[Senate Report 106-11]
[From the U.S. Government Publishing Office]





                                                        Calendar No. 35

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106th Congress                                                   Report
1st Session                      SENATE                          106-11
_______________________________________________________________________




                  THE FINANCIAL REGULATORY RELIEF AND

                    ECONOMIC EFFICIENCY ACT OF 1999

                               __________

                              R E P O R T

                                 OF THE

                     COMMITTEE ON BANKING, HOUSING,

                           AND URBAN AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                 S. 576



                                     



                 March 10, 1999.--Ordered to be printed

                               --------

                    U.S. GOVERNMENT PRINTING OFFICE                    
69-010                     WASHINGTON : 1999





            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
CONNIE MACK, Florida                 CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah              JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota                 RICHARD H. BRYAN, Nevada
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                JOHN EDWARDS, North Carolina
MIKE CRAPO, Idaho

                   Wayne A. Abernathy, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel

              Lendell W. Porterfield, Financial Economist

             Martin J. Gruenberg, Democratic Senior Counsel

                                  (ii)



                            C O N T E N T S

                              ----------                              
                                                                   Page

Introduction.....................................................     1
Purpose and Summary..............................................     1
History of the Legislation.......................................     2
Purpose and Scope of the Legislation.............................     3
    Title I--Improving Monetary Policy and Financial Institution 
      Management Practices.......................................     3
    Title II--Streamlining Activities of Institutions............     8
    Title III--Streamlining Agency Actions.......................    10
    Title IV--Miscellaneous......................................    10
    Title V--Technical Corrections...............................    11
Section-by-Section Analysis......................................    12
    Section 101. Payment of Interest on Reserves at Federal 
      Reserve Banks..............................................    12
    Section 102. Interest on Business Checking Accounts..........    12
    Section 103. Repeal of Savings Association Liquidity 
      Provision..................................................    12
    Section 104. Repeal of Thrift Dividend Notice Requirement....    12
    Section 105. Reduction of Regulatory Requirements for Thrift 
      Investments in Service Companies...........................    12
    Section 106. Elimination of Thrift Multi-State Multiple 
      Holding Company Restrictions...............................    12
    Section 107. Removal of Prohibition on Savings and Loan 
      Holding Company Acquiring a Non-Controlling Interest in 
      Another SLHC of Thrift.....................................    13
    Section 108. Repeal of Deposit Broker Notification to FDIC...    13
    Section 109. Uniform Regulations Governing Extensions of 
      Credit to Executive Officers...............................    13
    Section 110. Expedited Procedures for Certain Reorganizations    13
    Section 111. National Bank Directors.........................    13
    Section 112. Permit National Banks to Merge or Consolidate 
      with Subsidiaries or Other Nonbank Affiliates..............    13
    Section 113. Loans on or Purchases by Institutions of Their 
      Own Stock; Affiliations....................................    14
    Section 114. Depository Institution Management Interlocks....    14
    Section 115. Modify Treatment of Purchased Mortgage Servicing 
      Rights in Tier 1 Capital...................................    14
    Section 116. Cross Marketing Restriction on Limited--Purpose 
      Banks......................................................    14
    Section 117. Divestiture Requirement.........................    15
    Section 201. Updating Authority for Community Development 
      Investments................................................    15
    Section 202. Repeal Section 11(m) of the Federal Reserve Act.    15
    Section 203. Business Purpose Credit Extensions..............    15
    Section 204. Affinity Groups.................................    15
    Section 205. Fair Debt Collection Practices..................15, 16
    Section 206. Restriction on Acquisitions of Other Insured 
      Depository Institutions....................................    16
    Section 207. Mutual Holding Companies........................    16
    Section 208. Call Report Simplification......................    16
    Section 301. Elimination of Duplicative Disclosure of Fair 
      Market Value of Assets and Liabilities.....................    16
    Section 302. Payment of Interest in Receiverships of Surplus 
      Funds......................................................    16
    Section 303. Repeal of Reporting Requirement on Differences 
      in Accounting Standards....................................    16
    Section 304. Agency Review of Competitive Factors in Bank 
      Merger Act Filings.........................................    17
    Section 305. Elimination of SAIF and DIF Special Reserves....    17
    Section 401. Alternative Compliance Methods for Advertising 
      Credit Terms...............................................    17
    Section 402. Positions of Board of Governors of Federal 
      Reserve System on the Executive Schedule...................    17
    Section 403. Federal Housing Finance Board...................    17
    Section 404. CRA flexibility for Credit Card Banks...........    17
    Section 501. Technical Correction Relating to Deposit 
      Insurance Funds............................................    17
    Section 502. Rules for Continuation of Deposit Insurance for 
      Member Banks Converting Charters...........................    18
    Section 503. Amendments to the Revised Statutes..............    18
    Section 504. Conforming Change to the International Banking 
      Act........................................................    18
Regulatory Impact Statement......................................    19
Changes in existing laws.........................................    19
Cost of the legislation..........................................    19



                                                        Calendar No. 35

106th Congress                                                   Report
  1st Session                    SENATE                          106-11
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  THE FINANCIAL REGULATORY RELIEF AND ECONOMIC EFFICIENCY ACT OF 1999

                                _______
                                

                 March 10, 1999.--Ordered to be printed

                                _______


 Mr. Gramm, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 576]

    The Committee on Banking, Housing, and Urban Affairs, 
having considered an original bill, reports favorably thereon 
and recommends that the bill as amended do pass.

                              INTRODUCTION

    On February 11, 1999, the Senate Committee on Banking, 
Housing, and Urban Affairs (the ``Committee'') ordered to be 
reported an original bill entitled, the ``Financial Regulatory 
Relief and Economic Efficiency Act of 1999,'' a bill to provide 
for improved monetary policy and regulatory reform in financial 
institution management and activities, to streamline financial 
regulatory agency actions, to provide for improved consumer 
credit disclosure, and for other purposes. The Committee 
reports the bill favorably and recommends that the bill do 
pass.

