Introduction
On June 11th the federal financial regulatory agencies convened a
Bankers Outreach meeting under the leadership of interagency task
force chairman John M. Reich, Vice Chairman, FDIC. This meeting was
the first in a series of Banker Outreach meetings to be conducted
throughout the United States. The purpose of the meetings is to
obtain feedback from bankers on regulatory issues and legislation
that represent a significant burden to their operations. As detailed
elsewhere in this website, the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (EGRPRA) requires the federal
financial regulatory agencies to ask the public to identify areas of
regulations that are outdated, unnecessary, or unduly burdensome.
Through the Banker Outreach meetings, the regulators seek to open a
dialogue between the banking and regulatory communities, with the
goal of streamlining existing banking legislation and eliminating
laws that have outlived their original purpose or no longer make
sense in the current business environment.
Those participating in the Orlando meeting identified a number of
regulations which they believe deserve scrutiny under EGRPRA. They
also offered solutions.
Opening Remarks
Vice Chairman Reich opened the meeting in Orlando. He
recalled that earlier efforts to reduce regulatory burden had
resulted in some success but that those efforts were largely driven
by the regulatory agencies. In contrast, EGRPRA requires the
regulators to ask the public to help identify regulations that are
outdated, unnecessary, or unduly burdensome. He indicated that
bankers now have an opportunity to share their comments through the
EGRPRA process. He advised that all of the federal financial
regulators support the EGRPRA review and that key members of the
Federal Reserve, OCC, OTS, and FDIC are participating in each of the
Banker Outreach meetings. Vice Chairman Reich expressed the
hope that the effort would result in an approach that is more
intelligent, more efficient and better suited to the time.
Don Saxon, Director, Office of Financial Regulation, Florida
Department of Financial Services
After concluding his remarks, Vice Chairman Reich introduced Don
Saxon, Director, Office of Financial Regulation, Florida Department
of Financial Services. Director Saxon outlined
several activities initiated by his Office to reduce regulatory
burden. For example, his Office facilitated the electronic
submission of call reports, enhanced the availability of electronic
communication with the Office, streamlined the application process
for branch offices and reduced certain fees. Director Saxon
also described educational efforts initiated by his Office, such as
workshops targeted to board directors. Director Saxon urged
the federal authorities to consider initiatives such as those
implemented by Florida and concluded his remarks by voicing support
for the goals of EGRPRA.
Goals of EGRPRA
Claude Rollin, EGRPRA Project Manager, provided an overview of
the regulatory burden reduction process. After summarizing the
requirements of the statute, he described the process of
categorizing the regulations. He then referred to the
regulations currently available for comment and encouraged the
audience to submit comments through the EGRPRA website. Mr.
Rollin then outlined several topics for discussion during the
breakout or Roundtable Discussion Groups but emphasized that the
participants were free to raise any issues they wished to
discuss.
Panel Discussion
Following Mr. Rollin’s presentation, a panel featuring four of
the region’s bankers discussed issues affecting the financial
sector. The panel was moderated by C. K. Lee, Special Advisor
to the Chairman, FDIC. The panelists were: (1)
Mariano H. Fernández, Senior Vice President, Ocean Bank, Miami,
Florida; (2) Keith Leibfried, President and Chief Executive Officer,
First Federal Savings Bank of Florida, Live Oak, Florida; (3)
Stephen L. Price, President and Chief Executive Officer, Florida
Community Bank, Immokalee, Florida; and (4) James H. McKillop, III,
President and Chief Executive Officer, Independent Banker’s Bank of
Florida, Lake Mary, Florida.
Mr. Fernández outlined the impact of recent legislation on
financial institutions, focusing his comments on the USA Patriot Act
and the Bank Secrecy Act. Mr. Leibfried discussed customer
feedback based upon a poll of his employees and customers. Mr.
Price described the market impact of regulatory initiatives.
Mr. McKillop summarized approaches for attaining legislative goals.
Participant Comments
The Panelists and the individuals participating in the Roundtable
Discussion Groups singled out a number of regulations for
review. Their concerns and comments are described below.
1. Bank Secrecy Act and Currency Transaction
Reports
The participants agreed that regulations enacted pursuant to the
Bank Secrecy Act and anti-money laundering legislation are the most
burdensome regulations for the banking community. One of the
panelists captured many of the bankers’ concerns during his
presentation. He outlined the costs of filing Currency
Transaction Reports (CTRs), including purchasing and updating
software, allocating personnel resources to analyze transactions and
file reports, and providing training. He indicated that his
institution spent approximately $120,000 to purchase supporting
software and $85,000 to update instructional manuals. He
suggested that his institution was required to file approximately
24,000 CTRs during 2002. He estimated the cost of filing each
CTR at approximately $25. Thus, he estimated the cost of
filing CTRs during 2002 for his institution to be over
$600,000. The volume and costs experienced by his bank are not
unique. He referred to recent reports issued by the Financial
Crimes Enforcement Network (FINCEN), including the report to
Congress entitled Use of Currency Transaction Reports
(October 2002), and noted that over 12 million CTRs had been filed
during fiscal year 2002.
