Financial Services Regulatory Relief: Implementation and Reintroduced Provisions in the 110th Congress

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Federal financial services regulatory agencies are implementing the Financial Services ^th
Regulatory Relief Act of 2006, P.L. 109-351 (120 Stat. 1966), as the 110 Congress considers
new financial services regulatory relief bills. Most of the provisions under consideration were
debated and excluded from the final legislative process that enacted P.L. 109-351. The
simultaneity of these developments shows Congress’s continued concern with reducing the
regulatory burden of financial services providers. This report gives a brief summary of the
provisions of P.L. 109-351 followed by the specific provisions that federal regulatory agencies are
implementing. It then examines the regulatory relief provisions currently being introduced in the ^th
110 Congress. The report concludes with a discussion of the financial services regulatory relief
legislative process and whether these provisions could reverse the increasing concentration of the
financial services industry.
This report will be updated as developments warrant.

Introduc tion ..................................................................................................................................... 1
The Financial Services Regulatory Relief Act of 2006, P.L. 109-351 (120 Stat. 1966)..................1
The Major Provisions by Titles.................................................................................................1
Title I. Broker Relief...........................................................................................................1
Title II. Monetary Policy Provisions...................................................................................1
Title III. National Bank Provisions.....................................................................................2
Title IV. Savings Association Provisions............................................................................2
Title V. Credit Union Provisions.........................................................................................2
Title VI. Depository Institution Provisions.........................................................................2
Title VII. Banking Agency Provisions................................................................................3
Title VIII. Fair Debt Collection Practice Act Amendments................................................3
Title IX. Cash Management Modernization........................................................................3
Title X. Studies and Reports...............................................................................................3
What’s Being Implemented?...........................................................................................................3
Reintroduced Provisions..................................................................................................................4
Conclusion ....................................................................................................................................... 5
Author Contact Information............................................................................................................6

The intended purpose of regulatory relief for financial services providers is to lower the cost of
regulation on institutions offering financial services. However, regulatory relief provisions could
have a significant impact on the growing concentration in the U.S. banking industry. For example,
regulatory relief that reduces regulations limiting banks’ ability to merge could lead to more large
and fewer small banks. On the other hand, it is important to bear in mind that financial institution
regulations exist for many important purposes: to encourage the safety and soundness of
individual institutions, ensure systemic stability, deter concentration and encourage competition,
and provide consumer protection. Regulatory tools vary as well. In addition to the laws and
regulations specifying both the kinds of activities in which institutions may engage and their
structural arrangements, regulatory tools include licensing provisions; periodic examinations;
reporting and disclosure requirements; and supervision by regulators, particularly of problem
institutions. In providing regulatory relief, Members of Congress, regulators, and industry
analysts necessarily face the issue of whether existing laws and regulations restrain efficiency
and/or competitiveness in the financial services marketplace.
The Financial Services Regulatory Relief Act of 2006, P.L. 109-351 (120 Stat. 1966), was enacted
on October 13, 2006, after protracted debates in both houses of Congress on the underlying
bills—H.R. 3505 and S. 2856. While federal financial services regulators are implementing P.L.

109-351, regulatory relief provisions excluded from the law are now being reintroduced in the ^th

110 Congress. This report gives a brief summary of the provisions of P.L. 109-351 by title
followed by the provisions that federal regulatory agencies are implementing. The report then
briefly examines the financial services regulatory relief provisions that currently being ^th
reintroduced in the 110 Congress. It concludes with a discussion of financial services regulatory
relief legislative process and the banking industry’s increased concentration.

Requires the Securities and Exchange Commission to consult and seek concurrence with the
federal banking agencies in implementing the broker-dealers section of the Gramm-Leach-Bliley
Act.
Authorizes the Federal Reserve Board to pay interest on balances it holds for depository
institutions at Federal Reserve Banks. This title would also give the Federal Reserve Board
greater flexibility to set reserve requirements on transaction accounts maintained at its banks.

