On July 15th bankers from five states met in Denver to discuss the impact of regulations on the financial sector. Donald E. Powell, Chairman of the FDIC, opened the meeting.

Chairman Powell noted that he came to Washington after 32 years in the private sector as a community banker. He recalled that between the late 80's and early 90's, the FDIC and the Resolution Trust Corporation resolved hundreds of failing institutions. West Texas -- the region where his bank was located -- was especially hard-hit. Chairman Powell advised that, based upon his personal experience, he knew all too well the heavy regulatory burden borne by the banking industry. He also understood firsthand the challenges of managing a bank within a rigid regulatory framework during uncertain economic times.

Chairman Powell advised that the markets are evolving faster that the regulations can keep up. Banking transactions are becoming increasingly complex. He suggested the marketplace is leading the way into new lines of business, new combinations, and new products. Regulators must keep up, he said, to ensure that market innovations do not conflict with the public's basic interest in a safe, sound, and stable financial infrastructure.

Chairman Powell told the audience that when he first met with bankers shortly after arriving in Washington, they consistently asked him if anything could be done to simplify the regulatory burden imposed upon banks. EGRPRA was designed to address just such concerns, Chairman Powell advised the audience. Chairman Powell then praised Vice Chairman John Reich for spearheading the effort to carry out the goals of EGRPRA. He closed his remarks by urging the audience to share their comments and suggestions during the meeting.

Banking Commissioner Fulkerson Greets Bankers

Richard J. Fulkerson, State Bank Commissioner, State of Colorado Division of Banking, welcomed the audience to Denver. He noted that Chairman Powell and Vice Chairman Reich, as well as representatives from all of the federal banking agencies, were there to listen. They wanted to hear, first-hand, from the bankers in the region. They wanted to discuss the challenges facing the financial sector and derive solutions that would bring about a more efficient and effective regulatory framework. Commissioner Fulkerson urged the audience to share their experiences so the federal regulators would have a better understanding of the impact regulations were having on the banking community.

Goals of EGRPRA

Claude Rollin, Project Manager, provided an overview of the EGRPRA initiative. EGRPRA is intended to reduce regulatory-burden. It requires the banking agencies to identify outdated, unnecessary, or unduly burdensome statutory or regulatory requirements and propose statutory and regulatory changes. Because of the volume of statutes and regulations involved, the law first requires the federal agencies to breakdown the regulations by category, such as consumer regulations or safety/soundness regulations. Next, the agencies must solicit public comments regarding the regulations by category. The law then requires the agencies to publish a summary of the comments received; identify significant issues raised; eliminate unnecessary regulations if appropriate; and, finally, submit a report to Congress advising if legislative changes are needed.

Mr. Rollin told the audience that the agencies had completed the process of categorizing the regulations. He described the categories of regulations currently out for comment and encouraged the audience to submit comments through the EGRPRA website. He explained that the Banker Outreach meetings are designed to obtain further feedback to help identify outdated laws. Mr. Rollin then outlined several topics for discussion during the breakout or Roundtable Discussion segment of the meeting. For example, the participants could discuss the impact of regulations on competition; whether shifts in the industry or consumer practices rendered the regulations irrelevant; or whether reporting requirements were redundant. He emphasized, however, that the participants were free to raise any issues they wished to discuss.

Panel Discussion

Pat Robinson, a Senior Counsel in the Legal Division of the Federal Reserve Board of Governors, moderated a panel discussion featuring three of the region’s bankers. The panelists were: (1) Matthew J. Lynett, President, Wells Fargo Bank West, NA, Denver, Colorado; (2) Mari Lynn Glidden, President, FirstBank of Parker, Parker, Colorado; and (3) James Laphen, President and Chief Operating Officer, TierOne Bank, Lincoln, Nebraska.

Mr. Lynett emphasized the need to improve financial literacy in the United States. He also outlined methods of providing meaningful information to consumers. Ms. Glidden

discussed the role of community banks. She noted that community banks increase their value by developing customer relationships, using resources efficiently, and remaining competitive in the market place. Against this background, she suggested changes to the regulatory framework that would allow banks to better serve their customers. Mr. Laphen discussed the costs of implementing various regulatory requirements. He also suggested ways of simplifying and demystifying the lending process.

Participant Comments

The Denver audience identified a number of outdated and overly burdensome regulations. They also offered solutions to the problems they identified. To review the changes they suggested, together with the changes suggested at other Banker Outreach meetings, follow this link.

