Mr. Chairman and members of the Committee, my name is Lee Beard. I am President and Chief Executive Officer of First Federal Savings and Loan Association of Hazleton, in Hazleton, Pennsylvania. First Federal is a mutual institution with $380 million in assets. I am also First Vice Chair of America's Community Bankers (ACB).
ACB is the national trade association for 2,000 savings and community financial institutions and related business firms. The industry has more than $1 trillion in assets, 250,000 employees and 15,000 offices. ACB members have diverse business strategies based on consumer financial services, housing finance and community development.
I am pleased to appear before the Committee on behalf of ACB to discuss the provisions in the regulatory relief legislation under consideration by this Committee, the "Financial Regulatory Relief & Economic Efficiency Act of 1997," or "FRREE."
At the outset Mr. Chairman, I would like commend you and the other members of this Committee for taking a leadership role in the successful efforts of Congress to date in reducing regulatory burden. S.1405 represents the third installment of regulatory relief legislation in the last four years. Depository institutions and consumers both benefit from regulatory relief. S.1405 would reduce the costs of our operations. Excessive regulatory costs inhibit our ability to serve our customers because resources, human and financial, are diverted for other purposes. Regulatory relief clearly represents sound public policy.
Several provisions of this bill will enable savings associations to more directly benefit our communities. I will discuss these provisions in detail in this statement.
ACB strongly supports this legislation and urges its swift enactment. I will also suggest a few improvements to the bill.
S.1405 provides, in a balanced fashion, for additional regulatory relief for banks and savings institutions by:
ACB also supports provisions in S. 1405 that would affect only national banks and limited-purpose banks. National banks would be afforded greater flexibility in the areas of corporate governance, mergers or consolidations with their subsidiaries or nonbank affiliates, and purchasing or holding their own shares. A few provisions provide regulatory relief for limited-purpose banks. ACB supports the provisions to provide regulatory relief for national banks and limited-purpose banks.
ACB evaluates the regulatory relief efforts of Congress and the federal banking agencies according to the following guiding principles:
ACB believes that FRREE adheres to these guiding principles. ACB provides the following comments on the various provisions in the bill which would impact our members. I will not discuss Sections 101 and 102 which provide for interest on business checking accounts and payment of interest on reserves at Federal Reserve Banks. ACB testified before this Committee on March 3 expressing its total support for these provisions. In our testimony we explained in detail the consumer benefits of these provisions as well as operating efficiencies for consumers.
Section 103 would eliminate the superfluous statutory liquidity requirements of savings associations. ACB supports this section of FRREE. Section 6 of the Home Owners' Loan Act (HOLA) requires savings associations to retain liquid assets of between four and 10 percent of demand deposits and borrowings payable within one year. There are no statutory liquidity requirements for banks. The CAMELS rating system already takes adequate account of a savings association's liquidity, and the examination process generally addresses any concentration-of-credit and interest-rate-risk issues.
It is worth noting, Mr. Chairman, that the Office of Thrift Supervision (OTS) recently reduced the required liquidity to the lowest levels permissible by statute. Most institutions, on a voluntary basis, hold far more. However, all savings associations must go through the exercise of demonstrating that fact. We believe that the statutory requirements have outlived their usefulness.
ACB supports Section 104 which would eliminate the requirement that savings association subsidiaries of savings and loan holding companies give the OTS thirty days notice of a capital distribution. ACB does not believe that a savings association's status as a subsidiary of a savings and loan holding company should have any bearing on whether a capital distribution is safe and sound. First, a particular distribution may not necessarily be going to the holding company, in which case the requirement is clearly inappropriate. Second, even if the payments are upstreamed to the holding company, the supervisory process is the preferable method of determining whether the capital distribution is prudent and reasonable. Most notably, Sections 500 and 600 of the OTS Holding Companies Handbook provide detailed guidance to examiners on how to evaluate the extent to which a holding company relies on the subsidiary savings association to fund its activities and the financial effect of these funds transfers.
These directives would be buttressed by the rigid criteria the OTS is proposing, and which ACB supports, to permit capital distributions without either notice or application to the OTS, provided that the institution remains well-capitalized after the distribution. We also should recognize that proper and sound capital distributions could be made either to outside investors or upstreamed to the holding company, which could appropriately allocate the capital of the consolidated entity and eventually add strength to the insured subsidiary.