To date, not all the provisions of P.L. 109-351 have been implemented. It may take years and new
legislation to complete the implementation as demonstrated by the provisions of the Gramm-
Leach-Bliley Act of 1999, which is being implemented by P.L. 109-351 in 2007. At the same
time, provisions that were considered in the legislative process but were excluded from P.L. 109-^th
351 are now being reintroduced in the 110 Congress. One title would permit a national bank
greater flexibility in designing its articles of association, including how its directors are elected. A
national bank could also choose not to use cumulative voting, which is now mandated by current
law. This title also has provisions to simplify dividend calculations and repeal obsolete
regulations, including regulations that limit the authority of the Comptroller of the Currency.
These provisions, like the national bank provisions of H.R. 3505 (see above), provide national
banks greater organizational flexibility but stop short of permitting national banks to
fundamentally change their current organizational structure.
Would amend the definitions of bank and regulatory agencies to include savings associations and
the Office of Thrift Supervision (OTS), which would give associations the same treatment as
banks regarding broker-dealer registration requirements. This title also eliminates the cap on the
valuation of purchased mortgage servicing rights and raises the cap on loans to one borrower to
$500,000 for development of domestic residential housing units.
This title would give military and civilian authorities discretion to extend federal land leases to
credit unions at minimum charge. It also increases the maturity limitation on federal credit union
loans from 12 to 15 years. These provisions would also allow credit unions to expand electronic
transfer services to persons eligible for membership. This title would also clarify the definition of
net worth to conform with other depository institutions and the new accounting standards.
Would repeal three reporting requirements related to insider lending. This title would also extend
the same treatment to thrifts that banks already have in investing in bank service companies
(companies that provide services to banks), while maintaining activities limits and maximum
investment rules. It would allow member institutions of the Federal Reserve Board to count as
reserves the deposits in other banks that are passed through by those banks to the Federal Reserve
Banks as required reserve accounts. This title requires a review of all report requirements by
federal regulators, and it would expand eligibility for the 18-month examination cycle from
institutions with $250 million or less in assets to those with assets of $500 million or less. It
would streamline depository institutions’ merger application requirements. It would also allow
depository institution subsidiaries of a bank holding company to engage in cross-market
activities. This title also raises the asset size of institutions that are exempt from interlocking
management prohibitions from $20 million to $50 million.

These are regulatory housecleaning measures that clarify, extend, amend, remove, and correct
financial services laws and regulations. The 28 sections under this title are focused on improving
the regulatory process, thereby improving industry regulation. For example, Section 701 provides
greater consistency in the federal law governing how much time is available to challenge the
determination by the Office of the Comptroller of the Currency to appoint a receiver for a
national bank by providing a 30-day period for a party to judicially challenge an OCC
appointment. Section 711 underscores the authority of state regulators for institutions chartered
on the state level and clearly establishes that the chartering state is the primary state supervisor. It
also limits the host state supervisory authority in cooperative regulatory agreements. Section 728
directs regulatory agencies to finalize a proposal for a uniform, simplified privacy notice to
satisfy the requirements of the Gramm-Leach-Bliley Act.
Would extend the current exemption for debt collection by state and local agencies to private
collection entities working for state and local agencies.
Would make changes to 31 U.S.C. 9301 and 31 U.S.C. 9303 to allow the Secretary of the
Treasury to determine the type of securities that may be pledged in lieu of surety bonds, and
requires that the securities be valued at current market rates.
Would require a study by the Comptroller General on the volume of currency transaction reports
(CTRs) filed with the Treasury, including, if appropriate, recommendations for changes to the
filing system. It also requires a study by the Comptroller General on the cost of regulatory
compliance and the efficacy of consolidating federal financial services regulators.

The Federal Reserve Board and the Securities and Exchange Commission asked for comments on ¹
their joint proposal to clarify the rules governing banks’ securities activities. This is in response
to Title I of the Financial Services Regulatory Relief Act of 2006, which directed the SEC and the
federal bank regulatory agencies to jointly issue proposed rules within 180 days of the law’s
enactment. This proposal is the latest effort to meet the mandate of the Gramm-Leach-Bliley Act
(GLBA) of 1999 that repealed a broad registration exemption for bankers’ securities activities and
replaced it with specific exemptions. The SEC had issued several proposals that were criticized
by bankers and their regulators. The bank regulatory agencies and the SEC will take comments

¹^T^hⁱ^s^j^oⁱⁿ^t^ef^f^o^rtⁱ^s^su^p^p^o^r^t^e^d^b^y^man^y^an^al^y^s^t^s^.^S^{ee Ch}^ri^stⁱ^aⁿ^Bruce,^“F^ed^A^g^r^{ees t}^o^S^{eek Co}^mmen^t^On^P^r^o^p^o^s^ed
^Ban^k^Bro^k^{er Ru}^les,”^BN^{A B}^ankⁱⁿ^{g D}^a^ily^,^D^e^c^e^m^b^e^r^12,²⁰^06,²^p.^Se^e^http:^//p^ubs^.^bna^.c^om^/ip/^bna^/^bbd.^ns^f^/^c^h^/
^A⁰^B3V⁸^F²^N2,^aⁿ^d^ht^tp://w^ww^.^f^e^d^e^r^a^l^re^se^rve^.^g^o^v^/^boa^rd^doc^s/^pre^ss/bc^re^g^/²⁰⁰^6/²⁰⁰⁶¹²¹^8/^a^tta^c^h^m^e^nt.p^df^.

