CHFC 2017 Annual Report

regulations, which became effective in January 2014, that impact consumer mortgage lending and servicing. In addition, the CFPB has issued regulations, which became effective October 1, 2015, that change the disclosure requirements and forms used under the Truth in Lending Act and the Real Estate Settlement Procedures Act. Compliance with these new laws and regulations and other regulations under consideration by the CFPB have and will likely result in additional costs and could change the products and/or services that are currently being offered, which could be significant and could adversely impact the Corporation's results of operations, financial condition or liquidity. Enhanced Prudential Standards A publicly traded bank holding company with $10 billion or more in consolidated assets must comply with certain provisions of the Federal Reserve's enhanced prudential standards (EPS). The holding company is required to establish a stand- alone, board level risk committee that must have a formal written charter approved by the board of directors. The risk committee is charged with approving and periodically reviewing the risk-management policies of the company and overseeing the operation of its global risk-management framework. The Corporation has a Standing Risk Management Committee of the board of directors. Stress Tests The Dodd-Frank Act mandates company-run stress tests requirements for U.S. bank holding companies with total consolidated assets of $10 billion to $50 billion. The Dodd-Frank Act Stress Test ("DFAST") require bank holding companies to assess the potential impact of three macroeconomic scenarios - baseline, adverse, and seriously adverse - on the company's consolidated losses, revenues, balance sheet (including risk-weighted assets) and capital. The rules also require each banking organization to establish and maintain a system of controls, oversight and documentation, including policies and procedures, designed to ensure that the DFAST procedures used by the banking organization are effective in meeting the requirements of the rules. Chemical will be required to submit a stress test report in 2018. The Durbin Amendment The Dodd-Frank Act included provisions that require that interchange fees in debit card transactions be "reasonable and proportionate" in relation to the cost of the transaction incurred by the card issuer (the "Durbin Amendment"). Under rules issued by the Federal Reserve, interchange fees on a debit card transaction are capped at $0.21 per transaction plus five basis points multiplied by that amount of the transaction are conclusively determined to be reasonable and proportionate. In addition, an issuer may charge up to 1 cent on each debit card transaction as a fraud prevention adjustment if the issuer meets certain fraud prevention standards. The interchange fee restrictions in the Durbin Amendment apply to debit card issuers with $10 billion or more in total consolidated assets. Chemical Bank became subject to these interchange restrictions beginning on January 1, 2017. The Volcker Rule The Volcker Rule implements Section 619 of the Dodd-Frank Act. The Volcker Rule prohibits "banking entities," such as the Corporation, Chemical Bank and their affiliates and subsidiaries, from owning, sponsoring, or having certain relationships with hedge funds and private equity funds (referred to as "covered funds") and engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments. The Volcker Rule excepts certain transactions from the general prohibition against proprietary trading, including transactions in government securities (e.g., U.S. Treasuries or any instruments issued by the GNMA, FNMA, FHLMC, a Federal Home Loan Bank, or any state or a political division of any state, among others); transactions in connection with underwriting or market-making activities; and, transactions as a fiduciary on behalf of customers. Banking entities may also engage in risk- mitigating hedges if the entity can demonstrate that the hedge reduces or mitigates a specific, identifiable risk or aggregate risk position of the entity. The banking entity is required to conduct an analysis supporting its hedging strategy and the effectiveness of the hedges must be monitored and, if necessary, adjusted on an ongoing basis. Banking entities with more than $50 billion in total consolidated assets and liabilities that engage in permitted trading transactions are required to implement enhanced compliance programs, to regularly report data on trading activities to the regulators, and to provide a CEO attestation that the entity’s compliance program is reasonably designed to comply with the Volcker Rule. Although the Volcker Rule became effective on April 1, 2014, the Federal Reserve exercised its unilateral authority to extend the compliance deadline until July 21, 2017, with respect to covered funds. This period has ended and the Corporation, Chemical Bank and their affiliates and subsidiaries must be in compliance with the Volcker Rule. 13