Section105 contains among the most significant provisions in FRREE. Major geographic and ownership impediments to investing in service corporations would be eliminated. No longer would federal savings associations be limited to investing in service corporations chartered only in the association's home state. In addition, no longer would other investments in a particular service corporation be limited to state savings associations and federal associations having their home offices in the state. Thus, Section 105(a) would permit savings associations to engage in a wide range of joint venture opportunities with other entities throughout the country, including community development projects. For many savings associations, this would be a more efficient way of engaging in such activities and would provide a benefit to communities and consumers served by the savings association and its service corporation. ACB strongly supports this provision.
A related change that we suggest would permit federal savings associations to more easily make investments in community development projects. Federal savings associations that do not have service corporations are currently unable to fully realize their potential to make community development investments because of other statutory restrictions. Unlike national banks and state member banks, which are specifically authorized to make direct equity investments in entities such as community development corporations, there is no parallel statutory authority for federal savings associations. This means that associations that do not have service corporations are limited in their ability to fully serve their low- and moderate-income communities.
ACB recommends that Section 201 be amended to address this problem. Section 201 properly revises some obsolete language that currently impedes the ability of federal thrifts to make community development investments in conformity with the Community Development Block Grant Program. This section should be revised to grant federal savings associations the same general authority to directly invest in community development entities (such as CDCs) which now applies to national banks and state member banks (aggregate investments in all projects limited to five percent of capital, with an additional five percent upon approval of the appropriate federal regulator).
Section 105(b) would grant the OTS the authority to examine the operations of service corporations and other entities that perform services for savings associations. The other Federal banking agencies already have comparable examination authority to examine bank service corporations and other service providers to banks. ACB supports this explicit examination authority for the OTS. Time is getting short, and we cannot permit examination deficiencies to exist in any part of our supervisory system. ACB urges the Committee to act swiftly on this important matter, which was recently passed by the House. However, it is appropriate that this provision remain in S.1405, pending separate action by the Committee.
Section 107 would permit savings and loan holding companies to exceed the current five percent ownership limit of non-subsidiary thrifts or thrift holding companies, with the prior approval of the OTS. In addition, Section 106 would eliminate the existing restrictions on savings and loan holding companies' ownership of out-of-state thrift subsidiaries. These restrictions do not apply to interstate bank or thrift subsidiaries of bank holding companies. ACB supports Sections 106 and 107 which would increase the organizational flexibility of thrift holding companies and provide greater operational parity between bank and thrift holding companies.
The bill should also consider a HOLA amendment to explicitly provide for a two-year divestiture period for the sale of nonconforming assets by unitary savings and loan holding companies that become multiple savings and loan holding companies or fail to comply with the QTL requirement. This would avoid "firesales" of such assets and would conform with the general divestiture period in section 1467a(c) of HOLA.
Section 209 would allow the formation of a mid-tier holding company as part of the eventual holding company structure. ACB supports the added flexibility this section would provide to mutual institutions in choosing an organizational structure that will meet their business needs. ACB believes that the mid-tier holding company should be a state chartered entity with powers and protections granted by the state to corporations.
Section 108 would eliminate the requirement that deposit brokers file a written notice to the FDIC before soliciting or placing any deposit with an insured depository institution, and notifying the FDIC when it ceases to act as a deposit broker. It would also eliminate the FDIC's authority to prescribe regulations governing the recordkeeping and reporting of deposit brokers.
While ACB is generally in favor of reduced reporting burdens on institutions, in matters concerning brokered deposits, where the potential for abuses are so great, we do not favor eliminating all of the informational requirements mandated in Section 29A of the Federal Deposit Insurance Act (FDI Act). At a minimum, the FDIC should be notified of the intent of a person to engage in deposit brokering and to terminate these activities.
