Recent Developments Affecting Depository Institutions by Lynne Montgomery*
REGULATORY AGENCY ACTIONS
Final Patriot Act Regulations on Customer
On April 30, 2003, the Federal Reserve Board (FRB), the Office of
the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS),
the Federal Deposit Insurance Corporation (FDIC), the National Credit Union
Administration (NCUA), the Commodity Futures Trading Commission, the Securities
and Exchange Commission, and the Department of the Treasury and its Financial
Crimes Enforcement Network issued final regulations requiring certain financial
institutions to establish procedures to verify the identity of new account
holders. The regulations implement section 326 of the USA Patriot Act, which
mandates that rules be issued requiring financial institutions to implement
reasonable procedures to (1) verify the identity of a person opening an account,
(2) maintain records of the information used to verify the person’s identity,
and (3) determine whether the person appears on any list of known or suspected
terrorists or terrorist organizations. The rules apply to banks and trust
companies, savings associations, credit unions, securities brokers and dealers,
mutual funds, futures commission merchants, and introducing brokers.
Institutions subject to the final rules will be required to establish a program
for obtaining identifying information from customers who open new accounts.
Financial institutions are also required, among other things, to set forth
procedures for verifying the identity of customers within a reasonable period
of time. Financial institutions must be in full compliance with the new regulations
by October 1, 2003. PR-FRB, 4/30/03.
Guidance on Managing Credit-Card Accounts
On January 8, 2003, the FRB, the OCC, the OTS, and the FDIC issued
guidance on account management and loss-allowance practices for credit-card
lending and called for conservative management of credit-line assignments. The
guidance outlines the supervisory agencies’ expectations for prudent
risk-management, income-recognition, and loss-allowance practices. The
guidance, which applies to all banks and thrift institutions, requires that
lenders justify their credit-management decisions with careful analysis of
borrower repayment history, risk scores, and other relevant criteria. The
guidance is intended to help financial institutions conduct credit card lending
activities in a safe and sound manner while meeting the needs of their
customers. The agencies developed the guidance in response to recent
examinations that disclosed a number of inappropriate account-management,
risk-management, and loss-allowance practices.
1/13/03, p. 40.
Advisory on Mortgage Banking Activities
The FRB, the OCC, the OTS, and the FDIC on February 24, 2003,
issued an advisory letter providing guidance on mortgage banking activities.
The guidance, which applies to all banks and thrift institutions, was developed
in response to recent examinations and market developments. The guidance
details the agencies’ expectations regarding risk-management activities,
including valuation and modeling processes, hedging activities, management
information systems, and internal audits. The guidance also states that the
agencies may require additional capital from institutions that fail to
incorporate into their risk-management programs the sound practices set forth
in the advisory letter. PR-14-2003, FDIC, 2/25/03.
Deposit Insurance Corporation
Final Rule on Limited Liability Companies
On January 31, 2003, the FDIC adopted a final rule making banks
that are organized as limited liability companies (LLCs) eligible for federal
deposit insurance. An LLC offers an optional business organization model that
has both the limited liability benefits of a corporation and the “pass-through”
taxation benefits of a partnership. Under the new rule, the regulators will
retain their bank supervisory powers over banks operating as LLCs, including
the power to take prompt corrective action and issue enforcement orders to LLC
banks that become critically undercapitalized.
BBR, 2/3/03, pp. 195 –96.
On February 7, 2003, the California Commissioner of Financial
Institutions closed Southern Pacific Bank, Torrance, California, and named the
FDIC as receiver. Beal Bank, S.S.B., Plano, Texas, paid the FDIC a premium of
$500,000 to assume approximately $834.0 million of Southern Pacific’s insured
deposits and to purchase approximately $201.5 million of the failed bank’s
assets. The FDIC estimates that the cost of the failure to the Bank Insurance
Fund will be $134.5 million. This was the first failure of an FDIC-insured
institution in 2003 and the first bank failure in California since 2000. PR-11-2003,
Federal Reserve Board
Identity Theft Booklet
On January 16, 2003, the Federal Reserve Bank of Boston released a
new booklet designed to help consumers protect themselves against identity theft.
