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Speeches, Testimony & Articles
Statement of John M. Reich Vice Chairman Federal Deposit Insurance Corporation on Consideration of Regulatory Reform Proposals before the Committee on Banking, Housing and Urban Affairs United States Senate
June 22, 2004 -- 10:00 AM
538 Dirksen Senate Office Building
Mr. Chairman, Ranking Member Sarbanes, and Members of the Committee,
I very much appreciate this opportunity to testify on our efforts to reduce unnecessary regulatory burden on the nation's banks and the regulatory review process mandated by the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). As a former community banker with 23 years of experience in the industry, and as the current leader of the inter-agency effort to reduce regulatory burden, I have a strong personal commitment to eliminate all unnecessary burden while maintaining the safety and soundness of the industry and protecting important consumer rights.
The agencies published their first joint EGRPRA Federal Register notice on June 16, 2003, for a 90-day comment period, seeking comment on our overall regulatory review plan, including the way in which we categorized the regulations. The first notice also requested burden reduction recommendations on the initial three categories of regulations: Applications and Reporting; Powers and Activities; and International Operations. These three categories of regulations contained 48 separate regulations for comment. In response, the agencies received 19 written comments that included more than 150 recommendations for changes to our regulations. Each of the recommendations has been carefully reviewed and analyzed by the agency staffs. Based on the recommendations, staff will bring forward proposals to change specific regulations, as appropriate, which will be put out for public comment.
On January 20, 2004, the agencies issued their second joint request for comment under the EGRPRA program. This notice sought public comment on the lending-related consumer protection regulations, which include Truth-in-Lending (Regulation Z), Equal Credit Opportunity Act (ECOA), Home Mortgage Disclosure Act (HMDA), Fair Housing, Consumer Leasing, Flood Insurance and Unfair and Deceptive Acts and Practices. The comment period for that notice closed on April 20, 2004 and staff is currently analyzing the comment letters received to determine which recommendations to pursue. Even though the second Federal Register notice contained far fewer regulations for comment than the initial notice, the agencies received over 570 comment letters.
Banker, consumer and public insight into these issues is critical to the success of our effort. The regulatory agencies have tried to make it as easy as possible for all interested parties to get information about the EGRPRA project and to let us know what they think are the most critical regulatory burden issues. The EGRPRA website, which can be found at www.egrpra.gov, provides an overview of the EGRPRA review process, a description of the agencies' action plan, information about our banker and consumer outreach sessions and a summary of the top regulatory burden issues cited by bankers and consumer groups. There also are direct links to the actual text of each regulation and comments can be sent to the EGRPRA website. Comments submitted through the website are automatically transmitted to all of the financial institution regulatory agencies. Comments are then posted on the EGRPRA website for everyone to see. The website has proven to be a popular source for information about the project, with thousands of hits being reported every month.
While written comments are important to the agencies' efforts to reduce regulatory burden, we believe it is also important to have face-to-face meetings with bankers and consumer group representatives so that they have an opportunity to directly communicate their views on the issues of most concern to them.
Last year, the agencies sponsored five banker outreach meetings in different cities to heighten industry awareness of the EGRPRA project. The meetings provided an opportunity for the agencies to listen to bankers' regulatory burden concerns, hear comments and suggestions, and identify possible solutions. The outreach meetings were held over a six-month period in Orlando, St. Louis, Denver, San Francisco and New York. More than 250 bankers (mostly CEOs) as well as representatives from the national trade groups and a variety of state trade associations participated in the meetings with representatives from FDIC, FRB, OCC, OTS, CSBS and state regulatory agencies.
The banker outreach meetings were extremely useful and productive. Following panel discussions and a question and answer period, the meeting participants were broken into small discussion groups. Senior-level regulators served as moderators of the discussion groups and regulatory staff recorded bankers' concerns and their recommendations to reduce regulatory burden. Summaries of the issues raised were then posted on the EGRPRA website. Since the banker outreach meetings were so successful last year, we decided to hold at least three more meetings this year. The first one was on April 22 in Nashville, Tennessee and the second on June 9 in Seattle, Washington. Our third will be held on September 23 in Chicago, Illinois.