              PURPOSE AND SUMMARY OF NEED FOR LEGISLATION

    The purpose of this legislation is to strengthen our 
nation's financial institutions, to increase their ability to 
compete and to lower the costs of credit to consumers. The 
Committee recognizes the trend of increased dependency on 
credit among consumers, as well as a marked increase in 
consumer debt burden. Thus, the Committee believes it is 
necessary to do everything possible to lower the regulatory 
costs that increase the price of credit. As such, this 
legislation is intended to allow financial institutions to 
devote more resources to the business of lending and less to 
the bureaucratic maze of compliance with unnecessary 
regulations. This, in turn, should permit institutions to 
provide financial services at the best possible price to 
consumers.
    Senators Shelby and Mack have worked to reduce the 
regulatory burden on financial institutions in an effort to 
reduce the costs of credit to consumers since the 102nd 
Congress, when they introduced S. 1129, the Regulatory 
Efficiency for Depository Institutions Act. In the 103rd 
Congress, Senators Shelby and Mack introduced S. 265, the 
Economic Growth and Regulatory Paperwork Reduction Act of 1993. 
Portions of S. 265 were included in Title III of the Riegle 
Community Development and Regulatory Improvement Act of 1994. 
Congress passed into law S. 650, the Economic Growth and 
Regulatory Paperwork Reduction Act of 1995, which continued 
Senators Shelby and Mack's efforts to streamline an over 
regulated financial industry. In November, 1997, Senators 
Shelby and Mack introduced S. 1405 to ensure the regulatory 
framework that governs the financial industry is as unambiguous 
and efficient as possible. A key difference of that legislation 
from years past, was that S. 1405 provided the Federal Reserve 
with an additional tool in which to conduct monetary policy. 
The Committee believes this additional authority will, in the 
long run, benefit consumers in the form of price stability, or 
low inflation. Since S. 1405 was unanimously reported out of 
the Committee in September of 1998 but was never voted on in 
the full Senate, the Committee unanimously reported an original 
bill, the ``Financial Regulatory Relief and Economic Efficiency 
Act of 1999'' on February 11, 1999.

                       HISTORY OF THE LEGISLATION

    On November 7, 1997, S. 1405, the ``Financial Regulatory 
Relief and Economic Efficiency Act'' was introduced by Senators 
Shelby and Mack and referred to the Committee. The bill was 
cosponsored by Senator D'Amato, the Chairman of the Committee 
on Banking, Housing, and Urban Affairs, Senators Faircloth, 
Bryan, Grams, Kerry, Bennett, Gramm, Hagel, Allard, Enzi and 
Moseley-Braun.
    The Committee held two hearings on this legislation. At the 
first hearing, on March 3, 1998, the Committee received 
testimony from Hon. Laurence Meyer, Governor of the Federal 
Reserve Board; Mr. Rex Hammock, Chairman of Hammock Publishing, 
on behalf of the National Federation of Independent Business; 
Mr. Neil Mahoney, President and Chief Executive Officer of 
Woronoco Savings Bank; and Mr. Edward Furash, Chairman of 
Furash and Company.
    At the second hearing, on March 10, 1998, the Committee 
received testimony from Hon. Laurence Meyer, Governor of the 
Federal Reserve Board; Hon. John D. Hawke, Under Secretary for 
Domestic Finance of the Department of the Treasury; Hon. Andrew 
Hove, Acting Chairman of the Federal Deposit Insurance 
Corporation; Hon. Ellen Seidman, Director of the Office of 
Thrift Supervision; Mr. Edward Leary, Commissioner of Financial 
Institutions of Utah, on behalf of the Conference of State Bank 
Supervisors; Mr. Steven A. Yoder, Executive Vice President and 
General Counsel of AmSouth Bank of Alabama, on behalf of the 
American Bankers Association; Ms. E. Lee Beard, President and 
Chief Executive Officer of First Federal Savings & Loan of 
Hazleton, PA, on behalf of America's Community Bankers; Mr. 
Joseph S. Bracewell, Chairman and Chief Executive Officer of 
Century National Bank, on behalf of the Independent Bankers 
Association of America; Ms. Margot Saunders, Managing Attorney 
for the National Consumer Law Center; and Mr. Frank Torres, 
Legislative Counsel for the Consumers Union.
    On July 30, 1998, the Committee met in Executive Session to 
consider S. 1405. The Committee considered and adopted, without 
objection, an amendment in the nature of asubstitute that was 
offered by Senator Shelby. This amendment incorporated amendments that 
other Committee Members offered and that were agreed to on a bipartisan 
basis. Senator Shelby's amendment made changes to S. 1405 regarding: 
customer affinity groups; non-controlling investments to Savings and 
Loan holding companies; ``haircuts'' for net capital regulations on 
mortgage servicing rights; the Savings Association Insurance Fund 
(SAIF) special reserves; and struck language affecting the Federal Home 
Loan Bank System, anti-tying provisions, brokered deposits, and the 
Truth in Lending Act. The Committee rejected an amendment offered by 
Chairman D'Amato prohibiting banks from double charging for automatic 
teller machine withdrawals by a vote of 7-11. Senators D'Amato, 
Sarbanes, Dodd, Kerry, Bryan, Boxer and Moseley-Braun voted in favor of 
the amendment. Senators Gramm, Shelby, Mack, Faircloth, Bennett, Grams, 
Allard, Enzi, Hagel, Johnson and Reed voted against the amendment. 
Senator Hagel withdrew his amendment to modernize the Federal Home Loan 
Bank System.
    The Committee ordered S. 1405 reported to the Senate by a 
voice vote.
    On February 11, 1999 the Committee met in Executive Session 
to consider the ``Financial Regulatory Relief and Economic 
Efficiency Act of 1999,'' an original bill. This bill basically 
mirrored the legislation of 1998, with some refinements and 
technical changes. The Committee considered and adopted, 
without objection, an amendment offered by Senator Bryan to 
give credit card banks more flexibility in satisfying the 
requirements of the Community Reinvestment Act.
    The Committee ordered the Committee Print reported to the 
Senate by a voice vote.

                    PURPOSE AND SCOPE OF LEGISLATION

    The bill, as ordered reported by the Committee, contains 
five Titles that substantially amend a number of banking laws. 
The provisions in these Titles remove unnecessary and 
burdensome regulations that provide no supervisory benefit to 
the regulators, but serve only to increase the operational cost 
of financial institutions. Each provision has been analyzed and 
reviewed to ensure no negative impact on the safety and 
soundness of the financial system.

