[Congressional Record Volume 141, Number 79 (Friday, May 12, 1995)]
[Senate]
[Pages S6601-S6604]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. D'AMATO (for himself and Mr. Dodd):
  S. 799. A bill to amend the Federal Deposit Insurance Act to exclude 
certain bank products from the definition of a deposit; to the 
Committee on Banking, Housing, and Urban Affairs.


      the bank insurance fund and depositor protection act of 1995

 Mr. D'AMATO. Mr. President, today I am introducing the Bank 
Insurance 
 [[Page S6602]] Fund and Depositor Protection Act of 1995 with my 
distinguished colleague from Connecticut, Senator Dodd. This bill, 
which is substantially similar to S. 2548, the bill that Senator Dodd 
and I introduced last October, makes an essential change to the 
definition of a ``deposit'' contained in the Federal Deposit Insurance 
Act. Companion legislation was introduced in the House of 
Representatives last Wednesday. The House bill, H.R. 1574, was 
introduced by Representative Roukema and received bipartisan 
cosponsorship from Representatives McCollum, Vento, and Kanjorski.
  This amendment to the Federal Deposit Insurance Act is necessary to 
address a recent development in the banking industry--the so-called 
retirement CD. This product, which is essentially a deferred annuity, 
is offered and underwritten by banks. Senator Dodd and I, along with 
several other Banking Committee members, raised a number of concerns 
about the retirement CD in a letter to the FDIC and the Comptroller of 
the Currency last year. Nevertheless, the Comptroller of the Currency 
and the FDIC have permitted the offering of this investment vehicle, 
with FDIC insurance protection. In light of this, Congress must act to 
clarify the law.
  Mr. President, we are talking about banks, with little or no annuity 
underwriting experience, guided simply by computer software, assuming 
the underwriting risk that is attendant to this insured hybrid 
investment vehicle. This is not an empty concern--at least three 
federally insured banks have taken advantage of this breach in the 
regulatory scheme and are offering this investment vehicle. Allegedly, 
a number of other federally insured banks are getting ready to do so. 
And what will happen if these institutions cannot properly manage the 
underwriting risk? If any of these banks mismanage this risk and fail, 
the only guaranteed insurer will be the FDIC insurance fund, and 
ultimately, perhaps, the American taxpayer.
  Mr. President, the IRS recently issued a proposed regulation 
pertaining to the retirement CD's tax-deferred status. Nevertheless, 
banks may still offer this product, and the integrity of the bank 
insurance fund must be protected. The fund must not be used as a safety 
net for untested and uncertain investment vehicles. And that's exactly 
the risk that this legislation will protect against. This bill 
precludes the extension of FDIC insurance protection to this bank-
underwritten investment vehicle. Nothing more and nothing less. I have 
carefully considered the arguments offered in support of this product 
and I remain extremely concerned about the threat this product could 
pose to the bank insurance fund.
  Mr. President, this bill will protect the bank insurance fund against 
potential losses that are attributable to any retirement CD that has 
been underwritten by any bank since last October. This bill retains the 
effective date employed last Congress in S. 2548--October 6, 1994. This 
effective date is justified, since both industry and the regulators 
were put on notice of congressional concerns well before that time. 
Further, this effective date has been retained in fairness to those 
institutions that deferred to congressional concerns and did not pursue 
the marketing of this investment product.
  Mr. President, this bill was drafted with the intention of avoiding 
any undesired effects on standard deposit products that banks commonly 
offer today. For instance, qualified plans and individual retirement 
accounts are not intended to be covered by this legislation, to the 
extent that they do not generate depository institution liabilities 
that constitute annuity contracts. This is the case even if the 
depository institution liability has tax-deferred status under section 
72 of the Internal Revenue Code.
  Mr. President, this bill is being introduced in order to provide 
further congressional guidance as to the appropriate scope and 
operation of Federal banking law and the proper use of Federal deposit 
insurance. This bill makes sense in terms of bank insurance fund 
