[Senate Hearing 108-892]
[From the U.S. Government Publishing Office]
S. Hrg. 108-892
EXAMINATION OF THE GRAMM-LEACH-BLILEY ACT
FIVE YEARS AFTER ITS PASSAGE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
ON
THE GRAMM-LEACH-BLILEY ACT (P.L. 106-102), TO ENHANCE COMPETITION IN
THE FINANCIAL SERVICES INDUSTRY BY PROVIDING A PRUDENTIAL FRAMEWORK FOR
THE AFFILIATION OF BANKS, SECURITIES FIRMS, AND OTHER FINANCIAL SERVICE
PROVIDERS
__________
JULY 13, 2004
__________
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Affairs
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senate05sh.html
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Mark F. Oesterle, Counsel
Martin J. Gruenberg, Democratic Senior Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
TUESDAY, JULY 13, 2004
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 19
Senator Crapo................................................ 22
Senator Bennett.............................................. 25
Senator Carper............................................... 27
Senator Sununu............................................... 30
WITNESSES
Harry P. Doherty, First Vice Chairman, Board of Directors,
America's
Community Bankers and Vice Chairman of the Board, Independence
Community Bank Corporation, Brooklyn, New York on behalf of
America's
Community Bankers.............................................. 2
Prepared statement........................................... 40
Response to a written question of Senator Allard............. 88
Terry Jorde, Vice Chairman, Independent Community Bankers of
America and President and CEO, CountryBank, USA, Cando, North
Dakota......................................................... 3
Prepared statement........................................... 44
Response to a written question of Senator Allard............. 89
Travis Plunkett, Legislative Director, Consumer Federation of
America on behalf of the Consumer Federation of America,
Consumers Union, and the U.S. Public Interest Research Group... 6
Prepared statement........................................... 50
Ronnie Tubertini, Chairman, Government Affairs Committee, the
Independent Insurance Agents and Brokers of America, Inc....... 8
Prepared statement........................................... 61
Steve Bartlett, President and Chief Executive Officer, the
Financial Services Roundtable.................................. 10
Prepared statement........................................... 67
James D. McLaughlin, Director, Regulatory and Trust Affairs,
American Bankers Association................................... 11
Prepared statement........................................... 71
Response to written questions of Senator Allard.............. 89
John Taylor, President and CEO, National Community Reinvestment
Coalition...................................................... 13
Prepared statement........................................... 80
J. Steven Judge, Senior Vice President, Government Affairs,
Securities Industry Association................................ 15
Prepared statement........................................... 85
Additional Material Supplied for the Record
Statement of Dennis W. Archer, President, American Bar
Association, dated July 13, 2004............................... 91
Statement of David F. Woods, CLU, ChFC, President, the National
Association of Insurance and Financial Advisors, dated July 13,
2004........................................................... 93
(iii)
EXAMINATION OF THE GRAMM-LEACH-BLILEY ACT FIVE YEARS AFTER ITS PASSAGE
----------
TUESDAY, JULY 13, 2004
U.S. Senate,
Committee on Banking, Housing and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order. I would
like to thank our witnesses for appearing today. This morning,
the Committee will engage in what is sometimes an overlooked
but nevertheless an extremely important activity: Legislative
oversight. I think we have a considerable responsibility to
monitor the laws we pass and to periodically track developments
in the markets governed by such laws and ultimately ask some
basic questions, such as has the law been implemented as
Congress intended? Has it achieved the ends we sought? Does it
still work in the marketplace as it exists presently compared
to when it was enacted?
Today, we will be considering the Gramm-Leach-Bliley Act,
one of the most significant laws to come out of this Committee
in many years. The Act made profound changes to the laws
governing the affiliation of banking, securities, and insurance
firms in an attempt to promote the modernization of the
financial services sector.
Almost 5 years after passage, I think GLB merits this
Committee's time and attention. We will begin our overview with
witnesses who represent consumer groups and the industry
sectors covered under the law. Hopefully, they will provide us
with a real-world perspective about its operation and its
effects.
Later this year, we are planning to bring the regulators
before the Banking Committee to complete our discussion about
the law. We also plan to hold further hearings concerning the
state of the insurance industry in the post-Gramm-Leach-Bliley
environment.
Again, I want to thank all the witnesses for appearing
today, and I look forward to hearing their testimony.
And we have with us a distinguished group: Harry Doherty,
Vice Chairman of the Board, Independence Community Bank
Corporation, Brooklyn, New York. He will be testifying on
behalf of America's Community Bankers; Terry Jorde, President
and CEO, CountryBank USA, Cando, North Dakota, testifying on
behalf of the Independent Community Bankers of America; Travis
B. Plunkett, Legislative Director, Consumer Federation of
America; Ronnie Tubertini, President and CEO of SouthGroup
Insurance and Financial Services, Jackson, Mississippi,
testifying on behalf of the Independent Insurance Agents and
Brokers of America; Steve Bartlett, a former Congressman,
colleague of mine at one time, President and Chief Executive
Officer, Financial Services Roundtable; James McLaughlin,
Director, Regulatory and Trust Affairs, American Bankers
Association; John Taylor, President and Chief Executive
Officer, National Community Reinvestment Coalition; and Steve
Judge, Senior Vice President, Government Affairs, Securities
Industry Association.
This is a full panel. We will start with you, Mr. Doherty,
and all of your written testimony will be made part of the
hearing record in its entirety. If you could, briefly sum up
your toughest remarks.
STATEMENT OF HARRY P. DOHERTY
FIRST VICE CHAIRMAN, BOARD OF DIRECTORS
AMERICA'S COMMUNITY BANKERS AND
VICE CHAIRMAN OF THE BOARD, INDEPENDENCE
COMMUNITY BANK CORPORATION, BROOKLYN, NEW YORK
ON BEHALF OF AMERICA'S COMMUNITY BANKERS
Mr. Doherty. Thank you very much, Chairman Shelby and
Members of the Committee.
I am Harry P. Doherty, Vice Chairman of Independence
Community Bank Corporation of Brooklyn, New York. Independence
Community Bank is a New York State-chartered savings bank,
operating within an OTS-regulated holding company. Our bank has
more than $17 billion in assets, 121 branches, and 2,500
employees. I am here this morning representing America's
Community Bankers. I am First Vice Chair of ACB, and we are
pleased to have this opportunity to participate in the
Committee's review of the Gramm-Leach-Bliley Act.
In 1999, as they do today, ACB's diverse members wanted
financial organizations to have choices in their charters and
business models. At the time, decades-old legislation stood as
a barrier to the full integration of the banking, securities,
and insurance industry, even though securities, insurance, and
nonfinancial holding companies had been permitted to hold
thrifts.
ACB supported passage of the Gramm-Leach-Bliley Act. We did
so because it created new options for financial companies that
wanted to offer diversified financial services through a bank
charter. One of the innovations of the Act was the creation of
a notice and comment process for identifying new permissible
financial activities for national banks and new financial
holding companies.
The process relies on the expertise of Treasury and the
Federal Reserve. Congress wanted the primary consideration in
that process to be the safety and soundness of the banking
system. But then came the real estate brokerage rule. This was
the first real test of the new system. Because of
considerations other than safety and soundness, the
nonpolitical process established by the Act has not been
allowed to run its course.
Despite the restrictions on new commercial affiliations
imposed by the Act, the unitary savings and loan holding
company remained an important choice for financial firms. The
expertise of the OTS in regulating diverse holding companies is
one of the reasons financial companies frequently choose the
unitary savings and loan holding company structure.
The Act made positive changes in the membership
requirements, capital structure, and regulation of the Federal
Home Loan Bank System. For example, Federal savings banks and
savings associations became voluntary members instead of
mandatory members. Voluntary membership enhances the
cooperative nature of the system, and it provides incentives to
the Federal Home Loan Banks to work for the benefit of their
member-borrowers.
The Act added stability to the system's capital base. It
established a leverage and risk-based capital requirement for
the Bank System. It created a stable base of new capital for
the system. Nine of the twelve Federal Home Loan Banks have
implemented a new capital plan as required by the Act. The
remaining three are on track to implement their plans, but
proposals to require the Federal Home Loan Banks to register
stock with the Securities and Exchange Commission without first
establishing exemptions consistent with the cooperative
structure of the system could delay implementation of the
remaining capital plans.
The Act gave the Securities and Exchange Commission the
opportunity to ensure that savings associations are regulated
the same way as banks, when engaged in the same activities.
Unfortunately, the most recent version of the SEC's proposed
Push-Out rule does not treat savings associations the same as
banks when they are engaged in the same broker activities. ACB
believes that a legislative change is needed to ensure parity
for savings associations under the Securities Exchange Act.
The Act created important new privacy rights for consumers.
However, some of these provisions created a significant
regulatory burden for all deposit institutions. Not all of the
new requirements provided a benefit to consumers, and they did
not increase safety and soundness. Although compliance with
these provisions can be costly for all depository institutions,
compliance costs fall more heavily on community banks.
Congress should act to reduce the unnecessary regulatory
burden that results from these provisions. For example,
Congress should eliminate the required annual privacy notices
for banks that do not share information with nonaffiliated
third parties.
Finally, the Act eliminated the Savings Association
Insurance Fund Special Reserve. This gave the FDIC more
flexibility. ACB urges the Committee to act soon on the pending
deposit insurance reform legislation that will give FDIC
additional flexibility to manage FDIC's insurance funds.
Thank you very much for the opportunity to testify, and I
will be happy to answer questions later.
Chairman Shelby. Ms. Jorde.
STATEMENT OF TERRY JORDE, VICE CHAIRMAN,
INDEPENDENT COMMUNITY BANKERS OF AMERICA AND
PRESIDENT AND CEO
COUNTRYBANK USA, CANDO, NORTH DAKOTA
Ms. Jorde. Thank you, Mr. Chairman, Ranking Member
Sarbanes, and Members of the Committee, my name is Terry Jorde.
I am Vice Chairman of the Independent Community Bankers of
America and President and CEO of CountryBank USA, a community
bank with $37 million in assets located in Cando, North Dakota.
Cando is a small town of only 1,300 people, but we have three
banks and a motto that you can do better in Cando.
[Laughter.]
Our bank is full service and progressive, offering our
customers a full range of insurance and investment services,
residential mortgages, check imaging, and fully transactional
Internet banking.
ICBA appreciates this opportunity to testify on the effect
of the Gramm-Leach-Bliley Act and what it has had on the
financial industry, the Nation, and, most importantly, our
communities. The Act has had both positive and negative
effects. The Federal Home Loan Bank reforms made it possible
for community banks of all charter types to greatly increase
their involvement in the system. Since the passage of GLB, the
number of ICBA banks belonging to a Federal Home Loan Bank has
increased from 17 to 76 percent.
For community banks, the Federal Home Loan Bank System is
more important than ever. My bank is taking advances for the
first time in years because our deposits are down and loan
demand has increased. I am fortunate in that my Federal Home
Loan Bank of Des Moines has been a champion in accepting small
business and agricultural assets as collateral for advances,
which was permitted by GLB. However, some other Federal Home
Loan Banks have been slow to use the authority, either by
limiting the types of loans or severely haircutting values.
ICBA is pleased that this Committee addressed this by
adopting Senator Enzi's amendment to the GSE reform bill. It
clarifies that the mission of the Federal Home Loan Banks
includes providing liquidity and funds for these purposes. We
hope this will stimulate increased use of this authority.
GLB reaffirmed the Nation's longstanding policy maintaining
the separation between banking and commerce by closing the
unitary thrift loophole. This helps avoid the conflicts of
interest and threats to safety and soundness that will arise if
commercial firms, such as retailers and manufacturers, are
permitted to own their own banks. Policymakers now must face
the same issue with industrial loan companies that may be owned
by commercial firms.
The House's regulatory relief bill took steps to address
the ILC loophole by adopting the Gilmore-Frank Amendment.
However, ICBA strongly urges Congress to take the next step and
bring ILC's under the Bank Holding Company Act, closing the ILC
loophole completely.
ICBA repeatedly warned that GLB would likely lead to
increased financial concentration. GLB and the Riegle-Neal Act
have together led to the creation of truly huge financial
conglomerates. We now have three $1 trillion banks in the
United States. This is certain to decrease competition and
increase systemic risk.
As financial conglomerates are allowed to grow
exponentially, the corresponding regulatory burden falls
disproportionately on the community bank. ICBA strongly urges
you to reduce the burden on noncomplex community banks so that
economic development and small businesses will not suffer, and
competition will be maintained.
We also urge you to complete action on deposit insurance
reform legislation. Since community banks are not too big to
fail, our depositors look to deposit insurance to protect their
funds.
ICBA is troubled by another aspect of increased
concentration: The largest institutions appear to be too big to
regulate and too big to punish. In case after case, regulators
and courts impose only nominal fines for megabanks' misdeeds,
while regulators go on to approve their massive mergers.
Community banks undergo much harsher treatment for regulatory
violations. State and Federal regulators properly hold
management strictly accountable for everything that happens in
the bank.
Congress should direct the agencies to review their
policies, comparing the fines and other punishments that they
apply to the largest institutions they regulate with those they
mete out to the rank and file. This is certainly not the time
for Congress to take new steps, such as lifting the deposit
caps in the Riegle-Neal Act that would further increase
concentration, and ICBA will vigorously oppose any such
proposals.
GLB did not provide community banks with substantial new
opportunities. Preexisting laws already allowed my own bank and
many other community banks to offer insurance and investment
brokerage. However, real estate brokerage is a retail service
community banks believed they would have the opportunity to
offer to their customers. We were disappointed that Congress
has blocked the proposed real estate brokerage regulation. This
new power would allow community banks to better serve customers
by increasing choice, decreasing costs, and diversifying
revenue sources.
GLB also required burdensome and oftentimes irrelevant
retail insurance disclosures. I have seen the dumbfounded look
on my customers' faces when they have been told that their auto
policy or their crop insurance is not a deposit and may go down
in value, followed by their look of concern when we inform them
that their insurance is not guaranteed. This waste and
confusion puts us at a competitive disadvantage to other
insurance agencies in my community that are not housed within a
bank office. ICBA urges Congress to streamline these
disclosures.
The annual GLB privacy notice is another example of the
disclosure blizzard that does little more than confuse and
burden consumers with pages of incomprehensible legalese. Most
community banks do not share their customers' financial
information with outside marketers and the like. Congress
should amend GLB to allow them to provide a short statement to
that effect printed on the customer's bank statement. In
addition, community banks and many other financial institutions
maintain consistent privacy policies. They should be required
to deliver the annual notice only if they change their policy.
Customers would be more likely to pay attention to those
notices.
I would again like to compliment the Committee on holding
this hearing on the Gramm-Leach-Bliley Act. Again, we urge
Congress to complete action on the Enzi Federal Home Loan Bank
Amendment, close the ILC loophole, address concerns raised by
increase concentration, and streamline insurance and privacy
disclosures.
Thank you again for this opportunity to testify.
Chairman Shelby. Mr. Plunkett.
STATEMENT OF TRAVIS PLUNKETT
LEGISLATIVE DIRECTOR
CONSUMER FEDERATION OF AMERICA
ON BEHALF OF THE CONSUMER FEDERATION OF
AMERICA, CONSUMERS UNION, AND
U.S. PUBLIC INTEREST RESEARCH GROUP
Mr. Plunkett. Good morning, Mr. Chairman, Senator Sarbanes
and Members of the Committee, my name is Travis Plunkett. I am
the Legislative Director of the Consumer Federation of America.
We appreciate the opportunity to offer our comments and those
of Consumers Union and the U.S. Public Interest Research Group
on the effect of the Gramm-Leach-Bliley Act on consumers.
In the decade-long debate that led to enactment of the GLBA
in 1999, Congress heard many extravagant promises from
financial services industry representatives about how tearing
down the barriers between banking, securities, and insurance
sectors would be a boon to consumers. Banks, securities firms,
and insurance companies would merge into financial services
supermarkets, we were told, that would then offer increased
consumer access to new, innovative products at lower costs,
with improved privacy protections.
Five years later, this rhetoric has proven to be mostly
hype. Mergers have occurred but mostly within the banking
industry, not across sectors. While some, primarily affluent
consumers may benefit from larger, multistate ATM networks,
from discounts offered for multiple account relationships, et
cetera, we have seen no evidence that the mass of banking
consumers have benefitted from the Gramm-Leach-Bliley Act.
I would like to talk specifically about some of the key
issues that arose during the debate and how we think consumers
are faring on those issues 5 years later, and please note that
my lengthy testimony includes a number of specific solutions on
some of the concerns I am going to raise.
Regarding financial privacy, the privacy requirements, as
we have said many times, in the Gramm-Leach-Bliley Act are
narrow and weak. Consumers have no control over the sharing of
their confidential experience and transaction information if
two separate parties enter joint marketing agreements to sell
financial products, nor do consumers have any right to stop the
sharing of any information among affiliates of financial
institutions. Some financial institutions have hundreds of
affiliates; others have thousands.
Consumers can opt out of the sharing of information with
third parties selling nonfinancial products, but because the
burden is on the consumer to take this step, and because the
privacy notices that many financial institutions have used to
inform consumers of their limited rights are virtually
incomprehensible, very few consumers have actually opted out.
Let me turn now to safety and soundness issues. The
corporate scandals of the last few years have exposed
potentially significant safety and soundness risks in allowing
banks to sell both credit and investment banking services. As
you all are well aware, among the restrictions in the Glass-
Steagall Act that the Gramm-Leach-Bliley Act eliminated were
those that prohibited commercial banks from combining with
investment banks to sell both credit and investment banking
services.
At the time, consumer groups expressed many concerns that
the banking/securities combination in particular could allow
financial investors access to insured deposits for high-risk
lending schemes. In my written testimony, I provide, at length,
a case study that shows that just such a scandal has since
occured. This is the Citigroup-WorldCom situation. It is a
cautionary case study of the kinds of problems that can result
when banks inappropriately link decisions about lending and
investment banking.
Initially, Salomon Smith Barney had a strong incentive to
promote WorldCom stock and to continue to do so after
WorldCom's prospects had begun to deteriorate in order to keep
WorldCom as an investment banking client. After Travelers, Citi
and Salomon combined, the conflicts got bigger and more
complex. In one case, the bank apparently came up with a plan
to let WorldCom's CEO Bernie Ebbers turn his WorldCom stock
into cash without the scrutiny that would accompany such a sale
normally. In another case, Citi agreed to a very risky loan to
Ebbers, in this case, $43 million to buy a ranch, with the loan
banked by 2.3 million shares of WorldCom stock.
There are a number of significant lessons that we have
learned from this debacle. We explore them at length in the
testimony. A major lesson is that abuses are inevitable if
businesses are allowed to create structures that are so big and
complex that they require a major investment in regulatory
oversight to prevent these abuses. However, once Congress
allows these structures to be created, it had better be willing
to provide the resources for regulatory oversight and to push
regulatory agencies to be aggressive in enforcing the law.
Let me turn now to some consumer services issues. Gramm-
Leach-Bliley has not slowed the continuing trend of rising bank
fees, nor has it helped decrease the numbers of unbanked
consumers. Indeed, rather than offering innovative, moderately
priced products to middle-income consumers or to unbanked
consumers to bring them into the financial mainstream, some
banks have developed policies and services that deliver second
class or downright predatory products at an extremely high
cost.
Let me point, for example, to KeyBank's checkless checking
system: 1.9 percent charge per deposit for a paycheck deposited
into an account accessed by ATM cards. Let me point your
attention to stored value cards, payroll cards, and others,
where charges are extremely high. Let me also point your
attention to predatory products like bounce loans that are
targeted at moderate income
consumers with checking accounts. This is a new form of
overdraft protection at some big banks, and there are a number
of big banks, using it primarily to boost their fee revenue. We
are talking here about interest rates starting at a low of 240
percent and ranging as high as 540 percent.
We urge the Committee to look into steps to better regulate
all of these products, and in closing, let me also say on the
safety and soundness front we completely agree that the
industrial loan corporation loophole in the Bank Holding
Company Act needs to be shut tight.
Thank you.
Chairman Shelby. Mr. Tubertini.
STATEMENT OF RONNIE TUBERTINI
CHAIRMAN, GOVERNMENT AFFAIRS COMMITTEE,
INDEPENDENT INSURANCE AGENTS
AND BROKERS OF AMERICA, INC.
Mr. Tubertini. Good morning, Chairman Shelby, Ranking
Member Sarbanes, and Members of the Committee.
My name is Ronnie Tubertini, and I am pleased to have the
opportunity to give you the views of the Independent Insurance
Agents and Brokers of America on the Gramm-Leach-Bliley Act and
its effects on the insurance marketplace. I am President and
CEO of SouthGroup Insurance and Financial Services, which is
Mississippi's largest privately owned insurance agency, and I
am also currently Chairman of the IIABA Government Affairs
Committee.
I would like to discuss three points and what lessons might
be learned for possible next steps for Congress. First, the
expected megamergers of various financial services providers
into financial supermarkets, which has not taken place; second,
the success of the GLBA NARAB provisions in promoting agents'
licensing reform in the States; and third, the continued
importance of functional regulation and the State insurance
regulatory structure.
One stop shopping for financial services has not come to
pass. Some mergers certainly have occurred, but most have not
been among the leading players in different fields. The
convergence of products and services that began in the 1980's
continues to occur but through smaller and more targeted merger
activity.
Instead of purchasing insurance companies, as was
predicted, banks have bought individual securities firms and
insurance agencies, although this trend has not been
overwhelming. Announced bank-agency deals involve a relatively
small number of independent agents, and the independent agency
system continues to be a principal form of property and
casualty insurance distribution, as well as life and health
distribution.
One of the most significant accomplishments of GLBA was the
NARAB subtitle, known as the National Association of Registered
Agents and Brokers, which launched agents' licensing reform
that continues today. Prior to GLBA, there was no consistency
or reciprocity among the States, but licensing has improved
significantly over the last 5 years as a direct result of
Congress' decision to address those issues in GLBA.
The GLBA put the ball in the States' court by threatening
the creation of a new national NASD-style licensing entity. The
creation of NARAB was only averted when a majority of the
States achieved a level of reciprocity within the 3-year
period. Since GLBA, over 40 jurisdictions have been certified
by the NAIC as meeting the NARAB mandate.
The success of NARAB is a perfect example of what the
Federal Government and States can accomplish in partnership and
how Congress can assist the States to achieve the needed
reforms. The NAIC and States made little progress toward
reciprocal and uniform licensing until Congress set a deadline
with specific goals. In fact, Congress set the bar at only a
majority of the States. All but a handful of the States have
met the NARAB reciprocity standard.
While there is still more to do to get to full reciprocity
and ultimately to uniformity, this success would not have
occurred without what are now being called Federal tools.
Perhaps GLBA's most important accomplishment in protecting
insurance consumers was its focus on functional regulation.
GLBA specifically reaffirmed the traditional authority of the
States to regulate the business of insurance. Most observers
agree that State regulation has worked effectively to protect
consumers, because State officials are positioned to be
responsive to the needs in the local marketplace for consumers.
Insurance is a product about which consumers have many
questions, and if a problem arises, they want to be able to
resolve it with a local phone call. During 2001, for example,
State regulators handled over 3.5 million consumer inquiries
and complaints, and today, State insurance departments employ
approximately 13,000 individuals who draw on over a century and
a half of regulatory experience to protect consumers.
The diversity of underlying State insurance laws and
varying consumer needs from one region to another require local
officials on the beat. Despite its merits, State insurance
regulation is not without its share of problems. It takes too
long to get new insurance products to market, and there is
unnecessary duplicative regulatory oversight in licensing. The
speed to market issue is the most pressing from both a consumer
and an agent and broker perspective, because we all want new
and innovative products.
Banks and securities firms are able to develop new
products, while insurers are hampered by lengthy and
complicated filing and approval products in 50 States. As a
result, insurance companies and agents selling their products
are at a disadvantage.
IIABA supports State regulation of insurance from all
participants and for all activities in the marketplace, and we
are opposed to any form of Federal regulation, optional or
otherwise. But there are some problems in the State system
which the States will not be able to resolve on their own.
Therefore, IIABA believes that there is a vital role for
Congress but that it need not replace or duplicate what is
successful at the State level.
IIABA believes that the best alternative is a pragmatic,
middle ground approach that utilizes Federal legislative tools
to improve the State-based system. Targeted Federal legislation
is not a radical concept. There is the successful NARAB
precedent. The Senate Banking Committee and the House Financial
Services Committee have proven that that approach can work, and
IIABA believes that the NARAB model can serve as a template for
further reform of State insurance regulation.
We understand the Senate Banking Committee still has much
to consider on this subject and look forward to working with
you in any review of State insurance regulation and potential
reforms the Committee may conduct.
Chairman Shelby. Thank you.
Mr. Bartlett.
STATEMENT OF STEVE BARTLETT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE FINANCIAL SERVICES ROUNDTABLE
Mr. Bartlett. Thank you, Mr. Chairman and Members of the
Committee, my name is Steve Bartlett. I represent the Financial
Services Roundtable, which consists of 100 of the largest
financial services companies in the United States. One of the
key goals of Gramm-Leach-Bliley was to achieve a competitive
marketplace; that is, a financial regulation that should be for
the safety and soundness and for consumer protection, not for
product allocation.
More can be done to achieve this goal. I have prepared six
recommendations on behalf of my members to further achieve
competitiveness in the financial marketplace. Specifically,
those are to establish uniform national privacy standards; to
provide for optional Federal insurance chartering; to establish
a national antipredatory lending law; to remove the sunset on
nonfinancial activities; to remove the activity limitations on
national and State banks; and to allow the Treasury and Federal
Reserve to independently determine what activities are
financial in nature.
First, amend Gramm-Leach-Bliley to achieve uniform national
privacy statements. Title V, Mr. Chairman, of GLB imposed a
number of privacy requirements on financial institutions,
including the distribution of an annual privacy notice to
consumers. It also expressly acknowledged the right of States
to adopt their own individual separate privacy laws. Those
provisions have created, I believe, some unintended confusion
and conflict.
The annual privacy notice, as you have already heard,
required by GLB is astoundingly complex. Federal regulators
have requested to comment on alternative notices, but they lack
the authority to make the notice truly consumer-friendly. A
Federal court recently cited Title V of Gramm-Leach-Bliley in
upholding California's privacy law, which, if that is allowed
to stand, could end up repealing Gramm-Leach-Bliley with 50
different State laws.
Congress should eliminate this confusion and conflict by
repealing the State law provisions and establishing national,
uniform privacy standards for financial firms. Congress should
also, Mr. Chairman, direct the Federal regulators to issue a
simplified national privacy notice with a safe harbor.
Number two, amend Gramm-Leach-Bliley to provide for
optional Federal insurance charters. Title III of Gramm-Leach-
Bliley, I believe, mistakenly reaffirmed that the business of
insurance is regulated primarily by the States. During the past
5 years, all parties to insurance regulation, including State
insurance commissioners, have concluded that the current system
of insurance regulation is fundamentally flawed.
The Roundtable believes that the best way to reform the
regulation of insurance is to create a parallel system of
chartering and supervision for insurance companies at the
Federal level with a Federal option.
Number three, amend Gramm-Leach-Bliley to establish a
national antipredatory lending law. In the 5 years since the
enactment of Gramm-Leach-Bliley, the regulation of mortgage
lending has become a hot topic. A variety of State and local
governments have enacted laws designed to stop predatory
lending practices.
The Roundtable urges this Committee to use this review of
GLB as an opportunity to enact a national antipredatory lending
law that establishes basic protections for mortgage borrowers.
This Federal law should apply uniformly to all lenders
regardless of charter and supersede State antipredatory lending
laws.
Number four, amend Gramm-Leach-Bliley to remove the sunset
on nonfinancial activities. In a marketplace that is subject to
rapid changes in technology and even more rapid changes in
consumer demand, some companies need the flexibility to provide
products and services outside the statutory list of activities
that are financial in nature.
Title I of Gramm-Leach-Bliley grandfathered the
nonfinancial activities of companies that were not bank holding
companies prior to GLB. This grandfather provision,
unfortunately, is scheduled to sunset in 5 years, and thus, it
is a limitation built into the law. We recommend that Congress
make the grandfather permanent and remove the sunset.
Number five, amend Gramm-Leach-Bliley to remove the
activity limitation of national and State banks. Section 121
authorized national banks to own financial subsidiaries and
empowered those subsidiaries to engage in a range of financial
activities. At the same time, GLB proposed a number of
activities and other operating constraints of the financial
subsidiaries of national banks and State banks that do not
apply to financial holding companies.
The Roundtable recommends that the activities and operating
limitations imposed on national banks and State banks be
removed.
Number six, amend Gramm-Leach-Bliley to allow Treasury and
the Federal Reserve to independently determine what activities
are financial in nature. GLB established an overly complex
notice and disapproval procedure for the authorization of new
financial activities. The Roundtable recommends that the
Treasury and the Federal Reserve should have independent
authority to determine what is a permissible activity. The OCC
and Federal Reserve would still have the authority to regulate
for safety and soundness of financial affiliates.
Thank you, Mr. Chairman.
STATEMENT OF JAMES D. MCLAUGHLIN
DIRECTOR, REGULATORY AND TRUST AFFAIRS
AMERICAN BANKERS ASSOCIATION
Mr. McLaughlin. Mr. Chairman and Members of the Committee,
I am Jim McLaughlin, speaking on behalf of the American Bankers
Association.
Congress took a forward-thinking approach to financial
services regulation by enacting the GLB Act. Dynamic market
forces were already dramatically changing the financial
services market. By responding to this new reality and after
many years of debate, Congress modernized our financial system,
making it more sensible and straightforward, removing
inefficiencies in structure and regulation.
The Act lets market forces dictate what combinations of
financial services would be appropriate. The Act has worked
well. It has benefitted customers, diversified incomes of
financial firms, and at the same time posed no new risks to the
deposit insurance funds. While not all financial firms have
rushed to become a financial holding company, they could if
they so choose in the future.
This is a critical point: The success of the Act should not
be judged by the number of financial holding companies or
whether the combination of activities they now offer were a
direct result of the Act. Rather it is the very option to
undertake combinations of activities to meet the needs of the
customers that is the measure of success. But more can be done,
however, to fully realize the benefits of the GLB Act. Let me
touch on a few.
First, Congress designed a flexible regulatory process to
allow financial institutions to enter new lines of business. It
appropriately delegated responsibilities to the two agencies
most familiar with the financial services industry: The
Treasury and Federal Reserve. Unfortunately, this important
provision has been derailed, at least for now, in one of first
proposed rulings under this Act having to do with real estate
brokerage services.
As a result, Congress is once again refereeing another
competitive issue, the very thing it sought to avoid. We urge
Congress to let the Treasury and the Federal Reserve undertake
their legal responsibilities to assure that the financial
services market remains fair and competitive.
Second, the banking industry has serious concerns over the
new SEC proposal known as the Broker Push-Out rule. We
appreciate the SEC's responsiveness to many of our concerns. We
hope that the remaining issues can be addressed during the
current rulemaking process so our banks can continue to offer
longstanding bank products and services such as IRA accounts
and retirement plan services. During this process, we hope that
the Congress will continue to exercise its oversight
responsibilities.
Third, a sensible crossmarketing approach for merchant
banking is needed to provide equal footing for all financial
companies. Many ABA members regard the merchant banking
authority as the single most important new power granted by the
GLB Act. As a result, the ability to crossmarket through
Internet websites and statement stuffers is very important to
let our customers know about new products that can meet their
needs.
And last, the most significant work left undone by the GLB
Act is to modernize the State system of insurance regulation.
The GLB Act did strongly encourage States to adopt licensing
standards to which all insurance agents must adhere.
Unfortunately, as we have already heard, uniformity across
States is far from a reality, and duplicative and inefficient
State insurance regulation reduces product availability and
raises costs.
One solution that ABA endorses is to create an optional
Federal charter for insurance companies and agencies. Like the
dual banking system, this would provide an alternative to
State-by-State regulation and create uniformity and efficiency.
In conclusion, the GLB Act went a long way toward removing
obstacles to efficient provision of financial services. It
responded to the needs of consumers and increased the
competition among financial service providers. While we do not
know what innovations will take place in the years ahead, we do
know that free and fair competition creates an atmosphere that
encourages innovation. The GLB Act was an essential ingredient
in bringing about such competition.
We congratulate you on holding this hearing, and we ask
your continued oversight to assure the goals of the GLB Act are
achieved.
Thank you.
Chairman Shelby. Mr. Taylor.
STATEMENT OF JOHN TAYLOR
PRESIDENT AND CEO
NATIONAL COMMUNITY REINVESTMENT COALITION
Mr. Taylor. Good morning, Chairman Shelby, Ranking Minority
Member Sarbanes, and other distinguished Members of the
Committee on Banking, Housing, and Urban Affairs.
Thank you for the opportunity to testify today. I think it
is pretty fitting that NCRC, which is the trade association for
some 600 community organizations across the country whose main
focus is the increased access to credit and capital for all
Americans, it is particularly fitting that we get an
opportunity to testify today about the Gramm-Leach-Bliley Act
or GLBA, because we believe that it has weakened the Community
Reinvestment Act and thus reduced Americans' access to credit
and capital.
We do believe that the United States banking system is the
envy of the world. In great part, we believe this is
attributable to our extensive regulatory oversight, which,
among other things, ensures adequate capital reserves, safety
and soundness, and fair and equal access to credit. GLBA has
failed to ensure that the laws and regulations relating to fair
access to credit have kept pace with safety and soundness
regulation.
Mr. Chairman, I am not used to actually testifying in favor
of paperwork reduction for my friends in the banking world, but
I find myself in the position to make that recommendation
today. One area where I believe there is strong consensus among
community groups and the lending industry is the so-called CRA
sunshine requirements under GLBA. We believe these need to be
repealed.
The CRA sunshine provisions sought to quantify the amount
of bank dollars granted to community groups. It was believed
that such grants were used for operating support rather than
for direct provision of financial services and products. Five
years later, we now know the facts do not support this theory.
In a report issued in 2002 by the National Community
Reinvestment Coalition, NCRC found that of the $3.6 billion in
the 707 CRA agreements during the period of 1999 to 2002, only
$11.8 million, less than three-tenths of 1 percent, actually
went to grants for operating support for community groups.
CRA sunshine increases the paperwork burden on banks and
community groups with no tangible benefit to the public. The
repeal of this ill-advised section of GLBA must occur
immediately.
Mr. Chairman, another harm, from our perspective, of GLBA
is the reduction of the frequency of small bank exams. Under
GLBA, small banks with assets of $250 million are examined only
once every 4 or 5 years. Our 600 community members have
reported that less frequent exams have reduced the amount of
lending by small banks to low- and moderate-income borrowers.
We call upon Congress to commission a comprehensive study
assessing the impacts of this, what we call ``stretch-out of
CRA exams'' on working-class Americans, low- and moderate-
income borrowers, as well as minorities.
Mr. Chairman, in anticipation of this testimony, I
unfortunately had short notice on this testimony, but I took
the opportunity just to look at the State of Alabama and to see
how those lenders, who are covered under the small bank exam,
and see how they were impacted with these less-frequent exams.
Chairman Shelby. Take your time now.
[Laughter.]
Mr. Taylor. Okay; thank you very much.
Senator Sarbanes. You just picked Alabama out of the hat.
Mr. Taylor. Maryland was next, Senator.
[Laughter.]
Chairman Shelby. Absolutely, then Connecticut and then
Utah.
Mr. Taylor. Absolutely. I would be glad to do this for
anybody, but again, it would be great if Congress might want to
take a look at this itself.
But in any event, what jumped out at us as the CRA exams
became less frequent in Alabama, looking at the period of, say,
2000 through 2002, small banks in Alabama, in terms of all of
their single-family lending as a percentage of their loans to
low- and moderate-income borrowers in 2000 was about 37 percent
of all of the loans to small banks went to low-income
borrowers. That steadily declined until 2002 by 30 percent.
Today, it is down to 27 percent by those banks.
If you just look at home purchase lending, Mr. Chairman, in
Alabama, 33 percent of all the lending from banks who are
covered under $250 million in assets, 33 percent of all the
loans they made were made for home purchase lending. That
dropped. That figure dropped to 27 percent, a 20 percent drop.
So there has been this steady decline since the less frequent
exams occurred, whereas for the small banks, when the examiners
showed up every couple of years, there was this preparation,
there was this thoughtfulness to make sure that they were
making loans to low-income borrowers, and the impact has been,
at least in the one State we had the opportunity to look at,
has been negative.
Mr. Chairman, I appreciate your giving me some time to talk
about your home State, but I will finish my remarks if I could.
Gramm-Leach-Bliley added a requirement that bank holding
companies must ensure that all of their affiliates passed CRA
exams in order to be allowed to take advantage of the new
powers under GLBA. While well-intentioned, this requirement has
not been applied in a single case, to our knowledge. A major
reason for this is less than 2 percent of the banks and thrifts
fail their CRA exams. Since failed ratings are so rare, the
have and maintain requirement must be strengthened to ensure
that merging institutions will continue to serve minority and
lower-income communities.
NCRC urges you to consider requiring merging institutions
to submit a CRA plan with their application. In the past year,
the merging activities has reached a frenzied pace and has
included some of the largest mergers in our history: The Bank
of America-Fleet merger, the J.P. Morgan Chase with BankOne,
which create institutions with more than $1 trillion in assets.
Despite the incredible magnitude of these mergers, the
Federal Reserve Board does not require any meaningful CRA plan
from the merging institutions. The CRA discussions and the
merger applications usually consist of a one- or two-page boast
about the bank's CRA performance. A meaningful CRA plan would
require merging institutions to provide the number of loans,
investments, and services they made by State, metropolitan
area, and rural portions of the State in the past few years.
Recognizing that my time has expired, I will try to
conclude, Mr. Chairman. While GLBA created more powerful
financial institutions, it has not been updated to keep pace
with the dramatic changes in the financial services industry.
GLBA did not apply the CRA to mortgage companies, insurance
companies, or securities firms that are part of holding
companies. As a result, a very real possibility exists that CRA
will apply to fewer and fewer assets of holding companies.
At the same time, CRA was not applied to credit unions.
Again, we find ourselves in agreement with many of our
colleagues in the banking industry that CRA needs to be
expanded to credit unions, mortgage companies and other
competitors of bank holding companies. The uneven application
of CRA reduces the amount of community reinvestment and wealth
building in these communities. The uneven application of CRA
also undermines President Bush's call for more minority
homeownership and subverts the dreams of millions of Americans
seeking to build a future for their families. If Congress
wishes to ensure that GLBA benefits all Americans, it must
update CRA.