Title I: Improving monetary policy and financial institution management 
        practices

    Title I is designed to assist the Federal Reserve Board 
(the Board) in conducting monetary policy and financial 
institutions in managing their business activities. Two 
provisions, interest on reserves and interest on business 
checking accounts, specifically address recent technological 
developments that have negatively impacted the Federal 
Reserve's ability to maintain a stable federal funds market. 
Additional provisions repeal outdated laws, cut bureaucratic 
red tape and allow institutions to commit more resources to the 
business of lending and less to the regulatory maze of 
compliance.
    Banks are required to maintain a reserve balance of ten 
percent of all transaction deposits above a certain threshold. 
The reserve requirement can be satisfied with vault cash or 
with balances held at Federal Reserve Banks. However, the 
balances maintained at Federal Reserve Banks do not receive any 
payment of interest from the Federal Reserve. Banks have long 
complained about the reserve requirement and contend that the 
requirement is nothing more than a tax. As a result, a key 
strategy for banks is to minimize the balance at Federal 
Reserve Banks and reduce the amount of deposits that require 
reserves.
    While the Board has used the reserve requirement to control 
the growth of M1 in the past, the Board now focuses on the 
price of reserves (the federal funds rate) to implement 
monetary policy. In testimony before the Senate Banking 
Committee, Federal Reserve Board Governor Laurence Meyer 
testified that reserve requirements continue to play a critical 
role in the implementation of monetary policy. Mr. Meyer said:

          First, [reserve requirements] provide a predictable 
        demand for the total reserves that the Federal Reserve 
        needs to supply through open market operations in order 
        to achieve a given federal funds rate target. Second, 
        because required reserve balances must be maintained 
        only on an average basis over a two-week period, 
        depositories have some scope to adjust the daily 
        balances they hold in a manner that helps stabilize the 
        federal funds rate.1
---------------------------------------------------------------------------
    \1\ Testimony of Laurence H. Meyer, Governor, Federal Reserve 
Board, S. 1405 Hearings, March 3, 1998. (Hereinafter ``Meyer 
Testimony''.)
---------------------------------------------------------------------------
    Banks also hold balances as a precautionary measure to 
protect themselves from potential overdrafts with the Federal 
Reserve System. An overdraft is essentially a loan or an 
extension of credit--a practice discouraged by the Federal 
Reserve. Such precautionary demands distort the pricing 
function of the federal funds rate and therefore make it 
difficult for the Federal Reserve to determine the quantity of 
reserves to supply. According to Governor Meyer:

          In the absence of reserve requirements, or if reserve 
        requirements were very low, the daily demand for 
        balances at Reserve Banks would be dominated by these 
        precautionary demands, and as a result, the federal 
        funds rate could often diverge markedly from its 
        intended level.2

    \2\ Meyer Testimony, supra, note 1.

    Recent financial market innovations have reduced required 
reserve balances from $28 billion in 1993 to approximately $9 
billion in 1997. The most recent innovation used to avoid the 
reserve requirement is the computerized retail sweep account. 
It avoids the reserve requirement by sweeping consumer 
transaction deposits into personal savings accounts--accounts 
that are not subject to reserve requirements.
    The Federal Reserve Board fears that the proliferation of 
retail sweep accounts willjeopardize their ability to control 
the federal funds rate and therefore lead to substantial rate 
volatility. If this were to occur, all money market participants 
(bankers, securities dealers, mutual funds, etc.) would suffer an 
increase in the cost of doing business due to the unnecessary and 
significant increase in risk.
    Governor Meyer testified that the Federal Reserve Board 
needs the authority to compete directly with the retail sweep 
accounts by offering interest on reserves. This additional 
monetary tool would provide incentives for market participants 
to unwind many of the sweeps and significantly increase the 
level of transaction deposits.
    Another provision, intended to relieve the consumer demand 
for sweep accounts, removes the current prohibition on banks, 
thrifts, and nonmember banks from paying interest on demand 
deposits. The current prohibition on interest on demand 
deposits dates back to 1933, when it was believed that country 
banks would deposit their excess funds into money center banks 
in order to fund speculation in the stock market. Thus, monies 
needed to be loaned to farmers would be diverted to Wall Street 
for speculation instead of ``productive'' uses in rural areas. 
Governor Meyer questioned whether such rationale was ever 
valid, and assured the Committee that rationale was absolutely 
not valid today.
    Banks, especially small banks, are actually at a 
competitive disadvantage due to the 65 year old price control. 
One witness, Edward Furash, an established management and 
strategic consultant in the financial services industry 
testified:

        [the payment of interest on business checking accounts] 
        will significantly improve the ability of the banking 
        system to restore its competitiveness with the capital 
        markets through pricing clarity and product 
        simplification, while at the same time reduce bank risk 
        by reducing the need to engage in sweep accounts and 
        complex balance sheet manipulations to match capital 
        markets interest rates.3
---------------------------------------------------------------------------
    \3\ Testimony of Edward Furash, Chairman, Furash & Company, S. 1405 
Hearings, March 3, 1998.

    Removing the prohibition of the payment of interest on 
business checking accounts would also give small, community 
banks a better chance to compete. According to Cornelius 
---------------------------------------------------------------------------
Mahoney, Chairman of America's Community Bankers:

          Restrictions on [business checking accounts] make 
        community banks less competitive in their ability to 
        serve the financial services of many business 
        customers. * * * [T]he quandary is that if community 
        banks don't offer sweep accounts * * * their business 
        customers are likely to leave. The problem is that 
        sweep accounts are expensive and can be very labor 
        intensive, especially for smaller 
        institutions.4
---------------------------------------------------------------------------
    \4\ Testimony of Cornelius Mahoney, Chairman, America's Community 
Bankers, S. 1405 Hearings, March 3, 1998.

    Sweep accounts are not only labor intensive and expensive 
for banks. According to the National Federation of Independent 
Business (NFIB)--an association representing over 600,000 small 
business owners--sweep accounts impose costs on small business 
as well: 5
---------------------------------------------------------------------------
    \5\ Senator Shelby also submitted a letter dated March 2, 1998 into 
the record from the U.S. Chamber of Commerce in favor of removing the 
prohibition of interest on business checking accounts. ``* * * the U.S. 
Chamber supports your legislation to remove restrictive regulations on 
the ability of financial institutions to offer interest bearing 
checking accounts. By allowing for more open competition, your 
legislation offers an important opportunity to small business owners to 
establish a more complete relationship with their financial service 
providers.''

          We soon found that the sweep account resulted in a 
        flood of paper from the bank: each day a reconciliation 
        statement letting us know how the money had been 
        shifted around. And, because this is done via the mail, 
        there is always a two-to-three day delay in information 
        flow so we never have an accurate, up-to-the-minute 
        view of the flow of funds among our banking accounts. * 
        * * [sweep accounts] are a bookkeeping nightmare for a 
        small busi-
        ness * * * 6
---------------------------------------------------------------------------
    \6\ Testimony of Rex Hammock, Member, National Federation of 
Independent Business, S. 1405 Hearings, March 3, 1998.

