ABA Regulatory and Legislative Outlook

1. ABA Regulatory and Legislative Outlook Kathleen P. McTighe Senior Counsel, Office of Regulatory Policy American Bankers Association

2. OVERVIEW Financial Regulatory Reform Treasury Capital Purchase Program (CPP) Credit Card Accountability Responsibility and Disclosure Act of 2009 Overdrafts

3. Financial Regulatory Reform

4. A September to Remember � 2008 Sep 7 Fannie Mae & Freddie Mac Placed into conservatorship Sep 15 Merrill Lynch sold to Bank of America Sep 15 Lehman Brothers files for bankruptcy Sep 16 Federal Reserve lends $85B to AIG; takes 79.9% ownership Sep 19 Treasury announces TARP Proposal Sep 19 Government creates ABCP MMMF liquidity facility Sep 19 Treasury announces Money Market Guarantee Program Sep 21 Goldman Sachs announces it will become BHC Sep 21 Morgan Stanley announces it will become BHC Sep 25 WaMu placed into receivership; deposits sold to JPMC Sep 29 Fed announces $850 billion in liquidity actions Sep 29 FDIC approves sale of Wachovia to CitiGroup (although it is sold to Wells Fargo on Oct 3 without assistance)

5. Which Led to More Actions � TARP, Legacy Loans Program, Legacy Security Program, Public-Private Partnership Program, Capital Assistance Program, Capital Purchase Program, Extension of CPP, Withdrawals from CPP, Temporary Liquidity Guarantee Program, Hope Now Alliance, Homeowners Affordability Stability Plan, Hope For Homeowners, mortgage backed security insurance, tax incentives for homebuyers, Federal Reserve Board purchase of mortgage backed securities, Automotive Industry Financing Program, Fannie Mae/Freddie Mac Modification Program, national bank shelf charter, relaxation of private equity investment, Money Market Mutual Fund insurance, Term Asset-Backed Securities Loan Facility, Money Market Investor Funding Facility, Term Auction Facility, Primary Dealer Credit Facility, Term Securities Lending Facility, Commercial Paper Funding Facility, Asset Backed Commercial Paper Money Market Fund Liquidity Facility, Money Market Investing Funding Facility, Term Asset-Backed Securities Loan Facility, GSE loan limit increase, Federal Housing Administration loan limit increase, FHA rescue for troubled borrowers, goodwill net-of-tax change in capital rules, lower risk weights for Fannie and Freddie preferred stock, FDIC Private-Public Partnership, conversion of preferred stock into common of Citi, Systemically Systemic Failing Institutions Program, Targeted Investment Program, executive compensation restrictions, Federal Reserve Board Securities Lending facility, Term Securities Lending Option Program, payment of interest on reserves, �excess balance accounts,� Treasury Public-Private Investment Fund, OTS source of strength agreements, covered bonds, FDIC guarantee of insured debt, unlimited insurance for non-interest bearing accounts, insurance up to $250 thousand for interest-bearing accounts, Fed interest rate cuts to zero, changes in brokered deposit rules, special FDIC insurance assessments, increases in Fannie/Freddie conforming loan, extension of Transaction Account Guaranty �.

6. Which Led to a Need to �Fix� What the Administration Plan tries to fix Systemic Risk Oversight Supervision of Systemically Significant Institutions Resolution of Systemically Significant Institutions Consumer Financial Protection Agency Consolidation Charter Consolidation Plus much more (regulation of derivatives; ratings agency reform; compensation reform; insurance reform, etc.)