Since I have hit all of my main points, Mr. Chairman, and
my time has expired, and you have noted that my written
testimony is in the record, I will end. Thank you very much,
sir.
Chairman Shelby. Thank you.
Mr. Judge.
STATEMENT OF J. STEVEN JUDGE
SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS
SECURITIES INDUSTRY ASSOCIATION
Mr. Judge. Chairman Shelby, Senator Sarbanes, and Members
of the Committee, I am Steve Judge, Senior Vice President for
Government Affairs at the Securities Industry Association. I
appreciate the opportunity to testify on our views on the
Gramm-Leach-Bliley Act as we approach the 5-year anniversary of
the enactment of that landmark legislation.
SIA commends this Committee for its efforts in enacting GLB
and for holding these hearings to examine the effects of the
Act. We hope that these hearings will initiate an important
dialogue about identifying and eliminating obstacles that
impede the ability of our financial service firms to develop
and offer consumers a full range of financial services,
structure themselves optimally, mitigate risk, and maintain
global competitiveness. SIA looks forward to participating in
this dialogue.
In considering the effects of GLB, it is important to
recall how constrained the financial services industry was
before Congress acted. Financial service firms were operating
under a hodgepodge of confusing rules and regulations. The
regulatory environment failed to provide the full range of
relief the industry sought and the consumers demanded and
tilted the playing field in favor of one segment over another.
The enactment of the Gramm-Leach-Bliley Act has, in many
respects, rationalized and modernized the financial services
regulatory environment. Banks, securities firms, and insurance
companies can choose to affiliate under whatever structure best
fits their business plan. Subsidiaries of financial service
holding companies can engage in a wide variety of financial
activities beyond banking, securities, and insurance. All
financial service firms are subject to comprehensive privacy
requirements far beyond those that exist for any other industry
in the United States.
Since enactment of the Gramm-Leach-Bliley Act, there have
been a number of significant combinations of financial service
firms. Some firms have chosen to combine with commercial banks.
Other firms have chosen to remain independent, and that is how
it should be. One of the overarching goals of the Gramm-Leach-
Bliley Act was to allow financial service firms to choose the
optimal structure to best serve their customers' needs.
Among SIA's membership, bank or financial services holding
company ownership of broker-dealers has increased from 13.4
percent in 1999 to 21 percent today. Moreover, banks affiliated
with securities firms have significantly increased their
presence in capital market activities. For example, banks
affiliated with securities firms now lead/manage 58.2 percent
of equity underwriting today versus only 36.8 percent in 1999.
As a further example of Gramm-Leach-Bliley's effectiveness,
newly affiliated firms have not had to shed significant lines
of business or to artificially limit their revenues from
securities underwriting and certain other activities. These
combinations also have not required Federal regulators to
provide the type of significant regulatory relief that was
often necessary prior to the passage of GLB.
When assessing the overall impact of the Gramm-Leach-Bliley
Act, it is important to note various economic factors and
significant changes in the capital markets over the last 5
years have made it tenuous at best to determine the cause and
effect relationships to specific provisions of the Act. What we
do know is that the Act is a comprehensive statute regulating a
diverse, dynamic, and constantly evolving financial services
industry, and as a result, there have been and likely will
continue to be issues concerning the implementation of the
legislation.
There are some weaknesses that exist with the Gramm-Leach-
Bliley Act. Among those, securities firms in a financial
services holding company should be able to engage in a full
range of commercial activities to the same extent as securities
firms that are unaffiliated with a bank.
There should be a national standard governing consumer
privacy requirements. Requiring financial institutions to
comply with Federal requirements and then the additional
requirements potentially imposed by each State in which that
firm operates is confusing to customers and unnecessarily
burdensome on the industry.
And similarly, there should be a uniform national standard
for the regulatory of securities activities. To this end, SIA
is working with the State securities commissioners to secure
adoption of the Model Uniform Securities Act in each of the
State legislatures.
The U.S. capital markets and the financial service industry
are stronger, healthier, and more dynamic since Congress
enacted Gramm-Leach-Bliley. In spite of the tremendous
challenges and changes over the last several years, consumers
and financial service firms alike are better off as a result of
increased opportunities and choices made possible by the Act.
SIA commends this Committee for holding these hearings, and
we look forward to working with you to ensure that our Nation's
capital markets remain the most efficient, liquid, deepest, and
dynamic in the world.
Thank you.
Chairman Shelby. I thank all of you.
During the debate that led to the passage of Gramm-Leach-
Bliley, there were many predictions with respect to how the new
law would radically change the appearance of the financial
service industry. Mr. Doherty, you indicate in your written
testimony where you quote statistics provided by the Federal
Reserve Vice Chairman Roger Ferguson that significant
structural change within the financial service industry has not
occurred.
Mr. Doherty. That is true.
Chairman Shelby. Is that correct?
Mr. Doherty. That is correct. I see no evidence to that
effect that there have been significant changes.
Chairman Shelby. Mr. Bartlett, are the great changes just
around the next corner? Are they more likely to occur in fits
and starts or what?
Mr. Bartlett. Mr. Chairman, I think we have seen a series
of changes.
Chairman Shelby. Because there are changes.
Mr. Bartlett. There are changes.
Chairman Shelby. Evolution.
Mr. Bartlett. And it is a continuum of changes. Gramm-
Leach-Bliley still has some challenges that have prevented
additional changes. I cited one, the sunset provision, which
is, in my opinion, the largest barrier that stops companies
that are not bank holding companies from applying for a
financial holding company charter.
In my opinion, Mr. Chairman, what has happened is, as some
of the other witnesses have said, is that there is a continuum
of products and services. And 5 years post-Gramm-Leach-Bliley,
companies are offering a much broader range of that continuum,
both large and small companies, and that is as it should be. So
the marketplace is much more driven now by the customer than by
product regulation, but we still have a lot of vestiges of
product regulation.
Chairman Shelby. Has it helped the consumer that much?
Mr. Bartlett. It has helped the consumer tremendously.
Chairman Shelby. Brought more competition?
Mr. Bartlett. Yes, more competition. Consumers now have
additional choices of where to acquire an auto insurance loan,
a home loan, an auto insurance product, auto insurance, or a
mortgage; the choices are, if not infinite, at least close
enough to infinite.
Chairman Shelby. Have the changes, brought about by the
law, better prepared U.S. firms for international competition,
Mr. Bartlett, Mr. McLaughlin.
Mr. McLaughlin. Definitely better prepared for
international competition. We have seen foreign firms take a
greater presence in the United States, and some of them have
had powers that U.S. banks have not been able to compete with.
So it has better prepared banks in the United States.
Chairman Shelby. Mr. Tubertini, Gramm-Leach-Bliley took a
targeted approach with respect to enhancing the insurance agent
and broker licensing that worked within the State-based
regulatory structure. Do you believe that this was the
appropriate approach, and if not, why not?
Mr. Tubertini. I do believe that it was the appropriate
approach, Senator.
Chairman Shelby. Do you think it is working?
Mr. Tubertini. It has worked in that we now have over 40
States that have been certified NARAB compliant. There are
obviously still States that have not, but it was a giant step
toward full reciprocity or uniformity.
Chairman Shelby. In the State of Mississippi, do you
operate all over Mississippi? Your firm is a large insurance
firm.
Mr. Tubertini. We do, Mr. Shelby. We are in 17 locations
across the State. But we also provide insurance to our
customers in over 20 States.
Chairman Shelby. Other financial products including
insurance?
Mr. Tubertini. Not other than insurance products but
across-the-board insurance products.
Chairman Shelby. Mr. McLaughlin, in your testimony, you
cite two research papers that essentially conclude, one, that
most banks engage in permissible relationship banking
privileges and two, that tying is not a rational strategy for
banks. You recall that.
Mr. McLaughlin. That is right.
Chairman Shelby. How would you respond to the following
statements, including, in the executive summary of the
Association for Financial Professionals 2004 credit access
survey, and I am quoting from them, ``a significant number of
survey respondents note that their company has been subject to
activities that the Federal Reserve indicates would violate
Section 106 of the Bank Holding Company Act; further, many
companies continue to report that the pressure to award
business has increased over the past year.'' How do you respond
to that?
Mr. McLaughlin. First, Mr. Chairman, that is an attitudinal
survey. The bank regulators and the GAO have consistently
looked at banking practices in this area. And we have to
recognize that Section 106 of the Bank Holding Company Act
provides a higher standard for banks and banking organizations
than the rest of the world that they are competing with have to
comply with.
There is a very strict standard that applies to banks. What
I think we are hearing from some of the financial treasurers
and the like from that group is that they are saying they feel
the fact that there is this one-stop-shopping, and that the
marketing is intense. At the same time, we are hearing from our
member banks that the corporate treasurers are putting greater
pressure on the banks to provide better deals and packages of
services. So the marketplace is working.
Chairman Shelby. Good.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Mr. Chairman, let me just first follow up
on your question. The Wall Street Journal, when it reported on
this survey of the Association for Financial Professionals,
said just this past June in an article headlined ``Executives
See Rise in Tying Loans to Other Fees,'' began its story as
follows: ``Corporate finance officers say banks are
increasingly squeezing lucrative fees out of them by
conditioning loans on the purchase of other services.''
Now, tying is not permitted; is that correct?
Mr. McLaughlin. Well, you have to look at the law. It is a
very complex section of the law, Section 106, Senator, and
tying is permitted to traditional banking services. There is
some tying that is permitted.
Chairman Shelby. And how is traditional banking services
defined?
Mr. McLaughlin. Traditional banking services are loan,
deposits, trust services, cash management services, and the
like.
Senator Sarbanes. Now, do you agree that the Federal
Reserve, in its interpretation of the antitying restrictions of
Section 106 of the Bank Holding Company Act Amendments of 1970,
states that a bank would violate Section 106 if the bank
informs a customer seeking only a loan from the bank that the
bank will make the loan only if the customer commits to hire
the bank's securities affiliate to underwrite an upcoming bond
offering for the customer?
One out of seven large companies report that in the past 5
years, they have been explicitly required by a commercial bank
to obtain corporate debt and/or equity underwriting services
from an affiliate of the bank in order to obtain a loan from
the bank. What is your view on this?
Mr. McLaughlin. I am sorry. I do not follow where that one
out of seven comes from, who is saying that.
Senator Sarbanes. This is the credit access survey that I
made reference to.
Mr. McLaughlin. Oh, the credit access survey? Because the
Fed's statement of the law is accurate, that you cannot tie
underwriting of securities and condition that service for a
loan.
Senator Sarbanes. Right.
Mr. McLaughlin. That is clear.
Senator Sarbanes. Yes, do you think that is taking place?
Mr. McLaughlin. I cannot say, but I can tell you that the
GAO has examined it twice. The bank regulators have been in and
examined it. The Federal Reserve on the request of this
Committee has gone in and looked again at the banks, and they
cannot find more than one or two isolated cases, and there have
been, I think, one or two cases enforcement cases.
Senator Sarbanes. To the extent it happens, as I have read
it here, it is contrary to the law; is that correct?
Mr. McLaughlin. To tie underwriting services to the
granting of a loan?
Senator Sarbanes. Right.
Mr. McLaughlin. That is correct.
Mr. Plunkett. Senator, to that point----
Senator Sarbanes. Yes?
Mr. Plunkett. I have looked at the GAO study as well, and
they do point to a lack of documentation regarding the tying of
availability or the price of credit to the purchase of debt
underwriting services. But they also say that there may be good
reasons for the lack of documentation, that the Federal
regulators need to look at. For example, a lot of those deals
are conducted orally. Second reason, borrowers may be reluctant
to file formal complaints. And then, they point out that the
Federal banking regulators need to look for indirect evidence
of tying and do more to investigate these problems.
Senator Sarbanes. Mr. Chairman, I want to diverge for just
a moment, because I want to make sure I understand the
constituencies of some of the groups at the table.
Mr. McLaughlin, the American Bankers Association
encompasses all banks as potential members; is that correct?
Mr. McLaughlin. That is correct. Large banks, small banks,
savings associations, commercial banks, trust companies, all
banks.
Senator Sarbanes. Yes; now, what about the Community
Bankers? What is the definition or the parameters for your
membership?
Mr. Doherty. We also service savings banks, savings and
loans, Federal savings, commercial banks. We run the gamut.
Senator Sarbanes. Regardless of size?
Mr. Doherty. Regardless of size, regardless of charter.
Senator Sarbanes. So you, in effect, duplicate the
membership of the ABA? Would that be correct? I mean,
potentially.
Mr. Doherty. The potential; that is correct.
Senator Sarbanes. Okay; and some banks would be members of
both groups presumably?
Mr. Doherty. There are dual memberships; that is correct.
Senator Sarbanes. Okay; now, what about the Independent
Community Bankers of America?
Ms. Jorde. The ICBA does not have a size limitation.
However, members of the ICBA generally subscribe to the
philosophy that there is a symbiotic relationship between the
bank and the community that it serves. The bank is dependent on
its community. It is generally locally owned, or the board of
directors is normally from that local area. We have nearly
5,000 member banks throughout the country, primarily
independent banks and thrifts as well.
Senator Sarbanes. And I take it your institutions would be,
by and large, smaller in their asset size; would that be
correct?
Ms. Jorde. We have banks as small as $10 million in size,
and we have banks that are well into the billions of dollars in
size, too. Again, it goes back to the philosophy of the bank.
Many of those multibillion dollar banks started as community
banks, remain as community banks and share that philosophy.
Senator Sarbanes. Right.
And the Financial Services Roundtable, what are the
parameters for your membership?
Mr. Bartlett. Our membership is 100 of the largest
financial services companies. We believe that size matters;
that when you get to a certain size, you are able to offer a
variety of products to your customers. We believe our companies
share the philosophy of a competitive marketplace; that is, the
marketplace or our customers should determine what products
they wish to buy and not laws or regulations.
Senator Sarbanes. What size does a financial institution
have to be in order to qualify for membership in the
Roundtable?
Mr. Bartlett. We measure our size by market cap or by worth
of the enterprise, and I think our smallest is around $2
billion, $2.5 billion of market cap.
Senator Sarbanes. $2.5 billion?
Mr. Bartlett. Yes, sir.
Senator Sarbanes. And when you say you have 100,
presumably, that does not encompass all institutions above that
size; is that correct?
Mr. Bartlett. That is correct.
Senator Sarbanes. What percentage of the institutions above
that size would be members of the Roundtable, if you know?
Mr. Bartlett. I do not know exactly, but I would guess two-
thirds.
Senator Sarbanes. Two-thirds?
Mr. Bartlett. Yes, sir.
Senator Sarbanes. And are all of the largest institutions
members of the Roundtable?
Mr. Bartlett. Not all, no, sir; most but not all.
Senator Sarbanes. But as you say, two-thirds above $2.5
billion. But presumably, at the higher sizes, you have a larger
percentage, is that correct, of the banks?
Mr. Bartlett. Yes, sir, yes, sir; it is a voluntary
association, so people choose to join.
Senator Sarbanes. Let me put it this way: The 10 largest
institutions, are they all members of the Roundtable?
Mr. Bartlett. I think, as I recall, 7 or 8 are. I think a
couple of them are not.
Senator Sarbanes. Mr. Chairman, could I ask just one more
question?
Chairman Shelby. Go ahead.
Senator Sarbanes. I wanted to ask about this insurance to
get some sense of it. On this optional Federal charter would
regulate the insurance companies that chose an optional Federal
charter?
Mr. Bartlett. The Congress would choose a regulator. There
are various varieties. We prefer what is known as the OCC model
or an independent regulatory agency like the OCC.
Senator Sarbanes. A Federal regulator.
Mr. Bartlett. A Federal regulator.
Senator Sarbanes. And how would that regulator get its
budget?
Mr. Bartlett. From the industry, I presume, similar to the
OCC. We think that there is a good model of the dual banking
system that should be replicated in the insurance system.
Senator Sarbanes. And if you chose an optional Federal
charter, by making that choice, you could remove yourself from
State insurance regulation, would that be correct? And then be
subject only to whatever Federal insurance regulations?
Mr. Bartlett. That is correct, yes, sir.
Senator Sarbanes. And the institution would have the choice
to pick that; is that correct?
Mr. Bartlett. Comparable to the dual banking system.
Senator Sarbanes. Mr. Tubertini and Mr. Plunkett, what is
your view of that proposed arrangement?
Mr. Tubertini. Mr. Sarbanes, we are opposed to any type of
Federal regulation of insurance. Regulation of insurance, by
its nature, protects the consumer. And consumer protection
becomes much more difficult at a Federal level than it does at
a local level, a State level. The State regulation of insurance
has worked for 150 years.
There are certainly needs for reforms. GLBA provided a
number of those reforms. We believe that instead of a Federal
regulator of insurance that the Congress can take additional
action, following in the footsteps of the NARAB provisions of
GLBA, to further reform State insurance regulation, provide for
the consumers in a way that no Federal regulation can do.
Senator Sarbanes. Mr. Plunkett.
Mr. Plunkett. Senator, we are strongly opposed to the
optional Federal charter proposal for one significant reason:
If you give the regulated a choice of regulator, you are going
to end up with State and Federal officials competing to lower
standards, and that will absolutely harm consumers.
We look at the dual banking system, and we see a cautionary
tale on this point. To some extent, we have seen competition
between State and Federal regulators to lower standards to
govern more of the regulated, and that dynamic in insurance
could be a disaster.
Senator Sarbanes. Thank you, Mr. Chairman.
Chairman Shelby. Senator Crapo.
STATEMENT OF SENATOR MICHAEL CRAPO
Senator Crapo. Thank you very much, Mr. Chairman.
I want to use the time that I have for questions to address
the issue of the different treatment of thrifts and banks under
the Investment Advisors Act and the Securities and Exchange
Act, and I suppose that my questions would be most directed to
those that Senator Sarbanes just discussed about your
membership, the banking groups here, but I would be glad to
hear from any members of the panel.
As you know, the Investment Advisors Act and the Securities
and Exchange Act of 1934 together created different treatment
for thrifts as opposed to banks with regard to the statutory
investment advisor and broker-dealer registration requirements.
And there is a proposal to legislatively eliminate that
difference.
In response to that proposal, the SEC has now put out a
proposed rule that is under discussion and which supposedly
would eliminate the need for legislative action. And I would
just like to know, frankly, what the opinion of those here on
the panel is with regard to whether we need to move
legislatively or whether the SEC proposal is adequate.
Mr. McLaughlin.
Mr. McLaughlin. Senator, I would be glad to respond. In
fact, we have, if we have not filed it yet, we are filing today
a letter addressing that very SEC proposal. We think it does
not go nearly far enough. We think that there should be full
competitive equity and parity between savings associations and
commercial banks with respect to both the broker-dealer rules
and the investment advisor rules. We have testified to that
effect on the House side in the reg burden release bill, there
are provisions there, and we understand that they are over here
in the Senate now.
Senator Crapo. And the SEC proposal does not----
Mr. McLaughlin. The SEC proposal provides some relief, but
it goes probably halfway if that.
Senator Crapo. All right; thank you.
Mr. Doherty or Ms. Jorde.
Mr. Doherty. I would agree with the analogy that it goes
less than halfway. My comment would be it is half a loaf. It
has to go further.
Senator Crapo. All right.
Ms. Jorde. And I think the ICBA also agrees that there
should be competitive equity between the banks and thrifts and
that the SEC proposal that came out also needs to be looked at
in terms of making it less complex, if possible.
Senator Crapo. Thank you.
Mr. Bartlett, did you want to comment on this?
Mr. Bartlett. I think that the SEC proposal is a good
start, but it does not go far enough, and it is similar to the
other comments.
Senator Crapo. Thank you.
Any other members of the panel want to weigh in on this
issue?
Let me just ask if there is any disagreement on the panel
with the apparently unanimous position of those who have spoken
up about the fact that this issue needs to be addressed
legislatively.
All right; thank you.
I would like to also go to the question that Senator
Sarbanes also just talked about with regard to whether the
Gramm-Leach-Bliley provisions for the insurance marketplace
under the NARAB subtitle were adequate. Mr. Tubertini, you
indicated that you felt significant progress has been made. We
still have not got all the States into a uniform system, but
could you elaborate a little bit about your position that we do
not need to go further with a uniform national standard at this
point?
Mr. Tubertini. Senator, we believe that only Congress has
the ability to set standards that the States will then follow.
We have to admit, certainly, that the National Association of
Insurance Commissioners has been trying to create for many
years a set of standards for total reciprocity or uniformity in
licensing and have not been able to do it. And when you are
dealing with 50 different legislatures, I do not know if you
would ever be able to do it.
However, if the next step is taken in creating a set of
standards that then every State would adopt, continue to be
regulated by the commissioners in each local jurisdiction,
then, we would be able to achieve the objectives that we are
trying to achieve and, frankly, be able to achieve most of the
objectives that are outlined in some of the optional Federal
chartering proposals.
Senator Crapo. You are not opposed to a national standard
as much as the optional Federal charter.
Mr. Tubertini. That is correct. We believe that creating a
new Federal regulatory system would be the equivalent of
throwing the baby out with the bath water. We just need to make
the necessary changes to reach the objectives that we all
desire.
Senator Crapo. And Mr. Bartlett, you have a different
position on that.
Mr. Bartlett. Mr. Chairman, I have to tell you that among
my 100 companies, of those that are involved in the insurance
marketplace, which is most, they believe that the current
system is an absolutely chaotic disaster that is a disaster for
their customers, and they see the higher costs, the higher
confusion, and the inability of their customers to buy products
as they will in a number of areas.
First, insurance is a financial product. It is a financial
product that is similar to other kinds of financial products.
Sometimes, the difference between an insurance and something
that is not an insurance product is almost identical: Annuities
and mutual funds, for example. And yet, an annuity product has
to be rolled out and approved in 50 different States with 50
different commissioners, 50 different sets of rules, sometimes
as long as 2, 3, or 4 years to get approval, whereas a mutual
fund is essentially at the national level.
Second, many of the companies offer the products on an
interstate basis. They can better serve their customers
interstate, as many do now, but they have to do it one State at
a time. And many of the customers are buying insurance products
on an interstate basis, both commercial and consumers, and are
denied the right to do so.
And then last is on a global competitive basis, Mr.
Chairman. We hear from our Europeans colleagues particularly
that this is the number one trade barrier that the United
States puts up that denies their entry into the marketplace. So
we think it is a disaster, and it can be solved by a similar
system to the dual banking system that would be an optional
Federal charter or a dual insurance charter system.
Senator Crapo. Mr. Chairman, I see that I have stirred a
little thing up here. There are several more who want to
respond. May I have time to let them do so?
Chairman Shelby. Okay; yes, sir.
Senator Crapo. Mr. McLaughlin.
Mr. McLaughlin. Senator, I will be brief. I just want to
point out that there is a huge market. The State of California
is not a part of the NARAB process, and that is a market that
just is not available; NARAB is not working. That is one
example, because that consists of a huge potential market for
the companies that want to market insurance products
interstate.
Senator Crapo. Mr. Plunkett.
Mr. Plunkett. Senator, you have already heard our opinion
on the national charter approach. Let me turn your attention to
something else regarding national uniformity: consumer groups
are not opposed to uniform standards at the State level, with
Congress pushing the States to try to come up with more
uniformity. If inefficiencies exist, consumers pay for that.
What we are concerned about and oppose are weak uniform
standards, and let me just flag something for the entire
Committee. Over on the House side, we have seen a proposal
circulating for so-called ``Federal tools,'' that takes the
``pragmatic middle ground approach'' of actually preempting all
States, and there are a number of them, that regulate insurance
rates.
Now, that is not an appropriate role for the Federal
Government to be playing. Some of you would oppose rate
regulation; some of you would support it. Let us put that aside
and say that after over 100 years of State insurance
regulation, Congress should not be preempting, blocking
individual States from the approach they have chosen on
regulating insurance rates.
Senator Crapo. Mr. Taylor.
Mr. Taylor. Senator Crapo, thank you.
A related issue but something that was very much discussed
in the original passage of GLBA was trying to get a handle on
the picture of where exactly these insurance companies are
making their policies and products available. You have heard
the assertion from Mr. Bartlett and others that it is very
fluid; that it happens across State lines and so on. And we
have always had the concern through our experience that these
policies, whether it is various forms of insurance; whether it
is for commercial or personal that it disproportionately is not
offered in the same fair and equitable manner to working class
Americans as well as people of color.
And so, we asked that GLBA include a provision that at
least allows us to get a handle on the picture, what is
happening out there, because it does affect the ability of
people to own homes, people to start or expand businesses.
Unfortunately, we were unsuccessful on that. Perhaps you would
reconsider it this time. There are some States, the Great State
of Massachusetts; I have a bias, obviously, if you cannot tell
from my accent, that they have this coverage. The insurance
companies have to report; they have learned to live with it,
and it has been very helpful. They also, by the way, have CRA
coverage for credit unions, another good thing happening in
that State.
And it would be great if this Committee would really
consider, even if it was only temporarily, trying to get a
handle on what is the impact and the application of these
policies and whether or not it is occurring cross the board in
a fair and equitable marketing manner.
Senator Crapo. Thank you, and I thank the Chairman for
indulging me on that.
Chairman Shelby. Thank you, Senator Crapo.
Senator Bennett.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you, Mr. Chairman.
Following a little Senator Crapo's methodology, trying to
determine where there is some degree of unanimity here, I have
heard two things asked for, and I did not hear any objections,
and so, now, we will give people some of the opportunity to
object if, in fact, they do.
First, there should be a national standard on privacy.
Several said that there should be. I did not hear anybody say
that there should not be. Could we get a response to that? Does
everybody agree that there should be a national standard on
privacy?
Mr. Judge. Absolutely.
Mr. Doherty. Absolutely.
Mr. Plunkett. Senator, we have a different take.
Senator Bennett. Somehow, I expected you might.
[Laughter.]
Mr. Plunkett. It is similar to our rather pragmatic
approach on insurance. I mean, there are advantages and
disadvantages to national regulation versus State regulation of
insurance. Same on privacy. What we are concerned about is a
weak national privacy standard, and that is what we have now.
And the fact is that Section 507 of the Gramm-Leach-Bliley Act
permits the States to fill in the gaps in the national privacy
standard.
In response, what we are seeing are some proposals to
eliminate that; let us eliminate the ability of the States to
fill in the gaps, to improve what is a very weak national
standard and then let the existing standard or something
similar that is fairly weak stand. And that is the approach
that we would oppose.
Senator Bennett. Thank you.
Next, I heard several people say the sunset should
disappear. Some are nodding yes. Now, once again, is there
anybody who thinks that that is not good policy?
If we were to eliminate the sunset, that would be
relatively noncontroversial, and if I listen to you, a
beneficial thing that would happen.
Mr. Judge. We would support that, yes.
Senator Bennett. Okay; we are getting some degree of
unanimity here.
Mr. Plunkett, you talked about the few consumers who have
opted out, and you blamed the complexity of opting out for that
fact and said if it were much easier to opt out, a whole lot
more would. Do you have any evidence or empirical studies that
indicate that the reason people are not opting out is because
the Government created barriers? Or maybe the reason that they
are not opting out is that they do not want out?
Mr. Plunkett. We have a readability study done by the
Privacy Rights Clearing Center that determined that the reading
level in the privacy notices was close to graduate level as
opposed to what is normally determined to be the appropriate
reading level for these kinds of things which is at about age
12.
Senator Bennett. You are singing Ms. Jorde's song a little
bit, in that she is complaining that the reading level for some
of the things that she has to tell her customers is absolutely
impenetrable. And of course, that goes with Federal service. I
think that kind of is part of the entrance exam when you become
a bureaucrat is that you have to be able to speak
unintelligibly.
I get in trouble with that, but I made the point in here
that one of the best ways to hide something is to completely
surround it with impenetrable verbiage, and then, no one
understands what you are talking about. So, I will grant you
that, but that is not my question. Do you have any studies or
empirical evidence that would suggest that if the ability to go
through the process were much clearer that a much higher
percentage of consumers would, in fact, opt out?
Mr. Plunkett. We do not have a study, Senator. What we do
have is a great deal of anecdotal evidence from talking to
consumers, from talking to bankers, frankly, many of whom are
quite critical of the privacy notices, from talking to others
who all are consistent in saying two things: First, if you go
the opt out approach versus the opt in approach, by definition,
you will have fewer people choosing to protect their privacy,
including some, we can agree on some, who would like to. Maybe
it is not at the top of their priority list, but they would
like to.
You compound that problem with very difficult to read
privacy notices, and you have even fewer. The estimates I have
heard overall of people opting out are 5 to 10 percent. That is
extremely low, and we know from surveys of the American public
on privacy issues that it is a popular issue. We would assume
that many more people would opt out or choose privacy if there
were an opt in approach, if the notices were easier to read,
and if they had the opt in approach available to them.
Senator Bennett. We have had the opt out/opt in debate in
this Committee for a number of years, and I imagine we will
have for a number more.
Ms. Jorde, you want to comment.
Ms. Jorde. I was just going to mention, though, that I
think it would be interesting to look at the evidence as to how
many banks or financial institutions are actually sharing any
financial information. I think if we were able to eliminate the
disclosure requirements for banks that are not sharing, those
that are would be read, and now, we all know that we are
getting privacy notices annually from our banks or insurance
companies or insurance agencies, and it is just a statement
stuffer, and it gets thrown out. It is very long, and the
customer does not read it.
If the financial institution is not sharing information,
then, we do not believe that they should need to send that
privacy notice. If the customer knows that if they get a
notice, that there is something to look at, we think it would
be far more effective and efficient.
Senator Bennett. Well, it is said, the old adage is that
the best place to hide a leaf is on the floor of the forest in
plain sight, surrounded by all the other leaves. And that is
the phenomenon that you are seeing here.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. What was that? The best place to hide a
leaf ? On the floor of the forest?
Senator Bennett. The best place to hide a leaf is on the
floor of the forest, surrounded by all the other leaves.
Senator Carper. That is great. I pick up some new material
here. I always like to say if a tree falls in the forest, and
there is no one there to hear it, is there really----
Senator Bennett. I am not going there.
[Laughter.]
Senator Carper. Now, I can switch off. I can use yours, and
I will use mine some of the time.
Some familiar faces out here, Mr. Chairman. In fact, I
think one fellow maybe you and I once served with on the House
Banking Committee a fellow from down around Texas. It is nice
to see Steve Bartlett, who had the best staff, I think, of any
Committee in that House, and one of the great staff people
there was Steve Judge. Steve, it is nice of you to be here
today.
I want to go back and just pick up on a point that--is it
Jorde? Ms. Jorde?
Ms. Jorde. Jorde.
Senator Carper. Jorde? Ms. Jorde was making and try to tie
it in with what Mr. Plunkett was saying. Go back and make your
point for us again about who should be required to send out the
notices. Just go back and make that. I think that is a point
worth revisiting. I do not want this to be a leaf in the forest
that nobody notices.
Ms. Jorde. We believe that financial institutions that are
not sharing financial information on their customers, have
never and do not intend to, should not have to send a notice to
their customer that they do not share their financial
information. I have been a banker for 25 years; we have never
shared financial information. Suddenly my customers are getting
notices annually that we do not share customer information. And
they are confused by it, because suddenly, they think we are
sharing information, or maybe we did.
So if you take some of those leaves out of the forest, the
ones that are left are really going to be focused upon by those
customers. They may be able to make better-informed decisions
because of something that they have not just been getting a
blizzard full of paperwork throughout the year.
Mr. Plunkett. Senator, could I offer some thoughts on that?
Senator Carper. Well, I was going to ask you to, if you
would, so go right ahead, please.
Mr. Plunkett. I have no doubt that the vast majority of Ms.
Jorde's members are honest, and if they say they are not
sharing information, they are not sharing information. Let me
point out the obvious, though, that of course, the consumer
groups are most concerned about people who are sharing
information and that their consumers know about that and have
an opportunity to prohibit that, stop it.
But, of course, the obvious issue is enforcement. And it
strikes me as an enforcement nightmare. The FTC and State
enforcement authorities have dealt with a number of cases where
companies have said that they are not sharing information, and
then, they do. So it strikes me as a very difficult thing to
assure, given that we have some track record of some companies
promising no sharing and then doing it.
Senator Carper. Let me just ask the panel: Would there be
some way of, if a company was asserting that they are not
sharing information, a financial services company, and then,
they turned around and did that, would there be some way to
pick that up in a regulatory check?
Mr. McLaughlin. Obviously, nobody on this panel has--with
the exception of the two bankers down at the end--have ever
undergone a bank regulatory agency compliance exam, where they
check for everything and anything. I think the bankers on our
panel would attest to that. The examiners would pick it up,
believe me, and they would then take enforcement action. Bank
compliance exams are incredibly thorough, and incredibly
detailed.
Ms. Jorde. My bank is scheduled for an FDIC compliance exam
at the end of August, and just the preexamination process--and
again, I am a $37 million bank in North Dakota--the preexam-
ination process consists of 17 typewritten pages of information
that is requested that we send to the examiners in advance of
them coming in to do the bank examination. So it is a highly
regulated process, and the disclosure requirements that we have
continued to have burdened upon us in the last few years are
just overwhelming, and I believe it is truly driving
consolidation of the community banking industry.
Senator Carper. How many pages?
Ms. Jorde. Seventeen.
Senator Carper. Typed?
Ms. Jorde. Yes, typed.
Senator Carper. Small type?
[Laughter.]
Senator Carper. Ten point?
Ms. Jorde. About six point.
[Laughter.]
Senator Carper. That is pretty small. Pretty small.
Go ahead.
Mr. Doherty. I would agree with those comments. I think
that with what has been happening in this area with the
compliance, I think that the regulators would find, if someone
made the statement that they were not sharing, that they would
find it if you were sharing.
And I agree with my colleague down there about the
examinations. They are very thorough. I have gone through them
for 38 years, so I know what they are like. They were not all
compliance all the time, but they are getting more and more
difficult as each day goes by.
Senator Carper. Okay; anybody else here who has not had a
chance to say anything?
Mr. Bartlett.
Mr. Bartlett. Senator, I would just suggest that Ms.
Jorde's solution is a good step, but a better step is to solve
the underlying problem, and that would be to require that the
institution tell their customers what their policies are in
this information sharing when a new account is opened; to
provide it in a short form that is authorized by the regulators
and to give a safe harbor so that companies can depend upon
that form as being reliable.
That solves the problem across the board as opposed to
trying to pick and choose as to who provides notices and who
does not.
Senator Carper. I think Mr. Taylor had his hand up and then
Mr. McLaughlin.
Mr. Taylor. Senator Carper----
Senator Carper. Mr. Taylor, where are you from?
Mr. Taylor. Boston, Massachusetts.
Senator Carper. Would you say my name one more time?
Mr. Taylor. Carper.
Senator Carper. Thank you.
[Laughter.]
It rhymes with pucker. I have been called a lot worse.
[Laughter.]
Mr. Taylor. I think I did sit with a panel of lenders very
recently on the House side, and they talked a lot about the
regulatory burden, and one after one mentioned the increased
burden associated with the USA PATRIOT Act and the Bank Secrecy
Act, and I have also made a recommendation to Mr. Bennett as
well as the rest of the panel which I also heard unanimity of
support that the sunshine regulation, not the sunset but the
sunshine regulation that requires these banks to issue all
these reports--and I am sure Ms. Jorde has relationships with
community groups in her community that she works with, small,
but maybe there are not a lot of community organizations.
But for most banks and lenders, they have to issue these
reports that end up in some vault somewhere gathering dust and
piling up and are of no apparent benefit to anybody. And so, I
have made a recommendation to you to help my brothers and
sisters in the banking industry reduce their regulatory burden.
One is to eliminate this sunshine reporting requirement but
also look at just how effective and how useful the Bank Secrecy
and the Bank Privacy Acts have been.
Senator Carper. All right; thank you.
Mr. McLaughlin. I just wanted to add to Mr. Bartlett's
comment. It seems to me that it would be sensible and also
environmentally sensitive to not require continued mailings,
especially the privacy notices, especially when there has been
no change in policy from year to year or the bank does not
share information. That is just plain overkill.
Senator Carper. All right.
Mr. Judge, last word.
Mr. Judge. We think it would make a lot of sense to make
those privacy notices understandable, readable; it would save
money, reduce confusion, and it is something that should be
done.
Senator Carper. It is a good benediction. Thank you.
Chairman Shelby. Senator Sununu.
STATEMENT OF SENATOR JOHN E. SUNUNU
Senator Sununu. Thank you, Mr. Chairman.
I would like to go back to some of the questions and
responses that were offered by Senator Crapo, and if I
transcribed your responses correctly, Mr. Tubertini, you said
that your association was against any Federal regulation of
insurance but for enacting national standards.
Mr. Plunkett, you said you are not against tough standards,
but you are against an optional charter that would establish a
Federal regulator to establish national standards.
And Mr. Bartlett, you said that you are for a Federal
charter that would address a lot of the inefficiencies in the
insurance system that you talked about in your testimony and
your responses.
My question for the panel is: Do any of you believe that
these problems or concerns with the current affairs of
insurance regulation could be dealt with without some Federal
action or legislation? Who would like to begin?
Mr. Bartlett. Absolutely not.
Senator Sununu. No?
Mr. Bartlett. Could not be done.
Mr. McLaughlin. If any of us can picture the day when 50
different State regulators will be able to persuade 50
different State legislatures to grant the authority and then
reach an agreement as to what that authority is, maybe. I do
not believe that that is going to happen in my lifetime.
Mr. Plunkett. I will just add that if you define the
problem as merely a lack of uniformity, then, the answer would
probably be no. You could not do that without the Federal
Government pushing the States a little.
We define the problem differently. We see a number of
States that have gotten very weak in providing consumer
protections to insurance consumers. So we feel like part of the
discussion here has to be the quality of protection that is
offered, not just the uniformity.
Senator Sununu. And to that point, I think there was some
discussion of international competition and other issues that I
think moved beyond the issue of just uniformity, but your point
about quality is very well-taken.
Anyone else? Mr. Doherty.
Mr. Doherty. In one of my other lives, in one of the other
hats that I wear, I am a board member of an insurance company,
and we are a New York State-chartered insurance company, and we
want to go nationwide. And we have gone through the process for
the last 3 years of getting the approvals from all 48--the
lower States, 48 States, and it took us 4 years to get 40
States, and we are still working on the other 8.