    While the benefits of removing the price control seem 
evident, not all witnesses agreed. The most widely known 
opponent of the removal of the prohibition, First Union 
Corporation,7 was invited to testify on the matter, 
but chose not to appear in person. In written testimony, First 
Union Corporation, testified:
---------------------------------------------------------------------------
    \7\ See ``First Bigfoot Bank,'' Forbes, March 23, 1998, pp. 44-45. 
This article documents First Union's interest in maintaining the 
prohibition against the payment of interest on business checking 
accounts.

          Small banks could become less profitable, less 
        competitive, more susceptible to takeover and more 
        sensitive to interest rate changes and economic cycles, 
        possibly adversely impacting the safety and soundness 
        of the banking industry when the next recession 
        occurs.8
---------------------------------------------------------------------------
    \8\ Testimony of First Union Corporation, S. 1405 Hearings, March 
3, 1998. (Hereinafter ``First Union Testimony''.)

    The Committee was not convinced by this argument. In fact, 
the Independent Bankers Association of America (``IBAA'') 
surveyed it's members in 1997 and found that 71 percent of its 
members favored the payment of interest on reserves and the 
interest on business checking.9 In addition, the 
Committee received letters from the Comptroller of the 
Currency, the Chairman of the Federal Deposit Insurance 
Corporation, and the Director of Office of Thrift Supervision 
all stating that permitting the payment of interest on business 
checking accounts would not threaten the stability of the 
banking system or cause supervisory concerns, but instead, 
would improve overall institution efficiency.
---------------------------------------------------------------------------
    \9\ ``IBAA Survey on Interest-Bearing Commercial Transaction 
Accounts,'' 1997.
---------------------------------------------------------------------------
    First Union continued:

          The competitive need for an interest bearing 
        corporate product is diminishing rapidly since already 
        over 300 banks have corporate sweep account 
        capabilities and the number is rising 
        rapidly.10
---------------------------------------------------------------------------
    \10\ First Union Testimony, supra, note 8.

    The Committee also dismissed this argument since 300 banks 
represent less than three percent of all banks and thrifts 
nationwide (300/10,783=2.8%).
    Responding to concerns identified by the American Bankers 
Association and the Independent Bankers Association of America, 
such as the Year 2000 problem and repricing of services, the 
Committee did include a transition period with regard to the 
removal of the prohibition on interest on corporate demand 
deposits. Upon enactment of S. 1405, banks would be allowed to 
offer a 24-transaction reservable money market account until 
January 1, 2001 at which time the 1933 interest prohibition 
would be repealed in its entirety. Thus, starting January 1, 
2001, banks would be permitted--not mandated--to offer interest 
on business checking accounts.
    Governor Meyer of the Federal Reserve Board echoed the 
Committee's perspective on both interest on reserves and 
business checking accounts:

          These legislative proposals are important for 
        economic efficiency: Unnecessary restrictions on the 
        payment of interest on demand deposits and reserve 
        balances distort market prices and lead to economically 
        wasteful efforts to circumvent them.11
---------------------------------------------------------------------------
    \11\ Meyer Testimony, supra, note 1.

    In addition to allowing banks to offer interest on business 
checking, the Act repeals a number of outdated statutory 
mandates that do little to ensure safety and soundness or any 
other public policy goal. Specifically, Title I removes a 
number of regulatory restrictions on thrifts and their holding 
companies that will allow thrifts to compete with other 
financial service providers in a safe and sound manner. The 
bill would repeal the dated statutory mandate for liquid assets 
and give the regulator greater flexibility in establishing the 
proper liquidity requirements; this would give thrifts 
equitable treatment with banks, that do not have statutory 
liquidity requirements. Section 105 of the bill would repeal 
the current geographic restriction on thrift investments in 
---------------------------------------------------------------------------
service corporations. As one witness testified:

        section 105(a) would permit savings associations to 
        engage in a wide range of joint venture opportunities. 
        * * * including community development projects. For 
        many savings associations, this would be a more 
        efficient way of engaging in such activities and would 
        provide a benefit to communities and consumers. * * * 
        12
---------------------------------------------------------------------------
    \12\ Testimony of E. Lee Beard, President and CEO, First Federal 
Savings & Loan Association of Hazleton, testifying on behalf of 
America's Community Bankers, March 10, 1998, pp. 3-4 (Hereinafter ``ACB 
Testimony'').

    This Title also makes a number of changes that will give 
financial institution management greater flexibility in the 
day-to-day management of corporate activities. For instance, 
Section 111 of S. 1405 will give national banks greater 
discretion in establishing the size of, and the procedures for 
electing, Boards of Directors. Section 113 will allow banks to 
purchase and hold their own stock (a basic power under 
corporate law). Section 113 will also allow banks to take their 
own stock as additional collateral in ``work-out'' situations; 
this will provide lenders with greater security against default 
and can only enhance the safe and sound operations of a lender. 
The Committee believes that these existing regulatory 
limitations on such basic corporate decisions hinders 
managerial flexibility, and promotes cumbersome business 
operations. By doing this, such regulations deny shareholders 
of earnings and increase the price of financial services for 
consumers, without any countervailing public policy benefit.
    Other provisions in this Title are intended to provide 
greater discretion in corporate governance, particularly 
corporate structure reorganization such as the adoption of a 
holding company format, or the merger of affiliated 
institutions within a holding company format. The Committee 
realizes that there are legitimate public policy goals that 
require continued regulatory involvement. Accordingly, the 
provisions such as Sections 110 and 112 of this bill will 
facilitate expeditious restructuring while retaining a role for 
legitimate regulatory oversight. The Committee believes that 
management is best-positioned to make informed decisions 
regarding corporate restructuring. Clearly, management should 
be permitted to implement these decisions as cheaply and 
efficiently as possible--in such a way that both shareholders 
and customers can enjoy the full benefit of the efficiencies 
that can be achieved through restructuring.
    Finally, Title I repeals several restrictions that the 
Competitive Equality Banking Act of 1987 (CEBA) imposed on so-
called ``limited purpose'' financial institutions. When these 
restrictions were imposed, they were intended to be temporary; 
CEBA was intended as a stop-gap measure, to ensure 
``competitive equality'' until comprehensive financial 
modernization legislation could be enacted. Eleven years later, 
as Congress continues to wrestle with a myriad issues relating 
to financial modernization, the ``temporary'' restrictions 
continue to apply.13
---------------------------------------------------------------------------
    \13\ See, Sen. Rep. No.19, 100th Cong., 1st Sess. (1987) pp. 492-
494; cf., P.L. 100-86, Sec. 203.
---------------------------------------------------------------------------
    CEBA institutions have been frozen in place, operating 
under restrictive limitations on their activities. Further, any 
unintended breach of any of these restrictions triggers the 
divestiture requirements under current law. In recognition of 
the burden imposed on these institutions, Title I includes a 
number of provisions that relax the restrictions and draconian 
penalties of CEBA. The Committee believes that these provisions 
will permit the CEBA institutions to compete fairly with 
traditional financial institutions, and provide consumers with 
greater choices, and ultimately, lower prices.