We held an outreach meeting for consumer and community groups on February 20, 2004, in Arlington, Virginia. About 24 representatives from various consumer and community groups participated in the meeting along with representatives from the FDIC, FRB, OCC, OTS, NCUA and CSBS. The meeting provided a useful perspective on the effectiveness of many existing regulations. We plan to hold at least two more consumer and community group outreach meetings later this year, with one scheduled for June 24 in San Francisco and another tentatively planned for September 23 in Chicago.
The "Top 10" List of Banker Concerns
Based on the concerns expressed at our banker outreach meetings, we have identified a "Top 10" list of regulations bankers cite as being the most costly, burdensome or otherwise competitively detrimental. The FDIC and most bankers believe that the objectives of these laws are worthy. However, bankers have told us that these important goals can be achieved in a less burdensome manner. While this is not a scientifically selected survey of all bankers or issues, the most frequently mentioned regulations and the nature of their concerns are as follows:
Bank Secrecy Act (Currency Transaction Reports (CTRs), Suspicious Activity Reports (SARs)): Bankers are more than willing to do their part in the war on terrorism and recognize the importance of CTRs and SARs in the process. However, they would like the reporting process to be more effective and efficient. In addition, bankers say they receive no feedback on their efforts.The list above includes some of the most frequently mentioned regulatory burden concerns expressed by bankers to us over the last year. The regulators are examining these concerns to determine whether suggested changes to our regulations and/or current laws may be appropriate at this time. This process will continue until the end of the EGRPRA review process in 2006.
Response by Regulatory Agencies
The EGRPRA regulatory review project is still in its early stages, with approximately two years until completion. However, I am pleased to report that the banking and thrift regulatory agencies have been working together closely and harmoniously on a number of projects to address unnecessary burdens. In addition to eliminating outdated and unnecessary regulations, the agencies have begun to identify more efficient ways of achieving important public policy goals of existing statutes. I think it is fair to say that although we have much work ahead of us, there has been significant progress to date. Here are some notable examples:
On December 30, 2003, the Federal bank, thrift and credit union regulatory agencies, in conjunction with the Federal Trade Commission, Securities and Exchange Commission, and the Commodity Futures Trading Commission, issued an Advanced Notice of Proposed Rulemaking (ANPR), seeking public comment on ways to improve the privacy notices required by the Gramm-Leach-Bliley Act. Although there are many issues raised in the ANPR, the heart of the document solicits comments on how the privacy notices could be improved to be more readable and useful to consumers, while reducing the burden on banks and other service providers required to distribute the notices. In response to the comments received, the agencies are planning consumer research and testing that will be used to develop privacy notices that meet these goals. As they do so, the agencies will continue to be mindful of the burden implications of changing the privacy notices and the requirements for their distribution.
Community Reinvestment Act Regulations
On February 6, 2004, the Federal bank and thrift regulatory agencies jointly issued a proposal to amend the Community Reinvestment Act (CRA) regulations. The joint proposal would, among other things, reduce regulatory burden by changing the definition of "small institution" to mean an institution with total assets of less than $500 million, without regard to holding company assets. This represents a significant increase in the small bank threshold from the current level of $250 million which was established in the 1995. Under the proposal, just over 1,100 additional banks (those with assets between $250 and $500 million) would be subject to the streamlined CRA examination process for small banks. This streamlined examination focuses primarily on local lending, which is the mainstay of community banks.
This proposal would not exempt these institutions from complying with CRA-all banks, regardless of size, will be required to be thoroughly evaluated within the business context in which they operate. As I indicated at the FDIC Board meeting when this proposal was approved for publication, I think this is a good first step for the agencies. Personally, I would have liked to see the agencies propose a higher threshold, perhaps $1 billion, since I do not think any bank under $1 billion in assets should be judged by the same standards as a bank with $100 billion or $1 trillion in assets. I recognize that there are many competing interests and that community groups, in particular, as well as many members of Congress generally oppose any increase at all in the threshold level. However, I think that this change to the regulation, if adopted as proposed, would result in significant regulatory burden reduction for a number of institutions without weakening the objectives of the Community Reinvestment Act. The comment period for this proposal closed on April 6, and the agencies received approximately 1,000 comment letters that currently are being analyzed by staff. It is my hope the agencies will consider carefully all comments and agree on a final rule before the end of this year.