ACB recommends that Section 11(a) of the FDI Act be amended to eliminate the statutory linkage between extending pass-through deposit insurance coverage and accepting brokered deposits. The statute conditions pass-through deposit insurance coverage to participants in, and beneficiaries of, employee benefit plans on the depository institution's capital position and its ability to accept brokered deposits. This complicated statutory linkage often confuses plan sponsors and depository institutions and imposes unnecessary compliance burdens on institutions. In some cases, plan sponsors do not know whether, and under what circumstances, pass-through coverage is available at a particular institution. There is no justifiable basis for these statutory and regulatory restrictions on pass-through insurance for participants in employee benefit plans involving several billions of dollars. They pose far less risk to the depository institution than imprudent asset growth funded by brokered deposit arrangements. Moreover, the federal banking agencies already have the authority to impose growth restrictions on undercapitalized institutions under their prompt corrective action authority, no matter what the funding source for the growth.
Section 202 would simplify the brokered deposit statutory requirements by replacing the three separate rate limits on brokered deposits into a single national interest rate. The current statutory rate limits, which apply to institutions that are not well-capitalized, cover the "national rate," "normal market requirements" and "rate paid on deposits of similar maturity in such institution's normal market area."
ACB supports this simplification of the brokered deposit restrictions. Promulgating regulations to conform to these rate limits was a difficult effort for the FDIC, and it is not clear that the problems were, or could be, resolved. A national rate, which is published, is far easier to implement. It would also eliminate the problem of identifying which institutions to use in market rate determinations.
Section 210 would require the federal banking agencies to work jointly to develop a single, core report of condition and income (Call Report) and eliminate reporting items that are not needed for safety and soundness and other public policy purposes and to simplify Call Report instructions. ACB supports these requirements to streamline the reporting process. Similar mandates have been adopted in the past. The federal banking agencies made several efforts since 1994 to streamline the Call Report and Thrift Financial Report. Unfortunately, only limited progress has been made to develop a single, streamlined core report. ACB recommends that Section 210 provide a specific timetable for agency action.
One possibility is to require the agencies, under the auspices of the Federal Financial Institutions Examination Council (FFIEC), to adopt this core report no later than two years after enactment of FRREE. The FFIEC should consult regularly with the industry during this period and issue an advance notice of proposed rulemaking and proposed rules during this interval. Subsequent to the adoption of the core report, the FFIEC, upon consultation with the industry, should provide a reasonable transition period for implementing the core report. Whatever time period is chosen by the agencies, it should be flexible enough to accommodate the industry's Year 2000 responsibilities.
ACB is a member of an inter-association working group that advises the banking agencies on revisions to these reports. Through its participation in this working group and independently, ACB has suggested that these reports be streamlined to include only items necessary for supervisory purposes, peer-group analysis and Securities and Exchange Commission disclosure requirements.
The federal banking agencies have expressed a commitment to developing a common Call Report for banks and savings associations. The timing, structure and content of the initial core report will be determined in consultation with ACB and the other members of the inter-association working group.
ACB also supports Section 302 which would eliminate the explicit statutory authority of the federal banking agencies to seek supplemental disclosure of the estimated fair market value of assets and liabilities in any balance sheet, financial statement, report of condition or other reports of institutions. The agencies have stated on frequent occasions that some of these disclosures are not feasible or practicable. Moreover, all market values of financial instruments are already disclosed in the body or footnotes of financial statements.
ACB opposes Section 304, which would repeal the requirement that the agencies prepare annual reports on the differences among the agencies in accounting and capital standards. These reports can be useful in ascertaining whether and to what extent the agencies are not applying uniform and consistent reporting requirements in accordance with generally accepted accounting principles (GAAP). This annual report should also be used to satisfy the requirement that capital standards take account of the size and activities of institutions and do not cause undue reporting burdens.
Sections 401 and 402 would eliminate costly disclosures required under the Truth in Lending Act (TILA) that either have no benefit to consumers or often result in customer confusion. These should not be characterized as weakening necessary disclosures. Rather, they would permit consumers to make informed decisions.
Section 127A of the TILA currently requires a number of consumer disclosures for open-end consumer credit secured by the consumer's principal dwelling. Among others, a creditor must disclose a table, based on a $10,000 extension of credit, showing how the annual percentage rate and the minimum periodic payment amount under each repayment option of the plan would have been affected during the preceding 15-year period by changes in any index used to compute such rate. Section 401 of this bill would amend the TILA to allow creditors the option of providing a statement, in lieu of the 15-year historical table, that "periodic payments may increase or decrease substantially." ACB strongly supports such an amendment to the TILA to provide institutions with options for providing the most straightforward information to customers.