7. Systemic Risk Oversight Objective: Look for risks � particularly correlated risks � that threaten the economy Means: Form an Oversight Council Chaired by Treasury, but with all banking and securities agency heads as members Have permanent staff Three primary functions: Monitor for risks within and across industry lines Advise primary regulator of problems Report to Congress

8. Systemic Risk Oversight (continued) Alternatives: Federal Reserve as Systemic Risk Overseer (but does monetary policy + systemic risk role = conflict?) OCC New agency ABA view: We support the Oversight Council idea Proposed role is appropriate

9. Supervision of Systemically Significant Institutions (SSIs) Objective: Improve supervision of largest firms Means: Designate �Tier 1 Financial Holding Companies (FHCs)� Give Federal Reserve jurisdiction over all Tier 1 FHCs and (indirectly) over all their subsidiaries Impose more onerous capital, liquidity, and enterprise risk management requirements Require all to conform to Bank Holding Company Act activity limits

10. Supervision of SSI (continued) Alternatives: Refine �supervision by risk� without labels Impose mandatory size limits or otherwise incent shrinking Avoid giving Federal Reserve jurisdiction over all subs ABA view: Not clear we need �Tier 1� designation Products that pose systemic risk should be more transparent Impose comparable restrictions on comparable activities

11. Resolution of SSIs Objective: Eliminate �Too Big to Fail� Means: Create process for orderly unwinding of any financial firm Treasury, Federal Reserve, or SEC could initiate, but Treasury would make final decision to resolve Test: Would failure have serious adverse effects on economy? FDIC or SEC would be appointed receiver or conservator Funding?

12. Resolution of SSIs (continued) Alternatives: Amend Bankruptcy Code, as needed Increase Deposit Insurance Fund (or draw on credit line) to resolve banks ABA view: Replace �Too Big To Fail� with �TBTFQ� Do not compromise FDIC brand Do not ask banks to pay for non-bank resolutions

13. Consumer Financial Protection Objective: Protect consumers better Means: Create Consumer Financial Protection Agency (CFPA) Give it rulemaking, supervisory, and enforcement authority over all providers of financial products (except securities and insurance) Have it design �plain vanilla� products Have it bless disclosures Broad jurisdiction over products and services Eliminate preemption Expand states� enforcement authority over banks

14. Consumer Financial Protection (continued) Alternatives: Limit jurisdiction to non-banks Beef up consumer protection role in existing regulatory agencies ABA view: Do not separate consumer protection from safety & soundness Preserve preemption over state laws Close the regulatory gaps Mortgage and credit card issues have already largely been addressed

15. Agency Consolidation Objectives: Simplify complicated system Address perceived supervisory weaknesses Prevent forum shopping Means: Eliminate the Office of Thrift Supervision (OTS)

16. Agency Consolidation (Continued) Alternative: Preserve current regulatory structure Consolidate all regulatory agencies into one ABA view: Preserve the current options Eliminating the OTS creates perception, but not reality of solution Current checks and balances are healthy Forum shopping not a significant problem

17. Charter Consolidation Objectives: Prevent charter shopping Close nonbank loopholes Means: Eliminate national bank and thrift charters Have one federal bank charter Apply BHCA to every company that controls a bank (closing exemption for Industrial Loan Companies, Unitary Thrift Holding Companies, etc.)

18. Charter Consolidation (continued) Alternatives: Preserve status quo Eliminate dual banking system ABA view: Preserve charter choice, both in terms of regulator and corporate form Preserve dual banking system Keep banking and commerce separate

19. So what will happen? Stay tuned �

20. Treasury Capital Purchase Program (CPP)

21. What CPP is�and What It Is Not

22. Legislative Authority Emergency Economic Stabilization Act of 2008 (EESA) Enacted on October 3, 2008 The Troubled Assets Relief Program (TARP) was established by Treasury under EESA Goal: Stabilize the U.S. financial system and prevent a systemic collapse

23. Programs Implemented by Treasury under TARP 1. Capital Assistance Program 2. Consumer and Business Lending Initiative 3. Making Home Affordable Program 4. Public-Private Investment Program 5. Capital Purchase Program 6. Asset Guarantee Program 7. Targeted Investment Program 8. Automotive Industry Financing Program