The speaker emphasized that the banking community is eager to
support law enforcement efforts. He questioned whether CTRs
are truly useful to the law enforcement community, however. He
referred to an article titled U.S. to Cut Bank Reports on Cash
Deals, published in the Wall Street Journal on September 21,
1998. The article stated that, during a three-year period, the
IRS initiated fewer than 1,000 investigations based on CTRs and
Suspicious Activity Reports (SARs), despite the filing of around 35
million CTRs. Further, bankers do not receive feedback after
they have filed the CTRs; the members of the audience could not
recollect a time when they were contacted about the information
provided in a CTR. The audience cheered the speaker when he
noted that searching for criminal activity through the use of CTRs
is like searching for a needle in a haystack, and the government’s
response is to pile on more hay.
With regard to exemptions, the FINCEN report to Congress revealed
that financial institutions do not always take advantage of certain
exemptions. The speaker suggested that banks are reluctant to
rely on exemptions due to the difficulty of the requirements and the
potentially severe penalties involved. He recalled that one
small bank was fined $80,000, which ate up two years of that bank’s
earnings.
Another panelist referred to the number of advisories issued by
FINCEN and explained that banks have a difficult time keeping
up with the watch lists generated by the government. He urged
the regulators to consider whether such lists were effective.
With regard to FINCEN Names Lists, the participants found that they
were very costly, and both the FINCEN and OFAC lists have to be
created internally. A number of participants said that banks
found the OFAC list too inefficient to use and hence
ineffective at stopping transactions by suspicious individuals.
The participants also pointed out that the costs of complying
with these regulations hit small banks the hardest due to the
software and staffing required. For both small and large
institutions, there is a great deal of confusion concerning the
requirements pertaining to correspondent accounts. For
example, some institutions require their correspondents to sign
affidavits, whereas others require a letter. To avoid the
requirements, such as site checks at the correspondent’s facilities,
many institutions have closed out their accounts with foreign
correspondents. The result, bankers reported, is that "we’re
cutting off our business ties with other countries," which may harm
bankers in the long run. The requirement to ensure that
domestic correspondents have adequate policies and procedures
related to their foreign correspondents is also unduly
burdensome.
2. USA Patriot Act "Know Your Customer" Requirements
and Shifting Government’s Costs of Law Enforcement and
Investigation to the Private Sector.
The bankers are concerned about the evolving requirements of the
USA Patriot Act and so called Know Your Customer (KYC)
requirements. They reported that customers, especially
long-standing customers, are upset when forced to prove their
identity. The bankers feel it is a meaningless requirement
since they know many of their customers. They asked if the KYC
requirements are truly effective in combating terrorism. In
addition, it is not clear what type of information is
acceptable. The participants also expressed concern that the
identification and recordkeeping requirements of the USA Patriot Act
could put them in jeopardy of violating anti-discrimination laws
prohibiting the collection of data regarding customers. They
feel these laws force banks to assume the role of law
enforcement. They question whether this role is appropriate
for banks and whether these regulations relate to the well being of
their customers.
On a related subject, one of the panelists described the problems
of cost-shifting when law enforcement officials file open-ended
document requests. He explained that when a bank customer is
the target of a government investigation, the bank is subjected to
document requests. The costs of producing documents is often
shifted to the bank. Since the government does not bear the
cost of document searches and production, the government has no
incentive to focus its request. For example, his institution
once provided over 4,000 pages to law enforcement officials.
The investigator declined to set search parameters when asked to do
so. The panelist suggested that it is inappropriate for
government to shift its costs to private industry.
3. Regulation D and Limitations on Transfers and
Withdrawals from Money Market Deposit Accounts
Customers complain that the limitations on withdrawals imposed
upon money market accounts are unduly restrictive. Bankers
believe the regulation is antiquated and serves no apparent
purpose Moreover, the current restrictions place banks at a
competitive disadvantage with non-banks and credit unions.
Customers indicate that brokers did not impose similar
limitations. Participants also discussed eliminating rules
restricting the payment of interest on certain deposit
accounts. Currently, the only option for banks is to offer
"sweep repos," which sweep money from deposit accounts into
repurchase agreements. However, many banks, particularly small
institutions, are unable to offer this product, and this places them
at a competitive disadvantage. The participants acknowledged
that this issue may cause debate: removing restrictions on
interest payments will increase the cost of funds for banks.
4. Home Mortgage Disclosure Act (HMDA) and Regulation
C
The costs of software needed to comply with data collection and
reporting requirements are high yet the data collected seems to have
little utility. Some bankers complained that examiners
criticize them for making too many loans to high net worth
individuals. Some bankers reported that simple reporting
errors lead to criticism and fines, even though the errors have
nothing to do with the original intent of the law.