The Identity Theft booklet
describes some common sense precautions consumers should take to protect
personal information, shows consumers how to monitor for signs of identity
theft, and offers a guide for consumers whose identities have been stolen. The
booklet also has contact information for the national credit bureaus, federal
agencies, and nonprofit organizations that advise consumers and businesses.
The booklet is available online at the Federal Reserve Bank of Boston’s Web
site: http://www.bos.frb.org/consumer/identity/index.htm. PR-FRB, 1/16/03.
Updated Check-Processing Operations
The Federal Reserve Banks on February 6, 2003, announced changes
to their back-office check-processing operations intended to improve operating
efficiency and reduce check-cashing costs to the government. Reflecting the
ongoing shift in consumer and business preferences from checks to electronic
payments, the Reserve Banks intend to reduce their check service operating
costs through a combination of streamlining their check management structure,
reducing staff, and consolidating their check-processing locations. Check
payments continue to be the most popular form of noncash retail payment;
however, their share of all noncash retail payments has declined from 85 percent
in 1979 to 60 percent today. The changes, which are projected to be completed
by the end of 2004, are expected to reduce operating costs for check services
by approximately $60 million in 2005 and $300 million over the subsequent five
years. PR-FRB, 2/6/03; BBR, 2/10/03, p. 242.
Amendments to Regulation B—Equal Credit Opportunity Act
On February 19, 2003, the FRB approved a final rule amending
Regulation B, which implements the Equal Credit Opportunity Act (ECOA). The
ECOA prohibits discrimination on the basis of a credit applicant’s national
origin, marital status, religion, color, sex, race, age, receipt of public
assistance benefits, or the exercise of rights under the Consumer Credit
Protection Act. The FRB in 1976 adopted a general prohibition against
nonmortgage lenders’ inquiring about applicant characteristics. The final rule
creates an exception that allows nonmortgage lenders to collect data about
borrowers’ personal characteristics as long as the lenders keep the data
confidential and use the information to assess their own compliance with the
ECOA. PR-FRB, 2/19/03.
Online Resource Center
The FRB announced on March 28, 2003, the launch of an online
resource for researchers, educators, program directors, and others interested
in advancing financial education programs. The resource—the Financial
Education Research Center—was developed by the Federal Reserve Bank of Chicago
to encourage research and disseminate information through its repository of
studies related to financial education and its listing of major financial education programs through out the country. The
Web site for the Research Center is www.chicagofed.org/cedric/index.cfm.
of the Comptroller of the Currency
Simplified Application Process
The OCC announced on March 21, 2003, a new national bank service
that simplifies the corporate application process. National banks can use the
new “E-Corp” system to electronically complete and submit branch and relocation
applications to the OCC. E-Corp is available on National Banknet, the OCC’s
secure extranet Web site available exclusively to national banks. E-Corp is
one component of the agency’s continuing effort to eliminate unnecessary
regulatory burden, simplify administrative processes, enhance communications,
reduce paperwork, and take full advantage of e-government mandates.
2003-24, OCC, 3/21/03.
of Thrift Supervision
Appointment of Gilleran as FFIEC Chairman
OTS Director James E. Gilleran was named Chairman of the Federal
Financial Institutions Examination Council (FFIEC) for a two-year term
beginning April 1, 2003. Mr. Gilleran succeeds Donald E. Powell, Chairman of
the FDIC. Mr. Gilleran was sworn in as director of the OTS on December 7,
2001. Before joining the OTS, he served as chairman and chief executive officer
of the Bank of San Francisco from 1994 to 2000 and as superintendent of the
California State Banking Department from 1989 to 1994. He also served as
chairman of the Conference of State Bank Supervisors (CSBS) from 1993 to 1994
and as a member of the CSBS’s Bankers Advisory Council until 2000. From 1991
to 1992, Mr. Gilleran was chairman of the State Liaison Committee of the
FFIEC. OTS 03-14, 4/1/03.