24. A Changing Landscape Countrywide purchased (January 11, 2008) Bear Stearns decline (March 16) IndyMac failed (July 11) Fannie Mae and Freddie Mac assisted (September 7) Lehman Brothers failed (September 14) AIG assisted (September 16) (SSFI: 11/25/08 & 4/17/09) Merrill Lynch purchased (September 15) Washington Mutual failed (September 25) Wachovia purchased (October 3) National City purchased (October 24) Citigroup assisted (Nov. 23) (TIP: 12/31/08)(AGP:1/16/09) Bank of America assisted (January 16, 2009)

25. Evolving New Policies & Practices Use of CPP funds Restrictions on executive compensation Stress tests and regulatory review of capital levels Exit strategy

26. Use of CPP Funds Restrictions on the use of CPP funds No absolute restrictions other than those in the term sheets, although there has been much discussion on use of CPP funds Periodic reporting of use of CPP funds Large banks and banks that received funds by early 2009 All banks? Over 80% of participants used funds to directly support lending

27. Key Executive Compensation Restrictions Restrictions apply as long as a bank holds CPP funds Treasury Interim Final Rule � effective 6/15/2009 Current restrictions � CPP participants must: Certify contracts do not encourage or reward unnecessary & excessive risk taking Recover bonus or incentive compensation paid to �most highly compensated� employees based on material inaccuracies of statement of earnings or gains Not make golden parachute-type severance for �most highly compensated� employees Restrict cash bonuses for highly compensated executives (scaled basis) Provide shareholders non-binding vote on executive compensation

28. Exit Strategy First Option: Original payback strategy established by CPP term sheets and Agreements pursuant to EESA Process: �Qualified equity offering� 25% minimum repayment Second Option: CPP participant may use Capital Assistance Program (CAP) funds to repay Treasury�s CPP investment Generally done in conjunction with a request for additional funds under CAP

29. Exit Strategy (Continued) Third Option: American Recovery and Reinvestment Act of 2009 (ARRA) � section 7001 applies: Treasury consultation with appropriate Federal banking regulator Treasury Secretary shall permit TARP recipient to repay, without regard to whether the financial institution replaced funds from any other source or to any waiting period When CPP funds are repaid, the Secretary shall liquidate associated warrants at current market price Secretary shall promulgate implementing regulations (no regulations promulgated)

30. Financial Services Structural Revisions Changed structure of former investment banks and insurance companies to commercial banks in order to participate in CPP and other TARP programs Resulting re-structuring of business models and permissible activities Impact on the outlook of the �Too-big-to-fail� theory Increased regulatory review � capital levels and safety and soundness De-leveraging of some financial institutions Potential of increased capital Acquisitions

31. CPP August 2009 Statistics Recent activity has slowed � few new participants and few repayments $134 billion invested in 637 banks (8.7% of industry participated) Over 65% are community banks (assets < $1 b) Over $70 billion CPP funds repaid to the Treasury by 37 banks Average annualized return to Treasury of 16% for 22 banks that have exited CPP $5.25 billion dividend payments to Treasury

32. Credit Card Accountability Responsibility and Disclosure Act of 2009Credit CARD Act of 2009

33. Effective Dates Enacted May 22, 2009 Effective date: generally 9 months after enactment (February 2010) Effective 90 days after enactment (August 20, 2009) for: Advance notice of rate increase or significant change of terms of cardholder agreement Length of billing period Effective 15 months after enactment (August 2010) for: Interest rate reduction Reasonable penalty fees Gift cards

34. Effective August 20, 2009 Advance Notice of Rate Increase. Creditors must provide a 45-day clear and conspicuous advance written notice of: Credit card rate increase, unless exception applies (time expiration, variable rate, workout arrangement) �Significant change� to cardholder agreement with right to cancel and pay off over time under permissible repayment method Federal Reserve to determine �significant change� Notice must include right to cancel Length of Billing Period. Creditors must adopt reasonable procedures to ensure that periodic statements are mailed or delivered to consumer no later than 21 days before the due date.

