Federal Deposit
Insurance Corporation

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