[Congressional Record Volume 145, Number 156 (Monday, November 8, 1999)]
[Extensions of Remarks]
[Pages E2308-E2311]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




          CONFERENCE REPORT ON S. 900, GRAMM-LEACH-BLILEY ACT

                                 ______
                                 

                               speech of

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                       Thursday, November 4, 1999

  Mr. LaFALCE. Madam Speaker, I rise in strong support of the 
conference report on S. 900, the Gramm-Leach-Bliley Financial 
Modernization Act of 1999.
  In July, the House passed its version of financial modernization 
(H.R. 10), with a broad bipartisan vote of 343-86. The Senate passed a 
partisan product (S. 900) by a narrow margin of 54-44, a bill which the 
White House indicated it would veto because of its negative impact on 
the national bank charter, highly problematic provisions on the 
Community Reinvestment Act (CRA) and its nonexistent privacy 
protections.
  The conference report necessarily represents a compromise between the 
two versions. But it is a good and balanced compromise. It effectively 
modernizes our financial system, while ensuring strong protections for 
consumers and communities. As a result, the Administration strongly 
supports the conference report.
  There are clear gains for our financial services system, for 
consumers and for communities in this bill is enacted. There are clear 
losses if it is not.
  Without this bill, banks will continue to expand into securities and 
insurance business as they have been doing for some years under current 
law. However, they will do so without CRA coverage; without privacy 
protections; without the regulatory oversight and regulatory 
protections enhanced in this bill; and with artificial structural 
limitations that will place the U.S. financial services industry at a 
clear competitive disadvantage. Without this bill, commercial firms 
will continue to move more and more into the banking business, with no 
real limitations.
  I would like to review the major provisions of the bill and the 
intent of those provisions.

                        FINANCIAL MODERNIZATION

  This bill permits the creation of new financial services holding 
companies which can offer a full range of financial products under a 
strong regulatory regime based on the principle of functional 
regulation. Banks currently engage in securities and insurance activity 
under existing law and court interpretations of that law, including the 
Bank Holding Company Act, the Federal Reserve Act, the National Banks 
Act, and various state laws. This conference report ensures that such 
activities will occur, in the future, with appropriate regulatory 
oversight based on the principle of functional regulation. The 
conference report also provides for appropriate ``umbrella'' authority 
at the holding company level by the Federal Reserve, and essential 
consumer and community protections.
  The conference report, in contrast to the Senate bill, clearly 
preserves the strength of the national bank charter by giving 
institutions a choice of corporate structure through which they can 
conduct their business consistent with the original House product.
  I would like to clarify the intent of this legislation as it pertains 
to the market-making, dealing and other activities of securities 
affiliates of financial holding companies. Currently, bank holding 
companies are generally prohibited from acquiring more than five 
percent of the voting stock of any company whose activities are not 
closely related to banking. The Federal Reserve has determined that a 
securities affiliate of a bank holding company cannot acquire or retain 
more than five percent of the voting shares of a company in a market-
making or dealing capacity. In addition, for purposes of determining 
compliance with this five-percent limit, the Federal Reserve has 
required that the voting shares held by the securities affiliate be 
aggregated with the shares held by other affiliates of the bank holding 
company.
  I would like to make clear that, by permitting financial holding 
companies to engage in underwriting, dealing and market making, 
Congress intends that the five-percent limitation no longer apply to 
bona fide securities underwriting, dealing, and market-making 
activities. In addition, voting securities held by a securities 
affiliate of a financial holding company in an underwriting, dealing or 
market-making capacity would not need to be aggregated with any shares 
that may be held by other affiliates of the financial holding company. 
This is necessary under the bill so that bank-affiliated securities 
firms can conduct securities activities in the same manner and to the 
same extent as their non-bank affiliated competitors, which is one of 
the principal objectives of the legislation. The elimination of the 
restriction applies only to bona fide securities underwriting, dealing, 
and market-making activities and does not permit financial holding 
companies and their affiliates to control non-financial companies in 
ways that are otherwise impermissible under the bill.
  The Conference Committee agreed to make the effective date of 
implementation of Title I, except for Section 104, 120 days from the 
date of enactment. We reached this decision to provide the regulators 
with an opportunity to implement this legislation effectively. It is 
the intent of the Conferees that Title I become effective 120 days 
after enactment even if the agencies are not able to complete all of 
the rulemaking required under the act during that time.
  In addition, it should be noted that in some instances, no rule 
writing is required. For example, new Section 4(k)(4) of the Bank 
Holding Company Act, as added by Section 103 of the bill, explicitly 
authorizes bank holding companies which file the necessary 
certifications to engage in a laundry list of financial activities. 
These activities are permissible upon the effective date of the act 
without further action by the regulators. The Conferees recognize, 
however, that refinements in rulemaking may be necessary and desirable 
going forward, and for example, have specifically authorized the 
Federal Reserve and the Treasury Department to jointly issue rules on 
merchant banking activities. If regulators determine that any such 
rulemaking is necessary, the Conferees encourage them to act 
expeditiously.