Evolving Financial Sector

Banking is a service industry, emphasized the participants. Banks build and nurture their business by being responsive to customer wants and needs. If they don’t take care of their customers, they won’t stay in business. Excessive and unnecessary regulations are interfering with customer relationships, cautioned the bankers. For example, many banks do not share customer information and have no interest in doing so. Nonetheless, they must send privacy disclosures to their customers. Customers receiving warnings about non-existent policies naturally become upset with the bank. Likewise, the process of closing a home loan is daunting due to the number of documents and disclosures required by law. Instead of helping customers, however, this overflow of information confuses them. Customers assume the bank is responsible for the excessive documentation. Participants were also concerned that regulations originally intended to encourage community lending are undercutting community philanthropy.

Participants advised that financial institutions are not competing on a level playing field. Even though banks must work within a strict regulatory framework, their competitors are not as heavily regulated, said bankers. Moreover, the banking industry has become the “go to guy” for law enforcement. This is especially burdensome for small banks, said participants. Economic thresholds for the applicability of regulations have not kept pace with changes in the economy, said participants. They also urged the government to take advantage of available technologies. Keep electronic interfaces user-friendly, they said. For example, the government should allow electronic submission of reports in lieu of paper filings. Likewise, banks should be permitted to provide required notices to customers electronically; customers should be allowed to waive the right to receive statements in paper form if they wish. In short, if an electronic process is available and acceptable to the consumer, why not take advantage of it.

1. Bank Secrecy Act and Currency Transaction Reports (CTRs)

The audience indicated that the Bank Secrecy Act and related anti-money laundering legislation are among the most burdensome requirements for bankers. When the requirements were first implemented, there was very little activity over the $10,000 threshold, said the bankers. Now, however, they encounter a great deal of economic activity in the $10,000 - $15,000 range. The law has not kept pace with the economy, they reported. The threshold should be raised to take into account inflation. Some suggested a threshold of $25,000 or above would be appropriate.

The CTR form itself should be simplified, said the bankers. In its present form, CTRs present a serious training burden. Teller positions turn over more often that any other position, yet tellers are in the forefront of accepting funds. Bankers mentioned they were inundated with information requests from various government agencies and others. One way to simplify the CTR, they suggested, would be to require just the name, identification verification, and dollar amount on the initial form. If, after analyzing the data, the government detected a pattern, it could ask for additional information regarding the transaction. They say the government must do a better job of “data mining” reports.

The participants agreed that the government should accept electronic submissions. Although FinCEN launched the Patriot Act Communication System (“PACS”) in October 2002 to allow organizations to electronically file CTR and Suspicious Activity Reports (“SARs”) SAR forms, PACS has limited availability. Very few individuals are aware of the system. Very few institutions can take advantage of it. FinCEN and the banking agencies should do more to help banks transition to this system. Electronic filing procedures should be kept simple and easy to use, said the bankers. Overall, the government should do a better job of implementing modern technology.

Not only is compliance with BSA costly in terms of training, operating systems, and reporting, but nothing seems to be done with the data. “What happened to all the CTRs that have been filed,” they asked. Like their colleagues attending other Outreach meetings, the participants in Denver received no feedback from law enforcement officials. Thus, although they suggested improvements to the law, the participants unanimously believe that CTRs should be eliminated. “Replace CTRs with SARs,” they said. They contend that reports should be required only when the deposit is suspicious, not when the deposit is in the normal course of the customer's business. The focus on transaction size should be changed to a focus on “unusual and suspicious” activity, as with SARs. They believe the risk of criminal wrongdoing lies with the person initiating the transaction, not with the size of the cash transaction.

But even SARS have shortcomings, they caution. There is no tolerance for human error. SARs are costly. They can be burdensome. For example, banks are obligated to advise whenever they come across a facsimile or e-mail from someone offering to split unclaimed foreign deposits. Yet, these scams are widespread. Filing reports has done little to curb these schemes.