for 90 days, using the remaining 90 days to develop the proposed rules. The SEC has also
extended the exemption for banks until July 2, 2007.
The Federal Reserve Board has also invited public comments on its rules that would implement
Section 601 of the Financial Services Regulatory Relief Act of 2006, which eliminates several
statutory reporting and disclosure requirements related to insider lending by insured depository ²
institutions. The bank regulatory agencies supported eliminating these requirements because the
agencies have not found them useful in monitoring insider lending or preventing insider abuse.
When these rules become final, they would amend the Federal Reserve Board’s Regulation O,
which places restrictions on the ability of insured depository institutions to extend credit to their
executive officers, directors, and principal shareholders.
Section 728 of the Financial Services Regulatory Relief Act of 2006 mandated that federal
regulatory agencies develop a model format for conveying a financial institution’s privacy
policies. The model must be easily understood by consumers. It should clearly explain
consumers’ right to opt out of permitting the sharing of their nonpublic personal information with
nonaffiliated third parties. The law mandated that the regulatory agencies develop the model and
issue it for public comment no later than 180 days after the date of its enactment, which is
April11, 2007. The model, if approved in final rulemaking, would serve as a safe harbor for
institutions that use it to satisfy their account opening and annual privacy notification
requirements.
The privacy notices were required by the Gramm-Leach-Bliley Act of 1999, effective July 1,
2001. But as the new proposal mentioned, many of the notices that were offered to comply with
GLBA were long and complex, causing complaints of confusion from consumers. The sample
model provides simple introductory information telling consumers why the financial institutions
share customer information and what types of information are shared. It also details the uses of
the shared information and indicates whether the consumer can limit the sharing. Most important,
the model provides a simple opt-out form that can be returned to the financial institution.
The federal bank regulatory agencies have proposed interim rules to implement Section 605 of
P.L. 109-351. This provision of the law extends the range of small institutions eligible for an
extended 18-month on-site examination cycle to well-capitalized, well-managed banks and
savings associations with up to $500 million in total assets. This change reduces the cost of
preparing for on-site examinations for more small institutions. Before this regulatory change—
effective April 3, 2007—only banks with less than $250 million in total assets could qualify for
the extended 18-month cycle.

Analysts expect more provisions of H.R. 3505 and S. 2856 that were not included in P.L. 109-351 ^th
will be reintroduced in the 110 Congress as well as new provisions. Favorable provisions for
credit unions, thrifts, and small and large banks are likely to be reintroduced as separate bills, or
titles attached to non-financial-services legislation as was the case in other regulatory relief bills
in past Congresses.

²^Fo^{r t}^h^{e Fed}^e^{ral Reserv}^e ^Bo^ard^’^{s p}^r^{ess rel}^{ease an}^d^o^t^h^e^r^d^o^c^u^m^en^t^a^tⁱ^oⁿ^,^{see h}^t^t^p^:^/^/^www^.^f^ed^eral^reser^v^e.^go^v/
^boa^r^d^doc^s^/^pr^e^s^s^/^bc^r^e^g^/²⁰⁰⁶^/²⁰⁰⁶¹²⁰⁶²^/^d^e^f^a^u^lt.htm.