                    COMMUNITY REINVESTMENT ACT (CRA)


               DISCLOSURE AND REPORTING OF CRA AGREEMENTS

  While I support the general concept of disclosure, the so-called 
``sunshine'' provision could be pernicious because it could cast 
aspersions on the many constructive partnerships between banks and 
community groups that are helping to bring thousands of communities and 
millions of Americans into the financial mainstream.
  Fortunately, however, the bill now substantially limits the scope, 
reporting requirements, and penalties for violating the disclosure 
requirements.
  The ``sunshine'' amendment applies only to agreements that would 
``materially impact'' a bank's CRA rating or a regulator's decision to 
approve a bank's application. Few if any agreements with major banks 
would have so large an impact. Indeed, it would neither make sense nor 
be workable to require annual reports for every contract between a bank 
and every community partner merely because they had discussed how to 
best meet CRA requirements. In addition, grants and cash payments under 
$10,000 and loans under $50,000 would be automatically exempted, as 
would most market rate loans that are not re-lent. I also strongly 
encourage the regulators to use their

[[Page E2309]]

authority to exclude agreements with service organizations such as 
civil rights groups and community groups providing housing or other 
services in low-income neighborhoods. We have no business interfering 
with such organizations just because they work with banks, and it is 
not Congress' intent to do so.
  Community groups and other partners of banks would have to make 
annual reports of how the funds were used, but here again the conferees 
have substantially scaled back their requirements. The regulators are 
directed to ensure that the reporting requirements do not impose an 
undue burden on the parties and that proprietary and confidential 
information is protected. Organizations with multiple agreements with 
banks could file a single consolidated report. In addition, the 
Statement of Managers directs that a bank's partner may, ``in keeping 
with the provisions of this section, fulfill the requirements . . . . 
by the submission of its annual audited financial statement or its 
federal income tax return.''
  Finally, penalties only apply to a community group or another partner 
of a bank if the party makes a willful and material misrepresentation 
on a report and then fails to correct the problem after notification 
and a reasonable period. Only in such a case would an agreement between 
the bank and its partner become unenforceable.
  This summarizes the essential and substantial changes that have been 
made to the original Senate disclosure provision. However, these 
provisions are of such potential import that I would like to elaborate 
in considerable detail on the history of the provision and the intent 
of the conferees in making the substantial changes reflected in the 
conference report.