Guidance on Third-Party Arrangements
On March 19, 2003, the OTS issued a bulletin offering guidance to
federal thrift institutions on how to monitor the operational and financial
performance of third-party firms that provide key business services. The
guidance, published in Thrift Bulletin 82, cautions institutions to
exercise appropriate due diligence before entering into third-party
arrangements and to maintain effective oversight and controls for the duration
of the arrangement. OTS examiners will review internal controls and management
of third-party arrangements when conducting safety-and-soundness examinations.
Thrift institutions contract with third-party firms who provide security
services, tax services, legal advice, and an array of other services. This
guidance complements existing OTS guidance on third-party arrangements in two
other prominent areas: information technology and internal audits.
03-10, 3/10/03; BBR, 3/24/03, p. 502.
Credit Union Administration
Appointment of Johnson as Vice Chair
On January 15, 2003, the NCUA Board of Directors named board
member JoAnn Johnson as the board’s vice chair. The three-member board has
been without a vice chair since 1997. Before joining the NCUA board in March
2002, Ms. Johnson was a member of the Iowa Senate, having been elected to that
body in 1994. She chaired the Senate’s Ways and Means Committee from 1996 to
2000 and the Commerce Committee from 2000 until resigning her seat to join the
NCUA board. NR03-0115, NCUA, 1/15/03.
Broader Access to SBA Loan Program
A February 14, 2003, legal ruling by the Small Business
Administration (SBA) allows all credit unions to seek SBA approval to
participate in the SBA’s guaranteed business loan program under Section 7(a) of
the Small Business Act (the SBA guarantees up to 85 percent of Section 7(a)
loans). When the guaranteed business loan program was first established, the
SBA allowed all credit unions to participate. However, ten years ago the SBA
reinterpreted its regulations to mean that only credit unions whose members had
a geographic common bond were eligible because only those credit unions were
considered “open to the public,” as required by SBA rules. Other credit
unions—such as those bound together on the basis of common occupational
relationships—were not considered open to the public and were therefore
ineligible. Under the new ruling, all credit unions are once again eligible to
seek approval for participation in the program. BBR, 2/24/03, p.
Updated Chartering and Membership Rules
On March 27, 2003, the NCUA adopted a regulation that revises
federal credit union chartering and field-of-membership rules by expanding the
choices for groups that wish to establish federally chartered credit unions.
The regulation allows a proposed field of membership to include a trade,
industry, or profession. Another major feature of the regulation is a
provision for single-sponsor credit unions that allows a field of membership to
be diversified beyond a single employer. The regulation also provides that
multiple-group occupational credit unions with fewer than 3,000 members no
longer need an economic analysis to determine if each group could sustain a
separate credit union. In addition, the regulation assumes that any
metropolitan statistical area with a population of up to 1 million can serve as
the credit union’s local community. NR03-0327, NCUA, 3/27/03.
The NCUA adopted a final rule that establishes the requirements
for federally insured credit unions to branch outside the United States. The
rule requires credit unions to receive approval from the host country and the NCUA.
The NCUA recognizes that a host country will have some regulatory authority
over a foreign branch office; however, the NCUA retains the right to examine a
foreign branch and take any necessary enforcement actions. The final rule,
which becomes effective July 1, 2003, also requires that credit unions wishing
to set up a foreign branch submit a business plan to the NCUA.
