This month Congress passed sweeping bipartisan legislation titled “The 21st Century ROAD to Housing Act,” which includes important provisions that should provide immediate relief for community banks. Title IX of the new law, “Strengthening Community Banks’ Role in Housing,” includes several new mandates designed to reduce regulatory burdens on small banks and can be best understood as a community bank regulatory relief package.
For example, a key change in the law expands custodial and reciprocal deposits exemptions from being classified as brokered deposits by excluding certain custodial deposits (up to 20% of liabilities for qualifying banks under $10 billion in assets) from the brokered deposit definition. This change makes it easier for community banks to attract stable deposits and fund mortgage lending and increases capacity to lend and support local housing markets.
Other key provisions include doubling the statutory asset threshold size of community banks to $6 billion, thereby reducing regulatory burden for more institutions by making those banks subject to a less burdensome18-month safety and soundness examination cycles. This new threshold in Section 903 of Title IX, referred to as Tailored Regulatory Updates for Supervisory Testing (TRUST Act), in effect adds 77 institutions to community bank qualification thresholds to adequately capitalized or well-capitalized banks in good standing.
There are also important provisions in Title IX that are intended to streamline processes for the formation of de novo community banks and encourage new entrants into underserved markets. These changes seek to reverse the long decline in new community bank charters over the past several years.
Finally, while Title IX does not amend the Community Reinvestment Act, and community banks remain obligated to help meet the credit needs of low- and moderate-income neighborhoods, we believe the new law could provide indirect operational benefits by expanding small bank lending capacity through more stable funding and increased capital to deploy as a result of reduced examination burdens.