protection, safe-and-sound banking practices, and ultimately, taxpayer 
protection. The bank insurance fund exists to protect the ordinary 
depositor--it should not be used to give bank-offered financial 
products a competitive marketing edge. Competitive innovations should 
always be welcomed, but not the misuse of Federal deposit insurance. I 
hope my colleagues will support this legislation.
 Mr. DODD. Mr. President, I am pleased to join with my good 
friend, Senator D'Amato to reintroduce important legislation we 
sponsored last year, the Bank Insurance Fund and Depositor Protection 
Act of 1995.
  This short and simple piece of legislation would prohibit Federal 
deposit insurance coverage for the so-called retirement CD--a financial 
product that emerged a little over a year ago from a small corner of 
the retail banking world. This first of its kind product was cleverly 
constructed to receive both the benefits of Federal deposit insurance 
and tax deferral.
  Mr. President, as it is currently structured, the retirement should 
not be insured by the Federal Deposit Insurance Corporation. The 
retirement CD raises significant policy issues related to consumer 
protection, safety and soundness, regulatory control, and competitive 
equity. I believe that if we continue to allow it to proliferate as it 
is currently structured, the retirement CD could have a tremendously 
negative impact on consumer confidence in our financial institutions 
and on the stability of our deposit insurance system.
  The policy rationale for eliminating Federal deposit insurance for 
this product is just as compelling as it was when we last introduced 
this legislation. There are now a handful of financial institutions 
actively offering the retirement CD. More are planning to start selling 
the product in the near future.
  I understand that in addition to the Blackfeet National Bank, which 
first offered the retirement CD, the First National Bank of Sante Fe, 
NM, and the National Bank of the Commonwealth in Pennsylvania are other 
insured depository institutions offering the retirement CD. Other 
institutions have signed licensing agreements to sell the retirement CD 
or are carefully considering offering it soon.
  One year ago, the banking regulators sanctioned the sale of the 
retirement CD. In separate letters dated May 12, 1994, the Office of 
the Comptroller of the Currency [OCC] and the Federal Deposit Insurance 
Corporation [FDIC], stated they had no objection to the sale of the CD 
by Blackfeet National Bank in Browning, MT.
  However, on April 6, 1995, the Internal Revenue Service issued a 
proposed regulation which effectively eliminates the tax deferral 
feature of the retirement CD. If this proposed rule becomes final, it 
will substantially eliminate the most attractive feature of the 
retirement CD, leaving it essentially with only the characteristics of 
a regular certificate of deposit. While I applaud the IRS action, their 
rule is not yet final, and the product may still be sold--although I 
would hope only with full disclosure to consumers of the pending IRS 
rule.
  Most of my concerns about the retirement CD are described in detail 
in a June 20, 1994 letter that I and several of my Banking Committee 
colleagues sent to the OCC and the FDIC.
  I will not reiterate all the concerns described in that letter, but 
will briefly mention a couple of the more troubling issues that arise 
in connection with the retirement CD.
  First, there is enormous potential for customer confusion about the 
retirement CD's terms and conditions. This product is not a plain 
vanilla certificate of deposit. It is not a simple annuity. It is a 
complex newfangled hybrid that has both CD and annuity features.
  The retirement CD pays a fixed rate of interest up to 5 years, after 
which the rate is adjusted at the sole discretion of the bank. This 
rate is never supposed to fall below 3 percent. Interest ceases to be 
posted upon maturity. The customer may withdraw up to two-thirds of the 
balance at maturity, and the remainder will be disbursed in fixed 
periodic payments for life, incorporating the imputed interest rate.
  Consumers must understand that the interest rate is set at the sole 
discretion of the bank. While there is a 3-percent floor during the 
period when interest accrues, there is no similar threshold during the 
payout phase. This raises the prospect that a customer may not know 
what the imputed rate is tied to, and that the bank could offer a fixed 
payout at an extremely unfavorable rate.