In July, 2002, the Department of Housing and Urban Development (HUD) proposed a rule intended to improve the process for obtaining mortgages. Given the high level of concern expressed by the banking industry about the closing process, and the tremendous volume of paperwork that consumers have to deal with at real estate closings, I think it is incumbent upon the regulators to continue to play a role in the mortgage reform efforts. I agree with the basic goals of HUD's initiative, which are to: (1) enable people to know their options so they can shop intelligently; (2) clarify and simplify the required disclosures; and (3) provide some certainty that costs won't change before closing. The FDIC has provided some input into HUD's rulemaking process and will continue to provide whatever additional input may be necessary. I think it is important to assist in this effort to simplify and improve the closing process for consumers, while reducing unnecessary burden on the banking industry.
Bank Secrecy Act
There is no question that financial institutions and their regulators must be extremely vigilant in their efforts to implement the Bank Secrecy Act in order to thwart terrorist financing efforts and money-laundering. Last year, bankers filed over 12 million CTRs and SARs with the Financial Crimes Enforcement Network (FinCEN). Bankers reported that they believe they are filing millions of reports that are not utilized for any law enforcement purpose and consequently a costly burden is being carried which is providing little benefit to anyone. In an effort to address this concern and enhance the effectiveness of these programs, the financial institution regulatory agencies are working together with FinCEN and various law enforcement agencies, through task forces of the Bank Secrecy Act Advisory Group, to find ways to streamline reporting requirements for CTRs and SARs and make the reports that are filed more useful for law enforcement.
I am convinced that we can find ways to make this system more effective for law enforcement, while at the same time making it more cost efficient and less burdensome for bankers. I recently met with FinCEN's new Director, William Fox, and pledged to work with him to make bank reporting under the Bank Secrecy Act more effective and efficient while still meeting the important crime-fighting objectives of anti-terrorism and anti-money-laundering laws.
USA PATRIOT Act and Customer Identification Requirements
Most bankers understand the vital importance of knowing their customers and thus generally do not object to taking the additional steps necessary to verify the identity of their customers. However, bankers wanted guidance from the regulators on how they could comply with this important law. In response, the federal financial institution regulators, the Treasury Department and FinCEN issued interpretive guidance to all financial institutions to assist them in developing a Customer Identification Program (CIP), which was mandated by the USA PATRIOT Act. The inter-agency guidance answered the most frequently asked questions about the requirements of the CIP rule.
In addition to the above-noted inter-agency efforts to reduce regulatory burden, the FDIC, under the leadership of Chairman Powell, is constantly looking for ways to improve our operations and reduce regulatory burden, without compromising safety and soundness or undermining important consumer protections. Over the last several years, we streamlined our examination processes and procedures with an eye toward better allocating FDIC resources to areas that could ultimately pose greater risks to the insurance funds - such as problem banks, large financial institutions, high-risk lending, internal controls and fraud. Some of our recent initiatives to reduce regulatory burden can be summarized as follows:
2) Implemented more risk-focused compliance and trust examinations, placing greater emphasis on an institution's administration of its compliance and fiduciary responsibilities and less on transaction testing;
3) Increased the efficiency of the Information Technology (IT) examination procedures and streamlined IT examinations for institutions that pose the least technology risk;
4) Worked with CSBS and the Federal Reserve to develop, through a Nationwide State/Federal Supervisory Agreement, a closely coordinated supervisory system for banks that operate across state lines;
5) Initiated electronic filing of branch applications and began exploring alternatives for further streamlining the deposit insurance application process in connection with new charters and mergers;
6) Simplified the deposit insurance coverage rules for living trust accounts so that the rules are easier to understand and administer;
7) Reviewed existing Financial Institution Letters and other directives to eliminate outdated or unnecessary documents (also developing a more user-friendly, web-based system for finding communications from the Corporation);
8) Provided greater resources to bank directors, including the establishment of a "Director's Corner" on the FDIC website, as a one-stop site for Directors to obtain useful and practical information to in fulfilling their responsibilities, and the sponsorship of many "Director's Colleges" around the country;
9) Made it easier for banks to assist low and moderate income individuals, and obtain CRA credit for doing so, by developing Money Smart, a financial literacy curriculum and providing the Money SmartProgram free-of-charge to all insured institutions;
10) Implemented an interagency charter and federal deposit insurance application that eliminates duplicative information requests by consolidating into one uniform document, the different reporting requirements of the three regulatory agencies (FDIC, OCC and OTS);
11) Revised our internal delegations of authority to push more decision making out to the field level to expedite decision making and provide institutions with their final Reports of Examination on an expedited basis; and
12) Provided bankers with a customized version of the FDIC Electronic Deposit Insurance Estimator (EDIE), a CD-Rom and downloadable version of the web-based EDIE, which allows bankers easier access to information to help determine the extent to which a customer's funds are insured by the FDIC.