Section 401 should also amend the TILA for adjustable-rate open-end mortgages to give lenders the option to either disclose a 15-year historical table or provide a statement notifying borrowers that their interest rate may substantially increase or decrease. ACB members have routinely been confronted by consumers complaining that they do not understand the purpose of the historical table, have mistakenly believed (sometimes to their detriment) that the historical table is a "blue print" for the future, and have not used the historical table for shopping purposes as intended by the TILA.
In an advertisement for closed-end credit, Section 144(d) of the TILA requires a creditor to disclose (1) the down payment, (2) the terms of repayment, and (3) the APR should there be present in the ad any of the listed triggering terms contained in this section. Among the listed triggering terms are the number of installments and the period of repayment. Section 402 of this bill would amend the TILA by eliminating as triggering terms the number of installments and the period of repayment. ACB strongly supports Section 402 of this bill. Under current law, if the number of installments or the period of repayment were the only statements included in an advertisement for closed-end credit, a creditor would be obligated to provide all the required information under this section. This amendment would reduce regulatory burdens without diluting consumer protection.
Whether closed-end or open-end, the disclosure requirements for radio or television advertisements under the TILA are numerous, complex and varying among products. The cost of running ads on the radio and television is extremely high. Furthermore, given the relatively short time periods in which these ads typically run, consumers cannot comprehend the detailed and lengthy nature of such ads based on TILA requirements.
Therefore, ACB supports Section 402 of the bill which would provide for an alternative, uniform rule for all credit products advertised on either radio or television. ACB believes the simplicity of providing basic rate information, giving a toll free phone number, and making further information available upon request will significantly reduce regulatory burden for creditors while enhancing the consumer's ability to comprehend the credit product being advertised.
ACB supports Section 115 which would eliminate the statutory requirement that the federal banking agencies have a separate restriction on purchased mortgage servicing rights in determining how mortgage servicing assets should be treated for calculating a depository institution's capital. Section 115 also would eliminate the requirement that a 10 percent fair-market-value "haircut" be applied to the amount of purchased mortgage servicing rights that can be included in the calculation of the institution's capital. This haircut is unnecessary, given the added protection that mortgage servicing assets must be readily marketable and subject to an agency-imposed limit on the amount that can be included in capital. ACB believes that if reasonable capital limits apply to all servicing assets, separate sublimits for purchased mortgage servicing rights would serve only to add a further degree of needless complication to already intricate capital requirements.
The bill contains a number of technical but significant amendments to the Federal Home Loan Bank Act (FHLBank Act) in Sections 118-120. FHLBank members and others agree that the FHLBank Act needs further fine-tuning to complete the opening up of the System that was begun in 1989. Fortunately, the System is not in any crisis that mandates emergency action: in fact, System membership is at an all-time high and earnings levels have been restored to health.
As a matter of public policy, ACB does not object to the substance of any of the three amendments to the FHLBank Act in S.1405. Nevertheless, we do feel that the proposed changes to the governance procedures and responsibilities of the boards of the 12 individual FHLBanks and of the Federal Housing Finance Board, and even the modest expansion of eligible collateral, have to be considered within the context of the broader legislation on the FHLBank System introduced in this chamber by Senator Hagel (R-NE)
and on the House side by Rep. Richard Baker (R-LA). ACB recommends against moving the governance and collateral provisions outside the context of that broader FHLBank package because such separate treatment would imperil the careful balance of stakeholder interests that is necessary to deal with the full range of updates that the System needs.
On the topic of the coverage of the FHLBanks within the net debit caps administered by the Federal Reserve to control the implicit protection of intra-day float within the check-clearing system from Federal Reserve Bank "finality of payment," it is certainly appropriate for the Federal Reserve's regulation and procedures to recognize the agency status and credit quality of the individual FHLBanks. While this could be accomplished by agreement between these entities, statutory embodiment of this requirement will guarantee the achievement of this worthwhile step. In a number of areas, the statutory changes designed to provide valuable regulatory relief duplicate some helpful revisions that the federal banking agencies have either completed or are currently considering.