[[Page S6603]]

  Second, a consumer must understand that this retirement CD, unlike 
traditional certificates of deposit, contains a component that is not 
FDIC insured. FDIC insurance only applies to the balance that is not 
withdrawn at maturity, less the full dollar amount of any payments 
received. If a bank that issues a retirement CD fails at a point when 
the customer had already received the full value of the account through 
lump-sum distribution and monthly payments, the FDIC would neither 
insure nor continue to pay the monthly payments for the rest of the 
customer's life. This is the case despite the fact that the promotional 
material claims to guarantee payments for life.
  Mr. President, at the time they approved the sale of the retirement 
CD, the regulators expressed many of the concerns I have about the 
likelihood of customer confusion, the existence of misleading marketing 
information, and the impact of this product on bank safety and 
soundness. They outlined these concerns in their respective no 
objection letters I referred to earlier. However, the regulators chose 
not to prevent Blackfeet from going forward with the issuance of the 
retirement CD, as long as the bank complied with a lengthy list of 
conditions.
  Mr. President, I think this was ill-advised. There continues to be 
strong evidence of substantial customer confusion regarding the 
insurance status of non-deposit investment products like mutual funds 
and annuity products being sold by banks and other insured depository 
institutions. These products are much less complex than the retirement 
CD. The regulators themselves have helped to collect compelling 
evidence about the ongoing problem of customer confusion. At a time 
when we are wrestling with how to eliminate this problem, I find it 
difficult to understand why the regulators gave their stamp of approval 
to the sale of this new complex product which can only make a bad 
situation worse.
  Mr. President, for this and many other reasons, the retirement CD as 
it's currently structured should not be offered by banks to the public. 
The legislation we are introducing today will exclude the retirement CD 
from the definition of a deposit under the Federal Deposit Insurance 
Act. The Retirement CD will therefore not be covered by Federal deposit 
insurance.
  The legislation does not prohibit banks from offering the retirement 
CD. It simply denies the product deposit status under the Federal 
Deposit Insurance Act.
  The legislation is not intended to eliminate existing levels of 
deposit insurance coverage to deposit accounts established in 
connection with certain individual retirement accounts, Keogh plans, 
eligible deferred compensation plans, pension plans or similar employee 
benefit plans which may be maintained at an insured depository 
institution. This legislation eliminates Federal deposit insurance 
coverage for products which expose the issuing insured depository 
institution, and ultimately the deposit insurance funds, to liabilities 
that are annuity contracts and are tax deferred under section 72 of the 
Internal Revenue Code of 1986.
  The provisions of this act do not apply to any liability which is not 
an annuity contract, whether or not tax deferred under section 72 of 
the Internal Revenue Code. For example, a liability other than an 
annuity contract which is part of an individual retirement account 
would not be affected by the provisions of this act even though the tax 
liability is deferred under section 72 of the Internal Revenue Code of 
1986 because section 408(D) of the code incorporates section 72 only by 
reference.
  Mr. President, the retirement CD may be cleverly packaged. It may be 
a tempting new business opportunity for the banking industry. But 
because it raises serious public policy concerns that have not been 
fully explored, it must not receive the protection of the Federal 
safety net. I hope that the Banking Committee will be able to closely 
examine this matter soon either separately of in the context of 
financial services modernization.
  Mr. President, I ask unanimous consent that additional material be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

         U.S. Senate, Committee on Banking, Housing, and Urban 
           Affairs,
                                    Washington, DC, June 20, 1994.
     Hon. Eugene Ludwig,
     Comptroller of the Currency, Office of the Comptroller of the 
         Currency, Washington, DC.
     Hon. Andrew C. Hove,
     Acting Chairman, Federal Deposit Insurance Corporation, 
         Washington, DC.
       Dear Mr. Ludwig and Chairman Hove: We are following with 
     great interest and concern the efforts of the Blackfeet 
     National Bank (``Blackfeet'') of Browning, Montana to offer 
     to the general public a new ``Retirement CD.'' We are 
     disappointed that the OCC and the FDIC, by separate 
     correspondence dated May 12, 1994, have in effect sanctioned, 
     with certain conditions, plans to market and offer this 
     Retirement CD investment product.
       We are very troubled that the OCC and FDIC would react 
     favorably to a product with such enormous ramifications for 
     the banking system, the Bank Insurance Fund, the insurance 
     industry--and, most importantly, for the consumers of 
     financial products--without consultation with Congress and 
     without requesting more specific commitments and information 
     from American Deposit Corp. or Blackfeet.
       The Retirement CD product raises a number of significant 
     concerns which we have detailed below. We strongly believe 
     these matters need to be thoroughly addressed by the 
     regulators and Congress before this investment product is 
     offered to the public.
                     1. Consumer Protection Issues

