Financial Services Regulatory Relief: Implementation and Reintroduced Provisions in the 110th Congress
Order Code RS22651
April 25, 2007
Financial Services Regulatory Relief:
Implementation and Reintroduced Provisions
in the 110th Congress
Walter W. Eubanks
Specialist in Economic Policy
Government and Finance Division
Summary
Federal financial services regulatory agencies are implementing the Financial
Services Regulatory Relief Act of 2006, P.L. 109-351 (120 Stat. 1966), as the 110th
Congress considers new financial services regulatory relief bills. Most of the provisions
under consideration were debated and excluded from the final legislative process that
enacted P.L. 109-351. The simultaneity of these developments shows Congress’s
continued concern with reducing the regulatory burden of financial services providers.
This report gives a brief summary of the provisions of P.L. 109-351 followed by the
specific provisions that federal regulatory agencies are implementing. It then examines
the regulatory relief provisions currently being introduced in the 110th Congress. The
report concludes with a discussion of the financial services regulatory relief legislative
process and whether these provisions could reverse the increasing concentration of the
financial services industry.
This report will be updated as developments warrant.
Introduction
The intended purpose of regulatory relief for financial services providers is to lower
the cost of regulation on institutions offering financial services. However, regulatory
relief provisions could have a significant impact on the growing concentration in the U.S.
banking industry. For example, regulatory relief that reduces regulations limiting banks’
ability to merge could lead to more large and fewer small banks. On the other hand, it is
important to bear in mind that financial institution regulations exist for many important
purposes: to encourage the safety and soundness of individual institutions, ensure
systemic stability, deter concentration and encourage competition, and provide consumer
protection. Regulatory tools vary as well. In addition to the laws and regulations
specifying both the kinds of activities in which institutions may engage and their
structural arrangements, regulatory tools include licensing provisions; periodic
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examinations; reporting and disclosure requirements; and supervision by regulators,
particularly of problem institutions. In providing regulatory relief, Members of Congress,
regulators, and industry analysts necessarily face the issue of whether existing laws and
regulations restrain efficiency and/or competitiveness in the financial services
marketplace.
The Financial Services Regulatory Relief Act of 2006, P.L. 109-351 (120 Stat.
1966), was enacted on October 13, 2006, after protracted debates in both houses of
Congress on the underlying bills — H.R. 3505 and S. 2856. While federal financial
services regulators are implementing P.L. 109-351, regulatory relief provisions excluded
from the law are now being reintroduced in the 110th Congress. This report gives a brief
summary of the provisions of P.L. 109-351 by title followed by the provisions that federal
regulatory agencies are implementing. The report then briefly examines the financial
services regulatory relief provisions that currently being reintroduced in the 110th
Congress. It concludes with a discussion of financial services regulatory relief legislative
process and the banking industry’s increased concentration.
The Financial Services Regulatory Relief Act of 2006,
P.L. 109-351 (120 Stat. 1966)
The Major Provisions by Titles
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Title I. Broker Relief. Requires the Securities and Exchange
Commission to consult and seek concurrence with the federal banking
agencies in implementing the broker-dealers section of the Gramm-
Leach-Bliley Act.
!
Title II. Monetary Policy Provisions. Authorizes the Federal
Reserve Board to pay interest on balances it holds for depository
institutions at Federal Reserve Banks. This title would also give the
Federal Reserve Board greater flexibility to set reserve requirements on
transaction accounts maintained at its banks.
!
Title III. National Bank Provisions. To date, not all the
provisions of P.L. 109-351 have been implemented. It may take years
and new legislation to complete the implementation as demonstrated by
the provisions of the Gramm-Leach-Bliley Act of 1999, which is being
implemented by P.L. 109-351 in 2007. At the same time, provisions that
were considered in the legislative process but were excluded from P.L.
109-351 are now being reintroduced in the 110th Congress. One title
would permit a national bank greater flexibility in designing its articles
of association, including how its directors are elected. A national bank
could also choose not to use cumulative voting, which is now mandated
by current law. This title also has provisions to simplify dividend
calculations and repeal obsolete regulations, including regulations that
limit the authority of the Comptroller of the Currency. These provisions,
like the national bank provisions of H.R. 3505 (see above), provide
national banks greater organizational flexibility but stop short of
permitting national banks to fundamentally change their current
organizational structure.
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!
Title IV. Savings Association Provisions. Would amend the
definitions of bank and regulatory agencies to include savings
associations and the Office of Thrift Supervision (OTS), which would
give associations the same treatment as banks regarding broker-dealer
registration requirements. This title also eliminates the cap on the
valuation of purchased mortgage servicing rights and raises the cap on
loans to one borrower to $500,000 for development of domestic
residential housing units.
!
Title V. Credit Union Provisions. This title would give military
and civilian authorities discretion to extend federal land leases to credit
unions at minimum charge. It also increases the maturity limitation on
federal credit union loans from 12 to 15 years. These provisions would
also allow credit unions to expand electronic transfer services to persons
eligible for membership. This title would also clarify the definition of
net worth to conform with other depository institutions and the new
accounting standards.