                          Legislative History


                          Disclosure Provision

  Some legitimate concerns have been raised over the potential burden 
imposed by the disclosure and reporting requirements contained in 
Section 711 of the bill. The provision in the final bill involved 
intensive negotiations by both the minority and majority parties which 
significantly narrowed the scope of the provision, the reporting 
requirements, and the circumstances under which violations may be found 
to have occurred and penalties imposed.
  The statute provides in new section 48(h)(2)(A) of the Federal 
Deposit Insurance Act that the appropriate Federal banking agency 
``shall . . . ensure that the regulations prescribed by the agency do 
not impose an undue burden on the parties and that proprietary and 
confidential information is protected. . . .'' This is a central 
component of the provision as agreed to by the conferees. It is the 
conferees' understanding that this subsection is intended to prevent 
any overly broad or unduly burdensome reading of the reporting and 
disclosure requirements of this provision, including the requirements 
of section 48(c), the reporting requirements placed on non-insured 
depository institutions that are parties to agreements covered by this 
provision.
  The prohibition in section 48(h)(2)(A) against placing an ``undue 
burden'' on the parties applies fully to every subsection of section 
48. Section 48(c), which provides for reporting of information by 
nongovernmental entities or persons, is to be interpreted in light of 
subsection (h)(2)(A), to prevent any ``undue burden'' from falling on 
the parties to a covered agreement. As the Statement of Managers' 
provides:


       The Federal banking agencies are directed, in implementing 
     regulations under this provision, to minimize the regulatory 
     burden on reporting parties. One way in which to accomplish 
     this goal would be whenever possible and appropriate with the 
     purposes of this section, to make use of existing reporting 
     and auditing requirements and practices of reporting parties, 
     and thus avoid unnecessary duplication of effort. The 
     Managers intend that, in issuing regulations under this 
     section, the appropriate federal supervisory agency may 
     provide that the nongovernmental entity or person that is not 
     an insurer depository institution may, where appropriate and 
     in keeping with the provisions of this section, fulfill the 
     requirements of subsection (c) by the submission of its 
     annual audited financial statement or its federal income tax 
     return.


  It is intended that, for example, subsection (c)(3) be read to 
require a ``list'' of the ``categories'' of uses to which funds 
received by the reporting party under covered agreements have been 
made.
  It is not the intent that subsection (c)(3) require a reporting of 
any particular expense. A reporting entity might, however, include, if 
applicable an item in their report entitled ``administrative 
expenses,'' together with the amount, if any, of the funds received 
under a covered agreement or agreements, if any, expended for such 
purpose, or, the report might simply consist of an annual financial 
statement or federal income tax return. As the Statement of Managers 
states, this requirement could in most instances be fulfilled by the 
filing of an annual financial statement or federal income tax return.
  The statute also directs the appropriate Federal supervisory agency 
to ``establish procedures to allow any nongovernmental entity or person 
who is a party to a large number of agreements described in subsection 
(a) to make a single or consolidated filing of a report under 
subsection (c) to an insured depository institution or an appropriate 
Federal banking agency.'' An organization with a large number of such 
agreements could simply file one summary report, summarizing the 
information requirement to be provided with respect to covered 
agreements in a single set of data in a single report, with the 
depository institution or regulator.
  The conferees significantly modified the scope of agreements as to 
which this provision applies.
  First, under subsection (h)(2)(A), this section is to be interpreted 
so as to avoid placing an ``undue burden'' on the parties.
  Second, an agreement must be made ``pursuant to or in connection with 
the fulfillment of the Community Reinvestment Act,'' as defined in 
subsection (e). The term ``fulfillment'' means a list of factors that 
the appropriate Federal banking agency determines has a material impact 
on the agency's decision--(A) to approve or disapprove an application 
for a deposit facility, or (B) to assign a rating to an insured 
depository institution under an examination under the Community 
Reinvestment Act. As noted in the Manager's Statement, the regulator's 
assessment of material impact is to be based on factors that the 
regulator ``would attach importance to'' in approving or disapproving 
an application or in assigning a particular rating under CRA.
  Third, the statute only pertains to agreements in which a party to 
the agreement receives grants or other consideration in excess of 
$10,000, or receives loans in excess of $50,000 under the agreement. An 
agreement under which nothing of value exceeding these amounts is 
revealed by the party is not covered by this provision.
  Fourth, the statute provides for additional safe harbors from the 
provision. All individual mortgage loans are not covered. Other loans, 
unless they are substantially below market or involve re-lending to 
another party, are not covered. Agreements with a nongovernmental 
entity or person ``who has not commented on, testified about, or 
discussed with the institution, or otherwise contacted the institution, 
concerning the Community Reinvestment Act'' are also not covered. As 
noted in the Manager's Statement this exception could include a broad 
range of organizations providing services in low and moderate income 
areas, including ``service organizations such as civil rights groups, 
community groups providing housing or other services in low-income 
neighborhoods, the American Legion, community theater groups, and so 
forth.'' The conferees are aware that insured depository institutions 
may list contributions to these organizations as a factor to be 
evaluated in applications subject to CRA or in examinations under CRA. 
It is not the conferees' intent that the undertaking of such 
activities, and listing of such activities in an application or 
examination by an insured depository institution have any bearing 
whatsoever on the determination of whether an agreement is required to 
be disclosed, and as to which reporting is required to be made, under 
this section.
  Fifth, the Federal Reserve Board may, under 48(h)(3)(B), prescribe 
regulations ``to provide further exemptions . . . consistent with the 
purposes of this section.'' It is the conferees intent that, consistent 
with the purposes of this section, including the requirement of 
subsection (h)(2)(A), the Federal Reserve Board broadly construe its 
authority to provide for further such exemptions.
  In drafting this provision, the conferees were concerned about not 
``chilling'' the atmosphere between community groups and banks by 
creating uncertainty over whether a particular CRA agreement was 
covered by the provision. A bank and a community group should be able 
to determine clearly, up-front under implementing regulations whether 
their CRA agreement is covered by this provision. The conferees intend 
that implementing regulations should make clear whether this provision 
applies to any given CRA agreement. To the greatest extent possible, we 
do not want community groups and banks to have to report unnecessarily, 
and we do not want to deter community groups and banks from entering 
these arrangements by creating confusion. The bank regulators should 
promulgate regulations so that parties know in advance whether their 
agreement is covered or not, consistent with the purposes of the 
provision.