       The OCC and FDIC letters clearly indicate that both 
     regulators have rather significant reservations about the 
     consumer-protection implications of the Retirement CD. Both 
     letters contain suggestions or conditions aimed at ensuring 
     customer understanding and adequate disclosure. This insured 
     deposit product combines features of both certificates of 
     deposit and annuities, and it is enormously complex. 
     Consumers may not fully comprehend how it works, the interest 
     rate structure or the extent of FDIC insurance coverage.
       The Retirement CD will pay a fixed rate of interest for up 
     to five years, after which the rate becomes adjustable until 
     the agreed-upon maturity date. The only assurance given to 
     the consumers with respect to this variable interest rate is 
     that it will be at least 3 percent. Upon maturity, the 
     customer may withdraw up to two-thirds of the account 
     balance, and the remainder of the account will be dispersed 
     for life in fixed payments. These periodic payments 
     incorporate an imputed interest rate. The consumer must 
     understand that the interest rate, during much of the 
     accumulation period (prior to the agreed-upon maturity date) 
     and all of the payout phase, will be determined at the sole 
     discretion of the bank. Furthermore, as we understand this 
     product during the payout phase, there will be no minimum 
     imputed interest rate, similar to the three percent floor in 
     the accumulation phase. This raises an ominous prospect: that 
     a customer will not know exactly what the ``imputed'' rate is 
     keyed to and that the bank could offer a fixed payout at an 
     extremely unfavorable rate.
       As we understand the product, FDIC insurance would only 
     apply to the balance (principal plus accrued interest) that 
     was not withdrawn on the date of maturity, less the full 
     dollar amount of any payments received during the pay-out 
     period. Therefore, a customer would have to understand that 
     if the bank were to fail at a point when the customer had 
     already received the full value of the account through lump-
     sum distribution and monthly payments, the FDIC would neither 
     insure, nor continue to pay, the monthly payments for the 
     rest of the customer's life.
       The OCC and the FDIC have expressed consumer protection 
     concerns with respect to depository institution sales of 
     uninsured non-deposit investment products, such as mutual 
     fund shares. There is evidence that banking consumers do not 
     always understand the simple fact that some of the products 
     that banks offer are not FDIC-insured. With respect to the 
     Retirement CD, we are concerned that consumers will not be 
     able to fully-understand that a
      product that is called a ``certificate of deposit''--a 
     traditional insured deposit product--contains a component 
     that is not FDIC-insured (although we understand that the 
     promotional materials misleadingly ``guarantee'' payments 
     for life).
       Even the regulators seem somewhat uncertain about how the 
     Retirement CD works. The respective letters from the OCC and 
     the FDIC differ in their descriptions of one of the most 
     important basic terms of the product--mainly, at what point 
     the payout is agreed to. The OCC letter states, ``[o]n the 
     maturity date the customer will select from various options 
     for repayment'' (p. 2, emphasis added). The FDIC letter 
     states, ``[u]pon opening the account, the customer also 
     chooses his/her payout options'' (p. 1-2, emphasis added). If 
     the regulators are confused, certainly the potential for 
     consumer confusion is enormous.
       We must ask this question: ``Do the regulators honestly 
     believe that this product--that contains variable interest 
     rates, certain tax benefits, and partial FDIC-insured deposit 
     status--will not create substantially greater confusion than 
     non-deposit investment products?''
                  [[Page S6604]] 2. Regulatory Issues

       Annuties are currently subject to state regulations 
     enforced by state insurance officials. It is unclear if state 
     insurance regulatory requirements will apply to the 
     Retirement CD. Both customers and the bank should know this. 
     If state regulations do not apply, it should be determined 
     whether banks and bank regulators currently have the ability 
     or resources to safeguard these accounts, and what policies 
     and procedures are necessary to train bank personnel about 
     annuities and about appropriate sales practices.


