August 6, 2002Exchange
Bank's Commentary on Proposed Regulations on Customer
Identification under the USA Patriot Act
To: Executive Secretary
Attention Comments/OES, Federal Deposit Insurance Corporation.
550 17 Th Street, NW
Washington, DC 20429-0002
The following is Exchange Bank's commentary on the proposed regulations on Customer
Identification under Section 326 of the USA Patriot Act. We appreciate the opportunity to
comment.
(Exchange Bank is a billion-dollar community bank, with nineteen retail branches all
located in Sonoma County, California. Exchange Bank was founded in 1890. The majority
shareholder since 1948 is the Frank P. Doyle and Polly O'Meara Doyle Trust. Dividends
earned on the shares owned by the Trust go exclusively to fund scholarships at Santa Rosa
Junior College. Exchange Bank is chartered by the State of California. The bank's
principal regulators are the Federal Deposit Insurance Corporation and the State of
California Department of Financial Institutions.)
Exchange Bank's Overall Opinion of the Regulations in Support of Section 326, USA
Patriot Act:
With a couple of significant exceptions, Exchange Bank supports the implementation of the
proposed regulations. Exchange Bank recognizes that the September 2001 terrorists
successfully carried out their plan in large part because they were able to move their
funding undetected through the American banking system. We support the need to verify the
identity of all new bank customers, and we urge the development of a safe, speedy,
reliable and legally sanctioned tool which banks may use to validate taxpayer
identification numbers.
Our objections to the proposed regulations are few, but are very important to us:
Paperwork burden, which we see as significant.
Conflict with the Federal Reserve Board's Regulation B, in the bank's
gathering and retention of
personally identifying documents.
Concern #1: Paperwork Burden:
Section 3501 of the Paperwork Reduction Act of 1995 states the purposes of that law.
Among several
purposes listed are the following:
"minimize the paperwork burden for individuals, small businesses,
educational and nonprofit
institutions ,Federal contractors, State, local and tribal governments,
and other persons
resulting from the collection of information by or for the Federal
Government. "
''ensure the greatest possible public benefit from and maximize the
utility of information
created, collected, maintained, used, shared and disseminated by or for
the Federal
Government."
"ensure that information technology is acquired, used, and managed to
improve performance
of agency missions, including the reduction of information collection burdens
on the public."
It is evident to us that the writers of the proposed Customer Identification
regulations under the USA Patriot Act missed the mark in regard the spirit of the
Paperwork Reduction Act. The writers of the proposed USA Patriot regulation assert that
the paperwork will be minimal (section VI, "Paperwork Reduction Act"):
"Treasury and the Agencies believe that little burden is
associated with the recordkeeping
requirements outlined in the proposed section 103.121 (b) (2), because
such recordkeeping
is a usual and customary business practice. In addition, banks already
must keep similar records
to comply with existing regulations in 31 CFR part 103 (see e.g., 31
CFR 103.34, requiring records
for each deposit or share account opened.) "
We respectfully but adamantly disagree. 31 CFR 103.34 ("Additional records to be
made and obtained
by banks") requires banks to obtain and retain data, such as
taxpayer identification number. It requires
us to retain originals or images of documents we create or process, such as signature
cards, account
statements,and checks or drafts against deposits. Nowhere does this regulation require
banks to retain
copies of documents created outside the bank, such as driver's licenses.
The Recordkeeping section (103.121(b)(3) of the proposed regulation sets forth the
following:
"Where a bank relies upon a document to verify identity, the bank must
maintain a copy
of the document that the bank relied on that clearly evidences
the type of document and
any identifying information it may contain." "The bank must retain
all of these records for
five years after the date the account is closed. "
We find this requirement staggeringly burdensome and unnecessary. Exchange Bank currently
maintains 180,000 open and closed customer records on our main computer system. If this
requirement had been in place since the beginning of time, we would now have 180,000
additional and separate pieces of paper filed and maintained on separate retention
schedules. We would house these documents solely for the government, on the off chance
that an investigator from government or law enforcement needed to see a picture of any one
of our customer's identifying documents. We presume that, under the Right to Financial
Privacy Act, the government would need to subpoena is required, government agencies do not
feel the the effort is worth the information. In these cases, then, we would be housing
the documents for absolutely no reason.
We support the goal of requiring valid, authenticated identification of customers. We
do not dispute the need to positively identify the customer, not only for our own purposes
but also for national security, and to retain the knowledge of how he/she was identified.
