September 14, 2001 Mr. Robert E. Feldman
Executive Secretary
Attention: Comments/OES
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Re: Study of Banking Regulations Regarding the Online Delivery of Financial Services
66 FR 37029 (July 16, 2001)
Dear Mr. Feldman:
America's Community Bankers (ACB)1 welcomes the opportunity to respond to
the request for comment on the study of banking regulations relating to the online
delivery of financial services issued by the Federal Deposit Insurance Corporation (FDIC)2.
As required by the Gramm-Leach-Bliley Act (GLBA)3, the FDIC and the other
federal banking regulators are studying their respective regulations governing the online
delivery of financial services. GLBA requires the agencies to report back to Congress with
the findings of the studies and recommendations for appropriate legislative or regulatory
action. The FDIC also seeks comment on whether additional regulations are needed to
facilitate the use of new technologies by financial institutions. Finally, the FDIC seeks
comment on specific issues relating to Internet link arrangements, physical location
considerations, appraisals, and electronic signatures.
ACB Position
ACB commends the FDIC for seeking input in its review of regulations and policies relating
to the online delivery of financial services. Current FDIC regulations authorize banks to
engage in a wide range of activities through electronic means. While the current
regulatory framework is flexible and provides opportunities for banks to engage in an
array of services, we emphasize the point that with regard to electronic banking
activities in particular, very broad regulation coupled with interpretations and guidance
is preferable to specific requirements. Banks must be able to compete with unregulated
financial services providers while operating in a safe and sound manner.
Over the past several years the FDIC and the other banking regulators have issued a number
of Advisory Letters, Interpretations, Bulletins, and other guidance relating to the use of
technology by financial institutions. These documents provide helpful guidance, without
imposing strict, inflexible regulatory requirements. We suggest that the FDIC continue to
use this approach as the primary mechanism for communicating guidance relating to the
delivery of electronic financial services.
We believe that the development of electronic delivery channels for financial services and
products will continue to develop at a rapid pace and in unanticipated directions. This
pace of change continues to be driven by four broad factors: (1) competition among insured
institutions and their non-insured competitors; (2) advances in technology; (3) consumer
demand for convenience and lower costs; and (4) financial institution management's demand
for greater cost-effectiveness. Because of this rapid pace of change, ACB urges the FDIC
to apply two fundamental principles in contemplating regulations or supervisory policies
in the area of electronic banking:
· The public and insured depository institutions will be best served during this period
of rapid change, if statutory and regulatory restrictions are kept to a minimum. New
services should be allowed to develop within an overall framework of consumer protection,
safety and soundness statutes/regulations, and commercial law. Prematurely imposing overly
restrictive operational standards could impede the development of improved financial
services.
· It is important in a rapidly changing financial services marketplace that financial
institutions be permitted to operate within a framework that permits them to compete
effectively, not only with other regulated financial institutions, but with competing less
regulated non-bank firms that are offering financial and related services to small
businesses and consumers.
ACB Comments and Concerns
The FDIC has requested comment on a variety of specific issues relating to the electronic
delivery of financial products and services. The following are comments on some of these
issues.
1. Mitigating Burdens: Are there any regulations the FDIC should modify because they
impede the use of a new technology that would allow financial institutions to offer
improved products or services in a more efficient manner and at a lower cost?
ACB understands that the cost to banks for the ability to engage in activities through
electronic means is not just the development of the technology, but the bank also has an
obligation to ensure that the activity is undertaken in a safe and sound manner and that
customers are protected. Whatever product or service is offered using electronic
technology must be done in a manner that does not cause undue risk to the bank or to the
customer. Since the enactment of GLBA, the agencies have issued interagency guidance on
Standards for Safeguarding Customer Information. This guidance became effective on July 1,
2001 and we suggest that the FDIC and the other agencies use this framework to work with
banks to ensure that the institution, the agency and customers each understand the risks
of doing business through electronic means. We believe that the implementation of the
guidelines by banks and their use by examiners should be frequently reviewed to ensure
that they appropriately measure and identify industry risks. If, as a result of a better
understanding of technology and the risks to the industry, the guidelines need to be
revised, we urge the agencies to revise them as necessary.