They said the process to exempt a customer is onerous. Penalties for noncompliance are severe. Consequently, banks simply file a report for each transaction rather than apply an exemption. They also pointed out that BSA requires institutions to verify a customer's identity and collect information regarding purchases of monetary instruments (such as money orders) over $3,000. Participants said $3,000 is too low. This requirement should either be eliminated or the dollar amount should be increased from $3,000. Finally, they said, examination for BSA should be moved out of risk management and into compliance. In other words, they believe BSA is not a safety and soundness issue but a compliance issue

2. USA Patriot Act, “Know Your Customer” Requirements, and OFAC

The USA Patriot Act of 2001 is extremely burdensome with little identifiable benefit, said the participants. These requirements have a lot of policing implications, they reported. Banks are private entities but they are treated as if they were an arm of the Federal government. They are required to detect criminal activity on behalf of the government but they receive no compensation; they must absorb the significant costs of implementing these regulations.

The requirements regarding customer identification are especially burdensome. Yet, banks are not the source of this problem. Identity theft typically begins with the issuance of a false government ID. Motor vehicle bureaus and the Social Security Administration do a poor job of preventing the issuance of false IDs, they said. Motor vehicle bureaus and the Social Security Administration should take stronger measures to prevent the issuance of false documentation. Whatever requirements and liabilities are imposed upon banks should be imposed upon the agencies that issue IDs; those agencies are the first in line in preventing the issuance of false IDs. It is unrealistic to expect banks to ferret out false IDs issued by careless government agencies.

OFAC Reports (Office of Foreign Assets Control) – For larger institutions, the process of verifying new customer names against the OFAC list is fairly simple. One banker said, for example, that his bank’s main database is updated on a regular basis with all new accounts being processed through the database and compared for a match. The participants also noted, however, that the economies of scale of the larger institutions provide an advantage over smaller institutions. Smaller institutions must perform the same review with fewer employees. The more often the list changes, the less competitive smaller banks become due to the verification process, reported the participants. In any event, the requirement to review all customer accounts for OFAC hits every two weeks is extremely costly.

Overall, examination procedures are too extensive and more burdensome than necessary to assess compliance, participants said. But this is especially true with regard to the BSA, USA Patriot Act, and OFAC. Requirements that customer accounts be monitored have been translated into expensive, bi-weekly scans of all accounts. Yet, few bankers find a match. Banks are subjected to more rigorous government scrutiny that other companies, and this makes them less able to compete.

3. Regulation D and Limitations on Transfers and Withdrawals from Money Market Deposit Accounts

The limit on the number of transactions for money market accounts is burdensome and ineffective, the participants reported. It is expensive to track. These requirements also put banks at a competitive disadvantage. Investment firms have no such limit. The limit serves no purpose, they said. The original intent underlying the regulation is outdated. The “sweeping” option is generally available only at larger organizations, putting smaller institutions at a disadvantage. The participants also said the reserve requirements should be restructured.

4. Home Mortgage Disclosure Act (HMDA) and Regulation C

New HMDA reporting requirements (effective 2004) will be extremely burdensome, said the participants. They see little value in collecting additional information. It will do nothing to help protect customers, they said. They said HUD has little understanding of the banking business. Banks are already subject to multiple federal and state banking agency oversight, they said. Authorizing additional agencies such as HUD to impose requirements is burdensome and can result in conflicting guidance. The participants said that the last time comments were requested on this regulation, the regulation became even more burdensome. Participants suggested that some of the information that is currently publicly available should treated as confidential information. They also believe the schedule for updating information should be extended.

5. Community Reinvestment Act (CRA) Regulations

These regulations are excessively burdensome, particularly on small banks, said the participants. Community support is crucial to a successful business plan, they said. Thus, community banks already have an incentive to invest in their communities. CRA is beginning to have negative impacts on community philanthropy, however. As banks have consolidated, many will get involved in community philanthropy only if it will result in CRA credit. And, making things even more complicated, there is a scarcity of CRA projects. In short, CRA drains funds away from worthy causes.

The participants offered several solutions. Most felt the regulations should be removed as outdated and harmful to local philanthropy. An alternative would be to evaluate the community as a whole to see if its credit needs are being met. If local needs are being met, no CRA examinations would be needed for institutions in that community. If needs are not being met, however, institutions in the area could be examined. Others suggested that examinations could be initiated only if a "trigger" event occurs, such as fair lending complaints. Others suggested a "CRA Lite" exam. Institutions failing the “Lite” exam would bear the full cost of CRA data collection and examination.

Participants also suggested raising the “large bank” asset size definition to $1-2 billion. They recommended removal of the holding company requirement. They also said CRA credit should be given for long term projects throughout the life of the project. In that way, banks can make a commitment for the life of the project. Many reported that the investment test seemed to be the biggest problem area.