We currently do just that. For each customer, Exchange Bank keeps an identity record on
our automated Customer Information File, a key element in our main computer system. Each
customer record indicates, among various other things, forms of identification. What we
strenuously object to is the required retention of that information in paper
format, or perhaps even in a digitized image of the original paper. The potential
benefit to the nation of maintaining a copy of the document is far exceeded by our
expected record-keeping costs.
The regulation writers attempt to address this issue. In Section V. of the proposed
regulations ("Regulatory Flexibility Act"), the following is set forth:
"The recordkeeping requirements similarly may impose some costs on banks,
if, for example,
some of the information that must be maintained as a consequence of
implementing customer
identification programs is not already retained. Treasury and the Agencies
believe that the compliance
burden, if any, is minimized for banks, including small banks, because the
proposed regulation
vests a bank with the discretion to design and implement appropriate
recordkeeping procedures,
including allowing banks to maintain electronic records in lieu of (or in
combination with) paper
records."
Again, we respectfully but forcefully disagree with this conclusion. Maintaining a
"copy of the document"
used to identify customers will be costly, whether in paper or digital format. Whole
systems and procedures requiring capital outlay will be needed to implement this
requirement. Recordation of the
identifying information on existing databases (which we already do) is far different than
keeping and
retaining a "copy of the document."
Concern #2: Clear Conflict with Regulation B:
In the Recordkeeping requirements of the proposed regulation [103.121(b)(3)], the
following is set forth:
"Treasury and the Agencies emphasize that the collection and retention
of information about
a customer, such as on individual's race or sex, as an ancillary part of
collecting identifying
information do not relieve a bank from its obligations to comply with
anti-discrimination laws or
regulations, such as the prohibition in the Equal Credit Opportunity Act
against discrimination
in any aspect of a credit transaction on the basis of race, color, religion,
national origin,
sex, or marital status, age, or other prohibited classifications. "
The fact that this verbiage appears in the proposed regulation strikes us as clear
acknowledgement by the regulation writers of the direct conflict between FRB Regulation B
and the USA Patriot regulations. Banks will indeed have trouble reconciling these
differences in attempting to comply with both.
FRB Regulation B section 202.5 prohibits creditors from collecting any information from
applicants regarding marital status, sex, race, color, or national origin, among other
prohibitions. In our experience, bank examiners clearly regard the photocopying of
driver's licenses or other photo ID as a direct violation of this part of
Regulation B. Yet the Recordkeeping section of the proposed regulation requires banks to
obtain and photocopy such identification for all customers (including loan applicants,
whether or not they become borrowers) and to retain it over the life of the loan, plus
five years.
From where we sit, we see that we will automatically be in violation of either one
regulation or the other.
We strongly urge you to reconcile this conflict now, and not leave it to
the courts. If the reconciliation
is to be achieved by modifying either this, new regulation or Regulation B, so be it.
Other Comments:
Part III of the joint press release states that Treasury and the Agencies invite
comment on all aspects of this rulemaking". Several suggested items for comment
are listed. Exchange Bank chooses to comment on two of these:
Item #4: "Ways that banks can comply with the requirement
that a bank obtain both the address of an individual's residence, and, if different, the
individual's mailing address in situations involving individuals who lack a permanent
address. " Exchange Bank will have no problem whatsoever with this
requirement. By policy, all our customers must tell us their street address when they open
an account. Banks can comply with the requirement by adopting a similar policy. If the
customer chooses, bank correspondence may be sent to a separate mailing address. Our
computer system easily handles multiple addresses for
each individual and for each deposit account.
Item #6: "Whether the propose regulation will subject banks
to conflicting State laws. Treasury and the Agencies request that the commenters cite and
describe any potential conflicting State laws." There is currently a spate of
Privacy and Anti-Identity Theft legislation, either already passed into law or being
considered, in the California legislature. One such law (California Civil Code 1798.85)
prohibits banks from disseminating Social Security numbers in any form, except as required
by existing state and federal law. We have been advised by legal counsel that there is no
conflict between this law and other law, such as the Joint Marketing Agreement provisions
of the federal Gramm-Leach-Bliley law. Therefore, we see no immediate cause for concern in
regard to the USA Patriot regulations. However, to the extent that you legally are able
within the regulations, it might be helpful for banks for you to specify that the federal
requirements supercede any conflicting state laws.
Again, we thank you for the opportunity to comment.
Sincerely,
H. Robert Wallace
VP, Regulatory Review and Compliance
Exchange Bank
545 Fourth Street
Santa Rosa, CA 95401-6368
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