                    ``HAVE AND MAINTAIN'' PROVISIONS

  The requirement that a banking organization have a ``satisfactory'' 
CRA rating is an ongoing requirement in order for it to expand into 
these new areas. Each and every time that a bank or its holding company 
seeks to expand into these newly authorized nonbanking lines of 
business--such as securities underwriting or insurance--their insured 
depository affiliates must have a ``satisfactory'' CRA rating. This

[[Page E2310]]

requirement applies each time the banking organization commences one of 
these nonbanking activities, or acquires or merges with another company 
in a nonbanking area. The Conference Report would therefore extend 
enforcement of CRA, in that under the Act, a bank's CRA record would be 
taken into consideration in determining whether the bank or its holding 
company can expand into nonbanking activities.
  Today, banks are permitted to expand into nonbanking activities--to 
the extent permitted by current law--without any consideration of their 
CRA performance at all. The Federal Reserve Board reports that it has 
approved thousands of applications for such expansions, and the current 
law does not impose any CRA review on these nonbank expansions at all. 
Under the Conference Report, each of the insured depository affiliates 
of banking organizations must have a ``satisfactory'' CRA rating at the 
time it expands into the nonbanking area. This is a new requirement, 
and for the first time makes satisfactory CRA performance a 
prerequisite to entering these nonbanking lines of business.
  There are two major enforcement provisions for this requirement. 
First, if the banking organization violates the prohibition against 
entering these nonbanking lines of business without its affiliated 
banks having a satisfactory CRA rating, all the penalties of the 
Federal Deposit Insurance Act apply. The FDIA penalties for 
noncompliance include divestiture and cease and desist orders, civil 
money penalties, and removal of officers and directors. Second, by not 
earning a ``satisfactory'' CRA rating, a bank and its holding company 
would be prohibited from entering these new lines of business. In 
effect, that imposes a high opportunity cost in missed business 
opportunities, and creates a powerful imperative for the holding 
company to ensure that its affiliated and subsidiary banks maintain at 
least a satisfactory CRA rating.
  The bill does not affect the existing application process for banks 
acquiring or merging with other banks, in which the regulators review 
the banks' CRA record and the public has an opportunity to comment. The 
existing procedures for bank mergers or acquisitions with other banks 
are preserved fully intact. There are no changes.