The Seasoned Customer CTR Exemption Act of 2007 (H.R. 323), a key measure in H.R. 3505 in ^th^th
the 109 Congress, was the first provision to be reintroduced in the 110 Congress. CTRs are
currency transaction reports. This provision would exempt institutions’ seasoned customers from
the requirements under federal anti-money-laundering laws that require currency transactions of
more than $10,000 to be reported to the Internal Revenue Service. H.R. 3505 would have
exempted suspicious activity reports (SARs) as well as CTRs for seasoned customers. It was
argued that SARs exemptions could seriously undermine the U.S. antiterrorism financing efforts.
Title I in H.R. 3505, which was excluded from P.L. 109-351 by the Senate, would allow national
banks to elect to be organized as S corporations. S corporations are Limited Liability ^th
Corporations (LLCs) that avoid double federal taxation of profits. In the 110 Congress, the
Senate approved a package that includes $757 million in tax benefits for banks, including $351
million aimed directly at S corporation banks. This provision was part of H.R. 1591, the bill to
provide war supplemental funding that the President has threatened to veto. Nearly a third of all
American banks are S corporations. They are usually smaller banks; however, one of these banks ³
has assets of $14 billion and 42 have assets of more than $1 billion.
The Credit Union Regulatory Improvement Act of 2007 (CURIA) was introduced in the 110^th ⁴
Congress on March 15, 2007 (H.R. 1537). The new bill has 21 provisions, which is three more ⁵
than there were in the Credit Union Regulatory Improvement Act (CURIA) of 2005. In the
enactment of P.L. 109-531, only five of the 15 provisions in H.R. 3505 were included in the law.
This suggests that while the number of credit union regulatory relief provisions are growing,
Congress has been very selective in the ones it enacts. The new bill’s additional provisions tend to
be more multifaceted. For example, in Title I Capital Modernization, it proposed lowering the
capital requirements, amended the risk-based net worth requirements, and amended the net worth
restoration plans. In CURIA 2007, Section 201 would simply raise the cap on credit union
member business loans to 20% from the present 12.5%.

To date, not all the provisions of P.L. 109-351 have been implemented. It may take years and new
legislation to complete the implementation as demonstrated by the provisions of the Gramm-
Leach-Bliley Act of 1999, which is being implemented by P.L. 109-351 in 2007. At the same
time, provisions that were considered but excluded from P.L. 109-351 are now being reintroduced ^th
as separate bills in the 110 Congress. At some point later in the legislative session, these
individual relief bills may be bundled in a single regulatory relief bill. Regulatory relief
legislation often changes the playing field for depository institutions because many regulations
restrict or expand the activities of institutions. Consequently, regulatory relief legislation often
has significant impact on particular institutions in the financial services markets.

³^Cre^d^{it Un}^io^{n Na}^tio^na^{l A}^ssocⁱ^a^{tion, “}^S^eⁿ^a^t^e^P^a^sse^{s bill w}^{ith ta}^x^br^e^a^k^s^f^o^{r ba}^nk^s,”^{CUNA News No}^w,^”M^arch³¹^,
²⁰⁰^{7, p. 2.}
⁴^M^a^rci^a^Kass,^“Kan^j^o^rski^S^{eeks t}^o^Rai^s^{e Cap}^on^Credⁱ^t^Unⁱ^o^{n L}^eⁿ^dⁱⁿ^g^,^”^{BNA Ba}^nk^ing^Re^p^o^rt,^Ma^r^c^{h 5,}²⁰⁰⁷^{, p}^.¹^,
^http:^//ip^pu^bs.^bna^.c^om^/NW^SST^N^D^/I^P^/^BNA^/^ba^r.nsf^/^Se^a^r^c^h^A^llV^ie^w^/
^D^B^9B^49D⁸³^0C^A³⁹⁵⁰⁸⁵²⁵⁷²⁹³⁰⁰¹¹²⁶³^5?^O^p^eⁿ^&^h^ig^hlig^ht=^C^R^E^D^I^T^,^U^N^I^O^N^S^.
⁵^Se^e^C^R^S^R^e^por^{t R}^S²²²¹^2,^C^r^e^dⁱ^t^Uⁿ^io^{n Re}^gul^ator^y^I^m^pr^ov^e^m^eⁿ^ts^Ac^{t of}²⁰⁰⁵⁽^C^U^R^I^A⁾^{, by}^P^a^uliⁿ^e^Sm^a^l^e^.

Whether relieving the regulatory burden would have an impact on reversing the growing
concentration in the financial services industry is uncertain because knowledgeable observers
agree that the banking industry concentration is partly attributable to economies of scale. Larger
institutions experience declining average cost as they grow. These same institutions experience
economies of scale in complying with the federal banking regulations. This implies that
additional regulation relief legislation makes it increasingly difficult for smaller institutions to
comply and compete in the marketplace.
^Wa^l^t^e^{r W. Eu}^baⁿ^k^s
^Sp^{ecialist i}ⁿ^Fiⁿ^aⁿ^c^{ial Eco}ⁿ^o^m^ics
^w^e^u^b^ank^s^@^c^rs^.l^oc.g^o^v^{, 7-}⁷⁸⁴⁰