Legislation to Reduce Regulatory Burden
Mr. Chairman, I wish to commend you and your colleagues on your efforts to develop legislation removing unnecessary regulatory burden on the banking industry. Since most of our regulations are, in fact, mandated by statute, I believe that it is critical that the agencies work hard not only on the regulatory front, but also on the legislative front, to alert Congress to unnecessary regulatory burden. For that reason, I was gratified to see the House address some of the burden issues and pass H.R. 1375, the Financial Services Regulatory Relief Act. H.R. 1375 contains a number of significant regulatory relief provisions that could reduce regulatory burden. The bill also includes several provisions requested by the regulators, including the FDIC, to help us do our job better. As my testimony indicates, the FDIC staff has been working closely with their colleagues at the FRB, OCC and the OTS over the last several months, in an effort to identify additional legislative proposals to reduce regulatory burden on the industry. As you know, EGRPRA requires the agencies to collect comments from the public on ways to reduce regulatory burden and report their suggestions to the Congress. While we will submit a more formal report as required by EGRPRA, I would like to report to you some of the suggestions we have heard so far. I personally believe these proposals deserve careful review and ultimately consideration by Congress. Some of the bankers' key suggestions are discussed in detail below.
The Federal bank and thrift regulatory agencies believe that it is no longer necessary for directors and officers to file the following three reports that are currently required to be filed under section 22(g) of the Federal Reserve Act (12 USC 375a) and section 106(b)(2) of the Bank Holding Company Amendments of 1970 (12 USC 1972(2)):
2) a report required from banks regarding any loans the bank has made to its executive officers since its previous call report; and
3) an annual report from a bank's executive officers and principal shareholders to the board of directors of any outstanding loans from a correspondent bank.
The information contained in these reports is already collected through the normal examination and supervision programs of the regulatory agencies and through quarterly Call Reports. Therefore, the regulatory agencies believe that the preparation and submission of these reports is not necessary and imposes costs and unnecessary burden on the banks and the individuals required to prepare and file the reports.
Streamlining the Application Process
The Federal bank and thrift regulatory agencies believe that the application process and procedures for certain types of bank mergers can be significantly streamlined, without jeopardizing safety and soundness or weakening important consumer rights, by making the following legislative changes:
Presently, the BMA requires, among other things, the prior written approval of the appropriate federal banking agency whenever an insured depository institution proposes a merger transaction with any other insured depository institution, or with any noninsured institution, whether or not the institutions are affiliated. Before acting on any merger transaction application (other than one involving a probable failure or an emergency case), the agency must request a competitive factors report from the Attorney General and from each of the other three federal banking agencies and allow 30 days for them to respond. In the case of an emergency, the time period for response is 10 days. In the case of a probable failure, no such request is necessary.
Finally, the BMA provides that the merger transaction (other than a probable failure or emergency case), may not be consummated before the 30th day after approval or, if the Attorney General concurs, the 15th day after approval. In the case of a probable failure, the merger transaction may be consummated upon approval. In the case of an emergency, the merger transaction may be consummated on the 5th day after approval. The post-approval waiting period is generally designed to give the Attorney General an opportunity to file suit to block the merger transaction, if the Attorney General determines that the merger transaction is anticompetitive.
The proposed change would only apply to mergers between an insured depository institution and one or more of its affiliates. It is generally accepted that such mergers do not present any competitive issues. This legislative proposal would shorten the timeframe for the approval and consummation of corporate reorganizations and by doing so create savings for the applicant without raising safety and soundness issues.