Many participants decried the lack of financial education in secondary schools. Lack of education makes consumers vulnerable to abuses such as predatory lending, they said. This problem could be partly resolved by giving banks more CRA credits when they engage in educational and outreach efforts. Certain requirements could even be waived in return for financial training efforts.

Participants reported that public files were never requested by individual consumers. Data collection is geared toward community groups getting static information, they said, while discrimination cases have been rare. They also felt there is tension between CRA data collection requirements and customer privacy. Overall, participants believe this regulation involves subjective judgments; they feel they cannot win no matter what they do.

6. Expedited Funds Availability or Regulation CC

This regulation is very complicated, said bankers. It presents extensive operational issues. A great deal of time must be spent on employee training due to the complexity of the regulation. They felt there should be an automated system for keeping track of fund availability. With improved check clearing, this regulation could be simplified.

7. Truth in Lending or Regulation Z and RESPA

The regulation has lost its relevancy, said participants. The initial purpose of the law has been lost in a morass of complex documents and cumbersome regulations. They reported inconsistencies between the statute and the regulation. They said the regulations adversely impact small businesses. Responsibility for implementing RESPA should be moved to the Board of Governors of the Federal Reserve System and away from HUD, they suggested. Eliminate Regulation X, they said. Some suggested consolidating HMDA and RESPA with Regulation B to create a unified real estate regulation.

8. Truth-in-Lending and the Right of Rescission

Customers rarely exercise the right of rescission, said the participants. It was originally intended to prevent uninformed or naïve consumers from being victimized by salesmen making unsolicited offers. Most banking customers, however, contact banks for loans well in advance. The loans then take several days or weeks to close, giving the consumer ample time to change his/her mind. In addition, most banks use simple interest and mortgage loans are easier to understand and compare than in the past. Some participants, however, felt rescission might still be useful in the sub-prime mortgage market where, they believe, some predatory tactics still exist. Others reported that customers seldom read the loan documents even with the right of rescission. Consequently, borrowers might discover predatory tactics, such as prepayment penalties, only when they wanted to refinance. Simplifying loan documents would help borrowers focus on the essential information and is the better solution, they said. At a minimum, allow the consumer to waive this right, they suggested. Requiring a consumer to wait when there is an immediate need for funds is bad public policy.

9. Extensions of Credit to Insiders and Regulation O

The dollar limits on transactions are too restrictive, said participants. The required clauses, permitting loans to be callable at any time by the Board, are unfair. Bankers are forced to borrow outside of the bank. Because of this regulation, executive management and directors typically bank elsewhere even though they are excellent risks.

10. Flood Insurance and Flood Disaster Protection Act

Flood areas have been altered significantly due to modernization and public improvements, reported bankers. In some cases, a low risk loan transaction is required to have high cost flood insurance. For many transactions, there is a mismatch between the cost of insurance and the potential benefit.

11. Privacy Notices (Gramm-Leach-Bliley Act)

Customers seldom read notices, reported bankers. The notices create unnecessary concern. Instead of dunning customers with documentation, notices should be issued one-time only and subsequently reissued only if the bank changes its policy. The bankers also reported that notices are expensive and burdensome because they must be tailored to each state’s regulations, according to where the customer, not the institution, is located. Banks with large credit card portfolios are particularly disadvantaged.

12. Other Issues and Comments

Applications: Some regulations interfere with what should be purely business decisions, said participants. For example, decisions to open a branch office or to move capital in a well-run bank present little or no regulatory risk. Consequently, required reviews should be minimized or eliminated. CRA reviews in conjunction with branch relocations seem particularly unnecessary.

Deposit Insurance Coverage: Insurance rules are confusing. They are difficult to explain to consumers, especially when the consumer is looking at a mix of products. Eliminate the need to “structure” deposits. They recommend setting deposit insurance thresholds higher. One participant suggested that FDIC assessment forms are unnecessary.

Truth in Savings Act or Regulation DD: Repeal limitations on transfers for money market accounts. Some participants believe the FDIC can repeal these limitations without waiting for a in the law.

NOW Accounts: The limitations serve no purpose and should be repealed, said bankers.