ACB supports Section 109 which would make uniform the regulatory requirements of the federal banking agencies regarding extensions of credit made by banks and savings institutions to their executive officers. Currently, Section 22(g)(4) of the Federal Reserve Act provides that a bank (including a savings institution) may make extensions of credit to its executive officers not otherwise authorized in Section 22(g) pursuant to the regulations of its appropriate federal banking agency. Each agency has promulgated its own regulations. Several of the agencies have eliminated their own regulations and incorporate the Federal Reserve rules by reference. This change would ensure consistent regulatory treatment.
Section 114 would broaden the current exception in Section 205(8)(A) of the Depository Institution Management Interlocks Act that permits a diversified savings and loan holding company to request that the OTS allow the holding company to have on its board a director from a nonaffiliated company. The proposed amendment substitutes the broader term "management official" for the narrower term "director," thereby also allowing officers and other employees of a nonaffiliated company to serve on the board of a diversified savings and loan holding company (as defined in Section 1467a(a)(1)(F) of HOLA).
ACB supports the proposed amendment which would increase the range of qualified individuals that could serve on the board of the holding company.Anti-Tying Restrictions
Section 204 would equalize cross-marketing opportunities for banks and nonbanks by repealing the anti-tying provision in Section 106(b) of the Bank Holding Company Act Amendments of 1970. In effect, the repeal of Section 106(b) would allow a bank and its affiliates to bundle consumer products and services and provide discounts for such products and services. ACB supports this proposed amendment which would enable institutions to more readily cross-market products.
However, ACB recommends that comparable treatment be given to savings institutions whether or not a savings institution is an affiliate of a savings and loan holding company by repealing Sections 10(n) and 5(q) of HOLA. Permitting efficiencies through cross-marketing is sensible for all depository institutions.
Section 805 of the Fair Debt Collection Practices Act (FDCPA) strictly limits communications by debt collectors with debtors or third parties. Section 207(a)(1) of FRREE would clarify that communications involving legal complaints, pleadings and non-judicial foreclosures are not communications covered by the FDCPA. ACB supports this clarification.
The FDCPA seeks to eliminate abusive debt collection practices by strictly limiting the time, place and frequency of communications by debt collectors in their efforts to collect a debt. For instance, a debt collector may not attempt communication at unreasonable hours, may not attempt communication with a debtor when the collector knows that the debtor is represented by an attorney, and may not attempt communication with a debtor at the debtor's place of employment where the collector knows such communications are prohibited by the debtor's employer. While ACB supports the public policy furthered by these prohibitions of the FDCPA, ACB believes the effective and efficient administration of our judicial system must take precedence in communications involving legal complaints, pleadings and non-judicial foreclosures. Furthermore, these types of communications are subject to judicial checks and balances such as court oversight and prohibitions against abuse of process which serve to protect the debtor.
Section 809 of the FDCPA requires a debt collector to communicate to a debtor that the debtor has 30 days in which to notify the debt collector that the debtor disputes the debt and that upon such notice the debt collector will verify such debt. Section 207(b) of this bill would clarify that until the debt collector receives such notification from the debtor, the debt collector may continue to attempt to collect the debt. ACB supports this provision. A debt collector's activities should not be put on hold while waiting for up to 30 days for a debtor's decision whether or not to dispute the debt. During this time valuable assets which may be sufficient to satisfy the debt may vanish. Even where such assets do not vanish, delaying the collection process and ultimate recovery could be costly. Furthermore, ACB believes such a mandated delay would be tantamount, in effect, to a presumption that records of all creditors indicating a delinquency are incorrect or subject to a good-faith dispute. ACB believes such a presumption would be wrong, as would be any law requiring such a delay in a creditor's attempt to collect a legitimate debt.
ACB recommends the Committee consider the following additions to the FRREE to reduce regulatory burden on depository institutions, and which would result in clear cost savings without impairing the safe and sound operations of institutions.
ACB supports legislation to authorize the FDIC to rebate amounts in the BIF and SAIF that exceed the amounts necessary to maintain the respective fund at its statutorily designated reserve ratio. Sound public policy dictates that BIF and SAIF members be authorized to receive rebates on some or all of the excess amounts in their respective, currently over-capitalized funds. The excess amounts could prudently be returned to institutions without undermining the integrity of the funds.