Title II: Streamlining activities of institutions

    Title II of the bill makes a number of changes in the 
federal banking laws that are necessary to allow financial 
institutions to pursue new business strategies. This Title 
amends provisions that do not have significant safety-and-
soundness or consumer-protection implications, but have 
inhibited the development of new business lines or new means of 
delivering financial products. The Committee's intent in 
permitting these incremental changes in the business authority 
of various financial institutions is to enhance consumer choice 
and create greater opportunities for competition among market 
participants. The Committee believes that expanding choices and 
creating greater competition within the industry will 
ultimately benefit consumers of financial services through 
lower prices and development of products that best respond to 
the needs of consumers.
    For instance, Section 201 of the bill, which was prepared 
with the cooperation of the Office of Thrift Supervision (OTS) 
staff, will update the community development investment 
authority of thrifts to parallel the authority of national 
banks. The current provisions are outdated and inflexible, and 
minimize the opportunity for thrifts to make important 
investments in the community. Currently, Federal savings 
associations ``are limited in their ability to fully serve 
their low- and moderate-income communities.'' 14 
Director Seidman of the OTS testified that this Section would, 
``replace obsolete statutory cross-references with the same 
statutory language that currently defines the types of 
community development investments that can be made by national 
banks.'' 15
---------------------------------------------------------------------------
    \14\ Ms. E. Lee Beard, President & CEO, First Federal Bank, on 
behalf of America's Community Bankers, prepared testimony before the 
House Banking Committee, July 16, 1998.
    \15\ Testimony of Ellen Seidman, Director, Office of Thrift 
Supervision, S. 1405 Hearings, March 10, 1998.
---------------------------------------------------------------------------
    Section 203 will allow so-called ``credit card banks'' to 
offer credit cards for business-purposes. Clearly, these 
institutions have the capacity to compete in the credit card 
market, and thereby help to lower the cost of these products to 
the public. Nevertheless, these institutions have been unable 
to offer such credit cards because of the technical confines of 
the Truth In Lending Act (``TILA''), under which such cards 
qualify as ``commercial credit.''
    In connection with various types of retail loan and deposit 
programs, financial institutions have traditionally established 
relationships with what are known as ``affinity groups,'' for 
the purpose of offering the members of such groups various 
financial products and services. The affinity group's 
endorsement serves to increase the members' awareness of the 
financial institution. The exemption provided by Section 204 
will facilitate payments by lenders to affinity groups for a 
narrow range of real estate lending transactions. Only those 
``federally related mortgage loans'' (as defined in the Real 
Estate Settlement Procedures Act (``RESPA'')), for which the 
loan proceeds are not used to acquire the real property 
securing the loan, are exempt from the restrictions of Section 
8 of RESPA.
    In order to qualify for this exemption, a lender must also 
provide a direct benefit to the borrower from the endorsement. 
To be consistent with the intent of this provision, such 
benefit must be tangible, substantive and provided as part of 
the consummation of the loan agreement, either as a discount or 
reduction of settlement costs or fees or as a binding promise 
to provide some other benefit during the term of the loan. 
Other benefits that would be appropriate under this provision 
would include rate or fee reductions on other financial 
services or merchandise. All such benefits would necessarily be 
negotiated with, and approved by, the endorsing affinity group 
on behalf of its members. In general, the value of the ``direct 
financial benefit'' under this section will be dictated by 
competition in the marketplace for the endorsements from 
affinity groups.
    Section 205 clarifies the law with regard to unfair 
practices and the verification period of the Fair Debt 
Collection Practices Act (``FDCPA''), without jeopardizing any 
of the consumer protections of that Act. In addition, this 
section addresses the current conflict in law between the 
Higher Education Act and the FDCPA.

Title III: Streamlining agency actions

    The third Title of this bill is intended to streamline 
operations of various Federal financial regulators. The 
provisions in this Title will allow regulators to focus their 
energies on their primary responsibilities: that is, to ensure 
safety-and-soundness of the nation's banking systemby 
identifying, monitoring and addressing risks to the financial industry. 
This Title will eliminate redundant regulatory reports regarding topics 
such as regulatory accounting standards and the antitrust implications 
of mergers. In both these instances the law is not being altered to 
eliminate reporting requirements, but rather to do away with redundant 
reporting requirements. Changes like these will not impact meaningful 
public policy goals that these reports were intended to further. But 
they will allow regulators to focus on the achievement of these and 
other important goals and minimize wasted man hours on the preparation, 
review and approval of redundant reports.
    Section 305 eliminates the SAIF (Savings Association 
Insurance Fund) Special Reserve Fund (the Fund) that was 
established in 1996 primarily for budget-scoring purposes. This 
change is supported by the Federal Deposit Insurance 
Corporation and the Office of Thrift Supervision. Current law 
would require Congress to take the $800 million of excess 
reserves (above the statutory 1.25 percent reserve ratio) to 
fund the Special Reserve Fund. This, however, would subject 
insured institutions to the risk of significant insurance 
premium increases since the $800 million in excess funds serves 
as a buffer or cushion, should the Fund ever be drawn upon for 
failing institutions. Such a situation could, once again, lead 
to a disparity in the BIF (Bank Insurance Fund)-SAIF insurance 
premium. Congress spent a great deal of time and effort in 1996 
to address this disparity, and the Committee believes that 
situation should be avoided if at all possible.