So it does take a very long time to get it done. And then,
when you add a language component into it to have a Spanish
component, that makes it even more difficult.
Mr. Tubertini. Senator, to put a positive spin on it, I
think that the enactment of Federal regulation that sets a set
of standards, Federal tools, if you will, will accomplish the
objectives that we talked about here today.
Senator Sununu. With regard to that proposal that you and
the independent agents have advocated, when you talk about
national standards, you are suggesting standards that would
preempt States in those areas, correct?
Mr. Bartlett. That is correct.
Senator Sununu. Now, it would seem to me that an argument
could be made that an optional charter system is more in
keeping with the idea of choice and not completely preempting
States, because it would leave a State regulatory system
intact. Why do you see that as an inferior alternative to
completely preempting States in a number of areas?
Mr. Tubertini. Because, Senator, I would have to disagree
that it would not leave the State regulatory system intact. You
would have a confusing set of standards for most consumers, and
in different areas of the insurance industry, what is called,
what has been referred to as an optional Federal charter is not
optional. From my position, for example, as an independent
agent, the optional Federal charter proposals are not optional
at all for me.
I would have to be licensed to do business on a Federal
level with those who choose to be federally licensed, I would
have to be licensed on a State level with those who choose to
be State-regulated and add an entire level of bureaucracy and
licensing problems to my part of the industry.
Senator Sununu. Well, let us talk more about that. One area
where there was an attempt to establish uniform standards is in
the area of licensing with the NARAB provisions of Gramm-Leach-
Bliley. Have they been successful? Has that approach been
successful? And I would certainly like to hear from Mr.
McLaughlin on this as well.
Mr. Tubertini. Are you asking me next?
Senator Sununu. Yes.
Mr. Tubertini. Yes, it has been successful in that a limit
was set in the number of States, the majority of States, which
I believe was interpreted at 29.
Senator Sununu. How many States are yet to adopt the
licensing provisions of Gramm-Leach-Bliley?
Mr. Tubertini. The last I was told, Senator, that there
were, I think, 47 States that had adopted regulatory reform,
and 40 of those States have been certified by the NAIC as
compliant with the NARAB provisions.
Senator Sununu. Mr. McLaughlin.
Mr. McLaughlin. I think that number is closer to 40, and
obviously, that is after 5 years, not the 3-year goal set in
Gramm-Leach-Bliley. And there is a huge State, California,
which is not part of it. And if you are an insurance company
that wants to market a product, that is a big market to be out
of.
Senator Sununu. Mr. Bartlett, we have not seen a great
number of financial service holding companies form since Gramm-
Leach-Bliley was enacted. What are the key reasons for the slow
pace of creating a truly integrated marketplace?
Mr. Bartlett. The key reason in my opinion, the principal
reason, has been the financial activities that were sunsetted,
so that a company that is not a bank holding company has a set
of activities that they can participate in, but if they become
a financial holding company, then, those activities are
sunsetted, and they cannot continue them after 5 years.
So they give up a whole set of activities, and it is just a
glaring reason why a company would not choose to do that. I
think that has been the principal reason. There have been
others, mostly marketplace-driven; just companies make their
choices as to what kind of charter that they want, but I think
that is the principal reason.
Senator Sununu. Yes, Ms. Jorde.
Ms. Jorde. I would just say that from the standpoint of the
community banks, they were really able to do a lot of the
activities that were authorized under Gramm-Leach-Bliley. We
have been selling insurance in our bank since 1974. We have
been selling investments through a third-party brokerage since
1987. So we were already able to do that.
What we got out of Gramm-Leach-Bliley, though, was
tremendous disclosure regulations that had not been there in
the past. And so now, as I alluded in my testimony, for
example, with insurance, if a customer calls us on the phone,
and they have a question about auto insurance, the first thing
we have to do is say, well, I am obligated to inform you that
this is not a deposit product. It is not insured by the FDIC.
It may go down in value.
And then, we have to mail the disclosure to them, ask them
to sign it and send it back to us so we hold it in their file,
and they may not even buy the insurance from us. So the
protections that were put in place to, you know, prevent some
self-dealing and cross-dealing really have just resulted in an
exorbitant amount of disclosure requirements from banks that
have very successfully and safely been providing these products
all along.
Mr. Plunkett. Senator, I understand that this is a burden,
but the question is whether it is a necessary burden, this kind
of disclosure. If you recall, leading up to Gramm-Leach-Bliley,
we had a situation, for example, with NationsBank and
NationsSecurities. And NationsSecurities was peddling a very,
very risky derivative product to NationsBank customers. And the
majority of them had bought very, as you know, conservative
certificates of deposit.
So these were not at all the kind of consumers that should
have been approached on a derivative product. Some of them
bought them; some of them lost portions of their life savings.
Those were the kinds of problems that led to these types of
disclosures, and the question is whether they are necessary,
and we think telling somebody that it is not a depository
product is a necessary disclosure.
Senator Sununu. Ms. Jorde, do you want to respond to that
specific example?
Ms. Jorde. I think we have to give our customers more
credit. They understand that car insurance is not a deposit. I
mean, they are smarter than that, you know. And so, when we
tell them that it may go down in value, they do not understand
that, and we have to say, well, you know, they messed up a
little bit in the legislation, and they did not really define
what insurance is.
True, if it was an annuity product, that might be an
adequate disclosure. Our insurance agency does not even sell
annuities. We only sell property and casualty and life
insurance and that thing. And we have 1,500 insurance
customers. So we just have created this blizzard of paperwork
and killed a lot of trees in the process.
Senator Sununu. And a lot of leaves.
Ms. Jorde. In the forest.
Senator Sununu. Thank you, Mr. Chairman.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. I am tempted to ask the panel the
question whether you believe in the Federal system of
Government.
[Laughter.]
I mean, is there indeed a role for the States? And I have
to be very candid with you: My perception is that those who are
pushing for the States not to have a role are assuming that the
Federal substantive standard will be weak and therefore
accommodate their interests.
And of course, that may or may not be the case at a
particular time, but I dare say I have the suspicion that if it
were perceived that here in the Congress, if we went to a
uniform Federal standard, it would be a very high and rigorous
standard, that some at the table who now seem to favor that
would say ``now, wait a second: We have a Federal system of
Government in this country, and there is a role for the States
to play.'' And I just throw that out.
And I want to follow up on Senator Bennett's question: When
you all accede to removing the sunset, what was it you
understood you were acceding to? Or let me put the question
this way: How many at the table do not believe there should be
a separation between banking and commerce and that financial
institutions should be free, in effect, to engage in commerce
and commercial institutions to engage in banking?
And we have had a line, generally speaking. We have tried
to hold that line. I am sure the Federal Reserve would disagree
with this, because they have been quite strong on this point,
that we should maintain the separation between banking and
commerce. And we have this small exception, this
grandfathering, which there is an constantly effort to erode
it.
But how many at the table think we ought discard the old
separation between banking and commerce? Mr. Bartlett.
Mr. Bartlett. Senator, I believe that the marketplace
should be regulated for safety and soundness and for consumer
protection, but product allocation should be set by the
marketplace, not by either State or Federal Governments.
Senator Sarbanes. So you have no problem if a major
commercial outfit, Wal-Mart, to take an example, establishes a
Wal-Mart Bank; is that right?
Mr. Bartlett. Mr. Chairman, virtually every supermarket in
America has a bank within the supermarket.
Senator Sarbanes. Yes, but it is not their bank.
What about you, Mr. Doherty? What do you think about that?
Mr. Doherty. I think that the savings and loan and the
savings bank industry has had a long history with commercial
owners. It has worked. The OTS has been working with us over a
long period of time, and we have not had any safety and
soundness issues on this issue.
Back in the 1980's and 1990's, when the industry needed
equity, they needed funding, the commercial firms came in and
helped. So, I think it is a positive.
Senator Sarbanes. Ms. Jorde.
Ms. Jorde. I guess I do not agree at all. I think that
there was a reason that the unitary thrift loophole was closed
in Gramm-Leach-Bliley. There was a reason that the nonbank bank
loophole was closed back in 1987. And I think that it makes a
lot of sense to close the loophole right now on ILC's. And the
world has changed.
Senator Sarbanes. The ILC's? I understand that Merrill
Lynch has an ILC with $60 billion in assets in it, right?
Ms. Jorde. Yes, that is pretty big.
Senator Sarbanes. And they sweep it in, and they get
Federal deposit insurance coverage, if I am not mistaken; is
that correct?
Ms. Jorde. That is correct.
Senator Sarbanes. I also understand that since the
insurance fund does not need to be replenished, since it was
built up by previous premium payments by other financial
institutions that they do not pay anything into the deposit
insurance fund, even though they are sweeping in tens and tens
of billions of dollars; is that correct?
Ms. Jorde. That is exactly correct.
Senator Sarbanes. That does not sound very fair to me to
the other financial institutions. It seems to me something of a
free rider situation.
Ms. Jorde. That is a very good term.
Senator Sarbanes. All right.
Mr. Plunkett. Senator, on your commerce and----
Senator Sarbanes. I will come across. I am coming across,
yes.
[Laughter.]
No problem. Just bide your time.
[Laughter.]
Mr. Plunkett.
Ms. Jorde. Can I just follow up just to----
Senator Sarbanes. I am sorry.
Ms. Jorde. --just to finish?
You know, Wal-Mart, and I hate to pick on poor Wal-Mart,
but, you know----
[Laughter.]
Ms. Jorde. --they are kind of infamous for controlling the
supplier. And when Wal-Mart has a bank, or if they had a bank,
I think that it would be pretty reasonable to assume that they
would control the bank. And when you have a commercial firm
like Wal-Mart, the largest retailer company in the world,
controlling a financial institution, you deal with a lot of
issues regarding impartial allocation of credit. If the local
hardware store wants to go to the Wal-Mart bank to borrow
money, why would Wal-Mart lend them a loan to expand their
business when they would just as soon that their customers went
into the department 27 to purchase hardware?
So the world has changed, and I think now, more than ever,
it makes sense to look at ILC's and how they have evolved and
how they have grown to the $60 billion institutions and how
they have exploited the deposit insurance fund. And again, I
really urge you to look at passing deposit insurance reform
which will begin to address the free rider issues.
Senator Sarbanes. Mr. Plunkett.
Mr. Plunkett. Senator, we strongly support maintaining
policies separating commerce and banking. Let me just give you
five names to help you figure out why: Sunbeam, Enron,
WorldCom, Tyco, and Adelphia.
Chairman Shelby. Say it slowly. We know who they are, but I
want people to hear this.
Mr. Plunkett. Sunbeam, Enron, WorldCom, Tyco, and Adelphia.
If those companies had owned banks, not only would employees,
investors, and the economy have suffered but taxpayers as well.
On the ILC situation, not only have we had an exponential
growth of ILC's, and we are starting to see them become a
shadow banking system; but we also have the handful of States
that are chartering these ILC's going out and saying hey, we do
not regulate you all in the way that the Federal Reserve does
under the Federal Bank Holding Company Act. We do not do it as
well, essentially. Come to us.
That is a very tricky situation, and I think it is
incumbent on Congress to shut that loophole tight just as they
did on the unitary thrift loophole.
Senator Sarbanes. Mr. Tubertini.
Mr. Tubertini. Well, Senator, since I am here representing
the independent agents and brokers----
Senator Sarbanes. You are going to take a pass, right?
Mr. Tubertini. Well, as they would say in my area of the
country and Senator Shelby's, we do not have a dog in that
hunt, so we will pass.
Chairman Shelby. Not today.
Mr. Tubertini. Not today.
Senator Sarbanes. Mr. Bartlett.
Mr. Bartlett. We have a bunch of dogs in that hunt. It is a
free-fire zone, so I am not sure where to start.
First of all, we believe that the customers should make the
decisions, and that is whether it is Wal-Mart or Merrill Lynch
or others, the customers are the ones that ask for the products
and the services. The hardware store has a gazillion outlets
for their commercial loans of all kinds of financial
institutions, and that hardware store should make the decision
on where they want to get their loans.
As far as Merrill Lynch, Merrill Lynch is regulated for
safety and soundness. Their Merrill Lynch ILC is regulated for
safety and soundness by the FDIC, as it should be, and Merrill
Lynch would pay whatever deposit insurance premiums were
required of them by the FDIC. And as far as safety and
soundness, safety and soundness has been long-proven.
Senator Sarbanes. The FDIC does not exercise holding
company supervision the way the Federal Reserve does, and that
is quite a difference. So, I do not think we should just gloss
over that.
Mr. Plunkett. Or look at capital standards for holding
companies.
Senator Sarbanes. Yes.
Mr. McLaughlin.
Mr. McLaughlin. Senator, the American Bankers Association
continues to support the separation of commerce and banking,
but what we are seeing is that the line between banking and
finance is becoming blurred, witness the Gramm-Leach-Bliley Act
itself. And as that happens, it becomes a little bit more
difficult to figure out exactly where that line should be, but
there are some obvious commerce activities that we believe
should be kept separate from banking.
Senator Sarbanes. Mr. Taylor.
Mr. Taylor. NCRC continues to support a strong firewall
between commerce and banking.
Senator Sarbanes. Mr. Judge.
Mr. Judge. We would support removal of the cap, and we do
support the notion of increased synergy between banking and
commerce. We think that the ILC's have proven to be a valuable
tool for consumers as well as for companies. They have
regulation from the FDIC, the States, and the State banking
commissioner, and we think that they provide an important
opportunity for investors and for companies.
Senator Sarbanes. So when you say you want to remove the
sunset, it would not be just to permit the continuation of the
15 percent commercial basket; it would be to eliminate that
limitation altogether; is that correct?
Mr. Judge. We would first support removal of the sunset,
but we would like to see removal of the entire--make it open
for all and remove the 15 percent as well.
Senator Sarbanes. Yes, but when you say remove the sunset,
you encompass within it the removal of the 15 percent
limitation?
Mr. Judge. That is the second step, yes.
Senator Sarbanes. Okay; thank you, Mr. Chairman.
Chairman Shelby. Mr. Bartlett, would you tell us what
companies would have to do in order to comply with the
divestiture requirements in practical terms?
Mr. Bartlett. The divestiture requirement, as a practical
matter, means that a company would have to stop providing
products or services to their customers the customers are
trying to buy once the sunset comes into place. So if a
company, for example, owns a financial adviser and also a
travel agency, they would have to divest of one or the other.
And yet, their customers may well want to engage in both.
There are all kinds of other examples, but they would have to
stop selling products to their customers that their customers
want to buy.
Senator Sarbanes. Do you encompass, as Mr. Judge does, in
the elimination of the sunset the elimination of the 15 percent
limitation?
Mr. Bartlett. It is a two-step process. The elimination of
the sunset is what is urgent to make the system work. On a
theoretical basis, a long-term basis, I think eliminating the
15 percent is also called for. They are two different
decisions.
Chairman Shelby. Mr. Bartlett, you represent mostly the 100
largest financial institutions. And what you are saying is that
you are for the blending of commerce and banking? In other
words, if Wal-Mart wanted to start them a bank, and you can
imagine how large they would be in just a little while or
Target or any of these companies, Sears Roebuck, that is okay?
Mr. Bartlett. We think that the ownership, the ownership of
a financial services company is not the financial services
company. The regulation for safety and soundness should be at
the level of financial services, not with the ownership. And
so, if a company, a Wal-Mart or a supermarket, owns another
company that is financial services, the financial services
should be regulated.
Chairman Shelby. So if Wal-Mart was in the business, Kroger
would be in the banking business, all of them would be in the
banking business.
Mr. Bartlett. Yes, sir, and those products are being
offered today in Krogers and supermarkets all over the country
because the customers want them, and they can be regulated for
safety and soundness.
Chairman Shelby. Well, that would change banking as we know
it big time in this country, though, would it not, Ms. Jorde?
Ms. Jorde. It certainly would. I mean, we have an ATM in
the local convenience store in Cando, North Dakota also, but
the convenience store does not own the bank. And there is a
difference between providing financial products in a commercial
entity and actually owning it. And I think if you look to the
experience of Japan, where there has been cross-ownership of
banking companies and commercial firms, the experience has not
been good.
Chairman Shelby. Right.
Mr. Plunkett. Senator, could I point out that----
Chairman Shelby. Go ahead, Mr. Plunkett.
Mr. Plunkett. Thank you.
I would like to point out here that the concern is not just
commerce and banking but the ILC loophole being used by
financial companies like those that own ILC's now, Merrill
Lynch, for example, American Express, for example, as a way
around the bank holding company regulatory structure, because
they do not face the kind of bank holding company regulation
through ownership of an ILC that they would if they exercised
their right under Gramm-Leach-Bliley to buy a bank. That is the
issue as well.
And then, you get deposits drawn to this new system because
they do not have to go through the regulatory structure under
the Bank Holding Company Act, and then, it becomes a very large
shadow system.
Mr. Judge. Mr. Chairman, if I could: We cannot leave the
impression that this is an unregulated financial institution.
The ILC's existed prior to Gramm-Leach-Bliley. Gramm-Leach-
Bliley allowed them to continue. They are regulated by the
State banking commissioner. They are looked at in terms of the
relationship with the other company by the FDIC. And they are
subject to, if they are part of a thrift charter, or if they
are part of a securities firm, they are subject to either OTS
or CSE regulation.
It is not an unregulated entity. They pay deposit insurance
at the same rate that everybody else does for the marginal
increase in the deposits.
Chairman Shelby. That is why we hold these hearings. We are
dealing with very complex issues with great ramifications to
our economy, to everybody in America. That is why we intend to
continue to hold these oversight hearings and probably learn
more about it.
Senator Sarbanes, did you have any other questions?
Senator Sarbanes. I cannot let Mr. Judge's final comment
go--just to stand. Under the Bank Holding Company Act, from
which the ILC's are exempt, if they were under the Act, the
Federal Reserve would conduct examinations of the safety and
soundness, not just of banks but of the parent or holding
company of these banks. And the Bank Holding Company Act grants
the Federal Reserve the power to place capital requirements and
impose sanctions on the holding companies.
The FDIC does not have those powers. So this is a very
marked difference between the nature of the regulatory regime
which I think has important implications for safety and
soundness of the banking system.
Mr. Judge. The regulatory system is different. I mean, the
bank holding company----
Senator Sarbanes. No doubt about it.
Mr. Judge. --regulatory model is different than the FDIC.
That does not mean that it is not as effective or does not
protect the safety and soundness of the financial system as
well in the FDIC----
Senator Sarbanes. I mean, we can argue that. I feel very
strongly that the authorities under the Bank Holding Company
Act exercised by the Federal Reserve do provide greater
protection for safety and soundness than what exists with
respect to these institutions that are not subjected to those
Bank Holding Company authorities.
Mr. Plunkett. To protect taxpayers and deposits, you have
to look at the holding company. You cannot just look at the
institution itself. That is the only sure way to protect the
depository system and taxpayers.
Senator Sarbanes. In fact, even Chairman Powell, in
testimony before this Committee--I said: Do you have regular
annual examinations of the holding companies?
He said: No, sir.
I said: The process you follow does not begin to be the
equivalent in terms of reviewing banking practices to the one
that is followed by the Federal Reserve; is that correct?
Mr. Powell. That is correct.
Thank you, Mr. Chairman.
Chairman Shelby. I thank all of you. This has been an
interesting panel, and as I said, these are very complex
issues.
Senator Sarbanes. Could I just say to Ms. Jorde, you really
gave meaning, I thought, today, in your testimony to Cando in
North Dakota. Thank you very much, all of you for coming.
Chairman Shelby. Thank you. The hearing is adjourned.
[Whereupon, at 12:01 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF HARRY P. DOHERTY
Vice Chairman of the Board
Independence Community Bank Corp.
First Vice Chairman, Board of Directors
America's Community Bankers
July 12, 2004
Introduction
Chairman Shelby, Ranking Member Sarbanes, and Members of the
Committee, I am Harry P. Doherty, Vice Chairman of the Board of
Directors of Independence Community Bank Corp of Brooklyn, New York.
Independence Community Bank is a New York State-chartered savings bank,
operating within an OTS-regulated holding company. Independence
Community Bank has more than $17 billion in assets, 121 branches and
2,500 employees.
I am here this morning representing America's Community Bankers. I
am the First Vice Chairman of ACB's Board of Directors and will become
Chairman in October. ACB is pleased to have this opportunity to
participate in the Committee's review of the Gramm-Leach-Bliley Act.
America's Community Bankers supported the passage of the Gramm-
Leach-Bliley Act in 1999 because, overall, it created new options for
financial companies that wanted to offer diversified financial
services. It also made positive changes in the capital structure and
regulation of the Federal Home Loan Bank System and the law governing
the FDIC's Savings Association Insurance Fund. However, the GLBA was in
some ways a step backwards for an evolving financial services industry.
After a lengthy and trying debate, it was decided in GLBA to undo
provisions that had successfully permitted the creation of diversified
financial services holding companies and to prohibit commercial firms
from making any new acquisitions of savings associations. That change
limited choices and holding company options for
existing savings associations and deprived the financial services
industry of an important source of capital, without any positive effect
on the safety and soundness of the banking system.
GLBA has not always been implemented in a way to maximize its
potential for bringing financial services to consumers efficiently. For
example, savings associations have yet to achieve regulatory parity
with banks under the securities laws. Savings associations should be
given the same regulatory treatment as banks when they engage in the
same securities activities as banks. The lack of parity requires
savings association customers to pay more for services only because of
their financial institution's charter. While ACB continues to work
through the SEC's regulatory process to achieve parity, ACB believes
that only a statutory change can
ensure parity for savings associations under the securities laws.
Furthermore, the regulatory process established by GLBA to
authorize new financial activities for banking organizations has not
been allowed to work as intended, that is, through a notice and comment
regulatory process that is based on safety and soundness considerations
and administered by expert banking and financial regulators. As a
result of a highly politicized campaign by the realtor community, the
Treasury and Federal Reserve have been unable to finalize a rulemaking
allowing national banks and financial holding companies to offer real
estate services.
GLBA created important new privacy rights for consumers and made
other changes to consumer laws, such as the Community Reinvestment Act.
However, some of these provisions created significant regulatory burden
for all insured depository institutions without any benefit to
consumers or safety and soundness.
Congress and Federal regulators should act to reduce the unnecessary
regulatory burdens that result from these provisions.
I am pleased today to provide a more detailed discussion of ACB's
views on these and other provisions in the GLBA.
Why Financial Modernization Was Important
In 1999, as they do today, ACB's members supported providing
financial organizations choices in charters and business models that
reflected the reality of integration of the financial services
industry. Provisions of the Glass-Steagall Act, enacted during the
Depression, and the Bank Holding Company Act of 1956 stood as barriers
to the full integration of the banking, securities, and insurance
industry for those organizations that wanted to provide bank services
through a bank charter, rather than a savings association charter. For
years prior to 1999, securities, insurance, and nonfinancial holding
companies had owned savings associations. These institutions had given
their holding companies the ability to offer an important array of
financial services to their customers.
However, the Glass-Steagall Act hampered affiliations between
commercial banks and bank holding companies, on one hand, and
securities businesses, on the other. Although the Federal Reserve had
loosened this restriction considerably, Glass-Stegall remained an
anticompetitive anachronism. Bank holding companies could only acquire
securities firms that fit within arbitrary size limits, while major
securities firms were unable to acquire banks.
In a similar vein, the Bank Holding Company Act did not permit
banks to associate with insurance underwriters. Beyond that, the Bank
Holding Company Act limited banks to affiliations with firms ``closely
related'' to banking. Banks that wished to sell insurance products
faced a patchwork of State and Federal statutes, as well as court and
agency interpretations that sometimes permitted and sometimes
prohibited insurance activities. Because ACB members firmly believed
that each financial institution should have a full range of choices to
meet the needs of their customers and communities, ACB urged Congress
to expand choices for financial institutions by repealing these
decades-old restrictions on affiliations.
The Pace of Financial Integration Has Been Slow
GLBA repealed the restrictions on the integration of banking,
insurance, and securities, and established a framework of functional
regulation to supervise banking, insurance and securities activities of
financial conglomerates. However, passage of the Act has had only a
modest impact on the pace of integration of these activities.
Federal Reserve Vice Chairman Ferguson reported in a speech last
November that while there were about 600 financial holding companies at
the end of 2002, less than one-third reported actually engaging in any
new activities authorized by the GLBA. Eighty percent of those
activities were insurance agency activities, probably the ``least new''
and least risky of the activities authorized by the new law. Only 40
institutions reported broker-dealer assets, around 30 reported
insurance underwriting assets, and less than 20 held significant
merchant banking assets using GLBA authority. Ferguson concluded that
even accounting for the size of some these financial holding companies,
and the activities conducted in previously authorized section 20
affiliates, no evidence exists that the overall market structure of the
financial services industry has changed since the passage of the GLBA.
One of the promises of the GLBA was the relatively easy
authorization of new financial activities for banking organizations.
GLBA established a joint Federal Reserve and Treasury regulatory
process for the authorization of permissible new financial activities
for banking organizations. The hope was that under this process, safety
and soundness would be the dominant factor in the decisionmaking
process. However, in the first real test of this authority, the two
agencies have not been able to complete their work on a regulation that
would authorize for national banks and financial holding companies an
activity, which is already authorized for Federal savings associations
and roughly half the State-chartered banks.
In January 2001, the Treasury and the Federal Reserve issued a
proposed regulation to permit national bank financial subsidiaries and
financial holding companies to provide real estate brokerage and real
estate management services to their customers. However, due to a highly
politicized campaign by the realtor community, Treasury and the Federal
Reserve have not been allowed to complete their work on the regulation.
In this particular instance, considerations other than safety and
soundness have held sway.
GLBA Restricted an Important Holding Company Option
In 1999, we also urged Congress not to reduce choice by restricting
the unitary savings and loan holding company. However, policymakers,
ignoring the past success of the unitary savings and loan holding
company, chose to reduce the benefits of the charter by prohibiting
commercial (nonfinancial) firms from acquiring savings associations and
grandfathered unitary savings and loan holding companies. Critics
justified this limit by citing their concerns about mixing banking and
commerce. However, unitary thrift holding companies did not then, and
do not now, mix banking and commerce in any meaningful way. Savings
associations are not permitted to lend to commercial affiliates under
any circumstances. Savings associations' permissible commercial lending
is strictly limited to 20 percent of assets, half of which must be
small business loans. As a result of GLBA's restrictions on unitary
savings and loan holding companies, the banking industry and its
customers lost a potentially important source of capital.
Nevertheless, the unitary savings and loan holding company
structure remains an important choice for financial firms. The
expertise of the OTS in regulating diversified holding companies is one
reason that firms continue to consider this holding company option to
be an efficient choice.
SEC ``Push-Out'' Rule and Parity for Savings Associations
Before GLBA, banks--but not savings associations--enjoyed a blanket
exemption from broker-dealer registration requirements for certain
activities under the Securities Exchange Act of 1934 (Securities
Exchange Act). The GLBA removed the blanket exemption and permitted
banks to engage only in specified activities without having to register
as a broker-dealer. All other broker-dealer activities must be ``pushed
out'' to a registered broker-dealer affiliate. The SEC issued interim
broker-dealer rules on May 11, 2001, to implement the new ``push-out''
requirements. As part of the broker-dealer ``push out'' rules, the SEC
exercised its authority to include savings associations within the bank
exemption. This interim rule treated savings associations the same as
banks for the first time for purposes of broker-dealer registration. In
the interim rule, the SEC recognized it would be wrong to continue
disparate, anomalous treatment between savings associations and banks.
The SEC postponed the effective date of the interim rule several
times. It published proposed amendments to the interim dealer rule on
October 20, 2002 and the final dealer rule on February 24, 2003. The
proposed rules gave savings associations the same exemptions as banks.
On June 2, 2004, the SEC approved a new proposed rule governing when a
bank or thrift must register as a broker.
Unlike the SEC's interim broker rule, the new proposal would no
longer treat savings associations the same as banks in all respects.
Although savings associations would be treated the same as banks for
purposes of the 11 statutory activities they may engage in without
registering as a broker with the SEC, as provided by the GLBA, three
nonstatutory exemptions provided banks would not be extended to savings
associations. The SEC describes the three nonstatutory exemptions as
targeted exemptions that recognize the existing business practices of
some banks. We understand that the SEC staff does not believe savings
associations are engaged in the exempted securities activities and will
only extend relief for savings associations to the securities
activities they are currently performing. OTS General Counsel John
Bowman recently testified that it appears that savings associations
currently engage in some, if not all, of the securities activities
covered by the three additional exemptions. The SEC's discriminatory
approach makes no sense because the bank exemption applies to all
banks--whether or not they are currently engaged in one of the exempted
activities.
ACB vigorously supports providing parity for savings associations
with banks under the Securities Exchange Act. As more savings
associations engage in trust activities, there is no substantive reason
to subject them to different requirements. They should be subject to
the same regulatory conditions as banks engaged in the same services.
ACB intends to file comments with the SEC opposing the discriminatory
treatment of savings associations. However, the latest proposal from
the SEC demonstrates that a legislative change is needed in order to
ensure parity for savings associations under the Securities Exchange
Act.
FHLBank Modernization
Title VI of GLBA made important and welcome changes to the laws
governing the regulation, membership, and capital structure of the
Federal Home Loan Bank System. One of the important changes involved
the membership status of Federal savings banks and savings
associations. Prior to the 1999 law, the institutions were
required to be members of the Federal Home Loan Bank System, while
other financial institutions' membership was voluntary. GLBA put
Federal savings associations on the same footing as others by making
their membership voluntary. Voluntary membership enhances the
cooperative nature of the System and provides incentives to Federal
Home Loan Banks to work for the benefit of their member-borrowers.
After eliminating mandatory membership, GLBA added stability to the
System's capital base by establishing a leverage and risk-based capital
requirement for the FHLBanks and by creating ``permanent capital''
through a second class of stock with a 5-year ``put'' period.
The conversion of the FHLBanks to this new capital system has been
a complex process. Nevertheless, 9 of the 12 Banks have already
implemented their capital plans, and the other 3 are in the process of
implementation. However, regulatory proposals to require the Banks to
register certain equity securities with the SEC could significantly
complicate the implementation of the remaining capital plans.
The GLBA also shifted much authority over the day-to-day operation
of the FHLBanks from the Federal Housing Finance Board to the Banks
themselves. The role of the Finance Board became more that of safety
and soundness regulator
rather than a co-equal or superior in the management of the system. For
example, the GLBA gave the Finance Board new regulatory powers, such as
the authority to issue cease-and-desist orders and to impose civil
money penalties.
Title VI of GLBA made an important change to the formula for the
FHLBanks' contribution to the debt service of the REFCorp bonds, issued
in 1989 to fund the resolution activities of the Resolution Trust
Corporation. The GLBA formula requires the Banks to pay 20 percent of
net income to REFCorp. The old formula, eliminated by GLBA, had the
potential to create disincentives for FHLBanks to provide advances for
SAIF-insured financial institutions.
Financial Privacy
In Title V of GLBA, Congress passed the most sweeping law in
American history to protect the privacy of consumers' financial
information. Among other things, Title V requires each financial
institution to disclose its privacy policy to the consumers and
customers it serves and to restrict the sharing of nonpublic personal
information sharing with most nonaffiliated third parties without first
providing individuals the ability to prevent the exchange of their
information (opt out). In addition to an initial disclosure of an
institution's privacy policy and an initial opt out notice, GLBA
requires a financial institution to provide annual disclosures and
notices to its customers. GLBA required compliance with these
provisions by July 1, 2001.
At the end of 2001, ACB conducted a survey to measure the costs
incurred to comply with GLBA's privacy policy and opt out disclosure
requirements. The survey concluded that community banks spent a
disproportionately higher amount than larger banks in providing
customers copies of their privacy policies and opt-out disclosures. The
survey also found that customers rarely exercised the option of
prohibiting their bank from sharing customer financial information with
nonaffiliated third parties, and that a majority of customers did not
find the disclosures useful.
The average compliance cost was $1.37 per customer, with total
estimated compliance costs per bank ranging widely from as little as
$1,000 to more than $2 million. The survey found the cost per customer
averaged 27 cents at banks with assets of $10 billion or more, compared
with per customer costs of $2.37 at banks with assets of less than $50
million--almost nine times as much. As a percentage of noninterest
expenses (salaries, employee benefits, occupancy costs, etc.), banks
with less than $50 million in assets paid almost four times as much as
the group of banks with assets of $10 billion or more. The survey
interpreted these results to mean that larger banks with in-house legal
and consulting staff were able to do most of the compliance work
themselves, while smaller banks sought outside legal help and
consultants.
A 2002 survey found that while compliance costs were reduced
significantly,--as initial policies and procedures developed in 2001
have become institutionalized--they remained high. In 2002, ACB found
that the estimated average compliance per customer was about $0.65 per
customer. These costs are likely to increase.
I will tell you, community banks guard their depositors'
information like Fort Knox and have built their reputations on the
trust of their customers that their bank will actually do so. Most
community banks do not share information in any way whatsoever. Others
share information only under very controlled circumstances when certain
operational functions are outsourced to a vendor. We suggest that
Congress eliminate annual privacy notices for banks that do not share
information with nonaffiliated third parties. Banks with limited
information sharing practices should be allowed to provide customers
with an initial notice, and provide subsequent notices only when terms
are modified.
I am sure that you are all inundated by privacy statements each
fall. I am equally confident that most or all of them remain unread.
The complexity of the statements--which is dictated by GLBA and the
implementing privacy regulations--certainly contributes to customers'
disregard of the notices. ACB suggests that the
regulators improve the quality and utility of GLBA privacy notices by
developing an easy-to-understand, short-form notice, and that Congress
provide statutory relief as necessary to accommodate these changes.
Information Security Program
GLBA established new standards for ensuring the security and
confidentiality of customer records and information. While the
confidentiality and security of customer information has always been a
cornerstone of community banking, the new GLBA information security
standards brought increased focus to this issue.
The GLBA information security standards require every bank to
conduct a risk assessment to identify and assess risks that may
threaten the security, confidentiality, or integrity of customer
information. Each bank is then expected to implement a comprehensive
written information security program appropriate to the size and
complexity of the institution. Review of the information security
program is a part of the regular safety and soundness examination of
every depository institution.
In response to recent high profile cases of compromised personal
information such as credit and debit card numbers, Congress and the
banking regulators have considered what additional measures may be
necessary to protect consumer financial information. Community banks
were not involved in any of the recent high profile cases of
compromised consumer financial information. The development and
maintenance of a formal information security program is a significant
responsibility for all banks, but the burden is especially hard felt by
small community banks. Congress and the regulators should carefully
study the causes of these recent security breaches and avoid new
information security requirements that unnecessarily increase the
regulatory burden of the banking industry.
CRA Sunshine Law
Section 711 of the GLBA enacted the so-called ``CRA Sunshine Law.''
Under the CRA Sunshine Law, parties to certain CRA-related agreements
must make the agreements available to the public and the appropriate
Federal banking agency. Section 711 applies to written contracts,
arrangements, and understandings that are entered into by an insured
depository institution or an affiliate and a nongovernmental entity or
person; and which are entered into pursuant to or in connection with
the fulfillment of CRA; and which call for an insured depository
institution or affiliate to provide cash payments or other
consideration with an aggregate value of more than $10,000 in any year,
or loans with an aggregate value of more than $50,000 in any year. The
law requires both depository institutions and nongovernmental groups
(consumer groups) to make a report of all such agreements annually to
the appropriate Federal banking agency.
The regulations implementing the CRA Sunshine Law are overly broad
and impose significant paperwork, regulatory and cost burdens on banks
that far outweigh possible benefits. Community banks, especially small-
and mid-sized banks, are forced to spend considerable resources
complying with the disclosure, reporting and recordkeeping requirements
associated with CRA-related agreements rather than doing what really
matters--serving their communities with affordable credit and financial
services. As a result of the CRA Sunshine Law and these regulations,
fewer creative and innovative partnerships are formed because of
competitive and privacy concerns. According to FDIC Vice Chairman
Reich, both banks and consumer groups share these views. ACB believes
that the CRA Sunshine Law should be repealed in order to reduce
regulatory burden on depository institutions, consumer groups and
Federal banking agencies.
Deposit Insurance Reform
Finally, another important provision of GLBA eliminated the Savings
Association Insurance Fund Special Reserve. The Deposit Insurance Funds
Act of 1996 created a special reserve, effective as of January 1, 1999,
of amounts in excess of the statutory designated reserve ratio of 1.25
percent. As a result, nearly $1 billion was removed from the SAIF on
January 1, 1999. On the effective date of GLBA, November 12, 1999,
those funds were restored to the SAIF, which resulted in an increase in
the SAIF reserve ratio from 1.29 to 1.43 percent. The elimination of
the reserve reduced the risk that the SAIF reserve ratio would fall
below 1.25 percent, which triggers an FDIC insurance assessment on
SAIF-insured deposits. ACB strongly supported the elimination of this costly, unnecessary reserve.
This change also established greater flexibility for the FDIC that
improved the ability of the FDIC to manage the SAIF. ACB notes that
many of the provisions currently being considered by the Committee to
reform the Federal deposit insurance system similarly increase the
FDIC's operating flexibility, and would contribute to the security of
the Federal deposit insurance system. ACB urges the
Committee to act on pending legislation as soon as possible.
Conclusion
I wish to again express ACB's appreciation for this opportunity to
present its perspectives in connection with the Committee's review of
the impact of the GLBA.
----------
PREPARED STATEMENT OF TERRY JORDE
President and CEO, CountryBank, USA, Cando, North Dakota
Vice Chairman, Independent Community Bankers of America
July 13, 2004
Mr. Chairman, Ranking Member Sarbanes, and Members of the
Committee, my name is Terry Jorde. I am Vice Chairman of the
Independent Community Bankers of America (ICBA) \1\ and President and
CEO of CountryBank USA, a community bank with $37 million-in-assets
located in Cando, North Dakota. Cando is a small town of only 1,300
people, but we have three banks and a motto that ``You Can Do Better in
Cando.'' Our bank is full service and progressive, offering our
customers a full range of insurance and investment services,
residential mortgages, check imaging, and fully transactional Internet
banking.
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\1\ The Independent Community Bankers of America represents the
largest constituency of community banks of all sizes and charter types
in the Nation, and is dedicated exclusively to
protecting the interests of the community banking industry. ICBA
aggregates the power of its members to provide a voice for community
banking interests in Washington, resources to enhance community bank
education and marketability, and profitability options to help
community banks compete in an ever-changing marketplace. For more
information, visit ICBA's website at www.icba.org.