!
Title VI. Depository Institution Provisions. Would repeal three
reporting requirements related to insider lending. This title would also
extend the same treatment to thrifts that banks already have in investing
in bank service companies (companies that provide services to banks),
while maintaining activities limits and maximum investment rules. It
would allow member institutions of the Federal Reserve Board to count
as reserves the deposits in other banks that are passed through by those
banks to the Federal Reserve Banks as required reserve accounts. This
title requires a review of all report requirements by federal regulators, and
it would expand eligibility for the 18-month examination cycle from
institutions with $250 million or less in assets to those with assets of $500
million or less. It would streamline depository institutions’ merger
application requirements. It would also allow depository institution
subsidiaries of a bank holding company to engage in cross-market
activities. This title also raises the asset size of institutions that are
exempt from interlocking management prohibitions from $20 million to
$50 million.
!
Title VII. Banking Agency Provisions. These are regulatory
housecleaning measures that clarify, extend, amend, remove, and correct
financial services laws and regulations. The 28 sections under this title
are focused on improving the regulatory process, thereby improving
industry regulation. For example, Section 701 provides greater
consistency in the federal law governing how much time is available to
challenge the determination by the Office of the Comptroller of the
Currency to appoint a receiver for a national bank by providing a 30-day
period for a party to judicially challenge an OCC appointment. Section
711 underscores the authority of state regulators for institutions chartered
on the state level and clearly establishes that the chartering state is the
primary state supervisor. It also limits the host state supervisory authority
in cooperative regulatory agreements. Section 728 directs regulatory
agencies to finalize a proposal for a uniform, simplified privacy notice to
satisfy the requirements of the Gramm-Leach-Bliley Act.
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Title VIII. Fair Debt Collection Practice Act Amendments.
Would extend the current exemption for debt collection by state and local
agencies to private collection entities working for state and local agencies.
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Title IX. Cash Management Modernization. Would make
changes to 31 U.S.C. 9301 and 31 U.S.C. 9303 to allow the Secretary of
the Treasury to determine the type of securities that may be pledged in
lieu of surety bonds, and requires that the securities be valued at current
market rates.
!
Title X. Studies and Reports. Would require a study by the
Comptroller General on the volume of currency transaction reports
(CTRs) filed with the Treasury, including, if appropriate,
recommendations for changes to the filing system. It also requires a study
by the Comptroller General on the cost of regulatory compliance and the
efficacy of consolidating federal financial services regulators.
What’s Being Implemented?
The Federal Reserve Board and the Securities and Exchange Commission asked for
comments on their joint proposal to clarify the rules governing banks’ securities activities.1
This is in response to Title I of the Financial Services Regulatory Relief Act of 2006,
which directed the SEC and the federal bank regulatory agencies to jointly issue proposed
rules within 180 days of the law’s enactment. This proposal is the latest effort to meet the
mandate of the Gramm-Leach-Bliley Act (GLBA) of 1999 that repealed a broad
registration exemption for bankers’ securities activities and replaced it with specific
exemptions. The SEC had issued several proposals that were criticized by bankers and
their regulators. The bank regulatory agencies and the SEC will take comments for 90
days, using the remaining 90 days to develop the proposed rules. The SEC has also
extended the exemption for banks until July 2, 2007.
The Federal Reserve Board has also invited public comments on its rules that would
implement Section 601 of the Financial Services Regulatory Relief Act of 2006, which
eliminates several statutory reporting and disclosure requirements related to insider
lending by insured depository institutions.2 The bank regulatory agencies supported
eliminating these requirements because the agencies have not found them useful in
monitoring insider lending or preventing insider abuse. When these rules become final,
they would amend the Federal Reserve Board’s Regulation O, which places restrictions
on the ability of insured depository institutions to extend credit to their executive officers,
directors, and principal shareholders.
1 This joint effort is supported by many analysts. See Christian Bruce, “Fed Agrees to Seek
Comment On Proposed Bank Broker Rules,” BNA Banking Daily, December 12, 2006, 2 p. See
[ h t t p : / / p u b s . b n a . c o m / i p / b n a / b b d . n s f / c h / A 0 B 3 V 8 F 2 N 2 ] , a n d
[http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20061218/attachment.pdf].
2 For the Federal Reserve Board’s press release and other documentation, see
[http://www.federalreserve.gov/boarddocs/press/bcreg/2006/200612062/default.htm].
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Section 728 of the Financial Services Regulatory Relief Act of 2006 mandated that
federal regulatory agencies develop a model format for conveying a financial institution’s
privacy policies. The model must be easily understood by consumers. It should clearly
explain consumers’ right to opt out of permitting the sharing of their nonpublic personal
information with nonaffiliated third parties. The law mandated that the regulatory
agencies develop the model and issue it for public comment no later than 180 days after
the date of its enactment, which is April11, 2007. The model, if approved in final
rulemaking, would serve as a safe harbor for institutions that use it to satisfy their account
opening and annual privacy notification requirements.
