules. By requiring that compliance costs and 
liability risk be considered at a higher priority than 
protecting the integrity of the financial system, the bill 
could create a class of institutions with lowered compliance 
standards that might become an ideal target for drug cartel 
money laundering or terrorist financing.
    Finally, the TAILOR Act ignores the substantial amount of 
work regulatory agencies have done to ensure that rules are 
adopted in a way that considers the needs of smaller financial 
institutions. The CFPB has been very responsive to these 
concerns, granting myriad exemptions and alternative compliance 
opportunities for smaller, less risky institutions. The FDIC 
and the OCC have also both worked to minimize supervision and 
compliance burden for Dodd-Frank rulemakings--with the FDIC 
specifically benefitting small institutions by significantly 
reducing premiums for small banks.
    We share the belief that regulators must take into account 
the diverse needs of smaller institutions when regulating 
financial markets. Unfortunately, this objective is not the end 
goal of the TAILOR Act. Instead, H.R. 2896 would only serve to 
put consumers and the financial system at risk by subjecting 
important regulations to endless litigation.
    For the foregoing reasons, the Minority opposes H.R. 2896.

                                   Maxine Waters.
                                   Wm. Lacy Clay.
                                   Ruben Hinojosa.
                                   Keith Ellison.
                                   Al Green.

                                  [all]