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I would like to compliment this Committee on exercising its
oversight role by calling this hearing on the effect the Gramm-Leach-
Bliley Act has had on the financial industry, the Nation, and--most
importantly--on our communities. We conclude that the Act has had a
number of effects, many positive, and some negative:
The Federal Home Loan Bank reform provisions have been very
helpful to community banks and could be further improved by the
passage of Senator Enzi's amendment to this Committee's GSE reform
legislation. It clarified the FHLBank's mission to provide
community financial institutions with funding for agricultural and
small business loans.
GLB closed the unitary thrift loophole--which allowed any
commercial firm to purchase a thrift institution--but Congress now
needs to close the industrial loan company loophole to maintain the
separation of banking and commerce;
GLB contributed to increased financial concentration;
Community banks have made limited use of the Act's new
financial holding company structure, most likely to engage in
insurance agency activities;
The notice requirements under the privacy provisions should be
streamlined, especially for the majority of community banks that do
not share information with outside parties.
FHLBank System
The Federal Home Loan Bank reforms provided the Act's most
significant benefits to community banks. Frankly, during the time the
bill was being considered, ICBA concluded that these provisions and the
closing of the unitary thrift loophole offset the bill's problematic
aspects.
From our perspective, the FHLBank reforms included these
significant benefits:
Permitted any ``community financial institution'' (now--with
indexing--any FDIC-insured institution with less than $550 million
in total assets) to become a member. Previously, an institution had
to have at least 10 percent of total assets in ``residential
mortgage assets'' to qualify. Changing this was particularly
important to many agricultural banks that found the 10 percent test
difficult to meet in their markets.
Allowed community financial institutions to use small
business, small farm, and small agri-business loans as collateral
for advances.
Equalized membership requirements for commercial banks and
thrifts. This was a win-win for community banks of all charter
types, since it made membership for Federal thrifts voluntary and
eliminated second-class membership status for commercial banks.
Eliminated an emerging problem by repealing the 30 percent
ceiling on FHLBank System advances to institutions that did not
meet the qualified thrift lender test.
As a result of these reforms, community banks of all charter types
have greatly increased their involvement in the System. Approximately
76 percent of ICBA members are now also members of the System, compared
to 17 percent immediately after passage of GLB.
ICBA members are increasing their use of the FHLBanks' advances to
fund local loans. I am sure my experience is typical of many new
members. My bank was a member before GLB, but not an active advance
user. For the first time in years, we are borrowing from our FHLBank
because our deposits are down and loan demand has increased. Because of
these liquidity pressures, the FHLBank System is more important than
ever for our members.
While FHLBank access has provided community financial institutions
like CountryBank needed liquidity, it has also helped us better serve
our customers. FHLBanks provide many different types of advances that
help bankers better meet the needs of our customers who are seeking
longer-term, fixed-rate loans for residential mortgages, commercial and
agricultural real estate mortgages, and other types of loans that our
deposit base does not permit without unduly exposing the bank to
interest rate risk.
My bank belongs to the Federal Home Loan Bank of Des Moines that
has been a champion in accepting small business and agricultural assets
as collateral for advances. Some FHLBanks have been slow to accept the
new collateral types permitted by the Act and have place severe
constraints on pledging small business, small agri-business and small
farm loans, such as limiting the types of loans or severely haircutting
values. Thus, some community financial institutions have not been able
to use this collateral to obtain advances as Congress envisioned. While
any institution needs to be cautious about moving into a new type of
business, the FHLBanks have had sufficient time since the Act's passage
to develop the expertise and the policies and procedures to more
readily accept these new collateral types. As the economy strengthens
and loan demand increases, many community financial institutions will
need the ability to pledge this collateral.
ICBA is pleased that this Committee addressed this issue by
adopting an amendment by Senator Enzi to the GSE reform bill, S. 1508.
That amendment clarified that the mission of the FHLBanks includes
providing liquidity and funds to community financial institutions for
agriculture and small business lending. We are hopeful that your
endorsement of this will stimulate the FHLBanks to use the authority
provided in GLB. ICBA will continue to support Senator Enzi's effort as
this legislation moves through the process.
Maintaining the Separation of Banking and Commerce
GLB reaffirmed the Nation's long-standing policy maintaining the
separation between banking and commerce by closing the unitary thrift
loophole that permitted any commercial firm to acquire a single thrift
institution. By maintaining the separation of banking and commerce,
Congress helped ensure that our financial system would avoid the
conflicts of interest and threats to safety and soundness that would
arise if commercial firms--such as retailers and manufacturers--were
permitted to own their own banks.
While GLB grandfathered the few existing commercial/unitary thrift
combinations, it effectively cut off Wal-Mart's application to acquire
an Oklahoma thrift. This prevented Wal-Mart from engaging in dangerous
self-dealing between its huge retail operation and a federally insured
thrift institution. And, since many banks already have branches in
thousands of Wal-Mart stores, customers will continue to have
convenient access to banking services. However, the banks will maintain
their legal independence from Wal-Mart and will be able to lend on an
arm's length basis to all businesses in their communities.
Congress also successfully addressed the banking and commerce issue
before GLB. In 1987, the Competitive Equality Banking Act closed the
nonbank bank loophole that permitted commercial firms to establish
banks. In 1972, Congress closed a loophole that would have permitted
any commercial firm to own a single bank.
All of these loopholes existed for many years before they were
closed. However, Congress acted as soon as it became clear that they
could be exploited in a major way. Policymakers now must face the same
issue with industrial loan companies. Several years ago, Wal-Mart
attempted to buy a California ILC. Fortunately, the California
legislature quickly acted to block that attempt by closing the ILC
banking and commerce loophole in its State. Unfortunately, the loophole
remains in place in several other States and has been exploited most
enthusiastically in Utah. ICBA joins with the Federal Reserve in urging
Congress to reassert its authority and close the ILC loophole for the
entire Nation by bringing the ILC's under the Bank Holding Company Act.
This would prevent additional commercial/ILC affiliations and extend
effective holding company regulation to the parents of ILC's.
In its regulatory relief bill, H.R. 1375, the House took steps to
address the ILC loophole by adopting the Gillmor-Frank Amendment that
would prevent newly formed ILC's with commercial affiliations from
using the bill's new de novo interstate branching authority or the
interstate banking and branching powers provided by the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994.\2\
Unfortunately, the House did not include similar restrictions in the
business checking provisions of H.R. 1375. As a result, ILC's--
including those owned by commercial firms--would be granted completely
new authority to offer business checking accounts, plus be permitted to
pay interest on those accounts. This would make ILC's the functional
equivalent of full service banks and negate the original rationale--a
limited charter--for excluding them from the BHCA.
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\2\ Without the Gillmor-Frank Amendment, Wal-Mart could buy or
charter an ILC and establish a nationwide network by setting up
branches of the ILC in each one of its stores.
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While the Gillmor-Frank language was a positive first step, ICBA
strongly urges Congress to take the next step and close the ILC
loophole completely.
Increased Concentration
As Congress considered the financial modernization legislation that
ultimately became GLB, ICBA repeatedly warned that it would likely lead
to increased financial concentration. That has certainly proven to be
the case. GLB and the Riegle-Neal Act have together led to the creation
of truly huge financial conglomerates. We now have three $1 trillion
banks in the United States. This is certain to decrease competition and
increase systemic risk.
While it is too late to turn back the clock on these developments,
ICBA recommends that Congress take steps to improve the competitive
landscape so that consumers and businesses continue to have robust
financial services choices. In this regard, ICBA has particular concern
about the competitive position of community banks in this environment.
Just last month, ICBA submitted testimony that highlighted the
detrimental effects than increasing regulatory burden is having on
community banks' ability to compete. We again strongly urge you to
reduce this burden to improve our ability to serve our customers and
communities. This burden falls disproportionately on community banks
that cannot spread their costs across a large asset and personnel base.
Unless Congress and the regulators can lift it soon in material ways,
economic development and small businesses will suffer. Therefore, we
urge you to follow up on our recommendations and those the financial
regulatory agencies develop under the EGRPRA regulatory review.\3\
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\3\ The agencies are in the midst of reviewing 129 banking
regulations to identify provisions that are outdated, unnecessary, or
unduly burdensome, as required by the Economic Growth and Regulatory
Paperwork Reduction Act of 1996.
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In addition, we hope that Congress will complete action on deposit
insurance reform legislation this year. Deposit insurance provides the
bedrock for community bank competitiveness. Since community banks are
not too-big-to-fail, our depositors look to deposit insurance to
protect their transaction and savings accounts. While we continue to
favor immediate increases in coverage--especially for retirement
funds--ICBA hopes that at least Congress can pass legislation that will
provide a robust indexing system, along with other key reforms such as
eliminating the 23-basis-point premium cliff and ending the free ride
for rapidly growing institutions.
I would also like to draw your attention to another aspect of
increased concentration, the fact that the largest institutions appear
to be too big to regulate and too big to punish for their
transgressions. Community bankers from around the country are
increasingly concerned about what they perceive as a regulatory double
standard. In case after case, they note that regulators and courts
impose only nominal fines for megabanks' misdeeds and regulators go on
to approve their mergers. For example, Citigroup agreed to pay
investors $2.7 billion for its part in WorldCom's bankruptcy. J.P.
Morgan paid $135 million for its part in the Enron scandal. This proved
to be less than a speed bump for its acquisition of Bank One; the case
was barely alluded to in the 63-page approval decision. UBS was fined
$100 million for providing U.S. currency to Cuba, Libya, Iran, and
Yugoslavia. While it was also ordered out of this line of business, it
had not been particularly profitable or significant to the institution.
While some of the fines and settlements may seem large to the
average person, they are tiny when applied to these companies.
Commenting on Citi's WorldCom settlement, an analyst wrote that,
``Citi's earning power and existing capital levels allow it to take
such a charge without any material adverse impact to capital levels and
[with] no impact on dividend policy.'' \4\
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\4\ (Susan Roth, Credit Suisse First Boston, quoted in ``For Citi,
$5B Is Price of `Moving On' ''; American Banker, 5/11/04)
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A relatively large community bank like Riggs ($6 billion) in
Washington, DC, suffered more serious consequences when it failed to
file Suspicious Activity Reports on certain embassy transactions.
Regulators forced significant management changes and the bank is
exiting its signature line of business, handling the banking needs of
the diplomatic community. The $25 million fine assessed against Riggs
was more than its annual earnings for each of the last 4 years.
Analysts believe Riggs may even lose its independence.
The vast majority of community banks undergo even harsher
treatment. State and Federal regulators (properly) hold management
strictly accountable for everything that happens in the bank--from its
culture to the actions and deeds (and misdeeds) of its staff and
alliance partners. If they cross the line, both the bank and management
are punished. There are no exceptions.
ICBA urges Congress to direct the agencies to review their
policies, comparing the fines and other punishments that they apply to
the largest institutions they regulate with those they mete out to the
rank and file. It is important to eliminate the perception that large
institutions are above the law and can commit serious offenses without
facing serious consequences.
In the face of these concerns, this is certainly not the time for
Congress to take further steps, such as lifting the deposit caps in the
Riegle-Neal legislation, that would further increase concentration.
ICBA will vigorously oppose any such proposals.
Additional Financial Services
GLB did not provide community banks with substantial new
opportunities to provide financial services to their customers. In the
years prior to enactment, State action, plus court and regulatory
interpretations allowed virtually all banks to offer retail financial
services--primarily insurance and securities--as agents. One exception
to this general rule are the provisions of GLB that permit financial
holding companies and financial subsidiaries of national banks to sell
insurance even if they are not headquartered in towns of less than
5,000 in population or in States that granted insurance agency powers
to State-chartered banks. A number of community banks have formed FHC's
or financial subsidiaries, apparently for the purpose of engaging in
insurance sales. However, only the largest financial institutions were
interested in affiliating with underwriting companies. Indeed, it was
the apparently illegal merger between Citibank and Travelers' Insurance
that provided the final impetus to the legislation.
While community banks did not seek the new financial affiliation
authority under GLB, a significant number of ICBA member community
banks offer retail insurance and securities services. Just under half
of the banks under $1 billion in assets earned fee income from
insurance activities in 2003. That same year, nearly 23 percent of
those banks earned income from mutual fund and annuity activity.\5\
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\5\ Michael White's Bank Insurance & Investment Fee Income Report,
2003 Year-end Edition, pp. 13 & 109.
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My own bank is active in insurance sales and investment brokerage,
though we did not need GLB to enter these fields. Insurance sales are
particularly important for our bank and we are having good success. We
have just purchased our third agency. In fact, 30 percent of our bank's
employees are dedicated to insurance sales.
Real estate brokerage is another retail service community banks
would like the opportunity to offer to our customers. Therefore, ICBA
is disappointed that Congress has repeatedly used the appropriations
process to block the Treasury from finalizing the proposed regulation
to allow financial holding companies and financial subsidiaries of
national banks to engage in real estate brokerage and management. We
believe that GLB provides the Treasury and the Federal Reserve full
authority to permit these activities. More importantly, these new
powers will allow FHC's and financial subsidiaries to better serve
customers by increasing choice and decreasing costs. And, it will allow
community banks to diversify their sources of income by engaging in a
low-risk agency activity analogous to securities and insurance
brokerage.
The financial market is rapidly changing and evolving, and it is
important for community banks to have the means and opportunity to
serve all of their customers' financial needs. Many other entities
already offer one-stop-shopping for real estate brokerage, mortgage
lending, and real estate settlement services. It flies in the face of
the GLB Act's fundamental purpose to continue blocking the proposed
Treasury/Federal Reserve regulation.
While GLB did not greatly increase retail sales opportunities for
community banks, it did make substantial changes in how these sales are
conducted today.
Prior to GLB, banks were specifically excluded from the definition
of ``broker'' contained in the Securities Exchange Act of 1934. As a
result, banks could engage in securities sales activities and did not
have to be concerned about registering as a broker with the SEC. With
the enactment of GLB, banks are excluded from the definition of
'broker'' only to the extent that their securities sales activities
fall into one or more of the eleven statutory functional exceptions.
Each of these exceptions permits a bank to act as an agent with respect
to specified securities products or in transactions that meet specific
statutory conditions. In particular, Section 3(a)(4) of the Exchange
Act provides conditional exceptions from the definition of broker for
banks that engage in third party brokerage arrangements; trust and
fiduciary activities; permissible securities transactions; certain
stock purchase plans; sweep accounts; affiliate transactions; private
securities offerings; safekeeping and custody activities; municipal
securities; and de minimis transactions.
In 2001, the Commission adopted interim final rules designed to
provide banks with guidance regarding the GLB by defining certain key
terms used in the new statutory exceptions. These interim final rules
were suspended after the trade associations and members of the banking
industry expressed serious concerns about the complexity and regulatory
burden of the new rules and the negative impact they would have on
banks' ability to engage in traditional banking activities such as
trust, fiduciary, and custody activities.
On June 17, 2004, after discussions with representatives of the
industry, the SEC published new proposed rules (with comments due in
August). These new rules, which are 228 pages long, are designed to
define and clarify a number of the statutory exceptions from the
definition of ``broker'' in GLB.
Although ICBA is pleased that the SEC has modified its original
proposal made in 2001--particularly with respect to the definition of
what is considered a ``nominal'' fee under the network exemption and
raising the small bank threshold to $500 million under the custody
exception--ICBA still is concerned about the overall complexity of the
proposed rules. The regulatory burden on community banks is already
significant and these rules will just add to that burden by requiring
community banks to adopt compliance programs to ensure that they comply
with one of the complex exceptions under the regulations. The SEC
should make an effort to simplify the proposed rules, particularly with
regard to the trust and fiduciary activity exemption.
The banking agencies have long since finalized the consumer
protection regulations regarding the retail sale of insurance required
under GLB. Like so many consumer disclosures, these regulations--which
closely follow the legislative language--require far more information than consumers are prepared to absorb as they complete a financial transaction. Even more troubling, the disclosures are often irrelevant. For example, we must give all new insurance customers a disclosure that informs them that
the insurance product they are inquiring about is not a deposit, not
guaranteed by the bank, not insured by the FDIC, and may go down in
value. This disclosure must be given even if the insurance product has
no investment risk. In fact, none of the products that my agency sells
have investment risk. I have seen the dumbfound look on my customers'
faces when they have been told that their auto policy or their crop
insurance is not a deposit and may go down in value, followed by their
look of concern when we inform them that their insurance is not
guaranteed. If the customer inquires about insurance over the
telephone, we must make these disclosures orally and then follow up
with written disclosures. And we need for them to sign the disclosure
document and retain it in our file. The end result is a waste of time,
paper, and postage and puts us at a competitive disadvantage to other
insurance agencies in my community that are not housed within a bank
office. ICBA urges Congress to ask the agencies to recommend specific
changes in GLB to streamline and simplify these disclosures, while
maintaining adequate consumer protection.
Increased financial conglomeration of the kind permitted under GLB
has had a mixed competitive effect on community banks. Some report that
insurance companies like State Farm (which bought a thrift while GLB
was moving through Congress) present stiff competition by offering
extremely attractive rates on deposits. Others report an opposite
effect; some new financial conglomerates turn their attention away from
traditional banking, opening up competitive opportunities for community
banks. Still others report little direct effect at this time.
Privacy
GLB requires financial institutions to provide annual notices
regarding their privacy policies to each of their customers. Many
community bankers view the annual privacy notice as ineffective and
unnecessary. They have become another example of the disclosure
blizzard that has done little more than confuse and burden consumers
with pages of incomprehensible legalese.
Most community banks do not share their customers' financial
information with outside marketing companies and the like. They share
information with vendors like check printers and data processors that
use it strictly to help the bank provide essential services. Therefore,
ICBA recommends that Congress amend GLB to allow these institutions to
provide a short statement to that effect printed on the customer's bank
statement.
In addition, community banks--and doubtless many other financial
institutions--maintain consistent privacy policies from year to year.
These institutions should have the option not to deliver the annual
notice unless they have changed their privacy policy. Not only would
this relieve them of a costly paperwork burden, it would make it more
likely consumers would pay attention to the notices. The current
requirement that banks furnish all customers with an annual privacy
notice actually has a very serious unintended consequence: It
encourages customers to disregard the information that is provided,
making them increasingly less likely to pay heed to notices.
These notices are particularly pointless for my bank and our
customers, since North Dakota has such restrictive privacy laws that
the Federal requirements are a moot point. Yet we are required to mail
thousands of privacy notices to our customers every year just to tell
them that we will not break the law. It is this type of unnecessary
burden that is driving community banks to sell out, often times leaving
the very consumer that these laws are meant to protect with fewer
choices for financial services.
Conclusion
I would again like to compliment the Committee on holding this
oversight hearing on the Gramm-Leach-Bliley Act. Most of the benefits
we anticipated have been borne out, especially with regard to the
FHLBank System (although more must be done to implement the community
financial institution provisions regarding use of advances for
agriculture and small business lending). The Act successfully closed
the unitary thrift loophole, but a new one--the ILC loophole--is
emerging as an important threat. The Act has led to increased
concentration, though has provided some limited new opportunities for
community banks to offer insurance products. The impact of the
securities push-out provisions on community banks will depend on the
final rule expected to be issued by the SEC later this year. Finally,
Congress should streamline the privacy notice provisions and will need
to continue its oversight efforts if states seek to impose their own
privacy restrictions.
Thank you again for this opportunity to testify.
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PREPARED STATEMENT OF TRAVIS PLUNKETT
Legislative Director, Consumer Federation of America
on Behalf of the Consumer Federation of America,
Consumers Union, and the U.S. Public Interest Research Group
July 13, 2004
Mr. Chairman, Senator Sarbanes, and Members of the Committee, my
name is Travis Plunkett and I am the Legislative Director of the
Consumer Federation of America.\1\ We appreciate the opportunity to
offer our comments on the effect of the Gramm-Leach-Bliley Act on
consumers. This testimony is also being delivered on behalf of two
other national consumer organizations, Consumers Union,\2\ and the U.S.
Public Interest Research Group.\3\
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\1\ The Consumer Federation of America is a nonprofit association
of over 280 proconsumer groups, with a combined membership of 50
million people. CFA was founded in 1968 to advance consumers' interests
through advocacy and education.
\2\ Consumers Union is the nonprofit publisher of Consumer Reports
magazine. Consumers Union was created to provide consumers with
information, education and counsel about goods, services, health, and
personal finance; and to initiate and cooperate with individual and
group efforts to maintain and enhance the quality of life for
consumers. Consumers Union's income is solely derived from the sale of
Consumer Reports, its other publications and from noncommercial
contributions, grants, and fees. Consumers Union's publications carry
no advertising and receive no commercial support.
\3\ The U.S. Public Interest Research Group is the national
lobbying office for State PIRG's, which are nonprofit, nonpartisan
consumer advocacy groups with half a million citizen members around the
country.
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In the decade-long debate that led to enactment of the Gramm-Leach-
Bliley Act (GLBA) in 1999, Congress heard many promises from financial
services industry representatives about how tearing down the barriers
between banking, securities, and insurance sectors would be a boon to
consumers. Banks, securities firms and insurance companies would merge
into financial services ``supermarkets'' that offer increased consumer
access to new, innovative products at lower costs with improved privacy
protections.
Five years later, this rhetoric has proven to be mostly hype.
Mergers have occurred, but mostly within the banking industry, not
across sectors. While some, primarily affluent consumers may benefit
from larger multistate ATM networks, from discounts offered for
multiple account relationships or from sophisticated financial products
offered by boutique units to high-balance customers, we have seen no
evidence that GLBA has positively affected the mass of banking
consumers. It has not slowed the continuing trend of rising bank fees,
nor has it helped decrease the numbers of unbanked consumers. Indeed,
rather than offering innovative, moderately priced products to middle-
income consumers, or to unbanked consumers to bring them into the
financial mainstream, some banks are developing policies and services
that deliver second class or downright predatory products at an
extremely high cost.
The corporate scandals of the last few years have also exposed
potentially significant safety and soundness risks in allowing banks to
sell both credit and investment banking services with inadequate
regulatory oversight. The exponential growth of Industrial Loan
Companies, which were allowed to continue to exist under GLBA without
facing the rigorous regulatory scrutiny required of bank holding
companies, has also started to create concerns that this shadow banking
system could put taxpayer-backed deposits at risk.
Finally, the privacy requirements Congress ended up enacting as
part of GLBA are narrow and weak. They do not provide consumers with a
meaningful right to stop the sharing of much financial information with
third parties or any financial information with corporate affiliates.
Congress also missed an opportunity to modernize the Community
Reinvestment Act by placing reinvestment requirements on nonbank firms
that are performing bank-like functions. Instead, under the ``CRA
sunshine'' provision, it placed burdensome and poorly crafted reporting
requirements on both banks and community organizations.
Financial Privacy
During the decade-long debate that led to enactment of GLBA, our
organizations repeatedly raised concerns about an almost total lack of
Federal financial privacy protections for consumers. Unfortunately,
this situation has not changed demonstrably since the enactment of
GLBA. The financial privacy requirements that
Congress imposed on financial institutions in exchange for eliminating
the barriers between banks, insurers, and securities firms are narrow
and weak. These requirements put the burden on consumers to stop the
sharing of only some of the information shared by financial
institutions with third parties. Even worse, these requirements offer
consumers no ability at all to stop the sharing of sensitive financial
data among financial affiliates. Moreover, the privacy notices that
financial institutions are required to use to inform consumers of these
limited rights are virtually incomprehensible. As a result, they are
widely ignored by consumers.
Under Title V of GLBA, financial institutions only have to give
consumers the opportunity to say no to (``opt out'' of) the sharing of
their financial information with certain nonaffiliated third parties
selling nonfinancial products. However, sharing is allowed with other
third parties that have joint marketing agreements with financial
institutions to sell financial products. In other words, consumers have
no control over the sharing of their confidential ``experience and
transaction'' information if two separate parties enter joint marketing
agreements, nor do consumers have any right to stop the sharing of
information among affiliates of a financial institution. Some financial
institutions have hundreds of affiliates. A few have thousands of
affiliates.\4\
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\4\ See testimony before this committee of Vermont Assistant
Attorney General Julie Brill for a detailed list of some institutions'
affiliates. Senate Banking Committee, Hearing On Affiliate Sharing
Practices and Their Relationship to the Fair Credit Reporting Act, 26
June 2003 available at http://banking.senate.gov/
index.cfm?Fuseaction=Hearings.Detail&HearingID=46.
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The implications on consumer privacy of GLBA's establishment of
one-stop-shopping financial supermarkets are very serious, as decisions
about the type of and prices for services and products offered to a
consumer from one financial entity might be determined by information
provided in the past to an affiliate. The type of information that is
collected and shared often includes: Account balance, payment history,
parties paid by financial transactions, all credit card usage,
employment, and demographic information.
By combining all of these data about a particular consumer,
financial institutions are able to create customer profiles. Profiles
may then be used to determine how much a consumer will pay for a
product or service or whether or not the consumer will be offered the
product in the first place. Because this information sharing occurs
among affiliates of a financial institution, these profiles are created
and used without subjecting the firm to the requirements of or allowing
consumers the protections of the Federal Fair Credit Reporting Act (15
U.S.C. 1681 et seq).
The widespread sharing and selling of personal financial
information is also one of the reasons why consumers have become more
vulnerable to identity theft in recent years. Many financial
institutions have hundreds of affiliates that they share their
customers' financial information with, and sell that same information
to other third parties like telemarketers and direct mail firms. The
more this information is disbursed, the greater the likelihood it will
fall into the wrong hands and be used for illicit purposes. In Fall
2003, a Bank of America employee in Santa Ana, California was sentenced
to State prison for stealing identity and account information for over
740 Bank of America customers. Obviously, financial institutions cannot
ensure that information is perfectly secure at all times. Therefore, it
is imperative to at least give consumers the ability to do everything
they can to protect themselves against this crime.
Perhaps even more importantly, these business practices represent a
fundamental invasion of consumers' privacy. Most of us are very
selective when it comes to disclosing private financial information to
others. When banks and other financial institutions share or sell
information about our account balances or spending habits without first
getting our permission, they are violating our desire to keep this
information private.
To make matters worse, the privacy notices required under GLBA are
at best extremely confusing, if not altogether deceptive. These were
intended to serve two purposes. First, they were supposed to provide
consumers directions on how to exercise their limited rights. Second,
they were intended to inform consumers of the financial institution's
privacy policies. Unfortunately, because they are so confusing and hard
to understand they fail on both counts.
A July 2001 readability analysis of 60 financial privacy notices by
the Privacy Rights Clearinghouse found that they are written at a 3rd-
4th year college reading level. This is significantly higher than the
junior high school level that is recommended for materials written for
the general public. While we have heard anecdotal evidence that some
privacy notices are getting clearer, they are still a far cry from
sufficient.
If consumers are unable to read and comprehend their notices, they
will simply throw them away and not exercise their limited rights. The
Wall Street Journal summed up this situation accurately:
(I)n crafting the new law, known as the Gramm-Leach-Bliley Act,
the Government failed to ensure a vital detail: The mailers
have to be readable to do any good. Indeed, many recipients,
unwilling or unable to plough through the jargon and marketing
talk, have simply tossed them in the trash. This only plays
into the hands of the companies: A nonresponse to the mailer
gives them a green light to sell that person's data.\5\
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\5\ ``Privacy Notice Offers Little Help,'' By Russell Gold, Wall
Street Journal, May 31, 2002.
Our organizations argued in 1999 that financial institutions should
get the affirmative consent of consumers before sharing information
with any outside party whether an affiliate or a third party. Our
position has not changed, and if Congress chooses to address this issue
again, the standard should be opt in for information sharing among both
affiliates and 3rd parties.
A number of financial institutions have been very active in recent
rulemaking proceedings to improve the privacy notices. While consumer
groups are generally supportive of these efforts to make the notices
clearer,\6\ the exercise is, to some extent, like rearranging deck
chairs on the Titanic. Better notices will only help consumers more
clearly understand that their underlying right to protect their
financial information is very limited. Privacy notices are not privacy
rights.
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\6\ For example, one widely-supported proposal would be to require
that the highlights of the privacy notice be summarized in a statutory
box with express terms, similar to the widely-used nutrition labels
required by the Food and Drug Administration. However, consumer groups
would oppose efforts to have that be the only information consumers
receive--it would not be acceptable, for example, to have privacy
rights details exclusively available in a second ``layer'' that only
appears on the Internet.
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Safety and Soundness Issues
The Industrial Loan Company Loophole is Dangerous to the Banking System
and Taxpayers and Should be Eliminated
As part of GLBA, Congress eliminated the unitary thrift loophole.
This sent a clear message that it was the intent of Congress to slam
the door on the mixing of banking and commerce. Consumer groups
applauded this measure as an important step in better protecting
taxpayers and the safety and soundness of the Nation's banking system.
At the same time, the GLBA made it possible for the first time for
securities and insurance firms to own banks, but only if they were
subject to the rigorous safety and soundness oversight required in the
Bank Holding Company Act (BHCA).
Unfortunately, Congress left a little-noticed exception to the BHCA
for Industrial Loan Companies (ILC's) in place when it put GLBA on the
books. Commercial firms, such as General Motors, own ILC's, as do huge
financial firms like Merrill Lynch, American Express, and Morgan
Stanley. Moreover, ILC's are subject to much less rigorous oversight
than that received by bank holding companies from the Federal Reserve
Board. Not surprisingly, ILC's have grown exponentially in recent years
and are now threatening to become a parallel banking system that will
siphon commercial deposits from properly regulated bank holding
companies. Even worse, these commercial and financial firms are now
urging Congress to expand ILC powers, allowing them to offer business
checking and to branch to all 50 States.
This trend has enormous negative implications for the safety and
soundness of ILC's and thus for taxpayers, who, of course, support the
deposit insurance system. Our organizations strongly urge the Committee
to consider legislation that would plug the ILC loophole before it is
too late, and to reject legislation that would broaden ILC powers, for
the following reasons:
1. The ILC loophole to the Bank Holding Company Act is being abused
and should be closed, not expanded. ILC's were never intended to be
large, Nationwide banks that offered services indistinguishable from
commercial banks. In 1987, Congress granted an exception to the BHCA
for ILC's because there were few of them, they were only sporadically
chartered in a small number of States, they held very few assets and
were limited in the lending and services they offered. In fact, this
exception specifically applied only to ILC's chartered in five States
(Utah, California, Colorado, Nevada, and Minnesota) that have either
assets of $100 million or do not offer checking services. Since that
time, however, everything about ILC's has grown: The number that exist,
the amount of assets, and federally insured deposits in them and the
services and lending products that they can offer.
According to the Federal Reserve, the majority of ILC's had less
than $50 million in assets in 1987, with assets at the largest ILC at
less than $400 million. As of 2003, one ILC owned by Merrill Lynch had
more than $60 billion in assets (and more than $50 billion in federally
insured deposits) while eight other large ILC's had at least $1 billion
in assets and a collective total of more than $13 billion in insured
deposits. Moreover, the five States cited in the law are aggressively
chartering new ILC's, allowing them to call themselves ``banks'' and
giving them almost all of the powers of their State-chartered
commercial banks. These States, especially Utah, are also promoting
their oversight as a less rigorous alternative to those pesky
regulators at the Federal Reserve. For example, the website of the Utah
Department of Financial Institutions trumpets its ``positive regulatory
environment'' and states that ``ILC's offer a versatile depository
charter for companies that are not permitted to, or that choose not to,
become subject to the limitations of the Bank Holding Company Act . . .''
2. Large financial firms should not be permitted to skirt the GLBA
by establishing a parallel banking system that is not subject to the
rigorous oversight required for real banks. This represents an enormous
and unacceptable risk to taxpayers. If large financial firms were to
place their commercial banks under ILC oversight rather than Federal
Reserve oversight, this could rapidly increase the number of ILC's and
dilute the number of large financial systems that are subject to the
important safety and soundness rules that the current system requires.
Securities firms that own ILC's have taken the lead in promoting the
expansion of ILC powers. They have not been shy about stating that they
want to expand ILC powers because they do not want to deal with the
regulatory oversight they would face from the Federal Reserve if they
purchased a bank, as allowed under the Gramm-Leach-Bliley Act. Instead,
they prefer to set up a ``shadow'' banking system through ILC's. They
want to be able to offer the same services and loans as commercial
banks without the same regulatory oversight.
According to the Federal Reserve, however, the deposits in ILC
accounts are not as secure as those in real banks. As mentioned above,
ILC's are exempt from BHCA, which allows the Federal Reserve to conduct
examinations of the safety and soundness not just of banks, but of the
parent or holding company of these banks. The BHCA also grants the
Federal Reserve the power to place capital requirements and impose
sanctions on these holding companies. The Federal Deposit Insurance
Corporation (FDIC), which regulates ILC's, does not have these powers.
Oversight of the holding company is the key to protecting the
safety and soundness of the banking system. It is immaterial whether
the owner of the bank is a financial or a commercial entity. Holding
company regulation is essential to ensuring that financial weaknesses,
conflicts of interest, malfeasance, or incompetent leadership at the
parent company will not endanger the taxpayer-insured deposits at the
bank. Years of experience and bank failures have shown this to be true.
Moreover, the involvement of investment banking firms in recent
corporate scandals has provided plenty of evidence of the need for
rigorous scrutiny of these
companies as they get more involved in the banking industry. In
particular, the participation of some securities firms in the Enron and
Wall Street analyst scandals has shown that these firms were rife with
conflicts-of-interest that caused them to take actions that ultimately
harmed their investors. Given this track record, it would be a serious
dereliction of duty on the part of Congress to tie the hands of
regulators in looking at bank holding companies.
3. The ILC loophole violates long-standing principles of banking
law that commerce and banking should not mix. Recent corporate scandals
show the serious risks involved in allowing any commercial entity to
own a bank without significant regulatory scrutiny at the holding
company level. Accounting scandals at Sunbeam, Enron, Worldcom, Tyco,
Adelphia, and many others involved deliberate deception about the
financial health of the companies involved. If these companies had
owned banks, not only would employees, investors, and the economy have
suffered, but also taxpayers.
As ILC's grow larger, so does commercial involvement in banking.
Under current law, without any expansion of ILC powers, commercial
firms can charter ILC's in several States. Under the Riegle-Neal Act's
``opt in'' provision for reciprocal State agreements (that allows banks
chartered in each state to compete in all of them), 17 States already
allow ILC's to branch into their territories. As stated above, firms
such as General Motors, Pitney Bowes, BMW, Volkswagen, and Volvo
already own ILC's. States that have not restricted commercial ownership
of ILC's, like Utah, are aggressively encouraging other commercial
firms to purchase ILC's.
Instead of moving to close the ILC loophole, legislators in both
the Senate and the House are actually seeking to expand ILC powers.
H.R. 1375 would allow many existing and new ILC's to branch into all 50
States, whether these States approve or not, and to offer business
checking services. (Business checking can only be provided by very
small ILC's with less than $100 million in deposits.)
A Senate bill, S. 1967, would also allow industrial loan companies
to offer interest bearing checking accounts to businesses after 2
years. Although there is a requirement that the Secretary of the
Treasury and the Federal banking agencies issue joint regulations
within 2 years after the date of enactment, the authority goes into
effect after this period whether the joint regulations are issued or
not. As it is highly unlikely that the FDIC and the Federal Reserve
Board in particular would agree on joint regulations, our organizations
view this bill as a straightforward expansion of the authorities of
industrial loans companies.
We strongly urge the Committee to stop both of these dangerous
proposals in their tracks.
Banking/Securities Conflicts of Interest
Among the restrictions in the Glass-Steagall Act that GLBA
eliminated were those that prohibited commercial banks from combining
with investment banks to sell both credit and investment banking
services. Consumer groups expressed many concerns through the 1990's
that the banking/securities combination in particular could allow
financial investors access to insured deposits for high-risk lending
schemes. This could, our groups predicted, subject consumers and
shareholders to an increased potential for deception, leading to higher
costs for consumers and taxpayers. Our organizations also expressed
concern that complete elimination of the Glass-Steagall barriers also
meant increased concentration, creating institutions of a size, and
complexity that would be impossible to regulate effectively.
Unfortunately, the corporate scandals of the last few years have
provided widespread evidence of the kind of deception we were concerned
about, as well as proof that financial regulators were not equipped to
prevent these kinds of problems before they occurred, harming millions
of small investors and--in some cases--putting deposits insured by
taxpayers at risk. The involvement of investment banking firms like
Citigroup in these scandals have provided a cautionary ``case study''
of the kinds of problems that can result when banks inappropriately
``tie'' decisions about lending and investment banking.
WorldCom and Citigroup
For example, let's examine Citigroup's involvement in the WorldCom
scandal, as documented in great depth in an Emmy award-winning segment
for the Public Broadcasting series Frontline. \7\ Before Citibank
merged with Solomon Smith Barney and Travelers Insurance to become
CitiGroup, WorldCom had already become a very important investment
banking client of Solomon Smith Barney. As a telecommunications firm
whose business plan was to grow through mergers and acquisitions,
WorldCom produced lucrative fees for the investment bankers chosen to
handle these transactions. Solomon wanted that investment banking
business, and Solomon's star technology analyst Jack Grubman was
apparently willing to be a cheerleader for WorldCom's stock to keep
this business. (As evidence that investment banking considerations
influenced the research, Grubman justified his bonuses based on the
investment banking business he was bringing into the firm.)
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\7\ The Wall Street Fix, Frontline, May 8, 2003.
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So, the first conflict that existed was that Grubman had a strong
incentive to promote WorldCom's stock, and to continue to do so after
its prospects had begun to deteriorate, in order to keep WorldCom as an
investment banking client for Solomon. When Citibank CEO Sanford Weill
consolidated Solomon, Travelers, and Citibank into a single entity, the
conflicts just got bigger and more complex, with conflicts related to
commercial loans added to the mix.
With WorldCom's stock having risen considerably, thanks in no small
part to Grubman's cheerleading, Ebbers had a huge portion of his
personal wealth in the form of WorldCom stock. He wanted cash, but he
did not want to sell the stock to get it, as cashing out his stock
would have been looked on as a bad sign on Wall Street. In one case,
the bank apparently came up with a plan to let Ebbers turn his stock
into cash without the scrutiny that would accompany a sale. To
accomplish that, the bank agreed to lend Ebbers the money, in the form
of a $1 billion mortgage to a company he controlled. Once the property
was purchased, Ebbers was able to turn around and sell a portion of the
property for cash.