Call Reports: Even minor changes to the Call Report increases the burden on banks. This is because data is retrieved electronically. When changes are made, banks must scramble to modify their programming. They say the task of preparing Call Report data would not seem so burdensome if the FDIC released the summary information in a more timely fashion. They also suggest providing better access so banks can compare themselves to the “best performers.” They also ask for better summaries with graphics and trend reports (perhaps by state). In other words, the process of preparing individualized data will not seem as great if the aggregate data is valuable to bankers.

Electronic Funds Transfer Act and Regulation E: The liability provision of $50 for consumers is too low. Banks have to assume more than their fair share of the risk. The regulations should be more user-friendly and technologically flexible.

Regulations/Legislation, Plain English, Agency Cooperation: Participants applauded the goal of reducing outdated regulations. They suggested, however, that congress is passing new laws even as the agencies are working through the EGRPRA review process. "Sunset" dates should be standard in all laws and regulations, they said. Laws and regulations should not be renewed without analysis of the provision's effectiveness. Some participants believe consumers blame banks for the restrictions and paperwork that encumber loans and deposits. Agencies should do a better job of educating consumers or should try to “market” regulations so consumers have a better understanding of what the law is intended to accomplish. Some participants suggest extending the “risk-focused” approach typically applied in the supervisory process to the legislative/regulatory setting. When drafting laws/regulations, consider how a requirement will impact the financial health of the bank.

Simplify all agency communications, participants said. If regulations are written clearly in the first instance, there would be no need for explanatory supervisory letters, opinion letters, commentaries, etc. Bullet points in regulations would be helpful. Definitions need to be consistent throughout regulations (e.g., “business day,” “dwelling”). Agencies need to do a better job of informing banks when regulations/guidelines are superceded/repealed.

Many laws and regulations require banks to gather data. Yet, the cost of gathering data is high. Participants suggested that all of the regulatory agencies (including the SEC) should work together to identify the data required by the various agencies and combine the results. In other words, they said, a "One Stop Data Collection" process would reduce the burden on banks to collect data for the government.

Supervision & Examinations: Examiner Training. Seasoned examiners with business acumen are leaving the agencies even as the industry becomes more complex, said the bankers. Examiners often ask for duplicative information. Some bankers are concerned that they will be held liable if customer confidentiality is breached and therefore said examiners should not take customer information out of the bank. Also, it is impossible to make all loans using metrics, they said. On occasion, the judgment of the bank should be respected. Burden of Examinations. Participants report that it is time-consuming to prepare for an examination, especially compliance examinations. Examinations seem designed to be adversarial from the beginning; examiners come to the bank with an assumption that everything is wrong. Policies in small banks are often updated solely for examiners.

Sarbanes-Oxley Act: The bankers said the costs of compliance would be very high. They question whether there is a demonstrated need to extend these requirements to the banking sector, given that the banking sector is already heavily supervised.

Need for Level Playing Field: Financial institutions are not competing on a level playing field, said participants. For example, credit unions have tax advantages allowing them to undercut competitors, they said. At the same time, credit unions have been allowed to engage in new activities and expand their clientele. Yet, they are not being subjected to corresponding increases in supervisory oversight. Participants also question whether credit unions are subject to the same CRA requirements as banks. Participants cited a number of other non-bank entities that compete with banks but are not subjected to the same regulatory and supervisory burdens as banks. By focusing primarily on banks, the government has failed to effectively address problems such as over-the-limit fees on credit cards or predatory lending by non-banks, said some participants.

Availability Notices: Some bankers believe smaller institutions are being subjected to greater scrutiny regarding availability notices than branches belonging to larger institutions. This is because branches of large banks are not visited as frequently by examiners.

BASEL: Some participants were concerned that the proposed Basel II Accord would put community banks at a competitive disadvantage. Community banks might find it more difficult to justify lower capital levels under the new standards while large institutions would have more options. They urged the agencies to make the standards more flexible and not impose “one-size fits all” standards.

Simplified Disclosure Forms: Regulators should review, simplify, and consolidate disclosure forms. The simpler the disclosures, the easier it is to compare costs between institutions. Some participants suggested that the laws are not keeping pace with changing demographics and agency disclosures should be made available in multiple languages.

Predatory Lending and Financial Education: Many of the participants approved of the Colorado state law covering predatory lending. They thought a new Federal law was unnecessary, at least as far as Colorado was concerned. If a federal law is developed, they suggested, states should have the opportunity to “opt out”. They also believe predatory lending could be curbed if society placed more emphasis on financial literacy.