2. Shorten the post-approval waiting time on mergers where there are no adverse effects on competition - This proposal would amend section 11(b) of the BHCA (12 U.S.C. § 1849(b)) and section 18(c)(6) of the FDIA (12 U.S.C. § 1828(c)(6)) to shorten the current 15-day minimum post-approval waiting period for certain bank acquisitions and mergers when the appropriate federal banking agency and the U.S. Attorney General agree that merging with or acquiring another bank or bank holding company would not result in significantly adverse effects on competition to a 5-day period.
Under current law, the post-approval waiting period is generally 30 days. This 30-day period may be shortened to 15 days upon agreement of the appropriate banking agency and the Attorney General. This proposal would give the banking agency and the Attorney General the flexibility to further shorten the post-approval waiting period. The Attorney General would continue to be required to consider the competitive factors involved in each merger transaction. The institutions involved in mergers or acquisitions would benefit from the streamlining of the application review process that reduces bank waiting time and associated costs by allowing faster consummation of a merger where there are no adverse affects on competition or consumers.
3. Eliminate competitive factors report from the other three federal banking agencies - This proposal would amend paragraph (4) of section 18(c) of the FDIA (12 U.S.C. § 1828(c)) to streamline application requirements by eliminating the requirement that each federal banking agency must request a competitive factors report from the other three federal banking agencies as well as from the Attorney General.
The Attorney General would continue to be required to consider the competitive factors involved in each merger transaction. The FDIC, as insurer, would receive a copy of the responsible agency's request to the Attorney General when the FDIC is not the responsible agency for the particular merger, thereby giving the FDIC notice of the transaction. The proposal shortens the timeframe for approval and consummation of transactions and so would decrease regulatory burden associated with the application process.
4. Eliminate the requirement for prior written consent to establish branches by well-managed, well-capitalized, highly-rated institutions - While the regulators have not reached agreement, one additional proposal that we are looking at would amend section 18(d)(1) of the FDIA (12 U.S.C. § 1828(d)(1)) to eliminate the requirement for prior written consent to establish branches by well-managed, well-capitalized, highly-rated institutions. The institutions would need to have at least a satisfactory CRA rating and the agencies are exploring ways to preserve consumers' ability to raise any CRA concerns in connection with these transactions.
Instead of the requirement for prior written consent, this proposal would require after-the-fact notice. Such a notice procedure should permit well-run banks to establish branches more efficiently without the delay and substantial paperwork associated with an application. This amendment would not affect the requirement for prior approval for the establishment of interstate de novo branches under section 18(d)(4) of the FDIA (12 U.S.C. § 1824(d)(4).
I should note also that the Office of Thrift Supervision has recommended adding a new section 5(d)(3)(B) to the Home Owners' Loan Act (12 U.S.C. 1464(d)(3)) (HOLA) to give federal thrifts authority to merge with one or more of their nondepository institution affiliates. This authority would be equivalent to the authority national banks have pursuant to section 6 of the National Bank Consolidation and Merger Act (12 U.S.C. § 215a-3), which was added by section 1206 of the Financial Regulatory Relief and Economic Efficiency Act of 2000 (Pub. L. No. 106-569, 114 Stat. 2944, 3034). Section 18(c) of the Federal Deposit Insurance Act (FDIA) (12 U.S.C. § 1828(c)), also known as the Bank Merger Act, will continue to apply and the new authority does not give thrifts the power to engage in new activities.
Under current law, a federal thrift may only merge with another depository institution. This proposal reduces regulatory burdens on thrifts by permitting mergers with nondepository affiliates, where appropriate for sound business reasons and if otherwise permitted by law. This amendment reduces regulatory burden by permitting a thrift that wishes to acquire the business of an affiliate to do so without undertaking a costly series of transactions, such as merging the affiliate into a subsidiary and liquidating the subsidiary into the thrift.
Elimination of Annual Privacy Notice Requirement for Institutions That Do Not Share Personal Information
Waiver of the Three-Day Right of Rescission
The Truth in Lending Act provides consumers with a significant right that gives them three days to re-think the consequences of pledging their home as collateral on certain loans. There is no question that this is a valuable right that must be preserved.