In another case, Citibank agreed to lend Ebbers money--in this case
$43 million to buy a ranch--with the loan backed by 2.3 million shares
of WorldCom stock. This transaction was questionable for a variety of
reasons. First, stock is very risky collateral for a loan because of
its inherent volatility. Telecom stock is especially risky because, as
events later showed, telecom is a volatile business. It is, in our
view, highly unlikely that Citibank would have entered into such a
risky transaction had it not been seeking to curry favor with Ebbers
and WorldCom. That also added a second dimension to the conflicts of
interest--Citibank needed WorldCom's stock price to stay high in order
to maintain adequate backing for its loans.
We know now that WorldCom's strategy of constant mergers served in
part to hide its deteriorating financial condition. When the Sprint
merger fell apart, however, WorldCom could no longer keep up the
facade. There was a telecommunications capacity glut. Long distance
prices were plummeting. Other Wall Street analysts were turning more
negative on the company's prospects. WordCom's stock price began to
drop precipitously.
The company desperately needed cash, and Citibank came through
again. This time, it led a bank syndicate that sold investors $17
billion of WorldCom bonds. WorldCom turned around and used some of that
money to pay off its debts, and Citibank used that payment to reduce
its exposure to loans backed by WorldCom stock. This brings us to a
third major conflict of interest. Citibank's need to reduce its
exposure to WorldCom loans appears to have been a factor in its
investment bankers' willingness to approve a bond underwriting deal
without appropriate due diligence on WorldCom's ability to repay the
loans that those bonds represent and without adequate disclosure to
investors of WorldCom's deteriorating financial condition.
Meanwhile, analyst Grubman was still doing his part, touting
WorldCom's stock and calling it ``an incredible bargain'' at its newly
reduced price. Given his access to top officers at WorldCom--he
attended more than one board meeting and was listed as an adviser on
the failed Sprint merger deal--it is hard to believe that Grubman could
have been so oblivious to its deteriorating financial condition. At
best, it seems logical to conclude that he ignored red flags because he
had a strong incentive to ignore them.
There are three major lessons from this debacle for our discussion
on GLBA today that are relevant. First, when major conflicts of
interest exist and huge sums of money are at stake, abuses will occur.
When Federal law has eliminated barriers to many of these potential
conflicts, allowing them to flourish, it is naive to think that
regulators can stop potential conflicts from becoming real conflicts
through the erection of a few prohibitions.
Second, abuses are inevitable if businesses are allowed to create
structures that are so big and complex that they require a major
investment in regulatory oversight to prevent these abuses. However,
once Congress allows these structures to be created, it had better be
willing to provide the resources for regulatory oversight and to push
regulatory agencies to be aggressive in enforcing the law. Third,
investors will always be the ones left holding the bag when abuses
occur. The system is not very good at restoring those losses once the
damage is done.
Congress has in recent years given the Securities and Exchange
Commission a much needed infusion of funding, though it is still not
clear whether its funding matches its workload. Embarrassed by the New
York Attorney General's Office, which has shown itself more than ready
to step in and take action when it perceives there is an abuse that is
not being addressed, the Commission appears to have made a new
commitment to maintaining an aggressive enforcement program. Only time
will tell whether the agency is up to the task. However, the SEC is not
alone in bearing responsibility, and a ``solution'' that focuses
entirely on the SEC and ignores Federal banking regulators will not
solve the whole problem.
In the Citigroup/WorldCom affair, the balance of power in the
relationship seems to have tipped toward WorldCom. The picture that
comes through is this: Because Citigroup was desperate for WorldCom's
investment banking business, it was willing not only to abandon all
objectivity in its research, but also to overlook sound lending
practices by offering loans to WorldCom and Ebbers that were not
justified by WorldCom's underlying financial condition.
The conflicts that created this scandal are really the inverse of
traditional ``tying,'' when banks condition the availability or terms
of loans or other credit products on the purchase of other products and
services. In that situation, the balance of power tips toward the
lender. There is some evidence that traditional tying may also be alive
and well under GLBA.
A survey of corporate financial officers issued last year by the
Association for Financial Professionals found that commercial banks
frequently make access to credit contingent upon the purchase of other
financial services.\8\ Survey respondents indicated that they were
concerned that if they did not award other business to their creditors,
they would not receive credit in the future, would receive less credit,
or pay a higher price.
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\8\ Credit Access Survey: Linking Corporate Credit to the Awarding
of Other Financial Services; Association for Financial Professionals,
March 2003.
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While tying of this type is only a threat to the safety and
soundness of the banking system if the bank offers loans at less than
the market rate, or at otherwise more favorable terms to an unqualified
borrower, it does represent a potential threat to shareholders, albeit
one that is hard to quantify. For example, when a company is forced to
pay more than it should for credit, that can affect the share price.
Similarly, when a company selects investment bankers based not on which
are the best qualified to do the deal or which are offering the most
favorable terms to do the deal, but because of who is providing the
company with credit services, this could drive up the cost of
investment banking services. Those costs would also be absorbed by
shareholders. We urge the Committee to investigate this problem further
to examine what might be the ultimate costs and risks to shareholders.
Late last year, the GAO found a lack of documentation regarding
tying the availability or price of credit to the purchase of debt
underwriting services.\9\ However, the GAO also stated that ``the lack
of documentary evidence might be due to the fact that negotiations over
credit terms and conditions (during which a tying arrangement could be
imposed) were generally conducted orally'' and that ``borrowers were
reluctant to file formal complaints with banking regulators.'' GAO
recommended that the Federal Reserve and the OCC take additional steps
to enforce the antitying requirements in GLBA (in Sections 106 and 23B)
and look for indirect evidence to assess whether banks unlawfully tie
products and services. We strongly agree with this recommendation.
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\9\ ``Bank Tying: Additional Steps Needed to Ensure Effective
Enforcement of Tying Prohibitions,'' General Accounting Office, October
2003.
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Consumer Services Issues
Bank Fees Still a Problem
In the debates leading up to the enactment of GLBA, consumer
advocates focused attention on bank services and fees and bank policies
for retail bank products and services. While big banks are more likely
to advertise ``free checking'' these days, a close examination of the
Federal Reserve's annual report to Congress on bank fees will show that
the cost of having and using a bank account has simply been shifted
around.
Checking accounts are now viewed by banks with expanding branch
locations as the entry point for new customers for cross-selling of
other products and services. Banks are more likely now to offer
accounts without monthly maintenance fees or a minimum balance to avoid
fees (required to advertise as ``free'' checking by TISA), but make up
the revenue on penalty fees. As a result, bank noninterest income and
service fee income overall continues to rise. As noted by the Federal
Reserve reports and U.S. PIRG bank fee reports \10\ over the years,
banks continue to charge more fees, higher fees, and make it harder to
avoid paying fees. In addition, both the Federal Reserve and the PIRG
studies document that larger, multistate institutions impose higher
fees than local banks or credit unions.
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\10\ For example, Big Banks, Bigger Fees 2001, U.S. Public Interest
Research Group, November 2001.
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Our groups are most concerned about growing fees that penalize
consumers who have trouble making ends meet, including the insufficient
funds fee, deposit item return fees, and overdraft fees. According to
the Federal Reserve, NSF fees averaged $21.73 in 2002, an increase over
the prior year. Bank fee surveys find that NSF fees range up to $35 per
item at some banks. Seventy-five percent of banks now charge when items
are deposited and returned for insufficient funds, averaging $6.88 in
2002. On average, banks charged $21.83 in 2002 for overdraft
transactions, up over 1 percent from the prior year.
A Continuing Problem: The Unbanked
Millions of American consumers continue to conduct their routine
financial transactions outside mainstream banking, a situation that has
not significantly improved since GLBA was enacted. Despite high level
regulatory attention to the problem of ``banking the unbanked,''
including the FDIC's Symposium held last November, modest First
Accounts grants from Treasury over the last 2 years, and roll out of
the Electronic Transaction Account program of Treasury to implement
EFT '99 goals of enabling direct deposit of Federal benefits,
conservative estimates find that 10 percent of American families still
do not have a transaction account at a bank or credit union.
Consumers without bank accounts are more likely to be young, lower
income, minorities, renters, and have less formal education, according
to the Federal Reserve Survey of Consumer Finances and academic and
regulatory agency studies. One in three low- to moderate-income
consumers in New York City and Los Angeles does not have a bank
account. Twenty-two percent of low-income households (8.4 million
families making less than $25,000 a year) do not have a bank account.
The high cost of being unbanked includes paying fees to cash
checks, buying money orders to pay bills, paying to wire funds to
distant locations, and lacking a safe place to save money. The unbanked
live paycheck to paycheck, without savings to meet emergencies, making
them susceptible to high cost forms of credit, including rent to own,
car title pawn, and secured credit cards. While retailers such as Wal-
Mart have entered the check cashing business, charging a flat rate $3
to cash a payroll or government check, banks increasingly charge
noncustomers fees to cash checks drawn on the bank.
Second Class Financial Products for the Unbanked
Instead of bringing unbanked consumers into the mainstream by
designing fairly priced products and services that meet the needs of
consumers, banks and others are developing policies and services that
deliver subprime protections. For example, KeyBank is now offering a
``checkless'' checking service, Key Checkless Access, for a fee of 1.9
percent per deposit to have paychecks direct deposited into a KeyBank
account accessed by an ATM card. (The account is being marketed to
consumers blacklisted on ChexSystems for nonfraudulent account
mismanagement in the past.) Instead of providing account management
training through such programs as Get Checking (developed by the
University of Wisconsin Extension Service) and a free or low-cost
direct deposit account that cannot be overdrawn, KeyBank is charging
check cashing fees for a limited use bank account.
Payroll cards and other stored value cards are growing in use as a
way to deliver money without providing real bank accounts to unbanked
consumers. Instead of opening bank accounts in the employees' names,
some employers and their banks provide ATM cards that permit employees
to withdraw their pay electronically from a pooled account. As the OCC
noted in an Advisory Letter issued in May, unsettled regulatory issues
include whether FDIC deposit insurance is available to cardholders,
whether Regulation E applies to payroll card systems, whether Section
326 of the USA PATRIOT Act (verification of new customers) applies, and
whether Regulation CC (Availability of Funds) applies. Non-bank
involvement in payroll card programs raises the risk for both consumers
and banks if the nonbank becomes insolvent.
Financial services are being increasingly delivered via stored
value cards rather than through accounts open in the consumer's name.
The explosive growth of stored value gift cards and delivery of tax
refunds and refund anticipation loans through stored value cards is
taking place without adequate Federal consumer protections. While
consumers have Federal protections when they use credit cards and debit
cards, there is no Federal stored value card law and it is unclear what
Federal protections apply to stored value cards. Convergence of plastic
is not being supported by upgrading of consumer protections.
Stored value cards do not provide a means of asset development or a
way to build credit worthiness. It is regrettable that mainstream banks
are choosing to serve the financial needs of low- to moderate-income,
unbanked consumers through second-class financial products and
services.
Not What Congress Had in Mind: Mainstream Banks Offer High-Cost Credit
GLBA was intended to modernize banking law and to permit banks to
affiliate with other financial entities to offer a wide variety of
mainstream products and services to benefit American consumers. As
stated above, we see no evidence that the ``synergies'' that the
proponents of the law promised have led to substantial benefits for
consumers. While some, primarily affluent consumers may benefit from
larger multistate ATM networks, from discounts offered for multiple
account relationships or from sophisticated financial products offered
by boutique units to high-balance customers, we have seen no evidence
that GLBA has slowed the continuing trend of rising bank fee income
(that is from service fees on deposit accounts, from penalty fees on
credit cards and from ATM surcharges) nor has it helped decrease the
numbers of the unbanked.
Indeed, some banks have chosen to go beyond the scope of mainstream
financial services contemplated in GLBA and now participate in the
triple-digit-interest rate ``fringe lending'' market, or offer
predatory products like ``bounce protection'' that are all-but-
indistinguishable from many fringe lending products. Given the number
of banks now offering these high-cost products, or--in some cases--
affiliating with lenders who do, it is legitimate to ask whether
Congress was fooled by the promise of innovative, affordable financial
services products, only to find that the new products that are really
being promoted have an outrageously high price tag.
Payday Lending and GLBA
For example, a handful of banks have chosen to ``rent'' their bank
powers to pawn shops and small loan companies to assist those nonbank
companies to make small loans at costs that would violate State laws.
Payday loans are small loans made to cash-strapped consumers, secured
by a post-dated check or access to the borrower's bank account. Loans
for up to $500 plus a finance charge of $15 to $30 per $100 borrowed
are due in full on the borrower's next payday. Payday loans are made
without regard for the borrower's ability to repay. The cost of payday
loans averages 470 percent APR, far in excess of some State usury or
small loan laws.
Under a ``rent-a-charter'' arrangement, the payday lender markets
the loans, solicits borrowers, accepts applications, disburses loan
proceeds, services and collects the loans. The bank generally takes
only a small percentage of the loan revenues--often as little as 5
percent--while it is so-called ``agent'' takes the vast majority of the
revenues generated by the loan.
While GLBA provided for bank affiliation with other mainstream
financial entities, we are certain that Congress never intended to
empower banks to rent their interest rate exportation powers to third
party entities to make predatory loans or to undercut State authority
to enforce usury laws, small loan regulations, and, even State payday
loan laws. That is not what the payday lending industry thinks though.
The industry filed an amicus brief in the U.S. Court of Appeals for the
Eleventh Circuit, claiming that Georgia's law violated Section 104 of
GLBA, despite the fact that Section 104 is clearly intended to govern
the relationship between State laws and the sale of insurance by
financial institutions. The Court rejected the brief on grounds that it
made arguments not included in the District Court case.
Ten State-chartered FDIC-supervised banks partner with pawn chains,
check cashers, and payday lenders,\11\ according to CFA's latest
report, Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank
Charters to Peddle Usury. No federally chartered financial institutions
or state member banks partner with payday lenders, following regulatory
action by the Comptroller of the Currency, Office of Thrift
Supervision, and Federal Reserve. These regulators found that payday
lending exposes federally insured banks to unacceptable safety and
soundness risks, undermines consumer protections, and carries serious
reputational risk.
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\11\ State-chartered, nonmember banks currently partnering with
payday lenders are County Bank of Rehoboth Beach, DE; First Bank of
Delaware; BankWest, Inc., SD; First Fidelity Bank, SD: Community State
Bank, SD; American Bank & Trust, SD: Bryant State Bank, SD: Reliabank
Dakota, SD: Republic Bank & Trust, KY; and Venture Bank, WA.
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Eleven of the thirteen largest payday loan chains use bank partners
in States with consumer protection laws that do not permit unregulated
payday lending, such as Pennsylvania, Arkansas, New York, North
Carolina, Michigan, and Texas. Georgia recently enacted a law
strengthening enforcement tools to prevent usury and to prohibit rent-
a-bank payday lending where the local storefront gets the majority of
the money.
State banking officials and Attorneys General in several States
have challenged the claims of payday lenders that banks' exportation
powers extended to them and alleged that rent-a-bank arrangements are
fraudulent tactics to cloak illegal loan terms. States from California
to Maryland have enacted antibroker clauses in an attempt to prevent
local lenders from partnering with banks to evade State consumer
protections. In court litigation to date, none of these state
antibroker laws have been overturned. Federal courts in New York,
Florida, Maryland, Colorado, North Carolina, and Georgia have denied
bank/payday lender claims to total preemption of State law and have
remanded payday loan cases to State court. Yet the FDIC continues to
permit the banks it supervises to aid storefront lenders in evading
State consumer protections.
As the Committee reviews the Gramm-Leach-Bliley Act, we urge you to
clarify that bank charters are not for rent and halt the misuse of bank
charters by third party lenders to make loans under terms prohibited by
States.
Bounce Loans
Bounce loans \12\ are a high-cost new form of overdraft protection
that some banks are using primarily to boost their fee revenue, not to
assist consumers.\13\ Bounce loans represent a systematic attempt to
induce consumers into using overdrafts as a form of high-cost credit.
These plans offer short-term credit at triple-digit rates. For example,
a $100 overdraft will incur at least a $20 fee. If the consumer pays
the overdraft back in 30 days, the APR is 243 percent. If the consumer
pays the overdraft bank in 14 days, which is probably more typical for
a wage earner, the APR is 541 percent.
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\12\ Bounce ``protection'' is a euphemism used by banks to describe
this high-cost credit product.
\13\ For more information on bounce credit, see Consumer Federation
of America & National Consumer Law Center, Bounce Protection: How Banks
Turn Rubber Into Gold By Enticing Consumers to Write Bad Checks (2003),
available at www.consumerlaw.org/initiatives/test--and--comm/
appendix.shtml.
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Bounce loans also permit consumers to overdraw their accounts at
the ATM, at Point of Sale terminals, and through preauthorized
electronic payments. For many banks, the available balance displayed on
the ATM screen includes the overdraft amount, misleading consumers
about the true balance in accounts. Bounce loan plans turn debit cards
into credit cards without consumer consent or disclosure of the cost of
borrowing the bank's money.
Over 1,000 banks have implemented bounce protection plans. Although
many of these banks are small community banks, several very large
national banks and thrifts offer this product as well, including
Washington Mutual Bank, Charter One, TCF of Minneapolis, and Fifth
Third of Cincinnati.
This arrangement is much more expensive than alternatives that most
banks offer, such as overdraft lines of credit, linking the account to
a credit card, and transfers from savings. When a consumer uses bounce
credit, the bank deducts the amount covered by the plan plus the fee by
setting off the consumer's next deposit, even where that deposit is
protected income, such as a welfare or Social Security check. Consumers
who do not want such an expensive ``courtesy'' must explicitly opt out
by contacting the bank. The fee is often the same amount charged for an
NSF fee on a returned check, and in some cases the bank also charges an
additional, per-day fee. The Office of Comptroller of Currency has
recognized that bounce loans are credit as defined by TILA.\14\ Some
State regulators have reached the same conclusion.\15\
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\14\ Daniel P. Stipano, Deputy Chief Counsel, Office of Comptroller
of Currency, Interpretive Letter #914, September 2001.
\15\ Indiana Department of Financial Institutions, Newsletter--
Winter 2002 Edition (Nov. 2002), at 2, Clearinghouse No. (D/E: Fill in
number); Letter from Assistant Attorney General Paul Chessin, Colorado
Department of Law, Consumer Credit Unit, Mar. 21, 2001 (in response to
referral from the Administrator for the Colorado Uniform Consumer
Credit Code).
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There is considerable confusion and misunderstanding among
consumers about the rules and obligations of bounce loans. Consumers
often do not understand the full cost of these loans, and they do not
understand the recurring nature and exorbitant cost of the ongoing use
of bounce loans. In most cases, consumers do not affirmatively agree to
this coverage. Instead, the bank imposes coverage to a subset of
accountholders as a ``courtesy'' or additional service feature of their
account. Consumers would benefit enormously from application of TILA's
open-end credit disclosure rules to these expensive and deceptive
products.
The Federal Reserve Board recently announced new, proposed rules to
govern bounce loans, but chose to cover them under the Truth in Savings
Act, Reg DD. That is a completely inadequate response to the real need
consumers have for information about the exorbitant costs of these loan
products. Congress should step in and require--at the least--that
bounce loans be treated just as all other extensions of credit are
treated under the Federal Truth in Lending Act. This equivalent
treatment would simply--and most importantly--require that creditors of
bounce loans inform consumers about the true costs of this credit and
give consumers the right to affirmatively choose this product.
Ultimately, the irresponsible actions of banks in offering bounce
loans will lead to more unbanked consumers. Instead of discouraging
overdrafts and encouraging sound financial management, these banks are
now encouraging consumers to overdraw their accounts and use high-cost
credit. By permitting overdrafts, not just through checks but ATM's and
debit cards (where it was impossible or much harder to overdraft
before), these banks are creating more ways to impose exorbitant fees
and create financial hardship. These banks may ultimately drive
consumers away from bank accounts, either through consumer disgust at
high fees or involuntarily through the Chexsystem blacklist. Consumers
who are reported in the Chexsystems database for alleged bounced check
activity find it nearly impossible to open a new account.
GLBA and the Community Reinvestment Act
The Community Reinvestment Act (CRA) for over 25 years has been a
major tool in bringing capital and better banking services to the
Nation's underserved urban and rural communities. Yet given the changes
well underway in banking and mortgage lending CRA is in need of some
updating.
Two trends pose perhaps the greatest challenge to CRA. First, the
increasing consolidation among banks, increased competition in the
financial services industry, and the advent of new technologies have
combined to shift financial assets out of traditional banks covered by
CRA and into nonbank financial services providers, such as insurance,
consumer finance companies, and mutual funds. Moreover, the rise of
nonbank mortgage lending companies and the secondary mortgage market
have reduced the importance of depository institutions as a source of
mortgage funding. Consequently, CRA-covered institutions today make
less than 30 percent of home purchase loans, compared with more than 80
percent they made when the law was first enacted, which has limited
CRA's effectiveness.
The second important trend is the emergence of alternative delivery
systems for promoting banking products, such as the Internet and
telephone banking, instead of traditional brick-and-mortar branching
networks. The changing way in which banks offer products to consumers
poses a challenge to CRA, which traditionally relied upon a place-based
definition to determine a bank's compliance responsibilities.
Two key changes to CRA would help to modernize the law and keep
pace with these trends. First, CRA should be broadened to encompass a
larger share of nonbank financial service providers. This can be done
by extending CRA-like requirements to nonbank firms that are performing
bank-like functions. The second key adjustment to CRA would be to
broaden the definition of community beyond those areas where banks have
physical branches. The expanding use of new technologies means that a
bank's community for CRA purposes can no longer serve as a reasonable
proxy for the location of a bank's customer base anymore. The banking
regulators have discussed making such adjustments via regulations but
have yet to act on these proposals.
GLBA provided an important opportunity to ``modernize'' CRA by
applying these types of requirements to nonbank mortgage companies,
insurance firms, and other financial institutions that affiliate with
CRA covered banking institutions. Unfortunately, this did not happen.
We encourage the Committee to update CRA along the lines we discuss as
part of future legislation.
While failing to update CRA, GLBA includes a CRA-related provision
that is not particularly constructive. I am referring to the so-called
``CRA Sunshine Requirements,'' as contained in Section 711 of the Act.
The provision requires banks and community groups to report to Federal
regulators about certain ``CRA agreements'' made pursuant to or ``in
fulfillment of'' CRA.
Over the years, CRA agreements between banks and local community
groups have been frequently used to resolve disputes about lending
practices and to target special efforts and facilitate local community
reinvestment partnerships. Often these ``CRA agreements'' are reached
while bank expansion requests are pending before regulators, although
in recent years more and more institutions have elected to use pending
mergers to announce unilateral CRA pledges.
Whatever the merits of requiring the reporting and disclosure of
such agreements this statutory provision has not proven terribly useful
to anyone concerned with these issues.
For one thing, the CRA sunshine provision is not particularly well-
crafted, requiring some CRA agreements to be reported and but not
others. For example, it does not require banks to report unilateral CRA
pledges, which now have become the predominate form that these
commitments take. At the same time, CRA sunshine continues to impose
reporting burdens on those banks and their community group entering
into the more traditional types of two-party agreements. This is an
inequity that neither the statute nor its regulations address.
Further, the CRA sunshine requirements were premised on what
appears to be a faulty assumption--that community groups are somehow
using the CRA process to extort money from banks for themselves. In
fact, a study by the National Community Reinvestment Coalition that
reviewed CRA agreements filed with Federal regulators found that only
.3 percent of the total funding contained in these agreement to be
devoted toward general operating support for the nonbank parties. The
disclosures confirm that the vast majority of these funds are directed
to legitimate
lending activities. (CRA Sunshine Reveals Benefits of Bank-Community
Group Partnerships, National Community Reinvestment Coalition, 2002, at
3).
We believe that the CRA sunshine provision has outlasted its
usefulness, if indeed it truly ever had one. We favor, therefore,
repeal. Should the requirement be maintained, however, we believe that
it should be overhauled to reduce its inequities and to minimize the
reporting burdens and inconvenience this reporting provision imposes on
the affected parties.
----------
PREPARED STATEMENT OF RONNIE TUBERTINI
Chairman, Government Affairs Committee
The Independent Insurance Agents and Brokers of America
July 13, 2004
Good morning Chairman Shelby, Ranking Member Sarbanes, and Members
of the Committee. My name is Ronnie Tubertini, and I am pleased to have
the opportunity to give you the views of the Independent Insurance
Agents & Brokers of America (IIABA) on the Gramm-Leach-Bliley Act
(GLBA) \1\ and its effects on the insurance marketplace. I am President
and CEO of SouthGroup Insurance and Financial Services, Mississippi's
largest privately owned insurance agency. SouthGroup is a Jackson-based
insurance agency employing 120 people in 17 locations across the State.
Although based in Mississippi, SouthGroup writes business in over 20
States and provides foreign coverage for clients operating outside of
the United States. My agency represents over 50 insurance companies. I
am also the current Chairman of IIABA's Government Affairs Committee.
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\1\ Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102, 113 Stat.
1338 (1999).
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IIABA is the Nation's oldest and largest national trade association
of independent insurance agents and brokers. We represent more than
300,000 agents, brokers and agency employees nationwide. IIABA members
are small, medium, and large businesses that offer customers a choice
of policies from a variety of insurance companies. Independent agents
and brokers offer all lines of insurance--property,
casualty, life, health, employee benefit plans, and retirement
products.
Overview
The Gramm-Leach-Bliley Act,\2\ signed on November 12, 1999, was the
culmination of nearly two decades of effort by Congress and the
financial services industry to eliminate the Depression-era laws and
regulations which prevented depository institutions from affiliating
with both insurance companies/producers and with securities firms. The
GLBA also clarified the respective regulatory duties and powers of
Federal and State regulators as these industries began to engage in
each other's businesses.
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\2\ Previously known as the ``Financial Services Modernization Act
of 1999.''
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We would like to focus on three parts of GLBA that directly affect
insurance: (1) Title I, which facilitates affiliation between banks and
securities firms and insurance companies by repealing major portions of
the Glass-Steagall Act,\3\ the Bank Holding Company Act of 1956 \4\ and
other Federal banking laws; (2) Title III, Subtitle C, ``National
Association of Registered Agents & Brokers,'' which was designed to
encourage the States to establish a reciprocal or uniform agent
licensing system; and (3) Title III, Subtitle A, ``State Regulation of
Insurance,'' which reaffirms the traditional and primary authority of
the States to functionally regulate the business of insurance in the
United States and clarifies the extent to which banks, or their direct
subsidiaries, may engage in insurance.\5\ Below we will describe these
three aspects \6\ and the effect each has had so far on the insurance
marketplace in general and the independent agency system in particular.
We will also discuss what lessons may be learned from them when
considering potential reforms to the insurance regulatory structure.
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\3\ The Banking Act of 1933, Pub. L. No. 73-66, 48 Stat. 162
(1933).
\4\ The Bank Holding Company Act of 1956, Pub. L. No. 84-511, 70
Stat. 133 (1956).
\5\ GLBA Tit. I, Subtit. B, Sec. 112 (Authority of State Insurance
Regulators) also confirms the responsibility of States for the
functional regulation of insurance; Tit. I, Subtit. C, Sec. 121
(Subsidiaries of National Banks) similarly restricts banks' ability to
engage in insurance activities through operating subsidiaries.
\6\ GLBA Tit. III, Subtit. B, (Redomestication of Mutual Insurers)
and Subtit. D (Rental Car Agency Insurance Activities) also relate to
specialized insurance issues. In addition, Title V (Privacy) affects
insurance entities as well as other financial services, but that Title
makes clear--consistent with Tit. III Subtit. A's reaffirmation of the
State role--that State insurance regulators are responsible for privacy
supervision of the insurance sector.
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The Experience under Gramm-Leach-Bliley
Affiliation Among Banks, Securities Firms, and Insurance Companies
Title I of the GLBA (Facilitating Affiliation Among Banks,
Securities Firms, and Insurance Companies) allows depository
institutions, securities firms, insurance companies, and other firms
engaged in financial services to affiliate under a new financial
holding company (FHC) structure. Title I also provides for the
supervision of these new FHC's, streamlines somewhat the preexisting
bank holding company (BHC) supervision and specifies what financial
activities could be conducted directly in a bank or its subsidiary and
which were required to be conducted through other nonbank affiliates
within the FHC.
With the authorization of these new FHC systems, many industry
experts predicted that mega-mergers among the largest players in the
banking, securities, and insurance industries would transform the
financial services landscape. The expectation was that convergence
would lead to only a few, large diversified companies left standing to
offer consumers ``one-stop-shopping''--a smorgasborg of financial
services products.
However, this has not come to pass. So far there has not been a
massive move toward consolidation of the country's major financial
services companies. Some mergers have occurred, but most have not been
among the leading players--two exceptions to that general rule being
the Citicorp-Travelers Group deal, which was on the table when GLBA was
enacted; \7\ and more recently the Bank One purchase of key components
of Zurich Life from Zurich Financial Services Group in 2003. The
convergence of products and services that began in the 1980's continues
to occur but through smaller and more targeted merger activity. Banks
have bought individual securities firms and insurance agencies instead
of insurance companies as had been predicted, and insurance companies
and agencies have also begun to offer a wider variety of products.
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\7\ It should be noted, however, that in 2002 Citigroup spun off
Travelers Property Casualty Group while retaining Travelers Life and
Annuity Company.
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Banks have been reluctant to get into the insurance business, the
underwriting side if not sales, for a couple of reasons. First, the
insurance industry typically has a lower return on equity than the rest
of the financial services industry. Over the last decade, diversified
financial firms have earned nearly a 20 percent rate of return, banks
around 15 percent, and insurance companies generally between 5-10
percent. Put simply, acquiring insurers oftentimes does not make
economic sense for banks.
Second, there is philosophical conflict between the two industries
and, it seems, limited opportunity for synergies. Banks are by nature
risk averse and the insurance industry is inherently volatile and
risky. After all, insurance at its core is the aggregation of risk. The
insurance marketplace differs from most other financial services in
that insurers must price and sell their policies before the full cost
of coverage is known. This is especially true in the property/casualty
marketplace where insurers must try to anticipate losses such as
catastrophic exposures like earthquakes, hurricanes, and now terrorism.
Insurer results are also whipsawed by unexpected changes in the legal
system, such as Superfund or asbestos-related expenses, which can have
a negative effect on company surplus. Property/casualty insurers
typically break even or lose money on their underlying business, the
underwriting of risk--that is before investment income is taken into
account. The first half of this year was only the second time the U.S.
property/casualty industry has posted a collective underwriting profit
since 1986. It appears that banks are not willing to use available
capital to get into underwriting insurance as it is a very complicated
and difficult business.
Banks have been more inclined to get into the sale of insurance
through the acquisition of insurance agencies; however, this trend has
not been overwhelming. According to the Financial Services Fact Book
2004,\8\ banks acquired 60 securities firms and 74 insurance agencies
in 2002 \9\ (latest data available). While the number of bank purchases
of insurance agencies increased in 2002 by 17 percent from 2001, the
value of those deals decreased in that same year by 68 percent.\10\ In
fact, the number of bank/agency deals in the period from 1999-2002 has
remained relatively constant with 66 in 1999, 77 in 2000, 63 in 2001,
and 74 in 2002.\11\
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\8\ Insurance Information Institute and the Financial Services
Roundtable, The Financial Services Fact Book 2004 (Dec. 15, 2003),
available at www.financialservicesfacts.org. (FS Fact Book)
\9\ Id. at V.
\10\ Id. at 76.
\11\ Id.
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On the flip side, more insurance trade associations and a few
individual carriers have now entered the banking market. This has come
more in the form of applications for thrift charters to open new OTS-
supervised banks instead of buying existing banks. Examples of
insurers--or their trade associations--wading into the banking market
are the National Association of Mutual Insurance Companies, State Farm,
and Metlife. The IIABA has done the same with InsurBanc, the Federal
savings bank developed jointly by the IIABA and the W.R. Berkley
Corporation to serve independent agents and brokers as well as their
clients. InsurBanc opened on April 30, 2001. Three years later,
InsurBanc has more than $32 million in deposits and $60 million in
assets, including the investment of nearly $30 million in agency-
related loans.\12\ Along with agency financing products and services,
InsurBanc offers working capital lines of credit, commercial term
loans, and commercial real estate loans. InsurBanc also provides an
array of consumer banking products that agents and brokers can offer to
their clients, including consumer loans, credit cards, home equity
loans, mortgages, certificates of deposit, and money market accounts.
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\12\ For more information on InsurBanc's products and services, go
to www.insurbanc.com.
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While the mega-mergers that some envisioned have not occurred,
consolidations within most financial services sectors have boosted the
market share of the largest players in those sectors. This trend, which
began in the mid-1990's, has continued in this decade for the insurance
industry. From 1996 to 2002 the market share of the top 10 companies
grew from 38 to 51 percent in the life/health insurance market and from
35 to 55 percent in the property/casualty marketplace.\13\
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\13\ FS Fact Book at V.
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As life insurers, who are perhaps the most challenged by product
convergence from noninsurance players, attempt to diversify their
revenue streams and gain economies of scale, further consolidation
among the remaining 1,462 U.S. life/health insurers is expected.\14\
One commentator predicts that the market share of the top 10 life
insurers will approach 75 percent by the end of the decade.\15\
Continued consolidation is also anticipated in the property/casualty
industry. Some expect the number of U.S. property/casualty insurers,
now numbering approximately 3,300, to fall by 30 percent over the next
decade.\16\ With the fractured capital that this current large number
of players in both the life/health and property/casualty industries
represents and the inherent volatility of the business, it is perhaps
not surprising that return on equity has been lower for insurance
underwriters than the rest of the financial services industry.
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\14\ Meg Green, Bulking Up, Best's Review, July 2004, July 2004, at
22-23
\15\ Id.
\16\ FS Fact Book at 1.
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Industry experts are currently divided on whether the industry
consolidation will occur through large companies merging with or making
wholesale acquisitions of others (that is the St. Paul Cos.-Travelers
Property Casualty deal of 2003) or insurers taking only selected bits
and pieces of other companies in the form of purchases of specific
lines or blocks of business. Regardless, the result is largely expected
to be the same: Increased consolidation in the insurance marketplace.
The independent agency system has followed the overall insurance
industry trend toward consolidation. In 2002 (latest data available),
there were 192 announced mergers and acquisitions in the agent/broker
community. The number of deals has remained relatively constant over
the 5-year period from 1998 to 2002 with 184 deals in 1998, 235 deals
in 1999, 188 deals in 2000, and 179 deals in 2001.\17\ This however
involves a relatively small number of all independent agencies, which
continues to be a principal form of p/c insurance product distribution.
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\17\ FS Fact Book at 3.
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National Association of Registered Agents and Brokers (NARAB)
One of the most significant accomplishments of GLBA for the
insurance marketplace was the NARAB Subtitle, which launched a producer
licensing reform effort that continues today. Prior to the enactment of
GLBA, each State managed its agent/broker licensing process in a
distinct and independent manner, and there was virtually no consistency
or reciprocity among the States. For agents and brokers, who
increasingly operate in multiple jurisdictions, the financial and
paperwork burdens associated with multi-State licensing compliance
became overwhelming; and consumers suffered as duplicative and
redundant regulatory requirements made it difficult for producers to be
responsive to their needs. However, insurance producer licensing has
improved dramatically over the last 5 years, and these changes are a
direct result of Congress' decision to address these issues in Subtitle
C.
The Subtitle put the ball in the States' court by threatening the
creation of a new national, NASD-style licensing entity--known as the
National Association of Registered Agents and Brokers--if the States
did not satisfy the licensing reform objectives articulated by
Congress. The creation of NARAB was only averted when a
majority of the States and territories (interpreted to be 29
jurisdictions) achieved a specified level of licensing reciprocity
within a 3-year period.
To their credit, the National Association of Insurance
Commissioners (NAIC) and most States took swift and unprecedented
action in response to ``act-or-else'' licensing provision. Nearly every
State enacted new legislation that established licensing reciprocity
among the States and instituted interstate uniformity in certain
critical areas. According to the NAIC, at least 48 States have passed
licensing reform legislation since the enactment of GLBA, and over 40
jurisdictions have been formally certified as meeting the NARAB
mandates. There is no dispute that the NARAB provisions had their
intended effect and initiated the move toward licensing modernization
at the State level. Although more improvement is undoubtedly needed,
the States have made significant progress in the 5 years since the
passage of GLBA.
The success of the NARAB licensing provisions is a perfect example
of what the Federal Government and the States can accomplish in
partnership and how Congress can assist the States to achieve much
needed marketplace reforms. The NAIC and State policymakers had been
trying to move toward reciprocal and uniform licensing for over a
century, but little progress was made until Congress set a specific
deadline and attached specific goals and repercussions. In fact,
Congress set the bar at only a majority of the States and now all but a
handful of States have met the NARAB reciprocity standard. This success
would not have occurred without targeted Federal legislation, or what
some are now calling ``Federal tools.''
Some may argue that the bar was not set high enough--because
uniformity was not required and several States have not adopted the
reciprocity standards--but there is no arguing with the provision's
effectiveness so far. There is certainly much more to do to get to full
agent licensing reciprocity and the ultimate goal of licensing
uniformity, but NARAB has set State insurance regulators on the right
path, and Congress can now easily move the bar higher in follow-up
legislation.
Functional Regulation--State Insurance Regulation
Perhaps the most important accomplishment of GLBA in protecting
insurance consumers was its focus on functional regulation. The concept
of functional regulation provides that insurance regulators oversee the
business of insurance, banking regulators oversee banking activity, and
securities regulators likewise are responsible for securities activity.
GLBA specifically reaffirmed the traditional authority of the States to
regulate the business of insurance in the United States.
GLBA expressly states that the McCarran-Ferguson Act \18\ remains
the law of the United States and further states that no person shall
engage in the business of insurance in a State as principal or agent
unless such person is licensed as required by the appropriate insurance
regulator of such State. Title III also unequivocally provides that
``[t]he insurance activities of any person (including a national bank
exercising its powers to act as agent . . .) shall be functionally
regulated by the States,'' subject only to certain exceptions which are
intended to prevent a State from thereby frustrating the new
affiliation policy adopted in Title I of GLBA. These provisions
collectively ensured that State insurance regulators retained
regulatory authority over all insurance activities, including those
conducted by financial institutions and their insurance affiliates.