Since 1950, the FDIC has had the authority to rebate some portion of deposit insurance premiums in a way that would balance the financial burden of assessments to institutions with the preservation of a strong deposit insurance fund. Unfortunately, the 1996 BIF-SAIF legislation eliminated the FIRREA rebate options and replaced them with very restrictive provisions for BIF members, and provided no rebate or refund authority for SAIF members. In the process, Congress discarded a long and successful history of balancing the legitimate financial interests of fund members with maintaining strong insurance funds.
It is worth noting that throughout much of the history of the FDIC fund, rebates were based on the amount of assessments paid because assessments were the major source of fund growth. Now, the vast majority of BIF and SAIF members are paying zero assessments and the BIF and SAIF funds are generating excess reserves primarily from investment income. Over the years, Congress concluded that excess fund reserves, whether generated directly or indirectly from premium income, should be returned to members. The FDIC, as the agency responsible for administering the funds for both banks and savings associations, is capable of handling rebate matters in a safe and sound fashion for each fund once the target fund level is reached, and has a long history of doing so.
We recognize that there could be adverse budgetary implications associated with a full rebate of amounts in excess of those required to keep the insurance funds at the designated ratio of 1.25 percent of insured deposits. Parity between the rebate authority of BIF and SAIF is mandated by fairness. A rebate trigger somewhat higher than the designated reserve ratio is worth considering. ACB urges the Committee to work with the FDIC, Congressional Budget Office, and Office of Management and Budget to devise a reasonable solution that satisfies all parties.
The greatest opportunities to provide special regulatory relief for well-performing institutions remain in the applications area. In 1996, the EGRPRA replaced application requirements with notification requirements in some areas, but some unnecessary application requirements remain untouched. The most notable are branch opening and relocation requirements.
The FRREE should eliminate the prior approval requirements of the agencies for banks and savings associations for branch openings and relocations. Only institutions that are well-capitalized, with a CAMELS 1 or 2 rating and "Satisfactory" or better CRA rating, should be eligible for this flexibility. The agencies should still retain the authority to require banks to notify them of branch relocations and to publish such notice in newspapers in the relevant branch office.
Where the law permits, the FDIC is currently proposing to streamline all of the procedurally non-substantive application requirements and replace the vast majority of them with an expedited review process involving notifications by well-performing institutions. These proposed amendments would allow institutions to begin new activities or relocate branches more predictably. If the FDIC does not have a safety or soundness concern, an application on an expedited track will be automatically approved. But, the FDIC has gone as far as it can go, given statutory constraints. The OTS has also made similar efforts to streamline various application requirements, again subject to statutory constraints.
Another opportunity for further regulatory relief concerns external audit requirements. ACB believes that all depository institutions should have thorough internal and external audit programs to ensure that their financial statements are reliable. However, some unnecessary statutory requirements still remain, which result in excessive paperwork for institutions and time involved for the outside audit. The EGRPR eliminated the management reporting requirements and external auditor attestations regarding compliance with statutorily-designated safety and soundness laws. Congress properly recognized that these requirements overlapped with examiners' responsibilities. However, the legislation did not eliminate the required management report and attestation concerning the effectiveness of the institution's internal controls for financial reporting.
ACB supports the elimination of these remaining management reporting and attestation requirements for well-performing institutions. Internal controls over financial reporting are more appropriately addressed through the general review of the institution's internal controls. The Federal banking agencies issued new guidance to institutions regarding their internal audit responsibilities on December 22, 1997, which will be enforced by examiners. The proper scope of the responsibility for external auditors should be to attest to the reliability and integrity of the financial reports and to review the system of internal controls that are involved in their preparation.
Well-performing savings associations should also be free of unnecessary statutory notification requirements for establishing or acquiring a subsidiary or conducting a new activity in an existing subsidiary. Comparable notification requirements do not apply to banks. Section 18(m)(1)(A) of the FDI Act requires savings associations to provide thirty days prior notice to the FDIC and the OTS of their intents to engage in such transactions or activities. ACB recommends that this notification requirement to the FDIC be eliminated.
Mr. Chairman, this concludes my remarks. ACB stands ready to assist the Committee in any way possible to secure swift passage of this important legislation. Our industry is committed to actively servicing our communities in the most cost-effective and sound manner. The legislation before this Committee would help us achieve this goal.
Thank you, and I will be happy to answer your questions.
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