The privacy notices were required by the Gramm-Leach-Bliley Act of 1999, effective
July 1, 2001. But as the new proposal mentioned, many of the notices that were offered
to comply with GLBA were long and complex, causing complaints of confusion from
consumers. The sample model provides simple introductory information telling
consumers why the financial institutions share customer information and what types of
information are shared. It also details the uses of the shared information and indicates
whether the consumer can limit the sharing. Most important, the model provides a simple
opt-out form that can be returned to the financial institution.
The federal bank regulatory agencies have proposed interim rules to implement
Section 605 of P.L. 109-351. This provision of the law extends the range of small
institutions eligible for an extended 18-month on-site examination cycle to well-
capitalized, well-managed banks and savings associations with up to $500 million in total
assets. This change reduces the cost of preparing for on-site examinations for more small
institutions. Before this regulatory change — effective April 3, 2007 — only banks with
less than $250 million in total assets could qualify for the extended 18-month cycle.
Reintroduced Provisions
Analysts expect more provisions of H.R. 3505 and S. 2856 that were not included
in P.L. 109-351 will be reintroduced in the 110th Congress as well as new provisions.
Favorable provisions for credit unions, thrifts, and small and large banks are likely to be
reintroduced as separate bills, or titles attached to non-financial-services legislation as was
the case in other regulatory relief bills in past Congresses.
The Seasoned Customer CTR Exemption Act of 2007 (H.R.323), a key measure in
H.R. 3505 in the 109th Congress, was the first provision to be reintroduced in the 110th
Congress. CTRs are currency transaction reports. This provision would exempt
institutions’ seasoned customers from the requirements under federal anti-money-
laundering laws that require currency transactions of more than $10,000 to be reported to
the Internal Revenue Service. H.R. 3505 would have exempted suspicious activity reports
(SARs) as well as CTRs for seasoned customers. It was argued that SARs exemptions
could seriously undermine the U.S. antiterrorism financing efforts.
Title I in H.R. 3505, which was excluded from P.L. 109-351 by the Senate, would
allow national banks to elect to be organized as S corporations. S corporations are Limited
Liability Corporations (LLCs) that avoid double federal taxation of profits. In the 110th
Congress, the Senate approved a package that includes $757 million in tax benefits for
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banks, including $351 million aimed directly at S corporation banks. This provision was
part of H.R. 1591, the bill to provide war supplemental funding that the President has
threatened to veto. Nearly a third of all American banks are S corporations. They are
usually smaller banks; however, one of these banks has assets of $14 billion and 42 have
assets of more than $1 billion.3
The Credit Union Regulatory Improvement Act of 2007 (CURIA) was introduced in
the 110th Congress on March 15, 2007 (H.R. 1537).4 The new bill has 21 provisions,
which is three more than there were in the Credit Union Regulatory Improvement Act
(CURIA) of 2005.5 In the enactment of P.L. 109-531, only five of the 15 provisions in
H.R. 3505 were included in the law. This suggests that while the number of credit union
regulatory relief provisions are growing, Congress has been very selective in the ones it
enacts. The new bill’s additional provisions tend to be more multifaceted. For example,
in Title I Capital Modernization, it proposed lowering the capital requirements, amended
the risk-based net worth requirements, and amended the net worth restoration plans. In
CURIA 2007, Section 201 would simply raise the cap on credit union member business
loans to 20% from the present 12.5%.
Conclusion
To date, not all the provisions of P.L. 109-351 have been implemented. It may take
years and new legislation to complete the implementation as demonstrated by the
provisions of the Gramm-Leach-Bliley Act of 1999, which is being implemented by P.L.
109-351 in 2007. At the same time, provisions that were considered but excluded from
P.L 109-351 are now being reintroduced as separate bills in the 110th Congress. At some
point later in the legislative session, these individual relief bills may be bundled in a single
regulatory relief bill. Regulatory relief legislation often changes the playing field for
depository institutions because many regulations restrict or expand the activities of
institutions. Consequently, regulatory relief legislation often has significant impact on
particular institutions in the financial services markets.
Whether relieving the regulatory burden would have an impact on reversing the
growing concentration in the financial services industry is uncertain because
knowledgeable observers agree that the banking industry concentration is partly
attributable to economies of scale. Larger institutions experience declining average cost
as they grow. These same institutions experience economies of scale in complying with
the federal banking regulations. This implies that additional regulation relief legislation
makes it increasingly difficult for smaller institutions to comply and compete in the
marketplace.
3 Credit Union National Association, “Senate Passes bill with tax breaks for banks,” CUNA News
Now,”March 31, 2007, p. 2.
4 Marcia Kass, “Kanjorski Seeks to Raise Cap on Credit Union Lending,” BNA Banking Report,
March 5, 2007, p. 1, [http://ippubs.bna.com/NWSSTND/IP/BNA/bar.nsf/SearchAllView/
DB9B49D830CA39508525729300112635?Open&highlight=CREDIT,UNIONS].
5 See CRS Report RS22212, Credit Union Regulatory Improvements Act of 2005 (CURIA), by
Pauline Smale.