Title III also provided for expedited judicial review of disputes
between State officials and Federal financial regulators, with the
courts being directed to give equalized deference to the rulings or
actions of both the States and the Federal regulator. These mandates
were intended in large part to draw the appropriate boundaries among
the financial regulators, boundaries that unfortunately continue to be
challenged.
---------------------------------------------------------------------------
\18\ McCarran-Ferguson Act, ch. 20, 59 Stat. 33 (1945) (codified as
amended at 15 U.S.C. Sec. Sec. 1011-1015 (1994)).
---------------------------------------------------------------------------
Since GLBA codified this important principle, the focus has largely
shifted to the success of functional regulation in the insurance
marketplace and the effectiveness and efficiency of State insurance
regulation. The discussion has taken on more urgency as the perceived
need for regulatory reform has increased due to the emergence of a more
global financial services industry.
From the beginning of the insurance business in this country, it is
the States that have carried out the essential task of regulating the
insurance marketplace to protect consumers. The current State insurance
regulatory framework has its roots in the 19th century with New
Hampshire appointing the first insurance commissioner in 1851, and
insurance regulators' responsibilities have grown in scope and
complexity as the industry has evolved. When a Supreme Court decision
raised questions about the role of the authority of the States,
Congress quickly adopted the McCarran-Ferguson Act in 1945. That Act,
which was reaffirmed by Congress 5 years ago, declared that States
should regulate the business of insurance and that the continued
regulation of the insurance industry by the States was in the public's
best interest.
Most observers agree that State regulation has worked effectively
to protect consumers, largely because State officials are positioned to
be responsive to the needs of the local marketplace and local
consumers. Unlike most other financial products, the purchaser of an
insurance policy will not be able to fully determine the value of the
product purchased until after a claim is presented--when it is too late
to decide that a different insurer or a different product might make a
better choice. As a result, insurance is a product with which consumers
have many issues and questions and if a problem arises they want to
resolve it with a local call. During 2001, State insurance regulators
handled approximately 3.6 million consumer inquiries and complaints.
Today, State insurance departments employ approximately 13,000
individuals who draw on over a century-and-a-half of regulatory
experience to protect insurance consumers.
Unlike banking and securities, insurance policies are inextricably
bound to the separate legal systems of each State, and the policies
themselves are contracts written and interpreted under the laws of each
State. When property, casualty, and life claims arise, their legitimacy
and amounts must be determined according to individual State legal
codes. Consequently, the constitutions and statue books of every State
are thick with language laying out the rights and responsibilities of
insurers, agents, policyholders, and claimants. State courts have more
than 100 years of experience interpreting and applying these State laws
and judgments. The diversity of underlying State reparations laws,
varying consumer needs from one region to another, and differing public
expectations about the proper role of insurance regulation require
local officials ``on the beat.''
Protecting policyholders against excessive insurer insolvency risk
is one of the primary goals of insurance regulation. If insurers do not
remain solvent, they cannot meet their obligations to pay claims. State
insurance regulation gets high marks for the financial regulation of
insurance underwriters. State regulators protect policyholders'
interests by requiring insurers to meet certain financial standards and
to act prudently in managing their affairs. The States, through the
NAIC, have developed an effective accreditation system for financial
regulation that is built on the concept of domiciliary deference (the
State where the insurer is domiciled takes the lead role). When
insolvencies do occur, a State safety net is employed: The State
guaranty fund system. The system has paid out over $11 billion to cover
claims asserted against insolvent insurers since they were first
created in the mid-1970's. States also supervise insurance sales and
marketing practices and policy terms and conditions to ensure that
consumers are treated fairly when they purchase products and file
claims.
Despite its many benefits, State insurance regulation it not
without its share of problems. The shortcomings of State regulation of
insurance fall into two primary categories--it simply takes too long to
get a new insurance product to market, and there is unnecessary
duplicative regulatory oversight in the licensing and post-licensure
auditing process.
In many ways, the ``speed-to-market'' issue is the most pressing
and the most vexing from both a consumer and an agent/broker
perspective because we all want access to new and innovative products
that respond to identified needs. The reality of today's marketplace is
that banking institutions and securities firms are able to develop and
market new and more innovative products and services quickly, while
insurance companies are hampered by lengthy and complicated filing and
approval requirements in 50 States. As a result, insurance companies--
and, derivatively, agents and brokers selling their products and
services--are at a competitive disadvantage compared to their
counterparts in other financial services sectors.
Today, insurance rates and policy forms are subject to some form of
regulatory review in nearly every State, and the manner in which rates
and forms are approved and otherwise regulated can differ dramatically
from State-to-State and from one insurance line to the next. Such
requirements are significant because they not only affect the products
and prices that can be implemented, but also the timing of product and
rate changes in today's competitive and dynamic marketplace. The
current system, which may involve seeking approval for a new product or
service in up to 55 different jurisdictions, is too often inefficient,
paper intensive, time-consuming, and inconsistent with the advance of
technology and regulatory reforms made in other industries. Cumbersome
inefficiencies create opportunity costs, and the regulatory regime in
many States is likely responsible for driving many consumers into
alternative market mechanisms. In order to keep insurers competitive
with other financial services entities and maximize consumer choice in
terms of the range of products available to them, changes and
improvements are needed.
Similarly, insurers are required to be licensed in every State in
which they offer insurance products, and the regulators in those States
have an independent right to determine whether an insurer should be
licensed, to audit its market-conduct practices, to review mergers and
acquisitions, and to dictate how the insurer should be governed. It is
difficult to discern how the great cost of this duplicative regulatory
oversight is justified.
IIABA's Support for the NARAB Approach of Targeted Reforms
As we have for over 100 years, IIABA supports State regulation of
insurance--for all participants and for all activities in the
marketplace--and we are opposed to any form of Federal regulation,
optional or otherwise. Yet despite this historic and longstanding
support for State insurance regulation, we are not confident that the
State system will be able to resolve its problems on its own. For the
most part, reforms must be made by statute, and State lawmakers
inevitably face practical and political hurdles and collective action
challenges in their pursuit of improvements on a national basis.
Therefore, IIABA believes that there is a vital role for Congress
to play in helping to reform the State regulatory system, but that such
an effort need not replace or duplicate at the Federal level what is
already in place and successful at the State level. We propose that two
overarching principles should guide any such efforts in this regard.
First, Congress should attempt to fix only those components of the
State system that are broken. Second, no actions should be taken that
in any way jeopardize the protection of the insurance consumer, which
is the fundamental objective of insurance regulation and of paramount
importance to the IIABA as our members represent consumers in the
insurance marketplace.
IIABA believes the best alternative for addressing the current
deficiencies in the State-based regulatory system is a pragmatic,
middle ground approach that utilizes Federal legislative tools to
foster a more uniform system and to streamline the regulatory oversight
process at the State level. By using targeted and limited Federal
legislation to overcome the structural impediments to reform at the
State level, we can improve rather than replace the current State-based
system and in the process promote a more efficient and effective
regulatory framework. Rather than employ a one-size-fits-all regulatory
approach, a variety of legislative tools could be employed on an issue-
by-issue basis to take into account the realities of today's
increasingly global marketplace. There are only a handful of regulatory
areas where
uniformity and consistency are imperative, and Congress has the ability
to address each of these core issues on a national basis in a single
legislative act.
Congress's work in this area need not jeopardize or undermine the
knowledge, skills, and experience that State regulators have developed
over decades. While IIABA believes such a proposal must modernize those
areas where existing requirements or procedures are outdated, it is
important to ensure that this is done without displacing the components
of the current system that work well. In this way, we can assure that
insurance regulation will continue to be grounded on the proven
expertise of State regulators at the local level.
The enactment of targeted Federal legislation to address certain,
clearly identified problems with State regulation is not a radical
concept. The Senate Banking Committee and the House Financial Services
Committee have already proven that this approach can work with the
NARAB provisions of GLBA that we have already discussed. The IIABA
believes the NARAB model can serve as a template for further reform of
State insurance regulation. The leadership of the House Financial
Services Committee has recently decided to take the NARAB approach of
``targeted reform'' after conducting a 3-year, in-depth review of
insurance regulation. We understand the Senate Banking Committee still
has much to consider on this subject and the IIABA looks forward to
working with you in any review of State insurance regulation and
potential reforms that the Committee may conduct.
Conclusion
In conclusion, we can say that the GLBA has not fundamentally
altered the insurance landscape for consumers. While the consolidation
within the insurance marketplace that began in the 1990's has continued
and perhaps increased, the mega-mergers of financial services providers
that were expected have generally not occurred. GLBA reaffirmed the
authority of the States to functionally regulate insurance, and led to
substantial reform in the multi-State licensing of agents and brokers
through the NARAB Subtitle. This was an important precedent in
insurance regulation that Congress can look to in the future.
----------
PREPARED STATEMENT OF STEVE BARTLETT
President and Chief Executive Officer
The Financial Services Roundtable
July 13, 2004
Mr. Chairman and Members of the Committee, I am Steve Bartlett, and
I am President and Chief Executive Office of The Financial Services
Roundtable.
I particularly appreciate the opportunity to testify on the impact
of the Gramm-Leach-Bliley Act (GLBA). The Roundtable's membership
reflects the spirit of that landmark law. The Roundtable members are
100 of the Nation's largest integrated financial services companies
providing banking, insurance, and investment products and services to
the American consumer.
With the enactment of GLBA, Congress acknowledged the contribution
of the financial services industry to our economy. Not only are
financial services firms directly responsible for almost 10 percent of
our Nation's total gross domestic product (GDP), but they also
contribute to the Nation's GDP by financing the activities of
individual consumers and businesses. It is, therefore, appropriate for
the Committee to review the impact of GLBA on the financial services
industry and the economy as a whole.
One of the principal goals of GLBA was to maintain the
competitiveness of the financial services industry so that all
Americans could have access to financial services. Indeed, in writing
GLBA, lawmakers set out to create an environment whereby the
marketplace would determine through what channels consumers are able to
purchase financial services. The environment is governed by regulations
that ensure safety and soundness and consumer protection, but not what
products can be offered, or by whom. By this standards GLBA has, in
large measure, been a success. The U.S. financial services industry is
the envy of the world. U.S. financial services firms are among the
world's largest and best capitalized firms. The Roundtable members
offer American consumers and businesses an ever-increasing array of
financial products and services designed to address needs ranging from
home loans, life insurance, securities brokerage, and retirement
services.
However, in the past 5 years it has become apparent that some
modifications to GLBA are necessary. In the remainder of my statement,I
will outline some of the changes to GLBA that The Roundtable
recommends.
Amend GLBA to Establish Uniform, National Privacy, Insurance, and
Mortgage Lending Standards
In the past 5 years, it has become increasingly apparent that a
number of financial services firms operate on a nationwide basis. They
offer financial products and services to consumers and businesses not
only through physical offices, but also over the Internet and
telephone. Therefore, The Roundtable recommends that GLBA be amended to
subject national financial services firms to uniform, national
regulation.
This is not a call for the elimination of regulation. It is a
recommendation that financial firms that operate on a national basis be
subject to a single set of national standards rather than a
multiplicity of State and local regulatory requirements.
More importantly, this is a recommendation that is intended to
benefit the consumers of financial products and services. Overlapping
and conflicting State and local regulatory requirements increase the
operating costs of national firms, and these costs, inevitably, are
passed along to consumers. Overlapping and conflicting State and local
regulatory requirements also impair the ability of national firms to
offer uniform products and services, This complicates life for the
homeowner that moves from one State to another and seeks to receive the
same financial products and services in his or her new home State. It
also prevents a company that operates in multiple States from
purchasing the same financial product or service for all of the
company's facilities.
This Committee recently recognized the importance of uniform,
national laws in the reauthorization of the Fair Credit Reporting Act.
The principle of uniform, national financial regulation also is
embedded in the National Bank Act, which applies to national banks, and
the Home Owners' Loan Act, which applies to Federal savings
associations.
The need for national standards is most evident in three areas:
Privacy, insurance, and mortgage lending.
Privacy
Title V of GLBA imposed a number of privacy requirements upon
financial institutions. These requirements include the distribution of
an annual privacy notice to consumers, and they permit consumers to
prevent the sharing of personal financial information with unaffiliated
third parties. Title V of GLBA also expressly authorizes the States to
adopt privacy notice and disclosure laws that afford consumers greater
protection. The Roundtable urges the Committee to modify this provision
of GLBA and establish uniform, national privacy standards for financial
institutions.
Two examples illustrate the confusion and conflict created by
current law. First, like many consumers, The Roundtable member
companies have found that the annual privacy notice required by GLBA is
overly confusing, and largely ignored by many consumers. Extensive
research indicates that consumers have difficulty processing notices
that contain more than seven elements, and that require a reader to
translate vocabulary used in the notice into concepts they understand.
Consumer surveys also indicate that over 60 percent of consumers would
prefer a shorter notice than the lengthy privacy policy mandated by
GLBA.
The Federal banking agencies, in conjunction with the Federal Trade
Commission, the National Credit Union Administration, the Commodities
Futures Trading Commission, and the Securities and Exchange Commission,
recently requested comment on alternative notices that would be more
readable and useful to consumers. Yet, even if these agencies develop a
simplified notice, they lack the authority to make the notice truly
consumer-friendly because GLBA leaves the States free to adopt their
own, additional, notice requirements.
An illustration of the conflict created by GLBA's deference to
State privacy laws arose just 2 weeks ago, when a Federal court
affirmed the application of a California privacy law to financial
institutions operating in that State. The California law, SB 1, permits
consumers to prevent the sharing of information with affiliates (for
example opt out) and requires that consumers affirmatively authorize
the sharing of information with nonaffiliated third parties (for
example, opt in). In ruling that the FCRA does not preempt the
application of this law to financial institutions operating in
California, the court based its opinion in part on the provisions of
GLBA that allow States to adopt more stringent privacy laws, and that
the Federal preemption applicable to affiliate sharing in the Fair
Credit Reporting Act is limited strictly to credit reports. As the
court stated: ``. . . Title V of the Gramm-Leach-Bliley Act of 1999,
which sets forth basic privacy protections that must be provided to
consumers by financial institutions, demonstrates that it, and not the
FCRA, encompasses the kind of information sharing at issue in this
case.'' \1\ This decision, if not reversed, amounts to an invitation to
other States to pass their own privacy laws, thereby subjecting
financial institutions, and their customers, to a variety of different
and conflicting privacy regulations contrary to the clear intent of
Congress to establish national uniform standards for affiliate sharing.
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\1\ American Bankers Assoc. et. al. v. Lockyer, at page, 10.
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To avoid this consumer confusion and reaulatory conflict, the
privacy standards in GLBA should be national, uniform standards. Also,
the Federal regulators should be directed to promulgate a simplified,
national privacy notice with a safeharbor.
Insurance
Title III of GLBA reaffirmed that the business of insurance is
regulated primarily by the States. During the past 5 years, however,
all parties to insurance regulation, including the State insurance
commissioners, have concluded that the current system of insurance
regulation is flawed. Indeed, the regulatory regime should be
updated to reflect the needs of our mobile, transient population. As
the former President of the National Association of Insurance
Commissioners, Mike Pickens, told the House Financial Services
Committee last year: ``We agree with critics that there is a need to
make the [insurance regulatory] system more uniform, reciprocal, and
efficient.'' \2\
---------------------------------------------------------------------------
\2\ Hearing on ``Reforming Insurance Regulation'' before the
Capital Markets, Insurance and Government Sponsored Enterprises
Subcommittee of the House Financial Services Committee, November 5,
2003.
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The Roundtable has concluded that the best way to reform the
regulation of insurance is to create a parallel system of chartering
and supervision for insurance companies at the Federal level. This so-
called ``optional Federal chartering'' system would not replace State
insurance regulation. Instead, it would give insurance companies a
supervisory alternative, similar to that available to banks and
thrifts.
A soon-to-be published study that was partially funded by The
Roundtable has found that the competition between the States and the
Federal Government inherent in the dual banking system has generated
significant benefits for banks, their regulators and their customers.
Those benefits include enhanced product and regulatory innovation,
expanded consumer choices, and expanded efficiencies in bank activities
and regulations.\3\ These same benefits would flow to the insurance
industry, its regulators and its customers through the introduction of
optional Federal regulation of insurance.
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\3\ ``The Benefits of Competition in Financial Regulation:
Innovation, Choice and Efficiency,'' a paper by James A. Wilcox,
Kruttschnitt Family Professor of Financial Institutions, Haas School of
Business, University of California, Berkeley. We will provide the
Committee a copy of this study upon publication.
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Mortgage Lending
GLBA addressed mortgage lending through provisions in Title I,
which authorized financial holding companies to engage in mortgage
lending, and Title VI, which made various reforms to the Federal Home
Loan Bank System. In the 5 years since the enactment of GLBA, however,
the regulation of mortgage lending has become a ``hot'' topic, as a
variety of State and local governments have enacted laws designed to
stop predatory lending practices, and as this Committee has debated the
supervision of not only the Federal Home Loan Banks, but also Fannie
Mae and Freddie Mac.
Accordingly, The Roundtable urges the Committee to amend GLBA and
enact a national mortgage lending law that establishes basic
antipredatory lending protections for mortgage borrowers. This Federal
law should apply uniformly to all lenders, regardless of charter, and
should supersede State antipredatory lending laws.
The rationale for a uniform, national mortgage lending law is the
same as the rationale for a uniform, national privacy law: A single,
Federal standard avoids consumer confusion and the potential for
conflict between competing State and local laws.
Amend GLBA to Remove Sunset on Non-Financial Activities
One of the central features of GLBA was the creation of financial
holding companies. It is now apparent that this feature of the bill has
been only marginally successful. While most of the Nation's largest
banking firms have become financial holding companies, only a handful
of securities firms and insurance firms have chosen to do so. The
financial holding company structure significantly expanded the scope of
activities permissible for banking firms; it did not offer insurance
firms and securities firms a similar benefit. Outside of the financial
holding company structure, securities and insurance firms are subject
to few limitations on affiliations. Thus, it is not surprising that
only a handful of securities and insurance firms have become financial
holding companies.
In a marketplace that is subject to rapid changes in technology and
even more rapid changes in consumer demands, some companies need the
flexibility to provide products and services outside the statutory list
of activities that are financial in nature. Title I of GLBA took a step
in this direction when it grandfathered the nonfinancial activities of
companies that were not bank holding companies prior to GLBA, but
became financial holding companies after the enactment of GLBA. This
grandfather, however, only protects nonfinancial activities that
constitute less than 15 percent of the financial holding company's
gross revenues, and is scheduled to sunset in 5 years. We recommend
that the Committee remove this sunset.
Amend GLBA to Remove Activity Limitations Applicable to Financial
Subsidiaries of National Banks and State Banks
Section 121 of GLBA authorized national banks to own financial
subsidiaries, and empowered these subsidiaries to engage in a range of
financial activities. At the same time, however, GLBA imposed a number
of activity and other operating constraints on the financial
subsidiaries of national banks and State banks that do not apply to
financial holding companies. These constraints should be removed.\4\
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\4\ For example, financial subsidiaries of national banks may not
underwrite insurance, may not engage in merchant banking activities,
and may not engage in real estate development or investment. Moreover,
the total assets of all financial subsidiaries of national banks cannot
exceed a certain limit.
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The activity and operational limitations applicable to the
financial subsidiaries of national and banks were imposed to eliminate
a presumed subsidy enjoyed by banks as a result of the Federal safety
net, but not available to uninsured bank holding companies. Thus, the
activity and operational limitations were intended to ensure regulatory
parity between banks and bank holding companies.
The problem with these limitations is that the case for the
presumed subsidy was rather weak. Studies done by both the Office of
the Comptroller of the Currency (OCC) and the Federal Deposit Insurance
Corporation (FDIC) have found little, if any, evidence that banks, on
net balance, receive a subsidy because of the Federal safety net.
Therefore, instead of establishing regulatory parity between bank
holding companies and banks, the limitations have had the effect of
making the financial holding company structure, which is not subject to
similar limitations, the more viable corporate vehicle for banking
institutions seeking to engage in expanded financial activities.
Removing the activity and operational limitations on national and
State banks would allow banking organizations to select between
alternative corporate vehicles through which they could offer financial
products and services.
State-chartered banks are subject to another activity limitation,
which predates GLBA, and which also should be removed. In 1991,
Congress barred State banks from engaging in any activity, as a
principal, that is not permissible for a national bank. While the FDIC
can overcome this prohibition by determining that a particular activity
poses no significant risk to the deposit insurance fund, the
prohibition is fundamentally at odds with the philosophy behind our
dual banking system. The dual banking system is premised upon the
operation of two, independent regulatory systems. Therefore, linking
the powers of state banks to those permissible for national banks
diminishes the independence of the State banking system. Moreover, this
limitation cannot be justified on safety and soundness grounds. Both
Federal regulators of State banks, the Federal Reserve Board and the
Federal Deposit Insurance Corporation, have the authority to take
actions against State banks if the activities of subsidiaries
jeopardize the financial condition of the parent bank.\5\
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\5\ For example, the prompt corrective action provisions in the
Federal Deposit Insurance Act permit Federal regulators to restrictthe
activities of subsidiaries or even require the divestiture of
subsidiaries. Also, Section 114 of GLBA authorized the Federal banking
regulators to impose restrictions or requirements on relationships and
transactions between depository institutions and affiliated companies
to ensure the safety and soundness ofthe depository institutions.
---------------------------------------------------------------------------
Amend GLBA to Allow Treasury and the Federal Reserve Board to
Independently Determine What Activities are Financial in Nature
When it comes to determining whether or not a new activity should
be permissible for a financial subsidiary of a national or State bank
or a subsidiary of a financial holding company, GLBA establishes a
complex notice and disapproval procedure involving the Secretary of the
Treasury and the Federal Reserve Board. This procedure gives each
agency a veto over new activities. It also ensures that the activities
permissible for financial subsidiaries of national and State banks will
be the same as the activities permissible for subsidiaries of financial
holding companies.
In the 5 years since GLBA was enacted, the Treasury and Federal
Reserve Board have authorized few new activities. This suggests that
the current procedure is overly cumbersome. Therefore The Roundtable
recommends that the Treasury Department and the Federal Reserve Board
should have independent authority to determine what a permissible
financial activity is. 6 This would stimulate a positive competition
between regulators that will benefit the customers of financial
services firms and the financial services industry. This proposed
change should not jeopardize the safety and soundness of affiliated
depository institutions since the OCC and Federal Reserve have separate
authority to ensure that the operations of financial affiliates do not
harm depository institutions.
The Importance of National Laws, Federal Preemption, and
Regulatory Competition
Three regulatory principles run throughout our testimony. The first
is the need for uniform, national laws for the financial services
sector of our economy. Today's financial services markets are
characterized by a handful of large, national financial services firms,
and thousands of smaller, local firms. The top 10 property and casualty
insurers, for example, control roughly 55 percent of that industry's
assets. Similarly, the top 10 banks account for 45 percent of all
assets in the banking industry. Uniform, national regulation is in the
best interest of these national firms, and more importantly, their
customers. Uniform national regulation promotes efficiencies that can
be passed along to consumers. It also permits the development of
standard products and services that can be offered to consumers,
regardless of their location. Therefore, we urge the Committee to
incorporate the principle of uniform, national laws into GLBA in key
areas such as privacy, insurance, and mortgage lending.
The regulatory companion to uniform, national laws is Federal
preemption. Without Federal preemption, the goal of uniformity cannot
be realized. Congress has
recognized the Treasury also should have the ability to determine that
certain activities are ``complimentary'' to financial activities; a
power that Congress extended to the Federal Reserve Board when GLBA was
enacted, but not to Treasury. Importance of preemption in other key
sectors of our economy, such as drugs, airline safety, and
communications. This principle needs to be applied more broadly to
financial services.
Finally, the benefits of competition in financial regulation stand
behind several of our recommended modifications to GLBA. As James
Wilcox explains in his forthcoming paper, the competition between State
and Federal banking regulations that is inherent in the dual banking
system has produced numerous benefits to consumers, the industry and
regulators. Therefore, we urge the Committee to modify GLBA in these
concrete ways:
Create national uniform privacy standards;
Create national uniform protections against predatory lending;
Create and optional Federal charter for life and property &
casualty insurance companies;
Remove the sunset on nonfinancial activities;
Remove activity limitations on both national and State banks;
and
Allow Treasury and the Fed to determine independently what
activities are financial in nature
Thank you for the opportunity to testify on this most important
topic.
----------
PREPARED STATEMENT OF JAMES D. McLAUGHLIN
Director, Regulatory and Trust Affairs
American Bankers Association
July 13, 2004
Mr. Chairman and Members of the Committee, my name is James D.
McLaughlin, Director, Regulatory and Trust Affairs of the American
Bankers Association (ABA). The ABA brings together all categories of
banking institutions to best represent the interests of this rapidly
changing industry. Its membership--which includes community, regional
and money center banks and holding companies, as well as savings
associations, trust companies, and savings banks--makes ABA the largest
banking trade association in the country.
I am glad to be here today to present the views of the ABA on the
impact of the Gramm-Leach-Bliley Act (GLB Act) on our businesses and
customers. Consumers of financial services are a diverse group, ranging
from individuals, small businesses, churches, and schools to large
corporations and governments. The specific needs of each customer group
differ, but they all expect--and deserve--efficient and convenient
provision of financial services.
In 1999, Congress addressed the inefficiencies in the then-current
structure and regulation of financial services by taking a forward-
thinking approach to financial services regulation. By enacting the GLB
Act, Congress streamlined the regulatory approval process and let
market forces dictate what combinations of financial services would be
most appropriate. Thus, by any measure, the GLB Act was one of the most
significant laws affecting the financial services industry, providing
the framework for the next century. It was not, however, a sea change.
Dynamic market forces, aided by changing technologies and demographics,
were already changing the market. While we do not know what future
innovations will take place, we do know that free and fair competition
creates an atmosphere that encourages innovation. The GLB act was an
essential ingredient in bringing about such competition.
In my statement today, I would like to emphasize three points:
The GLB Act was critical to modernizing our financial system,
making it more sensible and straightforward, removing
inefficiencies in structure and regulation, and letting market
forces dictate what combinations of financial services would be
appropriate;
The GLB Act has worked well, benefiting customers,
diversifying incomes of financial firms, and posing no new risks to
the financial system or the deposit insurance funds; and
More can be done to fully realize the benefits of the GLB Act,
including preserving the regulatory flexibility given to the
Federal Reserve and Treasury to adjust to a dynamic financial
services market; assuring that regulatory proposals on broker
``push out'' address key industry concerns; providing a sensible
cross marketing approach for merchant banking activities;
encouraging the Federal Home Loan Banks to fully embrace the
expanded collateral provisions in the Act; and creating uniformity
of insurance regulation and supervision.
I will touch on each of these points in the remainder of my
statement.
The GLB Act was Critical to Modernizing our Financial System
Economics, demographics, and technology created a whole new genre
of financial consumers. Over the last 20 years, customers put a premium
on efficiency and convenience; they are not intimidated by automated
delivery systems; they are willing to use a wide variety of service
providers--not just banks--to meet their financial needs; and they are
much more active managers of their savings and investment dollars than
previous generations. As a result, the mix of assets held by households
changed significantly (see Chart 1).
Financial firms began to adapt to these changes. Securities firms
offered a full array of loan and loan-substitute products and mutual
funds (that compete directly with deposits). Today, mutual and money
market funds exceed bank deposits by $1.4 trillion (see Chart 2). Large
corporate borrowers increasingly went directly to the financial markets
for funding (See Chart 3). Diversified firms, like General Electric,
offered a wide array of financial services--earning a substantial
portion of their income from them. While the competing products were
similar, the regulation was not.
Internationally, U.S. financial firms were in danger of falling
behind foreign competitors, which typically were able to provide
securities, insurance, and real estate services within ``universal''
banks. This gave foreign financial firms a competitive edge over the
United States in attracting global financial business.
Banks were forced to be creative in finding ways to combine
services, often in convoluted and expensive ways. Regulatory decisions
helped--such as those permitting the establishment of so-called
``Section 20 Subsidiaries'' to allow bank holding companies to engage
to a limited extent in securities underwriting and the approval for
national banks to engage in the sale of insurance from towns of 5,000--
but were not enough. Regulatory decisions were often challenged in
court, slowing the evolution of the market. And the strict limits
placed on the activities in which they could engage prevented U.S.
banks--and their customers--from reaching all customers demanding these
services. Thus, customers of banks were unable to take advantage of a
full menu of financial services.
Responding to the need to modernize the financial system and after
many years of deliberation, Congress enacted the Gramm-Leach-Bliley
Act. It broke down decades-old barriers, allowed bank-affiliated firms
to recognize the synergies associated with full affiliation of banking
with underwriting and agency activities in securities and insurance. It
also broadened the definition of financial services to enhance
competition among all providers and it streamlined the approval process
for acquisitions.
To avoid the need for Congress to continually referee disputes
among financial service providers, the GLB Act gave to the Federal
Reserve and the Treasury authority to define new activities that are
financial in nature, or incidental to financial activities. This was
designed to assure that regulation remains responsive to the evolving
marketplace in financial services and to assure there was a level
competitive playing field. As will be discussed briefly below, the real
estate lobby has worked to derail this essential process in order to
protect its own business interests rather than those of consumers of
real estate services.
Importantly, while more efficient combinations can occur as a
result of the GLB Act, they can do so without excessive risk taking or
additional exposure to the FDIC fund. Several provisions help to ensure
any risk is controlled and poses no threat to the deposit insurance
fund. First, new products and services can now be provided to
customers, thus helping to diversify income and improve the overall
health of the financial institution. Second, the newly permissible
activities, for the most part, are placed in financial subsidiaries or
affiliates of the holding company, which are legally separate entities
from the bank and thus pose no risk to insured deposits. Third, to
utilize any of the new powers authorized in the GLB Act, all of the
banks of the banking organization must be well-capitalized and well-
managed and continue to be so. Failure to maintain these standards
means that they would have to divest themselves of the new activity.
And fourth, the Act also requires the large insured financial
institutions have at least one issue of outstanding subordinated debt
that is rated within the three highest investment grades. This
provision was adopted ``in order to bring market force and discipline
to bear on their operation and the assessment of their viability'' and
applies, by regulation, to the largest 50 institutions.
The GLB Act also kept banking and commerce separate, giving the
Federal Reserve the authority to determine when some nonfinancial
activities are complementary to financial services.
The GLB Act Has Worked Well, Benefiting Customers and Posing No New
Risks
By ratifying and rationalizing the regulatory structure of what was
already occurring in the marketplace, the GLB Act has already been
successful. The diversification of income sources most certainly helped
many banks through the periods of slow economic growth while at the
same time posing no new risks to the financial system or the deposit
insurance funds. In fact, the banking industry has posted strong
earnings since the enactment of the GLB Act, and now has capital and
reserves exceeding $900 billion. The financial services industry
continues to be a major driver in our economy, now accounting for over
20 percent of GDP (see Chart 4). Jobs within banking, and financial
services generally, have continued to be created even during the recent
slow economic times (see Chart 5).
As of July 2004, 647 financial holding companies--a new financial
structure established in the GLB Act--had been formed (about 12 percent
of banking organizations, holding 80 percent of the domestic banking-
industry assets). There are many reasons for establishing a financial
holding company (FHC). Some banks just wanted the streamlined approval
process for acquisitions. Others wanted the market to know that their
bank was well-capitalized and well-managed--a requirement to forming an
FHC. Others were interested in merchant banking. About 25 percent are
engaged in insurance agency activities and 5 percent in insurance
underwriting (unrelated to the extension of credit).\1\ Generally, all
the BHC's with Section 20 subsidiaries have converted to FHC's. The
reason for this is simple: These firms would no longer have to
calculate the 75-to-25 ratio of permissible to impermissible income for
a bank holding company--a burdensome and wasteful exercise.
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\1\ As of June 2003, 52 percent of banks below $1 billion in assets
were selling insurance with 33 percent selling general insurance
(products other than credit related insurance and annuities).
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While not all financial firms have rushed to become a financial
holding company, they could if they so choose in the future. This is a
critical point: The success of the GLB Act should not be judged by the
number of financial holding companies or whether the combination of
activities that firms now offer were a direct result of the GLB Act.
Rather it is the very option to undertake combinations of activities to
meet the needs of customers that is the measure of success.
Importantly, the streamlined approval process for nondepository
acquisitions has made a tremendous difference. FHC's now notify the
Federal Reserve after the acquisition. Banking firms are now more
competitive because they are able to make quick business decisions and
implement programs to meet the changing market needs. No longer do they
have to wait many months for regulatory approval of an acquisition,
thereby losing business to firms that did not have such impediments.
This is the way a dynamic, competitive market is supposed to work.
It should also be remembered that banks and other financial firms
had already established relationships with securities and insurance
firms prior to enactment of the GLB Act. The removal of the arbitrary
restrictions, such as the eligibility revenue limits, has helped expand
existing businesses that banks had underway. Smaller banks have used
the GLB authorities to expand insurance brokerage activities without
the artificial constraint of locating in a town of 5,000 residents.
There have been other benefits as well. About two dozen FHC's have
used the GLB Act authorities to establish merchant banking operations.
As the economy gains momentum, merchant banking activity is expected to
increase. Many members of the ABA and the ABA Securities Association
regard the authority to engage in expanded merchant banking activities
as the single most important new power granted by the GLB Act. As a
result, our members have a strong interest in ensuring that they can
engage in merchant banking activities to the full extent allowed under
the law. A particular concern, explained in more detail in Section III
of this testimony, relates to provisions that restrict cross-marketing
with respect to merchant banking for some firms (affiliated with
securities companies) but not for others (affiliated with insurance
companies). A sensible approach by Congress to cross marketing that is
not based on ownership of one financial firm or another is needed.
The GLB Act established a two-way street allowing banking companies
to efficiently enter securities, insurance, and other financial
businesses as well as allowing these financial firms to enter the
banking business. This enhances competition within the financial
services market as all firms have the opportunity to provide a full
range of financial services. It should be noted in this context, that
the BHC Act continues to impose a more stringent antitying standard on
bank and financial holding companies than on other firms competing in
the financial services market.
In spite of the fact that nonbank financial firms offer bundled
products, that they can form a FHC just like banking firms, and that
banking firms are subject to more stringent antitying standards, some
observers have claimed that banking organizations' ability to providing
bundled services is somehow unfair, or even in violation of antitying
statutes. These claims are serious and unfortunately are too often
accepted without legal understanding or economic analysis. Two recent
papers help to fill this analytical void. The first, ``Legality of
Relationship Banking Under Bank Antitying Restrictions'' by Covington &
Burling concludes that there are many permissible approaches for banks
to expand customer relationships, including cross-selling and cross-
marketing, engaging in certain forms of discount pricing based on the
volume of services purchased, and legal tying involving traditional
bank products under statutory and regulatory exceptions. This broad
range of permissible relationship banking practices is consistent with
the limited scope of Section 106, the antitying restrictions of the
antitrust laws, and benefits of bundled products and services.\2\
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\2\ ``Memorandum: Legality Of Relationship Banking Under Bank
Antitying Restrictions,'' Covington and Burling, Washington, DC, May
28, 2003. This paper and the one by Dr. Mullineaux were supported by
the American Bankers Association and the ABA Securities Association.
The views expressed herein are strictly my own and do not necessarily
represent the views of the American Bankers Association, ABASA or its
members.
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The second paper, ``Tying and Subsidized Loans: A Doubtful
Problem'' by Donald J. Mullineaux, DuPont Chair in Banking and
Financial Services at the University of Kentucky, analyzes whether
tying makes any sense from an economic perspective and evaluates the
so-called ``evidence of tying'' that is based on comparisons of
relative interest rates on syndicated loans and other types of
financial contracts. This paper concludes that tying is not a rational
strategy in today's financial environment and that no valid inferences
about tying can be drawn from simple comparisons of rates on loans with
those on bonds or credit default swaps.\3\
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\3\ ``Tying and Subsidized Loans: A Doubtful Problem'' by Dr.
Donald J. Mullineaux, Director, School of Management DuPont Chair in
Banking and Financial Services, Gatton College of Business and
Economics, University of Kentucky, May 2003.
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To summarize, the law no longer constrains the natural evolution of
the financial services market--that will be the legacy of the GLB Act.
The market will continue to evolve slowly as firms experiment and
innovate, trying to find the best combination of services to meet the
needs of their customers. Importantly, new combinations of services
have been provided without excessive risk taking or additional exposure
to the FDIC fund.
More Needs to be Done to Fully Realize the Benefits of the GLB Act
There are several issues of concern that limit or threaten the
benefits of fair and open competition envisioned in the GLB Act:
The flexible regulatory process designed to allow financial
institutions to enter new lines of business must be allowed to work
as envisioned in the Act;
The banking industry has serious concerns over a new proposal
by the Securities and Exchange Commission (SEC) regarding
Regulation B (a.k.a., broker ``push-out'' rules) that should be
addressed;
A sensible cross-marketing approach for merchant banking
activities is needed;
More rapid adoption of expanded collateral provisions for
Federal Home Loan Bank advances provided for in the GLB Act is
needed to facilitate small business and small agri-business
lending, and;
Insurance regulatory reform is the next natural legislative
step following the GLB Act to modernize the financial services
industry.
Regulatory Flexibility to Adjust to the Marketplace Should Be Preserved
In the more than 15 years of debate prior to enactment of the GLB
Act, Congress often found itself in the middle of arguments between
financial services industries about who should do what. The result was
gridlock and an out-of-date financial system that did not reflect
changes in consumer needs or in the use of technology. Congress also
recognized that the statutory standard for regulatory approval of new
activities for bank holding companies--the ``closely related to
banking'' standard--was woefully inadequate in an economy transformed
by technological progress.
To be sure that the procompetitive goals of the GLB Act continued
to be met in a dynamic marketplace, Congress: (1) established a
flexible regulatory process that would permit the financial industry to
``compete effectively with any company seeking to provide financial
services in the Unitied States'' without the need for further
legislation; and (2) set forth a new, considerably broader, standard to
enable banks and bank holding companies to remain competitive no matter
in what direction financial services evolved. That new standard--
activities that are financial in nature or incidental to a financial
activity--was intended to provide the flexibility Congress knew would
be necessary. In an abundance of caution, those activities, even very
low-risk agency activities, can only be conducted in FHC's or financial
subsidiaries.