                    SMALL BANK CRA EXAMINATION CYCLE

  Although the statute sets a time line for examinations of banks under 
$250 million in assets that are currently rated ``outstanding'', the 
regulators nonetheless retain the full discretion to examine any bank 
at any time for reasonable cause. Section 712 of the statute states: 
``a regulated financial institution described in subsection (a) may be 
subject to more frequent or less frequent examinations for reasonable 
cause under such circumstances as may be determined by the appropriate 
Federal financial supervisory agency.'' This means that regulators 
retain full discretion to examine any bank for CRA compliance at any 
time for reasonable cause. For example, the bank's local market 
conditions may have changed significantly so that the bank's lending 
should have adjusted accordingly, or a change in bank management may 
have redirected the bank's lending practices such that the regulators 
find reasonable cause to conduct a CRA examination outside the routine 
cycle. The public could send comments to the bank regulators at any 
time regarding the CRA performance of any banks--even if outside the 
routine CRA examination or application process--and if the regulators 
find reasonable cause to do so, they could conduct a CRA exam of that 
bank. The public may comment to the regulators regarding a particular 
bank so that regulators can make a fully informed judgment about 
whether there is ``reasonable cause'' to conduct a CRA exam outside the 
routine cycle. Of course, regulators must come to their own conclusions 
about whether such an ``off-cycle'' CRA exam is justified, but public 
comment to the regulators can be valuable to their decisionmaking.
  With regard to section 712, this provision does not affect the 
regulators' judgment about when to examine banks under $250 million 
with a less than satisfactory rating. This provision is not indented by 
the conferees to limit the regulators from examining small banks with 
less than satisfactory records as they deem appropriate. My 
understanding is that the bank regulators' current practice is to 
conduct CRA examinations of banks with less than satisfactory CRA 
records as often as every 6-18 months. This provision does not restrict 
or direct their judgment for those banks. CRA examinations in 
connection with applications for bank mergers and acquisitions are also 
not affected by these provisions in any way. The provision also does 
not in any way affect the current law's requirements to take into 
account an institution's CRA record of meeting the credit needs of its 
community when banks are merging or acquiring other banks, or for any 
application for a depository facility.

                                PRIVACY

  For the first time, this bill imposes substantial privacy protections 
for consumers under federal law in the financial services context. The 
privacy provisions of the bill:
  Impose on all financial institutions an ``affirmative and continuing 
obligation'' to respect the privacy of customers and the security and 
confidentiality of their personal information;
  Requires the federal regulators to issue institutional safeguards 
that will protect customers against unauthorized access to and use of 
their personal information;
  Requires that consumers be provided with notice and an ``opt-out'' 
opportunity before their financial institutions can disclose any 
personal financial information to unaffiliated third parties;
  Prohibits financial institutions from sharing with unaffiliated 
parties any credit card, savings and transaction account numbers or 
other means of access to such accounts for purposes of marketing;
  Prohibits unaffiliated third parties that receive confidential 
information from sharing that information with any other unaffiliated 
parties;
  Requires financial institutions to fully disclose to customers all of 
their privacy policies and procedures;
  Amends the Fair Credit Reporting Act to strengthen and expand 
regulatory authority to detect and enforce against violations of credit 
reporting and consumer privacy requirements.
  These are the very same privacy provisions that passed the House by a 
virtually unanimous 427-1 vote. In fact, the provisions actually 
represent a strengthening of the House product in two key respects. 
First of all, the disclosure requirement has been extended to cover a 
financial institution's practices on information-sharing within the 
affiliate structure, allowing consumers to comparison shop based on a 
company's privacy policies. Secondly, the conference report totally 
safeguards stronger state consumer protection laws in the privacy area.
  Section 502(d) of the conference report contains a broad prohibition 
against the disclosure of a consumer's account number or similar form 
of access device by a financial institution to any non-affiliated third 
party for use in direct marketing. The agencies with rulemaking 
authority under the legislation may grant exceptions to this 
prohibition if ``deemed consistent with the purposes of this 
subtitle.'' The report language makes clear that any exceptions to this 
strict prohibition are to be narrowly drawn and my be deemed consistent 
with the purposes of the bill only where three factors are present: (1) 
The customer account number or access device is encrypted, scrambled or 
decoded, (2) the customer provides express consent to the financial 
institution to make such disclosure prior to the time of the 
disclosure; in other words, the customer ``opts-in'' to such disclosure 
with the financial institution, and (3) such disclosure is necessary to 
service or process a transaction that the customer expressly requests 
or authorizes.
  The joint marketing provision sought to narrow the potentially 
unequal application of privacy restrictions between larger financial 
entities that operate through affiliates and smaller banks and credit 
unions that must contract with outside institutions to provide basic 
financial services such as credit cards or mortgages to customers. It 
is important to note that the provision contains at least four levels 
of restrictions to limit its application. The joint marketing exception 
applies only to agreements under which one financial institution 
markets the products of another or markets financial products on the 
other institution's behalf. Permissible joint agreements and financial 
products would be limited by federal regulation and any sharing of 
information must be clearly disclosed and subject to strict 
confidentiality contracts.