Title IV: Miscellaneous

    Title IV's provision address Truth In Lending Act 
(``TILA'') disclosures and a number of governance issues 
relating to Federal agencies under the Committee's 
jurisdiction. Section 401 simplifies the advertisement 
requirements under truth-in-lending. The Committee recognizes 
that TILA provides important consumer protections, but also 
contains a number of onerous disclosure requirements of 
marginal use to consumers. The Committee is also cognizant of 
ongoing efforts between various stakeholders to produce a TILA/
RESPA reform package. This attempt to create a comprehensive 
harmonization of TILA and RESPA has been ongoing for several 
years with no tangible results. Nevertheless, the Committee 
does not want to disturb this process; accordingly, the 
Committee has refrained from far-reaching TILA disclosure 
modifications in this bill.
    One change that the Committee did believe deserved 
immediate attention was retained. Section 401 will simplify the 
disclosures that are required at the end of radio and 
television advertisements for consumer credit. Currently, 
advertisers are required to provide so much detailed 
information at the end of an advertisement that the disclosure 
is little more than a garbled exercise in speed-reading. 
Section 401 would allow credit advertisers, at their option, to 
provide an abbreviated disclosure of essential terms of the 
credit agreement, along with an ``1-800'' number that the 
consumer may call for more detailed information. This provision 
also establishes requirements for the 1-800 service that will 
make sure that consumers who use it will obtain complete TILA 
disclosures at no long-distance charge. The Committee believes 
that by simplifying the on-air disclosure to those basic terms 
that allow comparison shopping, and by providing the consumer 
with the opportunity to obtain further disclosure free-of-
charge and in a more deliberate manner, the consumer will 
benefit from more meaningful information. America's Community 
Bankers supports this Section testifying they ``[believe] that 
the simplicity of providing basic rate information, giving a 
toll free number, and making further information available upon 
request will significantly reduce regulatory burden of 
creditors while enhancing the consumer's ability to comprehend 
the credit product being advertised.'' 16
---------------------------------------------------------------------------
    \16\ ACB Testimony, supra, note 11.
---------------------------------------------------------------------------
    Another important provision in this Title is Section 402, 
which will raise the salaries of the entire Board of Governors 
of the Federal Reserve Board. Currently the Chairman of the 
Federal Reserve is paid less than a Presidential Cabinet Member 
and less than some of the staff at the Federal Reserve Board. 
The Committee realizes that individuals are not drawn to 
service on the Federal Reserve Board by the salary. 
Nevertheless, the Committee believes that this gesture is an 
appropriate means of acknowledging a Chairman's tremendous 
responsibility and service in what has been described as ``one 
of the world's toughest jobs.'' 17 During his tenure 
at the Federal Reserve, Chairman Greenspan has provided cool 
and deliberate guidance for our nation's economy. Realizing 
that inflation represents the single greatest threat to our 
country's long-term economic viability, Chairman Greenspan has 
dedicated a tremendous amount of time and effort to controlling 
inflation. He has provided the stability and leadership that is 
responsible for the unprecedented economic growth that the U.S. 
economy has enjoyed since the last recession ended in 
1991.18
---------------------------------------------------------------------------
    \17\ The Economist, May 9, 1998.
    \18\ See, e.g., Congressional Research Services, Current Economic 
Conditions and Selected Forecasts, CRS Report to Congress, Rep. No. 96-
963E (Gail Makinen, August 4, 1998).
---------------------------------------------------------------------------
    Section 403 of this bill will remove the condition that at 
least one member of the Federal Housing Finance Board be a 
``Community Representative.'' This condition has existed since 
the Board was created in 1989, and the Committee believes that 
it is responsible for the fifth seat on the Board going 
unfilled.

Title V: Technical corrections

    This Title is comprised of technical corrections to the 
Deposit Insurance Funds Act, Federal Deposit Insurance Act, 
Economic Growth and Regulatory Paperwork Reduction Act and the 
International Bank Act.

                      SECTION-BY-SECTION ANALYSIS

Section 101. Interest on reserves

    This provision would allow the Federal Reserve to pay 
interest on reserve balances maintained at a Federal Reserve 
bank at a rate no greater than the federal funds rate. Recent 
developments in technology (sweep accounts) have allowed banks 
to decrease their reserve deposits, which could cause an 
increase in interest rate volatility. Interest on reserves 
would decrease this potential volatility and assist the central 
bank in conducting monetary policy.

Section 102. Interest on business checking accounts

    This provision allows depository institutions to offer 
negotiable order of withdrawal accounts to all businesses as of 
January 1, 2001. Until that point in time, depository 
institutions will be allowed to make up to 24 transfers a month 
on sweep account balances. Language is also included to ensure 
that allowing interest on business checking accounts does not 
affect state law's treatment of escrow accounts.

Section 103. Repeal of savings association liquidity provision

    This section repeals the 1950 statute requiring savings 
associations to hold liquid assets in an amount no less than 
four percent to ten percent of their total demand deposits and 
borrowing payable within one year. Commercial banks and state 
savings banks are not subject to a similar requirement. The 
liquidity of these institutions is monitored through the 
examination process pursuant to flexible safety and soundness 
guidelines.

Section 104. Repeal of thrift dividend notice requirement

    This provision would repeal the statutory requirement 
imposed on savings association subsidiaries of SLHCs to provide 
the OTS with 30-days notice of the payment of any dividend. The 
current provision applies only to savings associations owned by 
SLHCs. No similar provision applies to savings associations 
controlled by individuals, bank holding companies or even 
national banks owned by holding companies.

Section 105. Reduction of regulatory requirements for thrift 
        investments in service companies

    This amendment removes the geographic and ownership 
limitations on investments in first-tier service companies and 
imposes, instead, the activity-based limitations found in OTS 
regulations. In addition, it changes the term ``service 
corporation'' to ``service company'' to make consistent with 
the change made last year in Public Law 104-208 with regard to 
banks.

Section 106. Elimination of thrift multi-state multiple holding company 
        restriction imposed on SLHCs

    Currently, a bank holding company may own thrift 
subsidiaries in separate states, but a savings and loan holding 
company may not, unless one of three exemptions is applicable. 
An SLHC can own a subsidiary out of state if it buys the thrift 
in a neighboring state and then merges it with an in-state 
subsidiary. The provision would eliminate the existing multi-
state multiple restriction imposed on thrift holding companies 
allowing them the choice of whether to merge or not to merge.

Section 107. Removal of prohibition on SLHC acquiring a non-controlling 
        interest in another SLHC or thrift

    This provision would allow a savings and loan holding 
company to acquire a five to twenty-five percent non-
controlling interest of another SLHC or savings association, 
subject to the approval of the Director of OTS.

Section 108. Repeal of deposit broker notification to FDIC

    The section simply repeals the requirement of brokers to 
file a written notice (not a filing) with the FDIC before the 
deposit broker solicits or places any deposit with an insured 
depository institution so brokers cannot mislead consumers.

Section 109. Uniform regulations governing extensions of credit to 
        executive officers

    This provision would adopt a single common regulation--
Regulation O, 12 C.F.R. Part 215--to apply to loans for 
executive officers of all insured institutions.