12 CFR Part 741.
LEGISLATION AND REGULATION
On January 22, 2003, the OTS announced that federal law preempts provisions
of the Georgia Fair Lending Act (GFLA) from applying to federal savings
associations and their operating subsidiaries. The GFLA imposes various
restrictions on loans based on the annual percentage rate and amount of points
and fees charged. The preemption is based on the Home Owners’ Loan Act and OTS
regulations that comprehensively and exclusively regulate lending by federal
savings associations. The OTS also determined that with respect to terms of
credit, loan-related fees, disclosures, and the origination or refinancing of a
loan, the GFLA conflicts with OTS regulations governing lending operations. OTS 03-02,
On March 7, 2003, Georgia Governor Sonny Perdue signed legislation
(SB 53) that eases burdens on lenders and others under the Georgia Fair Lending
Act. The GFLA is one of the nation’s most controversial and criticized
anti-predatory-lending statutes. In February 2003, Standard & Poor’s and
Moody’s Investors Service refused to rate Georgia mortgage-backed securities because
of worries that loan assignees and other parties could be liable under the
GFLA; after SB 53 was signed, however, both credit agencies agreed to rate the
mortgage-backed securities. Under SB 53 assignee liability applies only to
high-cost loans, which are defined as loans on which the interest charged is 8
percentage points above the interest rate on comparable U.S. Treasury bills.
SB 53 also changed the reasonable tangible net benefit test—which required
lenders to determine whether a refinanced loan presents a tangible net benefit
to the borrower—so that it applies only to high-cost loans. In addition, SB 53
removed a provision in the GFLA that included mortgage insurance premiums and
Veteran Administration funding fees in the cap on points and fees. The new
legislation also removed a state fee from the point-and-fee cap. BBR, 3/10/03, p.
The OTS announced on January 30, 2003, that federal law preempts
provisions of the New York predatory lending law from applying to federal
savings associations and their operating subsidiaries. The New York law
restricts loans based on the annual percentage rate and amount of points and
fees charged. The preemption is based on the Home Owners’ Loan Act and OTS
regulations that comprehensively and exclusively regulate lending by federal
savings associations. The OTS also determined that, with respect to terms of
credit, loan-related fees, disclosures, advertising, and the origination,
refinancing, or servicing of a loan, the New York statute conflicts with OTS
regulations governing lending operations.
New York Attorney General Eliot Spitzer announced on February 11,
2003, that ten banks had signed agreements to block customers from using their
credit cards for online gambling. It is illegal in New York to promote or
facilitate unauthorized betting or gambling, online or off. The agreements
apply to lending activities arising in New York or affecting New York
residents, but the attorney general expects that the banks will block all gambling
transactions across their entire systems. The ten banks involved are: Cayuga
Bank, Chemung Canal Trust Company, First Consumers National Bank, First Premier
Bank, Merrick Bank, Peoples Bank, Trustco Bank, USAA Federal Savings Bank, US
Bank NA, and Wells Fargo Financial Bank. Eight months earlier Citibank signed
a similar agreement. BBR, 2/17/03, p. 300.
On March 28, 2003, New York State Banking Superintendent Elizabeth
McCaul resigned, citing personal reasons for her departure. Ms. McCaul had been
the state’s longest-serving superintendent, spending six years in the
position. On April 2, 2003, New York Governor George Pataki named Barbara Kent
the state’s acting banking superintendent. Ms. Kent joined the New York
Banking Department in 1988 and has been the department’s deputy for consumer
affairs for the past four years. AB, 4/2/03.
On April 17, 2003, Tennessee Governor Phil Bredesen signed
legislation (P.A. 03-32) that makes it easier for branches of Tennessee banks
to be acquired. Previous law required branches of Tennessee banks to have been
opened and engaged in the banking business for at least five years before being
acquired. The new legislation reduces the length of business from five years
to three years. BBR, 4/28/03, p. 687.