Unfortunately, this important provision has been derailed, at least
for now, in one of first proposed rulings under this Act, having to do
with real estate brokerage and management services. The merits of this
proposal are not the subject of this hearing, and I will not belabor
this matter beyond pointing out that real estate brokerage firms are
competing directly with banks in providing financial services. They
have even admitted so in testimony before this Committee and yet are
working to frustrate the procompetitive process that Congress put into
place in the GLB Act. What is central to this hearing is that an
extremely important provision of the GLB Act--one that appropriately
delegates responsibilities to the two agencies most familiar with the
financial services industry--is not working. As a result, Congress has
once again become embroiled in another competitive issue--the very
thing it sought to avoid. We urge Congress to let the Treasury and the
Federal Reserve undertake their responsibilities to assure that the
financial services market remains fair and competitive.
Concerns Remain over Regulation B (Broker ``Push-Out'' Rules) Proposed
by SEC
As part of its financial modernization scheme, the GLB Act removed
the blanket exemption from SEC registration for banks that engage in
securities activities. The blanket exemption was replaced with a set of
narrow exceptions for bank ``broker'' and ``dealer'' activities. Under
the GLB Act, any securities activities that fall outside of the
exceptions may no longer be handled directly in the bank and, for
practical reasons, must be ``pushed out'' into an SEC-supervised
securities affiliate of the bank. The SEC delayed implementation of its
rules several times, eventually putting in place a temporary exemption
that effectively preserved the blanket exemption until the new rules
could be rewritten. This action was very appropriate as the banking
industry made clear that the rules suggested at that time, in a variety
of respects, were burdensome, disruptive, costly, and unworkable.
In late 2002, the Commission took a dual track approach and issued
final rules implementing the ``dealer'' part of the exceptions only.
The ``dealer'' exception rules, including an exemption for securities
lending activities, were issued in February 2003, and compliance became
mandatory on September 30, 2003. On June 17, 2004, the SEC made public
the proposed ``Regulation B'' rules to implement the bank exceptions
from the definition of ``broker'' under Section 3(a)(4) of the
Securities Exchange Act of 1934, as amended by Title II of the GLB Act.
In crafting proposed Regulation B, the SEC sought input from the ABA,
the ABA Securities Association, and others. Bank trust officers,
employee benefit professionals, custody managers, securities
professionals, and private bankers all share a keen interest in the
practical application of these rules.
While the proposal, in most respects, is a significant improvement
over the earlier proposal, much work remains to be done. The regulation
defines and clarifies a number of the statutory exceptions from the
definition of ``broker'' and grants several new exemptions from the
``broker'' definition to banks and certain other financial institutions
(which would supplement the statutory exceptions). Among the key issues
that still need to be addressed are the following:
The complexity of the ``chiefly compensated'' test under the
trust and fiduciary exception;
The inability of banks to offer order-taking to many new
custodial clients after July 30, 2004, including, most importantly,
IRA custodial accounts;
The incompatibility of the employee benefit plan exception
with current pension plan operations;
The uncertainty posed by the proposal to current bank bonus
and referral fee plans;
The impact the rule will have on bank sweep programs; and,
The proposal's refusal to treat equally thrifts and commercial
banking organizations.
Over the last 3 years, the ABA has worked closely with the SEC on
these issues and the proposal, in most, but not all respects, is a
significant improvement over the earlier one. We appreciate the SEC's
responsiveness to many of our concerns and hope that these additional
problem areas can be adequately addressed in the next several months so
that our member banks and savings institutions can continue to offer
products and services, such as IRA accounts and pension plan services,
which our customers have come to enjoy. During this process, we would
hope that the Congress would continue to exercise its oversight
responsibilities.
A Sensible Cross-Marketing Approach for Merchant Banking Activities Is
Needed
There are two important changes in law that are needed that apply
to the new merchant banking powers authorized under the GLB Act. The
first change would allow all FHC's engaged in merchant banking
activities to cross-market products and services offered by both the
bank and the portfolio company in which the investment is made so long
as the financial holding company has a noncontrolling investment stake
in the portfolio company. The second change would permit all FHC's,
whether or not their investment in the portfolio company was
controlling, a limited ability to cross-market bank and portfolio
company products and services. This latter change is necessary to
ensure that FHC's affiliated with securities underwriting firms are not
unfairly disadvantaged vis-a-vis those FHC's affiliated with insurance
underwriting firms.
As background, the GLB Act generally imposes cross-marketing
restrictions on FHC's engaged in merchant banking activities. The Act
prohibits a depository institution controlled by an FHC from marketing
any product or service of a company in which the FHC has made a
merchant banking investment. The reverse is also true: The company in
which the FHC has invested may not market the products and services of
the FHC's affiliated depository institution to its customers.
An exception from this prohibition is provided, however, for
merchant banking investments made by insurance companies owned by an
FHC. Thus, insurance underwriting firms that affiliate with depository
institutions are able to cross-market through statement stuffers,
Internet websites products, or through the company in which they have
made a merchant banking investment. Moreover, products and services
offered by the company in which the insurance underwriting firm has
invested also may be marketed via the depository institution that is
affiliated with the insurance underwriting firm.
Nearly all of the members of the ABA Securities Association are
FHC's that are able to make merchant banking investments because of
their affiliation with securities firms; very few, however, own
insurance companies that could engage in the type of insurance company
merchant banking permitted by the GLB Act. As a result, our FHC members
could not take advantage of the website/statement-stuffer exception,
while other FHC's with insurance company merchant banking operations
would be permitted to do so.
There is simply no rational or public policy reason for this plain
competitive inequity. The ability to cross-market through Internet
websites is important to banks. Current business practices often
require an FHC to invest in an Internet firm in order for its banks'
products to be posted on or linked to that firm's website.
Taken together, the amendments suggested above would allow banks to
cross-market bank products and services to customers of a portfolio
company and vice versa, so long as the FHC's investment stake was
noncontrolling (which is defined as owning or controlling 25 percent or
more of the total equity or any class of voting securities). In
addition, we believe that even where a control situation existed,
limited cross-marketing through websites and statement stuffers should
be permitted for all FHC's.
Such changes will not only put our members on an equal footing with
those insurance underwriting firms that engage in merchant banking, but
they will also allow all FHC's to engage in cross-marketing so long as
their merchant banking stake is noncontrolling. This latter provision
is very important to level the playing field between FHC's and other
non-FHC financial firms not similarly constrained by the GLB Act's bar
on cross-marketing.
Federal Home Loan Banks Should Fully Embrace the Expanded Collateral
Provisions
of the GLB Act
Title VI of the GLB Act included a provision long advocated by the
ABA that expanded categories of eligible collateral for community
financial institution members of the Federal Home Loan Banks (FHLB's)
to include ``secured loans for small business, agriculture, or
securities representing a whole interest in such secured loans.'' \4\
Unfortunately, the acceptance of small business, small agri-business,
and small farm collateral for loan advances by the Federal Home Loan
Banks (FHLB's) has been spotty at best. In regions of the country where
agricultural lending is a major line of business for member banks of
the individual FHLB's, there has been some acceptance of the
collateral. The Dallas and Topeka Federal Home Loan Banks have
increased lending on this collateral the most, each accepting over $2
billion in small business, small agri-business or small farm collateral
thus far this year. The Des Moines Bank has accepted $1.1 billion in
this collateral thus far this year. However, even in these areas,
agricultural loans (real estate secured and nonreal estate secured)
continue to be heavily discounted for collateral advances. The
individual FHLB's assured the public that as they gained experience
with these loans that the discounting would be reduced if the loans
performed as anticipated--and some have begun to do so. As an example,
on July 1, 2004, the Dallas Bank increased the acceptable limit on this
type of collateral from two times a member's Tier 1 capital to three
times the member's Tier 1 capital. We applaud this move and encourage
other FHLB's to follow suit.
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\4\ 12 U.S.C. 1430(a)3E. Community financial institutions are FDIC
insured institutions with less than $530 million in assets (adjusted
for inflation from $500 million at the time of enactment). The FHLB's'
regulator, the Federal Housing Finance Board, implemented this
provision in 2000 allowing the FHLB's to accept small business, small
agri-business, and small farm collateral.
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In regions where agricultural lending does not dominate the
business lines of the member banks, there has been little or no
acceptance of these loans for collateral advances. Banks in these
regions generally have required that members exhaust all other
acceptable collateral before accepting the new categories.
To be fair to the FHLB's, some of the slowness is a result of the
slowed down in the agricultural and rural economy due to a rapid
decline in farm commodity prices and a decline in the manufacturing
sector. Member banks have needed less borrowed funds to meet loan
demand. Today, agricultural commodity prices have recovered, and a
robust farm real estate market is occurring in all regions of the
country. We are disappointed that more of the FHLB's are not positioned
to meet what could potentially be a renewed need for lendable funds.
A related issue that is particularly disappointing to us is the on-
going problem our members have faced when attempting to use Small
Business Administration (SBA) and U.S. Department of Agriculture (USDA)
guaranteed loans as collateral for FHLB advances. The Federal Housing
Finance Board has made it clear that these loans, backed by the full
faith and credit of the U.S. Government, are eligible collateral for
purposes of borrowing from the FHLB's. However, due to technical issues
related to SBA and USDA regulations on the terms and conditions of the
Federal guarantees, most FHLB's place no value on the ``full faith and
credit'' guaranty of the Federal Government. At best, some of the
FHLB's discount the Federal guaranty and give the pledging banks no
break on the collateral haircut; at other FHLB's, these loans are not
acceptable collateral at all. Despite efforts of both the ABA and
representatives from several FHLB's, officials that administer the loan
programs at USDA and SBA have been less than willing to resolve this
issue. Guaranteed loans are extended to the most economically
vulnerable small farmers and small business people, and they deserve
the best rates and terms possible. USDA and SBA should be encouraged to
modify their regulations to solve this problem.
Insurance Regulatory Reform
The most significant work left undone by the GLB Act is
modernization of the State system of insurance regulation. The American
system of insurance regulation was set in place at about the same time
as Allied forces were fighting the Battle of the Bulge in 1945. In
March of that year, Congress delegated its authority to regulate
insurance to the States with the passage of the McCarran-Ferguson
Act.\5\ This system is now more than half a century old and in dire
need of modernization. Congress began to recognize this need in 1999 by
including a provision within the GLB Act that encouraged the States to
adopt either uniform or reciprocal licensing standards for insurance
agents. The so-called ``NARAB provision'' called for the establishment
of a national licensing standard and required that standard to be
adopted by a majority of the States.\6\
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\5\ 15 U.S.C. Section 6701.
\6\ The National Association of Insurance Commissioners (NAIC)
created the NARAB Working Group in December 1999 to help States
implement Subtitle C requirements in Title III of the Gramm-Leach-
Bliley Act. That subtitle requires State insurance regulators to meet
Federal statutory requirements affecting insurance agent licensing, and
provides for establishing a new organization named the National
Association of Registered Agents and Brokers (NARAB) if the States fail
to achieve the goals set forth in Subtitle C. The mission of the NARAB
Working Group is to coordinate State regulatory actions related to
NARAB, so that we can fully and promptly comply with all requirements
in the GLB Act.
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Accordingly, we were hopeful that a uniform licensing regime would
be created, but that has not happened. Instead, a reciprocal licensing
regime has been created, and while a majority of States have enacted
this system, significant variations in licensing standards are still
permitted. Unfortunately, the goal of creating just one set of
licensing standards to which all insurance agents must adhere has yet
to be realized. On a more positive note, NARAB's inclusion in the GLB
Act began the discussion of why Congress is needed to resolve the
problems inherent in the State insurance regulatory system. Although
NARAB's success is limited, the States would not have achieved even
such little uniformity as currently exists absent a Congressional
mandate to do so. However, the narrow scope of the NARAB provision (for
example, addressing only agent licensing) left unaddressed the myriad
other problems of State insurance regulation that urgently need reform.
The most glaring among them are:
Non-uniform or duplicative agent and company licensing
criteria;
Inconsistent market conduct standards;
Non-uniform privacy standards;
Price controls; and,
Prior approval barriers to product introduction and
innovation.
All of these are fundamental problems associated with product
availability and cost that duplicative and inefficient State regulation
has created.
Witness the fact that most States require prior approval of
insurance products and rates before the product can be sold. The same
product--term life insurance, for example--must be modified to meet the
different requirements imposed by every State and as a result, can take
as long as 2 years to roll out a new product nationally.
Regulation of this sort impedes product innovation and introduction
as the cost of complying with so many different laws restricts the
ability of smaller companies to enter the marketplace. Similarly, rate
regulation, or price controls as they should more appropriately be
known, prevent some insurers from offering their products at prices
that are profitable. Accordingly, highly regulated States, like
Massachusetts and New Jersey, have a fraction of the insurance
companies offering products for sale compared to States like Illinois
and South Carolina where market forces set prices.
One solution to these problems endorsed by the ABA and its
insurance affiliate, the American Bankers Insurance Association (ABIA),
is to create an Optional Federal Charter (OFC) for insurance companies
and agencies. Like the dual-banking system, an OFC would provide an
alternative to the current State-by-State system of regulation and
create the uniformity and efficiency that is unattainable under State
regulation. Perhaps as important, an OFC would preclude or diminish the
harmful effects of having State regulators create many different
interpretations of a Federal standard. If uniformity is the goal, we
can see no benefit to replacing the universe of differing State laws
with a universe of differing State interpretations of a Federal law.
By leaving the State system intact, however, an OFC would preserve
state regulation for those companies and agents preferring that system
while providing choice for those that prefer the uniformity and
efficiency of a single Federal regulator and the uniform regulations
Federal oversight would provide. As with the dual-banking system,
providing this choice for the insurance industry will create a critical
dynamic that inures to the betterment of insurance regulation as a
whole and insurance consumers in particular.
The problems inherent in State insurance regulation grow worse
every day. We urge this Committee to examine State regulation of
insurance in separate hearings and to debate solutions to these most
urgent problems.
Conclusion
The GLB Act has helped to remove an obstacle to efficient provision
of financial services. It responded to the needs of consumers and has
increased the competition among financial service providers, each vying
to design new and creative products by rebundling the four basic
financial services--transactions services, intermediation, risk
management, and advice. In this new competitive environment, customers
look to suppliers who can provide combinations of services tailored to
meet their needs. As Senator Phil Gramm said at the signing ceremony
for this Act: ``The world changes, and Congress and the laws have to
change with it . . . . We have learned that we promote economic growth
and we promote stability by having competition and freedom.''
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PREPARED STATEMENT OF JOHN TAYLOR
President and CEO, National Community Reinvestment Coalition (NCRC)
July 13, 2004
Good morning Chairman Shelby and Ranking Minority Member Sarbanes.
I am honored to be testifying this morning and representing the views
of community organizations regarding a law that revolutionized the
banking industry. My name is John Taylor; I am the President and CEO of
the National Community Reinvestment Coalition (NCRC).
NCRC is the Nation's economic justice trade association of 600
community organizations and public agencies dedicated to increasing
access to capital and credit for minority and working class
communities. NCRC was founded to protect and strengthen the Community
Reinvestment Act (CRA) since CRA increases access to credit by insuring
that banks have an affirmative obligation to serve all communities in
which they are chartered.
It is particularly fitting that NCRC is testifying today because
the Gramm-Leach-Bliley Act (GLBA) has directly and indirectly weakened
CRA. If the flaws of GLBA are not fixed soon, Americans' access to
credit and capital will diminish dramatically. The U.S. banking system
is the envy of the world. In great part, this is directly attributable
to our extensive regulatory oversight, which ensures adequate capital
reserves, safety and soundness, and fair and equal access to credit.
GLBA has failed to ensure that regulations relating to fair and equal
access to credit and capital have kept pace with safety and soundness
regulation.
In order for fair lending regulation to keep pace with the changes
in the financial industry unleashed by GLBA, CRA must be updated and
applied to more institutions as one of GLBA's authors, Rep. James
Leach, supported. In particular, community reinvestment obligations
must apply to all affiliates of holding companies and to lending
institutions that are not part of holding companies. Data disclosure
requirements also must be enhanced. In addition, the harmful aspects of
GLBA that must be repealed immediately are CRA Sunshine and the
reduction in frequency of small bank CRA exams.
CRA Sunshine
The one area of strong consensus among community leaders and the
lending industry is that the so-called ``CRA sunshine requirements'' of
GLBA must be repealed. The CRA sunshine provision sought to quantify
the amount of bank dollars granted to community groups. It was believed
that such grants were used for operating support rather than for the
direct provision of financial services and products. Five years later,
we now know that the facts do not support this theory.
In fall 2002, NCRC released a report called CRA Sunshine Reveals
Benefits of Bank-Community Group Partnerships. In this report, NCRC
used the Freedom of Information Act (FOIA) to obtain 707 CRA agreements
made during 1999 through 2001 subject to the CRA sunshine disclosure
requirements. As defined by GLBA, a CRA agreement is a commitment in
writing by a bank to a nongovernmental enterprise exceeding $10,000 in
grants or $50,000 in loans. If the nongovernmental enterprise such as a
community group commented to the bank or a regulatory agency about the
CRA performance of the bank, the bank and community group must disclose
the initial CRA agreement to Federal regulatory agencies and must
disclose subsequent expenditures of funds received by the community
group under the agreement.
NCRC found that of the $3.6 billion in the 707 agreements, only
$11.8 million or less than three tenths of 1 percent was grants or
other funding for community groups (I have submitted a copy of our
report for the record).* These grants supported the vital missions of
nonprofit homeless shelters, housing developers, and other
neighborhoodbased groups engaged in housing and economic development.
The grants also helped lenders meet community credit needs and increase
their lending, investing, and services in low- and moderate-income
neighborhoods, as required by CRA.
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* Report held in Committee files.
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CRA sunshine frustrates the essential purpose of CRA, which is to
ensure that banks affirmatively meet credit needs. Further, CRA
sunshine increases paperwork burden on banks and community groups with
no tangible net benefit to the public. The repeal of this ill-advised
and useless section of GLBA must occur immediately.
Less Frequent Exams for Small Banks
Another direct harm of the GLBA is the reduction in frequency of
small bank CRA exams. Under GLBA, small banks with assets of under $250
million are examined only once every 4 years if they have a
Satisfactory CRA rating and once every 5 years if they have an
Outstanding rating.
When small banks are examined that infrequently, they have little
incentive to affirmatively and continually adhere to their reinvestment
obligations. They will have reduced incentives to make sufficient
numbers of loans to low- and moderate-income borrowers during the
entire 4- or 5-year time period between exams, and may only focus their
efforts during the last year or two before exams. It is commonsense
that infrequent examinations lead to infrequent commitments to
reinvestment, while more frequent examinations lead to more consistent
commitments to reinvestment.
NCRC's 600 community organization members have reported that less
frequent exams have reduced the amount of lending by small banks to
low- and moderate-income borrowers. NCRC would have preferred to
present quantifiable evidence to the Committee today, but we found out
about testifying a mere 2 days before our testimony was due. We call
upon Congress to commission a comprehensive study assessing the impacts
of the CRA exam stretch-out on lending to working class Americans.
This reduction in frequency responded to industry complaints about
so-called ``burden of CRA exams.'' What continues to astonish NCRC,
however, is that the Federal regulatory agencies appear to accept
industry arguments about burden although the Federal regulators
themselves have yet to conduct their own comprehensive cost-benefit
analysis regarding CRA's application to small banks.
The lack of a thoughtful cost-benefit analysis is readily apparent
in the GLBA stretch-out of the small bank CRA exam schedule. The small
bank exam is a quick and straightforward exam that focuses on lending
and dispenses with the investment and service test of the large bank
exam. For any small bank that is true to the mission of a ``community
banker,'' the small bank CRA exam is a relatively easy exam. If Members
of this Committee actually looked at small bank CRA exams, they would
be astonished that all of this noise about burden can be generated by
exams that rarely exceed 10 pages in length.
Despite the brevity of the exam, its importance cannot be
underestimated. In too many poor rural communities, the CRA exam
process is the only mechanism that holds small banks accountable for
serving low- and moderate-income borrowers and communities. Smaller
banks do not merge nearly as often as their larger counterparts,
rendering the merger application process a seldom-used avenue for
holding smaller banks accountable. Community groups are also not as
prevalent in smaller rural communities as in large cities. Thus, the
major mechanism for holding small banks accountable is the CRA exam.
Yet, GLBA has greatly diminished the most important means of
accountability of small banks. Instead of once every 2 or 3 years, CRA
exams for small banks now occur once every 4 or 5 years. In reality,
the exams are probably less frequent since scheduled exams often get
cancelled and rescheduled. In too many cases, the result of the
stretch-out of CRA exams means that small banks may be examined only
once or twice in a decade as opposed to 3 or 4 times.
In their scanty amount of analysis on small bank burdens, the
Federal banking agencies have found that CRA regulations ``impose a
modest information collection burden on small institutions--an average
of 10 burden hours per institution per year.'' \1\ In addition, the
relatively few trade articles on small bank CRA exams also reveal few
complaints about burden. In fact, an American Banker article shortly
after the CRA regulation reform in 1995 is entitled ``Small Banks Give
Thumbs-Up to Streamlined CRA Exams.'' In this article, small bankers
are quoted as saying that the exams were not burdensome and that CRA
examiners took less than 1 day of their time.\2\
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\1\ Federal Register, May 28, 1999 (Volume 64, Number 103), pages
29083 through 29086.
\2\ ``Small Banks Give Thumbs-Up To Steamlined CRA Exams,'' Jaret
Seiberg of the American Banker, Thursday, February 1, 1996.
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The available evidence suggests minimal burden, but great benefits
due to CRA exams. But since the 1995 regulatory changes to CRA exams,
the only action by policymakers has been to reduce the rigor of CRA
exams. First, GLBA reduces the frequency of small bank CRA exams. Now,
the regulatory agencies wish to apply the streamlined small bank CRA
exam to more than 1,000 additional institutions. Recently, the Senate
Banking Committee asked NCRC to document the damage caused by this
proposed change; NCRC eagerly responded, documenting in great detail
the loss in community reinvestment due to this latest proposal.
Mr. Chairman, it is clear to us that CRA is not burdensome and has
greatly benefited both banks and community groups by increasing the
number of profitable loans, investments, and services made to low- and
moderate-income communities. We urge you to halt and reverse the trend
of CRA deregulation. A place to begin would be to repeal the stretchout
of small bank CRA exams.
Have and Maintain Satisfactory CRA Requirement
GLBA added a requirement that bank holding companies must ensure
that all of their affiliates pass CRA exams (at least Satisfactory
ratings) in order to be allowed to merge with nonbank financial
institutions and take advantage of the new powers under GLBA. This
requirement sends a signal that banks must comply with their
obligations under CRA if they wish to enjoy the privileges afforded to
them by GLBA. While well-intentioned, this requirement has not been
applied in one case to our knowledge. A major reason for this is less
than 2 percent of banks and thrifts fail their CRA exams, and the great
majority of failing banks are smaller institutions less likely to merge
or engage in nonbank financial business authorized by GLBA.
In fact, the Federal Reserve Board had one opportunity in a large
and controversial merger to apply this requirement, but arbitrarily and
capriciously adopted a narrow reading of the GLBA requirement. During
2000, Citigroup acquired the notorious lender Associates First Capital
Corporation. A subsidiary of Associates, Associates National Bank, had
a Needs-to-Improve CRA rating. Once Citigroup owned Associates National
Bank, it would have had an affiliate with a Needs-to-Improve CRA
rating, rendering it ineligible for GLBA powers and privileges.
Confronted with the first opportunity to enforce the ``Have and
Maintain'' requirement, the Federal Reserve punted. The Federal Reserve
reasoned that the GLBA requirement applied only to the holding company
that is the acquirer, not to the institution being acquired. Yet, this
hair-splitting distinction is not present in the GLB Act.
Strengthening the ``Have and Maintain'' Requirement
The intention of the ``Have and Maintain'' requirement was to
ensure that institutions engaging in large scale mergers and embarking
on broad new powers adhered to their CRA obligation to serve all
communities, including low- and moderate-income ones. Unintentional
loopholes have subverted Congress' ambitious and laudatory intention.
Congress must close this loophole by specifying that the ``Have and
Maintain'' requirement must apply to the institution being acquired as
well as to the acquirer.
Furthermore, since failing ratings are so rare, the ``Have and
Maintain'' requirement must be strengthened by imposing significant
affirmative obligations on institutions that wish to merge. NCRC urges
you to consider requiring merging institutions to submit a CRA plan
with their merger application.
In the past year, merger activity has reached a frenzied pace and
has included the largest mergers in history. The Bank of America and
Fleet merger and the JP Morgan Chase and Bank One merger will create
institutions with more than $1 trillion in assets. Despite the
incredible magnitude of these and other recent mergers, the Federal
Reserve Board does not require any meaningful CRA plan from merging
institutions. The CRA ``convenience and needs'' discussions in the
merger applications usually consist of one or two page boasts about how
great the banks' CRA performance are. The presentations also usually
contain predications that the banks' CRA performance will improve once
they get bigger after mergers. Yet, NCRC has too often documented with
HMDA and CRA small business lending data that the amount of loans
decrease dramatically after large mergers. In too many cases, banks
close branches and lay-off loan offices in order to achieve merger
``efficiencies.''
A requirement for a meaningful CRA plan holds out hope for
communities that mergers will not result in significant reductions in
loans, investments, and services. A meaningful CRA plan would require
merging institutions to provide the number of loans, investments, and
services they made by State, metropolitan area, and rural portions of
States in past years. The plan would then describe how the institution
would increase their number of loans, investments, and services to
minority and low- and moderate-income communities and borrowers. In
addition, the plan would require meaningful performance measures such
as comparisons between the percentages of loans a bank made to low- and
moderate-income borrowers and communities, and the percentages of loans
that the bank's peers made to these borrowers and communities. The plan
would identify geographical areas (on a State, urban, and rural level)
in which the bank lags its peers on the performance measures and would
indicate how the bank will do better in these geographical areas.
Finally, and importantly, the CRA plan would include a fair lending
component. Large institutions seeking expanded GLBA powers are often
involved in making high-cost subprime mortgage loans or purchasing
these loans. The Federal Reserve Board and the other banking agencies,
however, are not requiring specific promises and reforms that would
ensure that these loans are not predatory. In addition, large banks
involved in the mega-mergers are financing payday lenders, car title
lenders, pawnbrokers, and other fringe lenders. The Federal Reserve
Board, however, is not requiring due diligence mechanisms for these
financial arrangements although the Federal Reserve Board has used its
supervisory powers to make sure that none of the banks it regulates
engages in payday lending.
The CRA and fair lending plan would become the focus of discussion
among banks, the regulators, and the general public during public
comment periods and hearings. Currently, banks submit applications with
no meaningful discussion of CRA and fair lending compliance; community
groups comment on these glaring inadequacies; and the Federal Reserve
then approves the merger applications with no conditions. In contrast,
meaningful CRA plans would stimulate meaningful discussions about
strengths and weaknesses in banks' CRA performance. The Federal Reserve
Board would then encourage and/or require banks to specifically address
weaknesses in their CRA and fair lending performance. The end result
would be an increase in safe and sound lending for traditionally
underserved communities.
NCRC believes that meaningful CRA and fair lending plans should be
required in every merger application proceeding. At the very least,
this requirement should apply to the larger mergers, involving
institutions with $1 billion or more in assets. Public hearings held by
the regulatory agencies in States most affected by the mergers must
also be automatic for the larger mergers. In addition, the CRA plan
requirement could also focus on geographical areas or parts of CRA
exams in which a lender scored Low Satisfactory or below.
Updating CRA to Keep Pace with Sweeping Changes in the Financial
Industry
As lawmakers debated GLBA, NCRC and our 600 member organizations
continually pointed out that while GLBA would create larger and vastly
more powerful financial institutions, CRA was not being updated to keep
pace with the dramatic changes in the financial industry unleashed by
GLBA. GLBA did not apply CRA or CRA-like requirements to mortgage
company affiliates, other affiliates that made loans, insurance
companies or securities firms that would become part of holding
companies. As a result, a very real possibility exists that CRA will
apply to fewer and fewer assets of holding companies. At the same time,
CRA was not applied to credit unions, mortgage companies, and other
competitors of bank holding companies. This creates an uneven playing
field for bank holding companies that must comply with CRA and with
institutions with no community reinvestment obligations. Of more
concern to communities, the uneven application of CRA reduces the
amount of community reinvestment, financial activity, and wealth
building in their communities. The uneven application of CRA also
undermines President Bush's call for more minority homeownership and
more importantly subverts the dreams and aspirations of millions of
Americans seeking to build a future for their families.
Since GLBA, NCRC worked with Congressman Gutierrez, Barrett, and
34 other Members of Congress to craft the CRA Modernization Act that
would apply CRA to all parts of bank holding companies as well as to
institutions outside of bank holding companies. If Congress wishes to
ensure that GLBA benefits all Americans, it must take up all or at
least parts of the CRA Modernization Act. A good place to begin would
be to apply CRA and fair lending exams to all affiliates of holding
companies that lend since the Federal Reserve still hesitates to act on
the GAO's recommendation of fair lending reviews for affiliates.\3\
Second, Congress can then
expand CRA to all lending institutions, including credit unions and
mortgage companies.
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\3\ General Accounting Office, Consumer Protection: Federal and
State Agencies Face Challenges in Combating Predatory Lending, January
2004, GAO-04-280.
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Third, Congress must increase the amount of data disclosure on
lending activity. Expanding upon a provision in the CRA Modernization
Act, Rep. James McGovern has sponsored H.R. 1748, the Access and
Openness in Small Business Lending Act of 2003.
This bill amends the Equal Credit Opportunity Act (specifically
Federal Reserve Regulation B) to permit the collection of demographic
information in connection with small business loans with the
applicant's consent. Currently, CRA only requires banks and thrifts to
report the census tract location of small businesses receiving loans.
Unlike publicly available home loan data, the small business loan
data lacks demographic characteristics of borrowers. In particular, the
small business loan data does not have information on the race and
gender of the small business owner. H.R. 1748 would update the CRA data
to require the collection and dissemination of race and gender of the
small business owner. Other data enhancements include the revenue size
of the small business and data on denials as well as approvals.
The home loan data has stimulated a significant increase in
lending to minorities, women, and low- and moderate-income borrowers
precisely because its public availability holds lenders accountable for
reaching formerly neglected borrowers. Enhancing the small business
data would similarly increase lending to women- and
minority-owned small businesses. We know from studies conducted by the
Milken Institute and others that women-owned businesses are in the dark
ages when it comes to access for credit. Improvements in small business
lending data would be a great benefit to half of the American
population by providing women with greater chances of securing loans
for their businesses.
Research has proven that CRA works to expand access to capital and
credit. Using NCRC's database of CRA agreements, Harvard University,
the Department of Treasury and Federal Reserve economists have shown
that banks made more loans to low- and moderate-income communities in
geographical areas in which they made CRA agreements. Moreover, the
research concluded that banks made more loans in geographical areas in
which they had branches and underwent CRA exams than in geographical
areas outside the purview of the CRA exams (often because their
mortgage company affiliates were not included on their CRA exams but
made considerable numbers of loans in a large number of geographical
areas).\4\
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\4\ The Joint Center for Housing Studies at Harvard University, The
25th Anniversary of the Community Reinvestment Act: Access to Capitol
in an Evolving Financial Services System, March 2002; Robert Litan,
Nicolas Retsinas, Eric Belsky and Susan White Haag, The Community
Reinvestment Act After Financial Modernization: A Baseline Report,
produced for the U.S. Department of the Treasury, April 2000; The
Performance and Profitability of CRA-Related Lending, Report by the
Board of Governors of the Federal Reserve System, July 17, 2000;
Raphael Bostic and Breck Robinson, Do CRA Agreements Influence Lending
Patterns? July 2002, available via [email protected].
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Lending is good for America. Access to credit and capital is the
traditional method that allows any family to build equity and create
wealth. CRA brings more wealth, more stakeholders, and more parity.
Uneven Regulatory Regime Threatens Sustainability of U.S. Banking
Success
Banks are highly regulated, but securities companies and insurance
firms are not. By allowing banks and nonbank financial companies to
merge, GLBA exposes banks to higher levels of risk from their lightly
regulated affiliates. At the same time, banks themselves are taking on
more risk by outsourcing their serving operations to foreign countries.
This creates job loss here at home and makes it more difficult for
banks to control and monitor their operations.
In addition to the safety and soundness risks, the increased
financial industry consolidation and globalization creates access
difficulties for low- and moderate-income borrowers. For example,
consumers need insurance policies in order to secure home mortgage
loans. Their bank may be covered by CRA, but the bank's insurance
company affiliate is not. What happens to CRA enforcement when the
bank's insurance company unfairly denies a low-income borrower for a
homeowner's insurance policy? NCRC does not believe that lawmakers
completely thought through the implications of industry consolidation
on CRA enforcement when passing GLBA.
Clearly, the safety and soundness and fair lending oversight of
nonbank financial affiliates of bank holding companies must be
increased. At the same time, stronger firewalls must be created between
Federal regulatory agencies and financial institutions. Recently, we
have all become alarmed by the case of the OCC examiner for Riggs
leaving the OCC and working for Riggs while the bank was not enacting
sufficient safeguards against money laundering. In the financial world
shaped by GLBA, the integrity and rigor of supervisory and examiner
officials assumes paramount importance. For this reason, NCRC
recommends that regulatory officials be barred from working at
financial institutions for a period of 5 years after they leave their
agencies. With all due respect, the same requirement should be imposed
upon members of Congress.
Conclusion
If research has shown beyond a reasonable doubt that CRA works,
why not update CRA and apply it evenly across the financial industry?
Firstly, lawmakers should do no harm to CRA and must repeal GLBA's CRA
sunshine requirement and small bank exam stretch-out. Second, lawmakers
must apply CRA to all parts of holding companies that lend and to
lending institutions outside of holding companies. Third, lawmakers
then must consider CRA-like requirements for nonbank financial
institutions including insurance companies and securities firms.
Mr. Chairman, communities cannot afford another 5 years of GLBA
and missed reinvestment opportunities. NCRC stands ready to support
Congressional efforts to update CRA and make capitalism and the
American Dream available to all Americans who work hard and play by the
rules.
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PREPARED STATEMENT OF J. STEVEN JUDGE
Senior Vice President, Government Affairs
Securities Industry Association
July 13, 2004
Chairman Shelby, Senator Sarbanes, and Members of the Committee, I
am Steve Judge, Senior Vice President of Government Affairs, Securities
Industry Association (SIA).\1\ I appreciate the opportunity to present
our views on the Gramm-Leach-Bliley Act (GLBA) as we approach the 5-
year anniversary ofthe enactment of that landmark legislation.
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\1\ The Securities Industry Association, established in 1972
through the merger of the Association of Stock Exchange Firms and the
Investment Banker's Association, brings together the shared interests
of nearly 600 securities firms to accomplish common goals. SIA member-
firms (including investment banks, broker-dealers, and mutual fund
companies) are active in all U.S. and foreign markets and in all phases
of corporate and public finance. According to the Bureau of Labor
Statistics, the U.S. securities industry employs 780,000 individuals.
Industry personnel manage the accounts of nearly 93 million investors
directly and indirectly through corporate, thrift, and pension plans.
In 2003, the industry generated an estimated $209 billion in domestic
revenue and $278 billion in global revenues. (More information about
SIA is available on its home page: www.sia.com.)
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SIA commends this Committee for its efforts in enacting the GLBA,
and for holding these hearings to examine the effects of the Act. SIA
believes that these hearings will initiate an important dialogue in the
financial services industry and with policymakers about identifying and
eliminating unnecessary regulatory restrictions that impede the ability
of our financial services firms to: Develop and offer consumers a full
range of financial services and products; structure themselves
optimally; mitigate risk for themselves and for the broader financial
markets, and; maintain global competitiveness and preeminence. SIA
looks forward to participating in that dialogue.
In considering the effects of the GLBA, it is useful to recall how
constrained the financial services industry would have been without
enactment of GLBA. The ability of financial services firms to affiliate
was primarily governed by the Glass-Steagall Act, a Depression-era law
that ceased to reflect the realities of the modern financial services
industry. That law's prohibition on affiliations between banks and
securities firms, for example, had long since lost any rationale it
might once have had. In the 66 years since enactment of the Glass-
Steagall Act, banks and securities firms had begun to offer an array of
competing products and services to their retail and institutional
clients, and many banks and securities firms determined that they could
best serve their customers by offering ``one-stop-financial-shopping.''
The banking regulators, in particular, had adopted a variety of
regulations that permitted banks to acquire certain securities firms,
although securities firms were prohibited from affiliating with banks.
The result was a ``mish-mash'' of confusing rules and regulations,
which were never able to provide the full range of relief the industry
sought and consumers needed, and which tilted the playing field in
favor of the banks. For example, national banks could own subsidiaries
that engaged in securities brokerage activities as long as the
subsidiary did not engage in dealer or underwriting activities.
Securities firms owned by bank holding companies could engage in a
limited amount of dealer and underwriting activities, but those
activities could not account for more than 20 percent (and eventually
25 percent) of that firm's revenues. Securities firms were prohibited
from owning banks, although they were able to affiliate with thrifts
and certain other types of financial institutions. State laws further
complicated the regulatory picture, and banking and securities
regulators occasionally wrestled in court over various jurisdictional
issues.
The resulting legislative restrictions and regulatory uncertainties
artificially restricted affiliations among financial services firms.
Such restrictions undermined their competitive position, their ability
to develop and offer new services and products, and consumers' access
to a full range of financial products and services from a single
financial institution.
SIA and various members of the financial services community had
been working with Congress for decades to pass legislation to permit
affiliations between and among securities firms, banks and insurance
companies. We sought legislation that would create a ``two-way street''
by allowing banks, securities firms, or insurance companies to
affiliate on an equal footing. Essential to that goal was the assurance
that competition, not regulatory fiat, would dictate when and how
financial services firms could affiliate. We sought legislation that
protected consumers by ensuring that each affiliated financial services
entity would be functionally regulated--that is, regulated by the
regulator with the regulatory expertise and statutory mandate to
regulate the activities in which that entity engaged.