However, bankers note that consumers are often perplexed and sometimes disturbed by the fact that the Federal government limits their access to borrowed funds for three days following loan closing. Bankers have described that consumer dissatisfaction is particularly acute when they are paying interest on their new loan without access to the funds. Although banks can allow consumers to waive their right of rescission, bankers believe the waiver criteria are very restrictive and narrow.
This is a sensitive area. There is no question about that. There need to be ways to address the issues we have heard about while still protecting consumer rights. There are several possibilities to explore and we are open to exploring them with consumers and the industry. For example, perhaps we should look at expanding the waiver criteria to allow a consumer to voluntarily choose not to be protected by the right of rescission. Another possibility is to provide the closing documents three days prior to closing and incorporate the right of rescission into this three-day period, much like the Federal Reserve Board and Department of Housing and Urban Development proposed to Congress in 1998.
Increased Flexibility of the Flood Insurance Law
Bankers have suggested several changes in the law to increase the flexibility of regulators and lenders to implement flood insurance program requirements and provide the federal financial regulatory agencies with discretion to impose civil money penalties in findings of patterns or practices of violations of flood insurance requirements. Specifically, the suggestions would address the situation where the official flood maps are more than ten years old; increase the "small loan" exception (currently $5,000) and allow adjustments for inflation on a regular basis; and amend the forced-placement rules to allow lenders to force-place flood insurance within 30 days (instead of the current 45 days) of notifying the borrower.
Other banker suggestions include removing the requirement of mandatory Civil Monetary Penalties (CMPs) when federal regulators discover a pattern and practice of certain violations of the National Flood Insurance Program (NFIP). In accordance with each agency's authority to impose CMPs pursuant to its own implementing act, the regulators can tailor their actions more closely to individual cases. The bankers' argue these proposals would reduce burden by increasing the speed with which flood map information may be obtained when maps are out of date, lowering risk when forced placement of insurance is necessary, adjusting for inflation periodically the threshold for loans covered by the NFIP, and replacing mandatory penalties with penalties crafted to match the violation.
Repeal of the CRA Sunshine Law
The agencies have heard from both bankers and consumer groups that paperwork requirements of the CRA Sunshine law are burdensome. The sunshine provisions are found in section 48 of the FDIA (12 U.S.C. § 1831y), enacted by section 711 of the Gramm-Leach-Bliley Act. One way to address these burdens would be to recommend repealing the law. However, the ramifications would need to be carefully studied before advocating repeal. Under current law, depository institutions, nongovernmental entities, and other parties to agreements providing for cash payments, grants, or other consideration with a value in excess of $10,000 or for loans exceeding $50,000 annually made pursuant to or in connection with, the fulfillment of the Community Reinvestment Act of 1977 must make a report of all such covered agreements annually to the appropriate Federal banking agency. Removing the annual reporting requirement would reduce regulatory burden on depository institutions, nongovernmental entities (i.e., consumer groups) and other parties to covered agreements, as well as the Federal banking agencies. There are no safety and soundness concerns about the repeal of this law.
The above-noted legislative proposals are just some of the ideas I am pursuing on an inter-agency basis to reduce unnecessary burdens on the banking industry without diluting important consumer protections and I hope to pursue many others over the course of the EGRPRA regulatory review process. I very much look forward to working with the Committee on developing a comprehensive legislative package that provides real regulatory relief for the industry. I am certain that this hearing will provide valuable input for the comprehensive package.
Mr. Chairman, as I mentioned at the outset, the EGRPRA effort is committed to addressing the problem of regulatory burden for every insured financial institution. Bankers, large and small, labor under the cumulative impact of regulations. However, I believe that if we do not do something to stem the tide of ever increasing regulation, a vital part of the banking system will disappear from many of the communities that need them the most. That is why I think it is incumbent upon all of us - Congress, regulators, industry and consumer groups - to work together to eliminate any outdated, unnecessary or unduly burdensome regulations. I am personally committed to accomplishing that objective.
I am confident that, if we all work together, we can find ways to regulate that are both more effective and less burdensome, without jeopardizing the safety and soundness of the industry or weakening important consumer protections.
Thank you for providing me with this opportunity to testify.
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