ARTICLES AND STUDIES
The percentage of community banks selling mortgages into the
secondary market has jumped from less than one-half in 2000 to approximately 72
percent in 2002, according to findings of the America’s Community Bankers 10th
annual Real Estate Lending Survey. The upward trend can be explained by an
overall increase in mortgage originations, as well as a favorable environment
for sales into the secondary market. The dollar volume of mortgage sales into
the secondary market has increased even more dramatically, rising from 17
percent of total mortgage originations in 2000 to 41 percent in 2001 and to 45
percent in 2002. Nearly 33 percent of the survey respondents said they
anticipate selling more loans into the secondary market in 2003, and 43 percent
expected to sell about the same level of loans in 2003 as in 2002. The
findings are based on survey responses from 320 community banks. BBR, 2/10/03,
AND THRIFT PERFORMANCE
Fourth-Quarter 2002 Results for Commercial Banks and
FDIC-insured commercial banks and savings institutions earned
$25.6 billion during the fourth quarter of 2002, an increase of $3.5 billion
from earnings in the fourth quarter of 2001. Key factors in the higher
earnings were gains on sales of securities and other assets, an increase in
service charges, a decrease in expenses for credit losses, and strong growth in
interest-earning assets. The average return on assets (ROA) was 1.23 percent
in the fourth quarter, up from 1.12 percent one year earlier. The number of
commercial banks and savings institutions on the FDIC’s “Problem List” declined
from 142 in the third quarter of 2002 to 136 in the fourth quarter, and assets
of “problem” banks fell from $42 billion to $39 billion. Eleven FDIC-insured
institutions failed during 2002, and two of those failures occurred in the
Quarterly Banking Profile, Fourth Quarter 2002.
Under an agreement with the International Monetary Fund signed on
January 24, 2003, the Argentine government pledged to pay banks $5.3 billion in
compensation for major losses they sustained following the country’s financial
crisis in late 2001 and the devaluation of the peso in January 2002. The
government also agreed to a major restructuring of Argentina’s three large
public banks—Banco de la Nacion Argentina, Banco de la Provincia de Buenos
Aires, and Banco de le Ciudad de Buenos Aires. BBR, 2/3/03, p.
On March 28, 2003, Argentine President Eduardo Duhalde signed a
decree to lift all the restrictions on bank withdrawals that had been in place
since the financial crisis of 2001. Under the decree, savers will receive
approximately two-thirds of their term deposits in cash and the remainder in a
ten-year government bond. BBR, 3/31/03, p. 552.
On February 25, 2003, the Basel Committee on Banking Supervision
issued guidelines for managing and supervising operational risk. The
guidelines discuss what banks will be expected to do to protect themselves from
operational risk and also provide a framework of ten core principles for
effective management of such risk. Institutions are expected to establish and
maintain systems for the “identification, assessment, monitoring, and
mitigation/control” of operational risk. The guidelines also recommend public
disclosure of these systems “to allow market participants to assess their
approach to operational risk management.” For regulators, the guidelines recommend
assessing existing risk controls at supervised banks and establishing systems
that allow timely communication of changes in an institution’s risk position. AB, 2/26/03.
A final package of regulations under Canada’s Bank Act eases
restrictions on the ability of foreign and domestic banks to undertake
information technology (IT) activities. The regulations follow the
implementation of the Financial Consumer Agency of Canada Act, which is a new
financial services framework that permits banks to engage in IT activities in a
financial context. The regulations ease existing restrictions by reducing the
“primarily financial” standard to a new “materially related” standard. The
regulations also provide financial institutions with added flexibility to
invest in entities that do not necessarily meet the materially related
standard, provided that the size of the investments falls below a certain
threshold. BBR, 3/3/03, p. 399.
The Office of the Superintendent of Financial Institutions issued
a new guideline outlining the policies and procedures that banks operating in
Canada are expected to have in place to deter and detect money laundering and
terrorist financing activities. The updated Guideline B-8 on Deterring and
Detecting Money Laundering incorporates legislative changes made since the
release of the original guideline in September 1996. The updated guideline
omits much of the material related to transaction identification and reporting
and shifts the focus to identifying and mitigating risks related to money
4/14/03, pp. 627–28.
China’s banking industry regulator, the People’s Bank of China,
issued new rules to combat money laundering. The new rules require financial
institutions and their employees to participate in the fight against money
laundering and cooperate with law enforcement officials in
anti-money-laundering efforts. Financial institutions that fail to comply with
the new rules will be subject to prosecution. The new rules, which became
effective March 1, 2003, are part of a broader campaign to stop illegal capital
flows and to bring the industry regulations into compliance with international
standards. BBR, 1/20/03, p. 120.