2. Internet Link Arrangements: Should the FDIC promulgate a regulation or publish guidance
setting forth standards for state nonmember banks concerning the use of hyperlinks?
The FDIC expressed concern over whether hypertext links that connect a bank's customer on
its Internet site to another entity's web site may create customer confusion over which
products are offered by a federally insured institution. Such weblinking relationships may
include the display of the bank's logo and the preservation of the "look and
feel" of the bank's site, or may involve a completely separate site controlled by a
third party. While ACB acknowledges the concern of the FDIC that such linking could be
confusing to the customer, we strongly urge the FDIC to refrain from promulgating any
regulation in this area.
The online financial marketplace is undergoing an exciting period of growth and
development. Establishing new regulations in this dynamic environment could have the
unintended consequences of impeding the growth of online financial services, and
benefiting less regulated entities that would not be subject to such regulations. The
Office of the Comptroller of the Currency recently issued an advisory on weblinking4
outlining the risks associated with weblinking and providing some advice on how to
mitigate this risk. Such guidance can provide useful information to all insured
institutions without imposing unintended restrictions on their activities. ACB recommends
that the FDIC issue guidance to communicate any concerns the agency has to the industry.
ACB does not believe that legitimate Internet links established by an insured depository
institution require the attention of the FDIC at this time, however, ACB has significant
concerns over the emerging practice of "contextual advertising." This new
advertising model, and other similar models allow a firm to buy certain key words or
phrases that pertain to their business. The words then become a hyperlink to the
advertiser's web site when the particular word/phrase is displayed through an Internet
browser with special advertising software loaded.
Consumers may unwittingly be installing this advertising software when downloading
unrelated programs such as music sharing software. The disclosure that this software is
included in a download is often buried in a lengthy disclosure statement that may be
overlooked by the consumer. The result is that a consumer could call up a legitimate bank
web site and find that a disclosure statement includes a contextual advertising word such
as "mortgage" that will be highlighted as an Internet link. Clicking on this
link will direct the consumer to another firm's site, perhaps a predatory or high-cost
lender, or even a potentially fraudulent Internet site. ACB believes that such practices
are more than just deceptive advertising, they effectively interfere with the ability of a
federally insured depository institutions to provide legally required disclosures, and
could potentially steer consumers to higher cost services. ACB urges the FDIC to study
this practice and its impact on a financial institution's ability to provide disclosures
to customers and take whatever action necessary to combat this practice.
3. Location Consideration: Are there instances in which online banking or lending would
benefit from a clarification of references to physical location in FDIC regulations?
As a general matter, many of the statutes that are administered by the FDIC and the other
federal banking agencies will have to be interpreted more flexibly to take the advances in
technology into account. The development of the Internet and the ability of insured
institutions to do business, provide services, and engage in activities over a broad
geographic area raises a number of issues, including restrictions on activities and
Community Reinvestment Act concerns. Defining "location" too narrowly would
unnecessarily restrict the ability of banks to determine how best to use the Internet to
serve customers and compete with unregulated service providers. We urge the FDIC to
develop a uniform approach to define "location" that will permit banks enough
flexibility to engage in activities and will not restrict where they can do business and
with whom. We note that the FDIC and the other federal banking agencies are looking at
this issue in the context of the advance notice of proposed rulemaking on possible reform
of the regulation that implements the Community Reinvestment Act. There are number of
other areas that should be reviewed for consistency, including management interlocks and
branching.
4. Appraisals: Would online lending benefit from any clarification of the FDIC's
regulations in terms of what constitutes a written appraisal?
Federal banking regulations specifically require a written appraisal in conjunction with
certain real estate related transactions. This requirement effectively prevents the use of
collateral valuation models of the most common automated underwriting systems,
significantly impeding the efficiency of online lending operations. A similar regulatory
requirement for a written appraisal does not exist for uninsured mortgage originators. The
result creates a competitive inequity whereby uninsured mortgage originators can establish
more streamlined and efficient mortgage processes than is possible for the mortgage
operation of an insured depository. This results in cost savings for the uninsured
mortgage originator that can be passed on to the consumer.