Section 110. Expedited procedures for certain reorganizations

    This section would expedite the reorganization of a 
national bank into a bank holding company by permitting 
national banks, with two-thirds approval of its shareholders of 
the bank and the Comptroller, to reorganize into a subsidiary 
of a bank holding company without first forming the phantom 
bank.

Section 111(a). Increase the one year term for national bank directors 
        and allow banks to have staggered board of directors

    This provision would permit national banks to elect their 
directors for terms of up to three years in length, and would 
permit these directors to be elected on a staggered basis in 
accordance with regulations issued by the OCC, so that only 
one-third of the board of directors is elected each year.

Section 111(b). Removal of upper limitation on number of board of 
        directors

    This provision would permit the Comptroller to remove the 
limitation on the number of board members, currently 25, in 
order to allow a bank more flexibility in determining the 
composition of its board. The lower limit of five would remain.

Section 112. Permit national banks to merge or consolidate with 
        subsidiaries or other nonbank affiliates

    This Section would permit a national bank, upon approval of 
the Comptroller and pursuant to regulations, to merge or 
consolidate with its subsidiaries or nonbank affiliates without 
providing for an increase in powers for the national bank.

Section 113 (a) & (b). Repeal prohibition on a national bank's 
        purchasing or holding its own shares

    This provision would repeal the prohibition on a bank 
owning or holding its stock but retain the prohibition on 
making loans or discounts on the security of the bank's own 
shares. This amendment would codify an OCC interpretation and 
eliminate any confusion about the authority of national banks 
to take legitimate corporate actions to reduce capital or 
otherwise acquire their own shares.

Section 113(c). Clarification of the Bank Holding Company Act

    This provision amends an unintended consequence of Section 
2615 of the Omnibus Consolidated Appropriations Act for FY 1997 
(P.L. 104-208), which inadvertently conflicts with another 
provision of federal law (12 U.S.C. Sec. 2279aa-4).

Section 114. Depository institution management interlocks

    Section 205(8)(A) of the Depository Management Interlocks 
Act of 1978 (DIMIA) permits a diversified savings & loan 
holding company to request the Office of Thrift Supervision to 
permit it to have on its Board an outside director of a non-
affiliated institution. This provision expands the authority of 
the OTS, so that it may approve ``dual service'' for not only 
outside directors, but also management officials, so long as it 
does not result in ``a monopoly or substantial lessening of 
competition in financial services in any part of the United 
States.''

Section 115. Modify treatment of purchased mortgage servicing rights in 
        Tier 1 capital

    The provision authorizes the appropriate Federal banking 
agencies to jointly simplify capital calculations by not 
requiring banks or thrifts to distinguish between types of 
mortgage servicing rights. This would allow regulators to value 
marketable mortgage servicing assets in capital determinations 
up to 100% of their fair market value rather than the current 
level which is limited to 90% of fair market value.

Section 116(a). Crossmarketing restriction on limited-purpose banks

    This provision would repeal the current crossmarketing 
restriction, allowing CEBA banks to crossmarket their products 
and services with the products and services of affiliates.

Section 116(b). Restriction on daylight overdrafts

    This provision would expand ``permissible overdrafts'' to 
include overdrafts incurred by affiliates that incidentally 
engage in financial services activities, if the overdraft is 
within the restrictions imposed by Section 23A and 23B of the 
Federal Reserve Act.

Section 116(c). Activities limitations

    This provision repeals the restriction which prohibited 
limited-purpose banks from engaging in activities they were not 
engaged in prior to March 5, 1987. Limited-purpose banks would 
still be prohibited from both accepting demand deposits and 
engaging in the business of commercial lending (i.e. a limited-
purpose bank can do one or the other, but not both). This 
Section also clarifies that a limited purpose bank may acquire 
without limit the same type of consumer assets that it can 
originate.

Section 117. Divestiture requirement

    This Section would modify the provision of CEBA which 
requires divestiture of a limited-purpose bank in the event the 
bank or its owner fails to remain qualified for the CEBA 
exception. The amendment allows limited-purpose bank owners to 
avoid divestiture by promptly correcting the violation (within 
180 days of receipt of notice from the FRB) that would 
otherwise lead to divestiture and implementing procedures to 
prevent similar violations in the future.

Section 201. Updating the authority for thrift community development 
        investments

    This provision would replace obsolete language with regard 
to the investment of a savings association in real estate or 
loans secured by real estate in concordance with title I 
(Community Development Block Grant program--CDBG) of the 
Housing and Community Development Act of 1974, with the same 
statutory language that currently defines the types of 
community development investments that can be made by national 
banks and state member banks.

Section 202. Repeal Section 11(m) of the Federal Reserve Act

    Repeals the limitation on the amount of stocks and bonds 
member banks may hold as collateral for a loan. Also eliminates 
arbitrary 15 percent capital limit under current law.

Section 203. Business purpose credit extensions

    This provision would make clear that the prohibition on 
commercial lending by credit card banks does not include the 
use of credit card accounts for business purposes.

Section 204. Affinity groups

    This provision clarifies that affinity arrangements and co-
branding arrangements with regard to non-purchase money 
transactions are legal if the consumer receives a direct 
financial benefit from the endorsement.

Section 205(a). Unfair practices

    Provides for collection on bad checks, if it is 
``reasonable, does not exceed $25, results from the collection 
of a check returned for insufficient funds, and notice of the 
charge was conspicuously posted * * *.''

Section 205(b). Clarification of allowable collection activities during 
        the verification period

    This provision codifies aspects of an FTC interpretation 
and analyses rendered by Federal Courts that if a debtor has 
not requested verification of the debt or notified the 
collector of a dispute, the collector may attempt to collect a 
debt during that 30-day period, as long as the activities and 
communications do not overshadow or contradict the consumer 
information provided in law.

Section 205(c). Amendment to Fair Debt Collections Practices Act 
        (FDCPA) to address conflicts with the Higher Education Act 
        (HEA)

    Exempts a ``prejudgment administrative wage garnishment 
permitted under section 488A of the Higher Education Act'' from 
the definition of communication with regard to the collection 
of any debt.

Section 206. Restriction on acquisitions of other insured institutions

    This provision would allow limited-purpose banks to acquire 
insured institutions which have Prompt Corrective Action 
capital categories of ``undercapitalized'' or lower.