5. Community Reinvestment Act (CRA)
Regulations
To many participants, this regulation seemed unnecessary in an
age of internet banking and national marketing. It also
creates a competitive disadvantage for banks in that brokers are not
subject to the same regulatory requirements. There needs to be
greater parity between these institutions and banks. In
addition, the definitions distinguishing banks by size are no longer
realistic in today’s market. Moreover, the documentation
burden created by CRA impacts small institutions more so than large
institutions. The level of documentation needed under the
investment and service tests is also unduly burdensome.
The participants also raised concerns about niche banks.
For example, large contributions to nonprofit organizations
typically do not qualify for consideration unless the bank can prove
where and how the money was used. The example given was of a
bank in Florida, whose customers (over 95%) are foreign but, because
the bank makes loans to foreign customers for the purchase of
Florida real estate, it is subject to CRA. Reportedly, the
bank finds that in order to maintain a Satisfactory CRA rating, it
must make loans to unqualified borrowers and these loans are almost
always charged-off. As a result, CRA becomes a cost of doing
business.
6. Expedited Funds Availability or Regulation
CC
Many participants found that the current availability schedule
for checks increases the loss exposure to banks. For example,
the shorter timeframe for making deposits from cashiers’ checks
available can subject banks to greater risk of loss. Also, the
risk of loss is greater given today’s more sophisticated
technology. For example, it is easier to commit fraud by
scanning signatures of bank officers on cashiers’ checks. In
order to protect themselves from fraud, some banks take advantage of
extended holds. However, the notices that must be sent to
depositors for these types of holds are burdensome and people
complain when they receive them. The notices are especially
burdensome for banks that do not have systems allowing them to give
notices at the teller window and must, instead, mail the
notices. In other words, the process for providing the notices
and the notices themselves are burdensome. Some participants
indicated that the rules were so burdensome and complex that they
routinely made funds immediately available, and therefore ran a risk
of loss. Overall, the participants felt that the entire
banking industry should not be held accountable for the abuses of
the small number of institutions that caused Congress to impose
Regulation CC.
7. Truth in Lending or Regulation Z and
RESPA
Overall, the bankers believe that the volume and complexity of
documents required at closing are daunting and frustrating for the
consumer. The documents are not written in a manner to
facilitate understanding. The customer does not perceive these
protections as beneficial to the customer. The participants
also expressed concern that the annual percentage rate (APR)
disclosures are not being applied uniformly across the financial
sector. One speaker referred to popular car ads offering zero
percent interest rates or a $1,000 rebate. He suggested that
the rebate might be tantamount to a finance charge so that the APR
was not actually zero percent. He contended that regulations
governing credit must be applied uniformly across the financial
sector so consumers understand the true costs of a loan.
Another speaker echoed the concern that the requirements put
bankers, who are subject to regulatory scrutiny, at a competitive
disadvantage.
8. Truth-in-Lending and the Right of
Rescission
The participants knew of few, if any, instances when a customer
exercised the right of rescission. Moreover, many customers
are upset when they have to wait three days for their loan
proceeds. The customers did not perceive the right of
rescission as beneficial to them. Occasionally the three-day
period is miscalculated. The participants felt that banks are
not the abusers that created the need for this regulation. The
abusers are loan companies and non-banks that finance home
improvements and door-to-door sales.
9. Extensions of Credit to Insiders and Regulation
O
The participants said restrictions on lending to insiders forces
directors and executive officers to bank elsewhere. They strip
the privacy of directors who wish to borrow from their
institutions. These restrictions also make it difficult to
find directors willing to serve on bank boards. Moreover, the
participants believe regulators can monitor this type of activity
using statistical analysis rather than imposing unwarranted
restrictions on all directors and executive officers. Overall,
some felt the regulation was implemented due to the abuses of one
individual and now the entire industry is paying for his
abuses.
10. Flood Insurance and the Flood Disaster Protection
Act
Bankers believe government has shifted the cost of enforcing
flood insurance requirements to the banking system. They think
it is unnecessary to mandate flood insurance for commercial real
estate loans since business people choosing to invest in a property
are well equipped to determine if they need insurance. In
addition, the participants stated that a bank often does not need
the improvements for collateral; the land provides sufficient
collateral protection.
11. Foreign Banking in General and Regulation K
A foreign bank with a U.S. presence that has not been through a
CCS determination must file a full application when it wants to
convert an agency office to a branch office, just as a foreign bank
seeking initial entry into the U.S. must do. The participants
believe that this is disparate treatment for banks whose ownership,
management, and activities are subject to regulatory reporting and
examination by the FRB. Foreign banks with a U.S. presence
that have been through a CCS determination may file a Notice of its
intent to convert an agency office to a branch; however, the Notice
is almost as lengthy and cumbersome as an application. The
bankers also suggested consumer regulations, such as RESPA, be
reviewed to ensure they do not apply to isolated transactions by
foreign banks not engaged in consumer
transactions.
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