                     3. Safety and Soundness Issues

       Blackfeet and other banks that may offer the Retirement CD 
     clearly will be acting as an underwriter of what is 
     essentially an annuity. Although clever lawyering has gained 
     this annuity product designation as a ``deposit'', it poses 
     much greater risk to the bank than a traditional deposit. 
     National banks will be assuming an unprecedented and 
     inappropriate risk as a result of having to make a fixed 
     payout for the life of a customer. Ultimately, these payments 
     could exceed the consumer's balance on deposit at maturity. 
     While the OCC suggests that Blackfeet's business plan should 
     indicate how it will manage the risk associated with the 
     annuity payment, the OCC requires no specific
      showing that the bank has the capability to quantify or 
     manage this long-term liability of unknown proportions.
       This ``deposit'' is structured so that at the date of 
     maturity, the bank must determine the fixed lifetime payout 
     for the customer using a complex and not entirely-discernible 
     process to achieve a proper rate of return. The Congress has 
     opted not to authorize banks to assume the type of risk 
     Blackfeet would assume in offering the Retirement CD, The OCC 
     and the FDIC seem willing to disregard this consistent record 
     of Congressional reluctance to allow federally-insured 
     depository institutions to engage in such high-risk 
     activities. The OCC and FDIC also seem too willing to take it 
     on faith that a small national bank (armed with a software 
     program) will have the business acumen and operational know-
     how to handle the risk of underwriting this annuity product.


                     4. Competitive Equality Issues

       The proliferation of the Retirement CD will produce an 
     unfair competitive advantage for banks. It is reasonable to 
     expect that consumers will be drawn to a tax-deferred annuity 
     that also offers federal deposit insurance. By allowing 
     national banks to underwrite, market and sell a tax-deferred 
     annuity that is FDIC-insured, the FDIC is granting a 
     substantial competitive advantage over similar annuity 
     products that do not come with a government guarantee.
       In expanding future opportunities for all financial service 
     providers and consumers, the Federal government's goal should 
     be to encourage competition on a free and fair basis. Balance 
     sheet strength, customer service and other market-determined 
     characteristics, not market-distorting government guarantees, 
     should determine success. Given the recent savings and loan 
     crisis, and the regulators' concerns over the abuse of 
     deposit insurance, it would seem ill-advised to extend the 
     reach of the federal safety net to a product that raises so 
     many regulatory, competitive and consumer protection 
     concerns.
       The OCC and the FDIC have made it very clear that when 
     given the opportunity, they will usually take the most 
     expansive and creative view of bank powers under current law. 
     We strongly support the view that, to the maximum extent 
     possible, an explicit statutory mandate must exist before the 
     regulators authorize expanded powers for banks, or any other 
     financial intermediaries. For this reason, we continue to 
     support comprehensive modernization of our entire financial 
     system. Until this can be accomplished by Congress, we urge 
     the OCC and FDIC to balance the proclivity to expand bank 
     powers through regulatory channels against the legitimate 
     public policy concerns of consumer protection, safety and 
     soundness, and competitive equality. Products that raise 
     serious public policy concerns deserve great scrutiny, 
     regardless of how cleverly they are packaged or how 
     attractive they may be to the banking industry. The 
     Retirement CD is clearly one such product.
       We do not share your view that this product, as it is 
     currently structured, is an appropriate product for national 
     banks to offer to retail customers. Therefore, we are 
     developing, and will soon introduce, legislation to prohibit 
     the sale of this investment product. Pending consideration of 
     this legislation by Congress, we urge the OCC and the FDIC to 
     reconsider their respective positions on the Retirement CD.
           Sincerely,
     Christopher J. Dodd,
     Richard H. Bryan,
     Alfonse M. D'Amato,
     Lauch Faircloth.
     

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