                other consumer and community protections

  The bill contains important other new consumer and community 
protections.
  It:
  Provides extensive new consumer protections in connection with bank 
sales of insurance products, including prohibitions against tying, 
misrepresentation or conditioning of credit on purchases of other 
products; clear disclosure of the risks associated with insurance 
products; separation of insurance sales from routine banking activity; 
and new federal procedures to resolve consumer complaints;
  Provides new consumer protections as prerequisites for bank sales of 
investment products, including full disclosures regarding potential 
risks and the uninsured status of the products, and sales practices 
standards restricting such sales to qualified brokers and to areas 
separated from routine banking activity;
  Expands small business and rural development lending by making 
Federal Home Loan Bank advances available for small business, small 
farm and agribusiness lending by smaller community banks;
  Creates a new federal ``Program for Investment in 
Microentrepreneurs'' (PRIME) to provide technical assistance and 
capacity building grants for small or disadvantaged business with less 
than five employees that have limited access to business financing;
  Prohibits discrimination against victims of domestic violence in the 
underwriting, pricing,

[[Page E2311]]

sale, renewal of any insurance product and in the settlement of any 
claim;
  States Congressional intent that financial advisors shall provide 
financial advice and products to women in an equal, nondiscriminatory 
manner.


                         mutual redomestication

  A bill of this breadth will inevitably include some elements that are 
highly problematic and objectionable. I strongly oppose the conference 
report language on redomestication of mutual insurers.
  This provision is not only not in the public interest, it is 
blatantly anti-consumer. It would circumvent well-designed and 
carefully considered state policy regarding the redomestication of 
mutual insurance companies. It has little or nothing to do with 
financial services modernization. Rather it serves to undermine state 
law, which seeks to protect our constituents, for the benefit of a few.
  The conference report could place as many as 35 million policyholders 
at risk of losing $94.7 billion in equity. This amounts to a 
Congressionally approved taking of consumers' personal property. I 
believe this provision will not withstand legal scrutiny and should and 
will be the subject of legal challenge in the courts.
  This provision would allow mutual insurers domiciled in states whose 
legislatures have elected not to allow mutual insurers to form mutual 
holding companies to escape that legislative determination. It would 
allow mutual insurers to move simply because a state, through its duly 
elected representatives, has determined that formation of mutual 
holding companies is not in the best interest of the state or its 
mutual insurance policyholders who are, after all, the owners to the 
company. This conference report will preempt the mutual insurance laws 
in approximately 30 states.


                               conclusion

  Overall, the conference report represents a reasonable and fair 
balance on a wide variety of difficult issues. Because of the many 
benefits this legislation provides for consumers, communities and the 
U.S. financial services industry, I offer my strong support to the 
legislation.

                          ____________________