35. Effective February, 2010 Rate Increase Restrictions. Rates may not increase on outstanding balances unless: Upon expiration of a specified time period, only if prior to the commencement of the time period, the issuer disclosed the length of the period and rate to apply after the expiration of the period Variable rates, if rate is based on index not under issuer�s control Work-out agreements 60-day delinquency of minimum payment �Outstanding balance� is the amount owed on the 14th day after the date the 45-day advance notice is sent No rate increases for first year account opened No rate increases for introductory and promotional rates for 6 months, subject to exceptions Board may determine

36. Effective February, 2010 Repayment Restrictions. Repayment of outstanding balance terms may not change, except using one of the following upon cancellation of account: 5-year amortization (beginning on effective date of the increase in the 45-day advance notice) Required minimum not more than doubled Repayment method no less beneficial

37. Effective February, 2010Limits on fees and interest charges Prohibits fees for on-time payments. Prohibits double-cycle billing Over-the-limit (OTL) fees. Card issuers may not charge OTL fees unless the customer opts-in to permit the issuer to complete the transaction Periodic statements with such fees must provide notice of right to rescind opt-in One OTL fee per billing cycle Regulations forthcoming to prevent manipulation of credit limits designed to increase OTL fees or other penalty fees Issuers not prohibited from completing OTL transaction as long as there is no OTL fee charged OTL fee only once during each of 2 subsequent billing cycles, unless consumer has: (1) additional transactions, or (2) the outstanding balance is below the credit limit as of the end of the billing cycle

38. Effective February, 2010Fee Limits on Methods of Payment Issuers may not impose a fee for any method of consumer payment, regardless of method (e.g. mail, electronic transfer, phone) However, fees are permitted for expedited payment service �by a service representative of the issuer�

39. Effective February, 2010Application of Card Payments Payments in excess of minimum payment amount must be applied first to the card balance with the highest interest rate (high to low) For deferred interest plans, entire amount in excess of minimum payment must be applied during the last two billing cycles immediately preceding the expiration date of deferred interest period

40. Effective February, 2010 Application of Card Payments 5 pm cut-off: No finance charge may be imposed if the issuer received payment in an �identifiable� form by 5 pm on the due date. Changes to payment receipt location: No late fee or finance charge may be charged for a late payment if, within 60 days, the issuer made a �material change� in the mailing address for payment, and such change causes a material delay in crediting the account

41. Effective February, 2010Periodic Statements Due date must be same day each month When payment date is a weekend or holiday, issuer may not treat payment received on the following business day as a late payment Billing statements must be sent 21 days prior to due date

42. Effective February, 2010Enhanced Consumer Disclosures Minimum Payment Disclosures. Issuer must disclose: Prescribed minimum payment warning by the Federal Reserve � amount of interest & time to repay Consumer specific notice on the number of months to repay balance, and total cost, if only minimum payment made and no further advances Monthly payment amount to repay balance over 36 months, and total cost if repaid over 36 months Telephone number for credit counseling and debt management Notice must be conspicuous and in a prominent location, in table with headings, on billing statement Federal Reserve will prescribe the disclosure form

43. Effective February, 2010Enhanced Consumer Disclosures Due Date, Late Payment Disclosures. To charge a late fee, the issuer must conspicuously disclose on the periodic statement, the due date and amount of late fee together To impose a penalty rate increase for a late payment, this fact and the applicable penalty rate, must be conspicuously disclosed on the periodic statement, close to the due date If payment in person is permitted, issuer must disclose the date the payment at branch or office would be considered made for determining if a late fee can be imposed

44. Effective February, 2010Renewal Disclosures If any term changed since the date of the last account renewal without prior disclosure of the change of term, the issuer must disclose the following, at least 30 days prior to the renewal of the consumer�s account: Date the account will expire if not renewed Information about APR, annual fee, interest-free period, calculation method Method to terminate continued credit availability