ACB acknowledges the importance of the appraisal process, and the challenges associated
with documenting the authenticity and credibility of real property valuations in light of
new technology. In order to address this situation, ACB suggests that the banking agencies
establish an exception to the "written appraisal" requirement for loans that
have been processed using an automated underwriting system selected pursuant to the
institution's required board approved real estate lending standards5 .
Automated underwriting systems use sophisticated Automated Valuation Models (AVMs) to
assess the market value of properties processed through the underwriting systems. These
AVMs analyze each property based on its history, market value comparable sales, regional
indicators and other factors. A separate physical report is not produced, nor is a dollar
value assigned to the collateral. Rather the purchase price or stated value is accepted,
if the analysis finds the represented value consistent with the findings. These systems
are emerging as industry standards that have increased the efficiency of the mortgage
origination process and significantly reduced lending costs. By amending regulations on
written appraisal requirements, regulators can help improve the efficiency of the mortgage
process, and create a level playing field for insured depositories and non-bank mortgage
originators.
A related issue is the $250,000 regulatory threshold for loans requiring the use of state
licensed or certified appraisals. The current regulation waives the requirement for an
appraisal performed by a state licensed or certified appraiser on most real estate
transactions $250,000 or less. This exception threshold is less than the current Fannie
Mae and Freddie Mac (GSE) loan purchase limit of $275,000 (for most parts of the country)
resulting in a range of loans between the regulatory threshold of $250,000 and the
conforming loan limit for which the use of the efficiencies provided by automated
underwriting and valuation technology may be unavailable. When the $250,000 threshold was
established by regulation in 19946, the prevailing conforming loan limit was
$203,150. The current loan limit reflects real estate market trends and ACB strongly
believes that the appraisal requirement threshold should be increased. Rather than issue
periodic revisions to this threshold that will require compliance with the procedures of
the Administrative Procedure Act, ACB recommends that the regulations be amended to
provide that the $250,000 appraisal threshold be changed to current conforming GSE loan
limit.
5. Electronic Signatures: Should the FDIC promulgate regulations or publish guidance
setting forth standards for the use of electronic signatures and records?
The FDIC seeks comment on the challenges banks are facing in implementing the E-Sign Act.
The electronic signature marketplace is continuing to develop. It is difficult to predict
its eventual structure and what issues will emerge. Institutions are just now beginning to
grapple with issues such as how consent is received, how individuals are authenticated,
and what to do when an email is sent to a consumer that comes back to the bank as
undeliverable. ACB recommends that FDIC allow the electronic signature environment to
further develop before issuing any regulation or supervisory guidance.
Miscellaneous
Finally, ACB believes that the FDIC's actions regarding electronic disclosures and
electronic banking generally will provide valuable opportunities for community banks to
more efficiently comply with the consumer protection requirements of various statutes and
regulations and compete in their markets. The ability to provide electronic delivery of
services will be an important factor in the future. The issue of preemption of state laws
in this area is a controversial one. Generally, we support preemption of state laws that
are inconsistent with a community bank's ability to provide electronic services, and we
would support appropriate statutory or regulatory changes.
Conclusion
ACB appreciates the opportunity to provide input into the FDIC on its ongoing study of
regulations governing the online activities of savings associations. As further
developments occur, it is critically important that state nonmember banks have the maximum
flexibility possible to serve customers and compete with unregulated financial services
providers.
If you have any questions, please contact Rob Drozdowski at (202) 857-3148, or via email
at rdrozdowski@acbankers.org.
Sincerely,
Charlotte M. Bahin
Director of Regulatory Affairs and
Senior Regulatory Counsel
1 ACB represents the nation's community banks of all charter types and
sizes. ACB members, whose aggregate assets exceed $1 trillion, pursue progressive,
entrepreneurial and service-oriented strategies in providing financial services to benefit
their customers and communities.
2 66 Fed. Reg. 37029-37030 (July 16, 2001).
3 P.L. 106-102, Title VII, Section 729.
4 Office of the Comptroller of the Currency, OCC Bulletin 2001-31 (July
3, 2001).
5 12 CFR Part 560.101.
6 59 Fed. Reg. 29482 (June 7, 1994).