The enactment of GLBA has in many respects rationalized and
modernized the untenable and antiquated financial institution
regulatory environment that existed prior to its passage. Under the
GLBA:
Banks, securities firms, and insurance companies can now
affiliate under a financial services holding company (FSHC)
structure. The FSHC is regulated by the Federal Reserve Board
(FRB), and each of the subsidiary financial services firms are
regulated by their respective functional regulators. A securities
firm in a FSHC structure is not limited to an artificial cap on the
amount of revenue it can derive from underwriting and principal
transactions (such as the 20 percent, and then 25 percent, caps
imposed under the Bank Holding Company Act). The ability of
financial services firms to more easily affiliate under a FSHC
structure should permit larger firms to become more diversified,
which should in turn result in greater product and services
offerings, increased domestic and international competitiveness,
and greater financial stability.
Financial services firms also have a number of other
structural options available to them, further increasing their
flexibility and competitiveness. For example, bank holding
companies can elect to remain under the same structure as they did
prior to the enactment of the GLBA. Holding companies that own
securities firms, but that do not have substantial commercial
banking activities, can elect to be regulated as investment bank
holding companies, which are subject to the jurisdiction of the
Securities and Exchange Commission (SEC). Well-capitalized and
well-managed banks can own securities firms. And securities firms
and certain other companies that owned thrifts and other nonbank
banks prior to the enactment of the GLBA may continue to own those
entities.
Subsidiaries of FSHC's can engage in a wide variety of
financial activities beyond banking, securities, and insurance
activities, including merchant-banking activities. Notably, the
intent of the GLBA was to permit securities firms in a FSHC
structure to engage in merchant-banking activities to the same
extent as securities firms that are unaffiliated with a bank.
Securities firms that are subsidiaries of FSHC's also are permitted
to continue to engage in certain preexisting commercial lines of
business until 2009.
Banks are permitted to engage in a variety of specified
securities activities without being required to register as broker-
dealers. The SEC has recently reproposed regulations (proposed
Regulation B) that would implement these provisions.
Financial services firms (regardless of whether they are
affiliated with FSHC's) are subject to comprehensive privacy
requirements, which among other things require disclosure of the
firm's privacy policies, and impose substantive limitations on the
circumstances in which a financial services firm can share
confidential financial information about a customer or consumer.
Financial services firms are required to implement policies and
procedures to safeguard confidential customer information. To SIA's
knowledge, no other industry in the United States is subject to the
comprehensive Federal privacy requirements that now apply to
financial services firms.
Since the enactment of the GLBA, there have been a number of
significant combinations of financial services firms. Some firms have
chosen to combine with commercial banks. Other firms have chosen to
remain independent. That is how it should be. One of the overarching
goals of the GLBA was to allow financial services firms to choose the
optimal structure to best serve their customers' needs. Among SIA's
membership, bank or financial-holding company-ownership has increased
from 13.4 percent in 1999 to 21 percent today. Moreover, banks have
significantly increased their presence in capital markets activities.
For example, banks now lead-manage 58.2 percent of equity underwriting
deals versus only 36.8 percent in 1999.
As a further example of the effectiveness of the GLBA, these
combinations generally have not resulted in the newly affiliated firms
having to shed significant lines of business or having to artificially
limit their revenues from securities underwriting and certain other
activities, as was often the case prior to the GLBA. These combinations
also generally have not required Federal regulators to provide the type
of significant regulatory relief that was often necessary pre-GLBA.
When examining the overall effectiveness of the GLBA, it is
important to note that various economic factors and significant changes
in the capital markets over the last 5 years have made it tenuous, at
best, to determine cause-and-effect relationships post-GLBA. We need
more time and experience to get the full picture of the GLBA's effects.
What we do know is that the GLBA is a comprehensive statute regulating
a diverse, dynamic, and constantly evolving financial services
industry. As a result, there have been, and likely will continue to be,
issues concerning the implementation of the legislation. SIA and other
industry participants have questioned how, for example, the FRB
proposed to implement the merchant-banking provisions of the GLBA, and
how the Federal Trade Commission and other regulatory agencies proposed
to implement the Act's privacy provisions. Currently, the SEC has
reproposed rules governing the scope of bank-securities activities; the
reproposed rules are intended to respond to the significant criticism
of the rules as they were initially proposed.
Neither these nor similar implementation issues, however,
necessarily suggest structural problems with the GLBA. Rather, they may
well be normal transition issues that are almost inevitable when first
permitting combinations of companies that had largely been prohibited,
or significantly restricted, from combining for over 60 years. In this
regard, GLBA is notable for the fact that, despite its complexity and
scope, it was so carefully drafted that not a single technical or
similar amendment has been enacted to correct any of its provisions.
Moreover, there are some weaknesses that have always existed with
GLBA that this Committee could address. Among the most significant of
those are:
Securities firms in a FSHC should be able to engage in a full
range of commercial activities to the same extent as securities
firms that are unaffiliated with a bank. Currently, the GLBA only
permits securities firms in a FSHC structure to continue engaging
in preexisting commercial activities until 2009.
There should be solely national standards governing customer
privacy requirements, especially given the national scope of many
financial institutions, and the fact that even many smaller
financial institutions now have customers from a number of States.
Requiring financial institutions to comply with Federal
requirements and then the additional requirements potentially
imposed by each State in which that firm operates is burdensome,
cumbersome, and contrary to an overarching goal of the GLBA of
increasing efficiency in the regulation of financial services
companies.
There should be uniform national standards for securities. The
National Conference of Commissioners on Uniform State Laws (NCCUSL)
has adopted a Model Uniform Securities Act that brings uniformity
to the registration process, facilitates electronic signatures,
filing and records, and adopts additional investor protections. SIA
is actively working with State securities commissioners for
adoption of the Uniform Securities Act by their State legislatures.
The U.S. capital markets and financial services industry are
stronger, healthier, and more dynamic since Congress enacted the GLBA
in 1999. In spite of the tremendous challenges and changes of the last
several years, consumers and financial services firms alike are better
off as a result of the increased opportunities and choices that the
GLBA made possible. SIA commends this Committee for holding these
hearings, and looks forward to working with you, the regulators, and
other industry participants to maintain our Nation's preeminent capital
markets.
RESPONSE TO A WRITTEN QUESTION OF SENATOR ALLARD FROM HARRY P.
DOHERTY
Q.1. In your testimony your write, ``However, due to a highly
politicized campaign by the Realtor community, Treasury and the
Federal Reserve have not been allowed to complete their work on
the regulation. In this particular instance, considerations
other than safety and soundness have held sway.''
As the Senate sponsor of the Community Choice in Real
Estate Act, what considerations are alleging that I am acting
upon? Doesn't this statement call into questions the integrity
of the bill's supporters?
Do you believe that the consideration of Congressional
intent, which is my motivation for introducing the Community
Choice in Real Estate Act, is inappropriate?
If Congress believes that a regulation is moving forward
contrary to legislative intent, what should it do?
A.1. On July 13, 2004, I testified about the implementation and
impact of the Gramm-Leach-Bliley Act on the financial services
industry. In my written statement, I had the following to say
about the joint Treasury-Federal Reserve process for
determining permissible new financial activities for financial
holding companies and financial subsidiaries of national banks:
One of the promises of the GLBA was the relatively easy
authorization of new financial activities for banking
organizations. GLBA established a joint Federal Reserve and
Treasury regulatory process for the authorization of
permissible new financial activities for banking organizations.
The hope was that under this process, safety-and-soundness
would be the dominant factor in the decisionmaking process.
However, in the first real test of this authority, the two
agencies have not been able to complete their work on a
regulation that would authorize for national banks and
financial holding companies an activity, which is already
authorized for Federal savings associations and roughly half
the State-chartered banks.
In January 2001, the Treasury and the Federal Reserve
issued a proposed regulation to permit national bank financial
subsidiaries and financial holding companies to provide real
estate brokerage and real estate management services to their
customers. However, due to a highly politicized campaign by the
realtor community, Treasury and the Federal Reserve have not
been allowed to complete their work on the regulation. In this
particular instance, considerations other than safety and
soundness have held sway.
It was not my intent, or the intent of America's Community
Bankers, to call into question the integrity of any Senator for
his or her sponsorship of the Community Choice in Real Estate
Act (S. 98) or any other legislation. It was, however, my
intent to make the observation that appropriations riders have
circumvented the process established by Congress in GLBA--a
process that is based on safety and soundness and related
statutory considerations. Moreover, because real estate
activities have been authorized for years and safely conducted
by Federal savings associations and State-chartered banks, we
believe that safety and soundness considerations should lead
the Treasury and the Federal Reserve to finalize regulations to
permit financial holding companies and national bank financial
subsidiaries to conduct real estate brokerage and management
activities.
Congress clearly has the right to change the policy
established in the GLBA and carve out, through subsequent
legislation, real estate brokerage and management activities
from the list of permissible activities for financial holding
companies and financial
subsidiaries. ACB does not support such legislation. ACB
believes that permitting these banking organizations to engage
in these real estate activities will bring additional, healthy
competition to the real estate sector, which can only benefit
consumers. Clearly, many in the real estate industry and in
Congress disagree with our position. But, ours is a
disagreement about policy, not about motives.
RESPONSE TO A WRITTEN QUESTIONS OF SENATOR ALLARD FROM TERRY
JORDE
Q.1. Regarding real estate management and brokerage activities
you testified, ``We believe that GLB provides the Treasury and
the Federal Reserve full authority to permit these
activities.'' Do you at least acknowledge that a number of
House and Senate Members, including a number of Members who
wrote the GLB bill, would disagree with the characterization
that GLB permits these activities?
Do you consider it insignificant or unimportant that more
than half of the Members of Congress have indicated that they
disagree with your characterization of GLB by cosponsoring
bills to prohibit implementation of the regulations?
What place should the views of the Congress have in the
regulatory process?
A.1. I hesitate to speculate on the motives or opinions of
Members of Congress who have cosponsored legislation to block
the real estate brokerage and management rule proposed by the
Treasury and Federal Reserve. They may believe that the
agencies lack the authority to adopt the regulation or that the
agencies have the authority and they wish to take it away.
Whatever the case, I do
believe that it is significant when over half of the Members of
Congress cosponsor any piece of legislation. And, as I
indicated in my testimony, ICBA strongly encourages Congress to
maintain active oversight of the legislation it enacts.
Nevertheless, in this case ICBA believes that GLB does
provide the Treasury and the Federal Reserve the authority to
adopt the real estate brokerage and management proposal and
that it would provide community banks and their customers
significant benefits. Therefore, we hope that Congress does not
adopt permanent legislation blocking the rule or continue
blocking it through the appropriations process.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ALLARD FROM JAMES D.
MCLAUGHLIN
Q.1. You testified that, ``What is central to this hearing is
that an extremely important provision of the GLB Act--one that
appropriately delegates responsibilities to the two agencies
most familiar with the financial services industry--is not
working.'' But doesn't Congress retain the authority, and in
fact the duty, to oversee implementation of the laws is has
passed?
A.1. Of course Congress should oversee the manner in which the
laws it enacts are implemented. The July 13 hearing was such an
example of the appropriate exercise of Congress's oversight
duty--a review by the Committee holding substantive expertise
in and jurisdiction over the law enacted.
Q.2. Once a law is enacted, does Congress become irrelevant? If
not, what role should Congress play? If Congress believes that
a regulation is moving forward contrary to legislative intent,
what should it do?
A.2. Where the Congress sees an incorrect interpretation or an
inadequate implementation of a law it can and should bring it
to the attention of the agency. If further action is deemed
necessary Congress has the power, through the substantive
legislative process involving the Committees of jurisdiction,
to change the law.
STATEMENT OF DENNIS W. ARCHER
President, American Bar Association
July 13, 2004
Mr. Chairman and Members of the Committee, I am Dennis W. Archer,
President of the American Bar Association. Thank you for holding this
oversight hearing on the Gramm-Leach-Bliley Act 5 years after its
passage. I applaud your leadership in conducting the Committee's
oversight role in this important area. I respectfully submit to you
this statement with the request that it be made part of the hearing
record.
The American Bar Association is the world's largest voluntary
professional association with more than 400,000 members. As the
national umbrella organization of the legal field, our mission is to
serve the public and the profession by promoting justice, professional
excellence, and respect for the law.
In June 2001, attorneys nationwide awoke to find that the Federal
Trade Commission had interpreted the Gramm-Leach-Bliley Act (GLBA), the
most sweeping reform of the banking, securities, and insurance
industries since Glass-Stegall, as amending the attorney's duty of
confidentiality to clients and imposing unnecessary and
counterproductive measures that confused consumers regarding the
attorney-client relationship.
There was no evidence before and leading up to the passage of the
GLBA to indicate that Congress intended to treat lawyers as ``financial
institutions'' within the meaning of the Act. In fact, in the record of
the 106th Congress' consideration of S. 900, the legislation that would
become the GLBA, the only mention of attorneys were two references to
the stringent and effective confidentiality rules with which attorneys
must comply.\1\ In the debate on the Conference Report of S. 900,
Senator Conrad R. Burns confirmed that there was no intent that the
privacy provisions of the GLBA apply to lawyers when he stated:
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\1\ Please see 145 Cong. Rec. S13891 (daily ed. Nov. 4 1999) and
145 Cong Rec. S13908 (daily ed. Nov. 4, 1999).
Paramount to our freedom is the right to privacy; to be left
alone and to be secure in the belief that our business is just
that, ours and no one else's. When we do share our personal
business information with others, it is with the real and
reasonable expectation that it remains our property. When
dealing with our doctor or lawyer we know that the
communication is privileged.\2\
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\2\ 145 Cong Rec. S13908 at S13908.
The ABA contributes to the high standards of conduct of the legal
profession expected by the public through our development and
promulgation of the Model Rules of Professional Conduct and, its
predecessor, of the Model Code of Professional Responsibility. The
Model Rules and its predecessor are the source of the vast majority of
the professional conduct codes that are enforced in every State and
every territory of the United States and with which attorneys must
comply in order to retain the right to practice law in this country.
Each of the 50 States and 6 territories, including the District of
Columbia, has either adopted Model Rule 1.6, Confidentiality of
Information, has adopted its equivalent from the Model Code, Canon 5,
or, as in the case of California, has developed a similar rule for its
own jurisdiction. The text of Model Rule 1.6 is as follows:
(a) A lawyer shall not reveal information relating to the
representation of a client unless the client consents after
consultation, except for disclosures that are impliedly
authorized in order to carry out the representation, and except
as stated in paragraph (b).
(b) A lawyer may reveal such information to the extent the
lawyer reasonably believes necessary:
(1) to prevent the client from committing a criminal act that
the lawyer believes is likely to result in imminent death or
substantial bodily harm; or
(2) to establish a claim or defense on behalf of the lawyer
in a controversy between the lawyer and the client, to
establish a defense to a criminal charge or a civil claim
against the lawyer based upon conduct in which the client was
involved, or to respond to allegations in any proceeding
concerning the lawyer's representation of the client.\3\
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\3\ Model Code of Professional Responsibility Rule 1.6 (1998).
The California rule states, in pertinent part: ``It is the duty of
an attorney to . . . maintain inviolate the confidences, and at every
peril to himself or herself to preserve the secrets, of his or her
client.'' \4\
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\4\ Cal. Bus. & Prof. Code, Section 6068 (2001).
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Professional conduct rules for attorneys are enacted under the
authority of the court of highest appellate authority within the State
or territory, or, in some cases, the State legislature. Attorneys, as
officers of the court, are answerable for their ethical conduct to the
court. Violations are prosecuted through sui generis disciplinary
proceedings that result from the inherent regulatory authority of the
courts.\5\
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\5\ See Middlesex County Ethics Committee v. Garden State Bar
Association, 457 U.S. 423 (1982).
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To date, there have been no allegations of insufficient enforcement
of client confidentiality rules at the state or territory level, nor
has there been a call for Federal intervention. The current system for
protecting clients' rights has remained in place and been effectively
applied for decades. Application of the privacy provisions of the GLBA
to attorneys--including requiring attorneys to mail confusing privacy
notices to their clients--will not increase protection for the public
above that which the State-based system currently requires.
These State and territory conduct codes, along with the attorney-
client privilege and the work product doctrine found in common law,
form the foundation of the attorney's duty of confidentiality. This
duty exists in all matters related to the client's representation. It
applies not only to communications from the client but to all
information relating to the representation, whatever its source. These
codes flatly prohibit disclosure of any information relating to a representation without prior discussion with, and consent by, the affected client, except in limited and legally mandated circumstances. Affiliate
sharing, as envisioned by the GLBA, does not occur in the practice of
law.
GLBA was enacted ``to enhance competition in the financial services
industry by providing a prudential framework for the affiliation of
banks, securities firms, insurance companies, and other financial
service providers. . .'' \6\ Its broad privacy protection provisions
were added to enable consumers to limit the use of their personal
information by financial institutions and their affiliates. These
protections were deemed necessary because of the potential for abuse
that the ability to merge affiliate records. and the increased ease of
dissemination through technological advances in data storage and
retrieval afforded the post-GLBA financial institution.
---------------------------------------------------------------------------
\6\ H.R. Conf. Rep. No. 106-434, at 245 (1999), reprinted in 1999
U.S.C.C.A.N. 245, 245.
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The scope and application of the GLBA privacy provisions at issue
hinge on the term ``financial institution.'' The term was defined by
Congress as ``any institution the business of which is engaging in
financial activities as described in Section 1843(k) of Title 12
[Section 4(k) of the Bank Holding Company Act of 1956].'' \7\
Regulations promulgated by the Federal Reserve Board pursuant to the
Bank Holding Company Act provide that the term ``financial activities''
should include real estate settlement services, tax-planning and tax-
preparation services, and collection of overdue accounts receivable.
Based on the fact that some of the activities on this list are
performed by attorneys, the Federal Trade Commission has taken the
position that lawyers and law firms who engage in any of these
activities in the course of practicing law are ``financial
institutions'' within the meaning of the GLBA. This interpretation of
the GLBA is overbroad and ignores both the common sense meaning of
``financial institution'' and the legislative history and purpose of
the GLBA.
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\7\ 15 U.S.C. Sec. 6809(3)(A).
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Imposing the burdens of the GLBA privacy provisions on the legal
profession does not further any of the legislative objectives of the
statute. Worse yet, it has been counterproductive because it has, and
could continue to, create confusion among consumers regarding the scope
of attorney-client confidentiality. Many attorneys have already
contacted the ABA regarding the confusion and consternation that has
been caused among clients as a result of the GLBA privacy notices
mandated by the FTC's interpretation. They report instances in which
the sending of privacy notices have revealed the fact of legal
representation to adverse parties residing at the same address as the
client, of anxious phone calls requesting detailed explanations of the
notices' meaning in the context of a confidential relationship and of
money wasted on needless mailings of confidentiality policies that
already were well understood.
Clients know that their information is protected by the duty of
confidentiality, by professional conduct codes and by court recognized
privileges. When they receive privacy notices from their attorney
listing the GLBA mandated exceptions in statutorily mandated terms,
however, they question how the relationship between them and their
attorney could have changed. Clients know they have the right to an opt
in disclosure policy with their attorneys; that no information will be
disclosed unless the client wishes to do so. The GLBA privacy
provisions provide for an opt out policy, with disclosure as the
default. This is contradictory and misleading to consumers. Confusion
naturally results.
The ABA and several State bar associations petitioned the Federal
Trade Commission for relief. When the Commission refused those
requests, the New York State Bar Association and the ABA filed suit in
the U.S. District Court for the District of Columbia. Twenty-five State
and local bar associations \8\ and the Conference of Chief Justices
joined the litigation as amici curiae. On May 12, 2004, the District
Court for the District of Columbia entered a final judgment in favor of
the ABA. On July 12, 2004, the day before this hearing, the FTC filed
notice of appeal, which presents the prospect of a lengthy period of
litigation resulting in sustained uncertainty for more than a half-
million attorneys and millions of their clients. This situation is
untenable.
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\8\ The State and local bar associations are: the Arizona Bar,
Arkansas Bar Association, Atlanta Bar Association, Beverley Hills Bar
Association, Cleveland Bar Association, Colorado Bar Association,
Connecticut Bar Association, Cuyahoga County Bar Association, The
Florida Bar, Illinois State Bar Association, Lawyer's Club of Los
Angeles County, Maryland State Bar Association, Nashville Bar
Association, New Orleans Bar Association, Ohio Bar Association,
Oklahoma Bar Association, New Jersey State Bar Association, State Bar
Association of North Dakota, Pennsylvania Bar Association, South
Carolina Bar Association, the State Bar of Wisconsin, Tennessee Bar
Association, Vermont Bar Association, Virginia State Bar, and West
Virginia Bar Association.
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We urge, the Committee, as it reexamines the efficacy of GLBA, to
use its authority to clarify the original intent of Congress as to the
application of Title V. Attorneys are not financial institutions and
should not be treated as such. Thank you for the opportunity to present
the views of the American Bar Association at this time.
----------
STATEMENT OF DAVID F. WOODS, CLU, ChFC
President, The National Association of Insurance and Financial Advisors
July 13, 2004
The National Association of Insurance and Financial Advisors
(NAIFA) is delighted to have the opportunity to share with the Senate
Banking Committee our views regarding the performance and impact of the
Gramm-Leach-Bliley Act (GLBA) 5 years after its passage.
NAIFA is a federation of approximately 800 State and local
associations representing over 225,000 life and health insurance agents
and advisers and their
employees. Originally founded in 1890 as the National Association of
Life Underwriters, NAIFA is the Nation's oldest and largest trade
association of life and health insurance agents and financial advisers.
NAIFA's mission is to enhance the business and professional skills, and
promote the ethical conduct, of our members, and to advocate for a
positive legislative and regulatory environment.
At the outset, NAIFA commends Chairman Shelby, Senator Sarbanes,
and the Committee Members for holding this hearing. Passage of the
Gramm-Leach-Bliley Act was a watershed event in the financial services
industry. It is critical that we understand the impact of the law since
its enactment and how it will affect financial services entities,
including life insurance agents and financial advisers, in the future.
NAIFA supported passage of GLBA because we believed the law would
benefit agents and consumers. We believed that breaking down Federal
and State law barriers among the banking, securities, and insurance
industries would lead to a more vibrant financial services marketplace
and help to ensure that insurance agents are on an even playing field
with our colleagues and competitors in the banking and securities
sectors. Since its enactment, NAIFA members have worked diligently with
State and Federal regulators and lawmakers to ensure that GLBA
implementation is carried out in a way that benefits consumers and
benefits, or does not unduly burden, industry.
While there have been some tangible and important benefits arising
from GLBA, overall the results have been mixed. On the broad scale, we
have not seen the market convergence that was predicted with the repeal
of the Glass-Steagall Act. The mixing of insurance and banking has
taken place almost entirely at the agent level. There has been little
in the way of mergers among banks, securities firms, and insurance
companies. This is not necessarily a bad thing. In fact, the benefit of
GLBA is that it has allowed the industry, rather than regulators, to
make decisions based on the workings of the marketplace. Citigroup's
divestiture of its property and casualty insurance divisions is clear
evidence of the marketplace at work.
GLBA has also had mixed results on the narrower insurance-specific
issues. Licensing of insurance agents and brokers (also referred to
herein as insurance producers), privacy, preemption, coordination and
cooperation among regulators, and consumer protection are all addressed
in GLBA and all significantly affect insurance agents and our clients.
Although there are a number of reasons we have not realized the full
benefit of these GLBA provisions, NAIFA believes one of the most
critical roadblocks is the current cumbersome, duplicative insurance
regulatory system. The States have made solid efforts to improve the
current regulatory system, and we strongly support their work. It has
become increasingly clear, however, that the State system needs help.
NAIFA believes it is imperative that the problems and inefficiencies in
the State regulatory system be corrected quickly, and supports the
active involvement of the Congress in the reform process.
This statement addresses the performance and impact of GLBA from
the perspective of a life insurance agent. Life insurance agents
generally sell products including standard life insurance policies,
annuities, disability income, and long-term care products. The
statement focuses on two areas: (i) the impact of GLBA on the life
insurance agent community and NAIFA's work with State legislators,
State insurance regulators, and Federal financial services regulators
in its implementation; and (ii) the need for Congressional involvement
in insurance regulatory reform, which is necessary to help us realize
the full potential of the Gramm-Leach-Bliley Act.
GLBA Five Years Later--Mixed Results for Insurance Agents
GLBA affects the insurance industry, including insurance producers,
in numerous ways, including:
reform of the producer licensing system and providing for
creation of the National Association of Registered Agents and
Brokers (NARAB);
imposing notice and opt out obligations on financial services
entities to protect consumer privacy;
preempting State insurance laws, potentially giving Federal
banking regulators significant input into insurance regulation; and
enlarging the role of the Federal Government in insurance
regulation through provisions including Federal consumer protection
requirements, ``functional regulation,'' and coordination among
State and Federal regulators.
NARAB/Producer Licensing
NAIFA has worked for years to get the NAIC and State insurance
regulators to fix the cumbersome, duplicative State-based system of
producer licensing. GLBA's NARAB provision successfully pushed the
States to enact reform. In 2000, the NAIC adopted the Producer
Licensing Model Act (PLMA), which provides for a system of reciprocal
licensing in the States pursuant to the NARAB requirements. The PLMA
has been enacted in some form in 49 States and the District of
Columbia.
NAIFA and our State affiliates have been extremely active and are,
in large part, responsible for enactment of the PLMA in the States.
NAIFA is also working with the NAIC in the development of specific
recommendations for greater uniformity in producer licensing
requirements, and we have been a board member of the National Insurance
Producer Registry (NIPR), which operates the electronic database of
producer information that has made licensing significantly faster and
easier.
Passage of NARAB gave the States the needed incentive to streamline
the insurance producer licensing system, but it did not go far enough.
Today, there are approximately 40 States that the NAIC has deemed
``reciprocal'' for NARAB purposes. Although other States have adopted
portions of the PLMA, there remain a significant number of States--
including major markets such as California and Florida--that are not
reciprocal and therefore not in compliance.
In addition, reciprocal States sometimes have similar legal
requirements but differing standards for licensure--thus creating a
patchwork of approaches across the country.
Full reciprocity, uniformity of standards and, ultimately, uniform
laws in every State are needed before NARAB can be considered a
complete success.
Privacy of Consumer Information
GLBA imposes obligations on financial services entities to protect
the privacy of certain consumer information. The Federal banking and
securities agencies promulgated regulations for banks and securities
firms, and the State insurance regulators were delegated the task of
promulgating regulations for the insurance industry. NAIFA worked with
the NAIC Privacy Working Group to draft a model privacy regulation
outlining a uniform regime for all elements of the financial services
industry, and worked with the States to ensure that the model
regulation was promulgated as uniformly as possible across the country.
To assist NAIFA members in complying with the new privacy obligations,
NAIFA produced an Insurance Producer Privacy Guide that outlines the
requirements and compliance steps for producers.
The requirements of the GLBA privacy provisions have been met by
regulators and industry, but they fall short of their potential. In the
insurance sector, the lack of uniformity in privacy requirements makes
it burdensome for insurers and producers to comply. Many States have
promulgated the NAIC's privacy model regulation, but a significant
number have different laws on their books, many based on an older NAIC
model. In addition, the lack of preemption of State privacy laws makes
it possible that the States could change their privacy requirements at
any time, as demonstrated by California's privacy law, which was
recently found to be not preempted by the Fair Credit Reporting Act
(FCRA).
Finally, to add to the complexity of the GLBA privacy requirements,
the FCRA and HIPPA also impose privacy requirements with which insurers
and producers must comply. These multiple layers of protection arguably
confuse, rather than help, consumers, who must work through pages of
disclosure to decipher what their financial services company's policies
are and to determine what their options are. It is worth noting that
the State insurance regulators and the Federal agencies have deemed it
necessary to review GLBA privacy notices to determine if the disclosure
can be simplified to be more understandable.
Preemption of State Insurance Laws
Although GLBA prohibits the States from taking certain actions with
respect to the insurance activities of banks, the parameters of these
preemption provisions are not clear in the statutes and have not been
firmly established by the courts. Two important preemption cases have
been decided recently--one by the U.S. Court of Appeals for the First
Circuit and one by the Fourth Circuit.\1\ In the Fourth Circuit case,
the court rejected the State of West Virginia's challenge to an OCC
``preemption opinion'' finding that certain West Virginia bank sales of
insurance provisions were preempted because, in the court's view, the
OCC has full authority to make that determination.\2\ In the First
Circuit case, the court took exactly the opposite view, ruling that an
OCC ``preemption opinion'' opining that certain Massachusetts bank
sales of insurance provisions were preempted by Section 104(d)(2) was
entitled to no consideration whatsoever and that the Massachusetts
challenge to that opinion letter was therefore moot.\3\ The
Massachusetts banks have begun a court challenge against those
provisions but without OCC participation.
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\1\ A third case, Association of Banks in Insurance, Inc. v.
Duryee, 270 F.3d 397, (6th Cir. 2001), was decided in 2001. In that
case, the 6th Circuit ruled that the challenged Ohio law was preempted
because it imposed a prohibition on bank insurance sales activity.
Therefore, the court did not make a holding on the parameters of the
``significant interference'' test.
\2\ Cline v. Hawke, No. 02-2100 (4th Cir. Nov. 19, 2002), cert.
denied (U.S. October 6, 2003) (No. 02-1620).
\3\ Bowler v. Hawke, 320 F.3d 59 (1st Cir. 2003).
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Clarification of GLBA's preemption provisions is important to all
participants in the insurance marketplace, particularly producers.
NAIFA supports equal treatment of all producers--whether or not they
are bank-affiliated. However, we would oppose any effort to unfairly
favor a particular group of producers through Federal preemption. Most
important, we need to have a clear standard, so that we can make
business decisions based on full knowledge of the law and marketplace.
Other Provisions
There are many other provisions of GLBA that affect insurance
producers, many of them involving Federal regulators and their
interaction with State insurance regulators. GLBA establishes a system
of ``functional regulation,'' in which responsibility for enforcement
of laws generally is determined according to the function of the
activity rather than the type of institution performing the activity.
In addition, the law requires coordination and communication among
State and Federal financial services regulators. This coordination was
most evident in the implementation of GLBA's consumer protection
provisions, a process that NAIFA was also heavily involved in. The
Federal agencies and State regulators consulted each other closely in
the promulgation of Federal rules and the amendment of the NAIC Unfair
Claims Practices Model Act.
NAIFA supports interaction between the Federal and State
regulators. As supporters of State regulation, however, we do not want
the Federal banking and securities agencies to exert undue influence on
the insurance regulatory process. Insurance is different from banking
and securities, and it is important for regulation of the industry to
be handled by insurance experts. Having said that, it would be
extremely beneficial to have an insurance presence at the Federal
level. Although the NAIC and State insurance regulators do their best
to assist the Federal agencies and Congress on insurance issues, the
lack of a knowledgeable insurance professional at the Federal level
makes the education process much more difficult. An expert at the
Federal level of Government would be able to educate policymakers so
the implications of their decisions on the insurance market are well-
understood. In addition, a Federal presence could serve an important
role in international and trade issues, where it is important to speak
with one voice. Banking and securities regulators currently serve this
role with respect to the industries they regulate, and we believe it is
sensible to add an insurance voice to the mix.
Full Promise of GLBA Requires Insurance Regulatory Reform
NAIFA members are long-time supporters of State regulation and
remain steadfastly committed to this tradition. We believe, as others
do, that fixing the problems with the insurance regulatory system will
yield a strong and healthy insurance marketplace, ultimately providing
better and greater choices for consumers.
Having said that, we also recognize the challenges facing State
regulators in their efforts to achieve reform. In addition, the
changing dynamics of the financial services industry in the 21st
century compel NAIFA to be open to all promising options to improve the
regulation of the industry. There is widespread agreement that the
State insurance regulatory system is in need of improvement in numerous
areas and that reform is critical to protect consumers and ensure a
strong and healthy insurance marketplace. Insurance producers have been
working with State insurance regulators for years to encourage sensible
reforms to make the quilt of State insurance laws and regulations more
uniform, thus enabling producers to better compete in an increasingly
crowded financial services marketplace. Improvements in regulation
benefit consumers, as well, who share the heavy burden of paying for
the costs of complying with the current system.
Although State insurance regulators have made great efforts in the
past several years to reform and modernize the system, the necessary
improvements have not been made. Insurance regulation has failed to
adapt to changes in the industry and the markets it serves, resulting
in the significant regulatory deficiencies that exist today.
Unnecessary distinctions among the States and inconsistencies within
the States on issues such as licensing, product approval, and consumer
protection, thwart competition, reduce predictability and add
unnecessary expenses to the cost of doing business. Similarly, these
outdated rules and practices do not serve the goals of regulation in
today's converging financial services marketplace.
It has proved to be very difficult for State regulators and their
legislatures to unilaterally correct the identified deficiencies in
State insurance regulation. Both practical and political realities
dictate that, if identical bills are proposed in 50 State
legislatures, 50 different bills will emerge from those 50 separate
legislative processes. There are numerous reasons for this lack of
success--lack of will, disagreements over substantive details,
structural impediments, and the fact that it is simply very difficult
to get 50 different jurisdictions to act in a coordinated fashion, and
act quickly in a constantly changing global marketplace.
To their credit, the State insurance regulators have recognized to
some degree the need to improve and modernize the insurance regulatory
system currently under their control. Ernst Csiszar, the South Carolina
Insurance Director and current President of the National Association of
Insurance Commissioners (NAIC), has acknowledged publicly that change
is needed and that holding the regulators' ``feet to the fire'' could
lead to improvements in the regulatory system. The Commissioners have
adopted an ``Action Plan for Regulatory Modernization'' that outlines
their plan for reform.
Despite their good intentions, however, the commissioners' action
plan is limited in scope and sparse on details. It is unclear what the
States will accomplish or how long it will take to achieve the reforms
that are so important for the insurance marketplace. Even for those
initiatives that are clearly addressed in the action plan, the
commissioners' ultimate goal is less than ambitious. For example, the
State regulators have drafted an interstate compact establishing a
single point of filing for regulatory review and approval of certain
life, annuity, disability income, and long-term care insurance
products. This is extremely important to NAIFA members, and NAIFA
supports the compact wholeheartedly. We are disheartened to note,
however, that its implementation is not on a fast track. Very few
States have adopted the compact and obtaining timely enactment of the
compact in identical form in every State presents a very challenging
legislative obstacle. Moreover, even if the compact is someday adopted
in a substantial number of States, the compact itself permits States to
opt out of particular products, which would undermine the uniformity
that is needed in the product approval process. These circumstances
lead us to conclude that Congressional involvement in the reform effort
could help improve the regulatory environment.
Since 2002, NAIFA policy has supported Congressional action to
improve and augment the regulation of insurance, provided such action
meets NAIFA's specific guidelines aimed at maintaining fairness to
agents and protection for the consumers they serve. Early this year, we
clarified this policy to highlight our support for the NAIC's
regulatory modernization action plan and to identify certain Federal
proposals that could, if properly crafted, improve the regulation of
our industry. A copy of our current Insurance Regulatory Reform Policy
is attached as Addendum A.
While our regulatory reform policy continues our century-long
support for State regulation of insurance and confirms our commitment
to improve the State-based system, we believe the status quo of
insurance regulation is detrimental to consumers and NAIFA members.
Thus, the recent strengthening of the policy was necessary to
acknowledge that all options are on the table and that NAIFA is willing
to consider a breadth of alternatives in our desire to fix the problems
confronting us. As a result, we have adopted a policy that embraces
Federal initiatives to improve the regulation of insurance. Simply put,
NAIFA favors reform, improvement, and progress over the status quo.
Conclusion
It is still early to judge the ultimate effectiveness of the Gramm-
Leach-Bliley Act because the full impact of such sweeping legislation
may not be evident for years, if not decades. Nonetheless, discussion
of the benefits and drawbacks of the law is worthwhile to determine if
changes need to be made to realize the full potential of the law. As
this statement makes clear, there are several specific areas in which
changes can be made to improve GLBA's effectiveness. Most important in
the view of NAIFA members is insurance regulatory reform, which is
critical to enable insurance producers to enjoy streamlined, effect
regulation and take full advantage of GLBA's promise for the benefit of
insurance consumers.
* * * * *
Addendum A
NAIFA Policy on Insurance Regulatory Reform
NAIFA supports the principles underlying State regulation of the
business of insurance and efforts to improve the State-based system of
insurance regulation, including support for the National Association of
Insurance Commissioners' Action Plan for Regulatory Modernization.
NAIFA also supports Congressional initiatives to improve and augment
the regulation of the business of insurance, such as the creation of a
Federal insurance regulator, optional Federal charters for insurance
companies and agencies, a national producer's license for insurance
professionals, and other Federal efforts to improve the insurance
regulatory system. NAIFA supports reform of the insurance regulatory
system that meets the following guidelines:
(1) With respect to producer licensing and continuing education
requirements:
All insurance producers must be licensed.
All duplicative licensing requirements should be eliminated to
ensure that each insurance producer will be required to demonstrate
to only one regulator that he/she is qualified to receive a license
to engage in insurance representing either a State-chartered or
Federally chartered insurer.
Uniform substantive and procedural licensing requirements
should be established for each class of similarly situated
producers.
The uniform licensing requirements should include the mandated
performance of a criminal background check on all applicants for
licensure.
A database to which only financial services regulators have
access should be established to help ensure that individuals who
have committed fraud or engaged in other behavior which should bar
their participation in the business of insurance are identified and
tracked.
Each insurance producer should need to satisfy only a single
set of continuing education requirements for each line of business
for which he/she is licensed.
Uniform continuing education requirements should be
established for each class of similarly situated producers.
(2) With respect to other consumer protection requirements:
The tax incentives supporting life and other insurance
products must be preserved.
Uniform trade practices and consumer protection requirements
should apply to all insurance sales and service activities.
Adequate solvency requirements for insurers must be in place
such as guarantee funds or comparable fail safe mechanisms.
Regulators' responsiveness and accessibility to consumers must
be preserved.
(3) With respect to rate and form filing and approval requirements:
Duplicative filing and approval requirements should be
eliminated.
Unifonn filing and approval requirements should be
established.
``Quality to market'' concerns should not be sacrificed for
``speed to market.''
(4) With respect to changes in regulatory rules, structures and
procedures:
Current regulatory expertise should be preserved to the
maximum extent possible as consistent with efficient regulation.
Any ``reform'' should be viable for both accumulation and
risk-shifting products.
Submission to the jurisdiction of any additional newly created
regulatory authority should be truly optional for all producers.
Producers should have an institutionalized role in the
development and application of all new regulatory rules,
structures, and procedures.
Approved by the NAIFA Board of Trustees 1/16/04