45. Effective February, 2010 Internet Posting of Agreements Issuers must post on a website the agreement between the issuer and consumer for each open-end consumer credit plan Issuer must provide Federal Reserve every agreement it posts on its website Federal Reserve to establish a website as a central repository for all consumer credit card agreements received from issuers Exempts workouts of negotiated plans Exceptions when administrative burden outweighs benefit of transparency

46. Effective February, 2010Issuer Restrictions for Young Consumers To issue a credit card to a consumer under 21: Written application is required Application must include: Signature of an eligible co-signer who will be jointly liable, or Information showing consumer�s �independent means� to repay Consumer must opt-in to prescreened offers Prohibition against credit limit increases without a co-signer approving the increase in writing and assuming joint liability for increase

47. Effective February, 2010Campus Marketing Provisions Universities must disclose marketing contracts made with card issuers to market credit cards Issuer inducements to students to open card account by offering �tangible items� are prohibited on or near campus Card issuers must submit annual report to Federal Reserve about terms and conditions of college affinity card agreements

48. Effective August 2010 Interest rate reduction after rate increase. If issuer increases credit card rate based on certain factors, it must consider changes in such factors when later considering rate reduction. Issuer must: Have �reasonable methodologies� for assessing factors Review account increases since Jan. 1, 2009, every 6 months to assess factor changes Reduce increased rate where indicated Provide 45 day advance notice of reason for any increase Act does not require a reduction in any specific amount

49. Effective August 2010 Reasonable penalty fees. Prohibits issuer imposing a penalty fee or charge for any omission or violation of cardholder agreement unless fee is �reasonable and proportional� to the omission or violation Fees include: late fees, over-the-limit (OTL), & others Federal Reserve to establish standards for assessing whether OTL is reasonable and appropriate, including costs, deterrence of omission or violation, or other factors deemed necessary or appropriate Standards may vary for types of fees and charges May provide amount of penalty fee or charge presumed �reasonable and proportional�

50. Effective August 2010 Gift Cards. (general-use prepaid cards, stored value cards, gift certificates) Prohibits dormancy fee, inactivity fee, or service fee, unless: No activity for prior 12 months Required disclosures provided prior to purchase (fee may be charged, amount, frequency, inactivity fee may be charged) Only 1 fee per month Additional Board requirements met Some exclusions (i.e. promotional cards) Prohibits gift card expiration dates, unless: Not earlier than 5 years after issued or reloaded Expiration terms clearly and conspicuously stated Board to issue regulations

51. Impact of CREDIT Card Act Institutions will have to redesign credit card models Competition will drive market

52. Overdrafts

53. Overdrafts June 2008: FR Board proposal under UDAP & Regulation DD: Opt out of having overdrafts paid Opt out of ATM/debit card overdrafts, but not ACH and check ODs New disclosures on periodic statements December 2008: FR Board re-proposes under Regulation E Alternative proposals Opt in or opt out of having overdrafts paid Option to have certain debit card ODs declined but have checks, ACH, and �recurring� transactions paid Requirements related to ATM/debit card overdrafts and holds Final Regulation DD disclosures: must disclose OD fees on periodic statements, regardless of promotion of ODs

54. Overdrafts Legislative proposal Opt in APR calculation Limits on number and amount of overdraft fees Legislative status Monitoring regulatory action

55. Overdrafts - ABA August 2009 Survey: More Consumers Avoid Overdraft Fees 82% of bank customers did not pay an overdraft fee in the previous 12 months Of the 17% of consumers who paid overdraft fees in prior 12 months, 36% paid just one fee

56. Overdrafts � ABA Consumer Tips to Avoid Paying Overdraft Fees Use direct deposit for paycheck Track your balance and transactions (online, by phone, at the ATM, 24 hours a day) Keep a cushion of money in checking account Link your checking account to a savings account or credit card Ask your bank for an overdraft line of credit Ask your bank if they will allow you to �opt-out� of overdraft protection See if your bank offers automatic notification when your balance drops below a certain level