Section 207. Mutual holding companies

    This section includes numerous technical changes to the 
mutual holding company provisions of the Home Owners' Loan Act, 
as well as some clarifying language. It specifically authorizes 
a mid-tier stock holding company as currently permitted by 
several states. It would facilitate capital raising by 
permitting the subsidiary stock holding company or the 
subsidiary association to issue one or more classes of voting 
stock, and build in more flexibility by allowing shares 
authorized at the time of the initial mutual holding company 
formation to be subsequently issued. This section does not 
amend or alter the applicability of the Federal securities 
laws.

Section 208. Call report simplification

    This provision calls for: the modernization of the call 
report filing and disclosure system; the uniformity of reports 
and simplification of instructions; and the review of the call 
report schedule. The exact same provision was included in 
Section 307 of the Riegle Community Development and Regulatory 
Improvement Act of 1994.

Section 301. Elimination of further development of the supplemental 
        disclosure of fair market value of assets and liabilities as 
        duplicative

    This section would clarify that banking agencies need no 
longer pursue further development of the supplemental 
disclosure method. Even so, Section 36 of FDIA and its 
supporting regulations provide agencies with discretion to seek 
additional information in regulatory reports and annual reports 
regarding fair market value.

Section 302. Creditor fairness/payment of interest in receiverships 
        with surplus funds

    This provision gives the FDIC the authority to establish a 
uniform interest rate with regard to receiverships.

Section 303. Amends the reporting requirement of differences in 
        accounting standards.

    Amends the requirement for each agency to produce an Annual 
Report on ``Agency Differences in Reporting Capital Ratios and 
Related Accounting Standards.'' Instead, this provision directs 
the Federal banking agencies to jointly produce one report.

Section 304. Streamlining of Bank Merger Act application filing 
        requirements

    This provision eliminates the requirement that each federal 
banking agency request a competitive factors report from the 
other three federal banking agencies as well as the Attorney 
General. The proposed provision would decrease that number to 
two, with the AG continuing to be required to consider the 
competitive factors of each merger transaction. The provision 
also requires the responsible banking agency to take into 
account appropriate competitive measures when considering the 
competitive effect of mergers.

Section 305. Elimination of SAIF and DIF Special Reserves

    This provision would eliminate the need for the 
establishment of a SAIF ``special reserve.'' Beginning in 1999, 
the FDIC will be required to establish a SAIF special reserve 
equal to that amount of SAIF funds that is above 1.25% on 
January 1, 1999. The FDIC has suggested that this could mean an 
amount of nearly $800 million set aside for a special reserve, 
yet, none of these funds could be used in calculating the 
reserve to deposit ratio of the SAIF.

Section 401. Amend TILA requirements for credit advertising

    Provide a uniform rule for all credit products advertised 
on either radio or TV. As anoptional alternative to current 
disclosure requirements, credit advertisements in those media would 
state basic rate information, give a toll free number, and make further 
information available upon request.

Section 402. Positions of Board of Governors of Federal Reserve System 
        on the executive schedule

    This provision simply raises the pay of the Chairman of the 
Federal Reserve Board from Level II of the Executive Schedule 
to Level I (approx. $14,800) and the Board Members from Level 
III to Level II (approx. $10,500).

Section 403. Federal Housing Finance Board position

    This section eliminates the Consumer Representative 
requirement for a member of the Board of Directors, since no 
such position has ever been filled. In doing so, this provision 
does not reduce the required number of Directors, merely this 
specific requirement.

Section 404. CRA flexibility for credit card banks

    This provision would permit credit card banks to invest in, 
or directly offer, residential mortgage loans, community 
development loans, and other loans to help meet the credit 
needs of low and moderate income persons to provide credit card 
banks the flexibility needed to meet their obligations to CRA. 
These specific loans are limited to one percent of the loan 
portfolio.

Section 501. Technical error in DIFA amendment

    Section 2707 amends section 7(b)(2) of the FDIA to provide 
that assessment rates for SAIF members may not be less than 
assessment rates for BIF members. It currently begins as 
follows: ``Section 7(b)(2)(C) of the Federal Deposit Insurance 
Act (12 U.S.C. 1817 (b)(2)(E), as redesignated by section 
2704(d)(6) of this subtitle) is amended--''. The proper 
reference is to section 7(b)(2)(E) of the FDIA.

Section 502. Conform rules for continuation of deposit insurance for 
        member banks converting charters

    Section 8(o) of the Federal Deposit Insurance Act (FDIA) 
provides for termination of deposit insurance when a member 
bank ceases to be a member of the Federal Reserve System, 
subject to an exception for certain mergers or consolidations. 
Prior to FIRREA, section 4(c) and (d) were referenced in a 
single subsection: subsection (b). In FIRREA, Congress divided 
former section 4(b) into two separate sections, 4(c) and 4(d), 
but neglected to change the reference in section 8(o). Later, 
in a technical amendment designed to correct the error, 
Congress amended section 8(o) to include an exception for 
section 4(d). This incomplete amendment was insufficient to 
encompass the original intent of section 8(o) because no 
exception was included for section 4(c), which provides for 
state-to-federal and federal-to-state conversions. Providing a 
technical amendment to section 8(o) to include a cross 
reference to section 4(c) would remedy this omission and 
restore the original intent.

Section 503(a). Waiver of the citizenship requirement for national bank 
        directors

    This provision provides that the Comptroller may waive the 
U.S. citizenship requirement for up to a minority of a national 
bank's directors. The Economic Growth and Regulatory Paperwork 
Reduction Act (EGRPRA) inadvertently deleted the long-standing 
authority of the Comptroller to waive the citizenship 
requirement for up to a minority of directors of national banks 
that are subsidiaries or affiliates of foreign banks.

Section 503(b). Technical amendment to section 11 which currently 
        prohibits the Comptroller from having an interest in any 
        national bank ``issuing national currency.''

    This provision simply updates section 11 to reflect that 
national banks no longer issue national currency, while 
maintaining the provision that prohibits the Comptroller from 
owning interest in the national banks they regulate.

Section 503(c). Technical amendment to repeal section 51 (obsolete 
        minimum level of capital)

    This provision repeals Section 5138 of the Revised Statutes 
(first enacted in 1864), which imposes minimum capital 
requirements for national banks. This minimum capital 
requirement (ranging from $50,000 to $200,000) is obsolete, 
since Congress granted the Federal banking agencies the 
regulatory authority to establish minimum capital requirements 
in 1983.

Section 504. Conforming change to the International Bank Act

    Allows branches and agencies of foreign banks that satisfy 
the asset test imposed on domestic banks to be examined on an 
18-month cycle instead of the 12-month cycle.

                      REGULATORY IMPACT STATEMENT

    In compliance with paragraph 11(b) of the rule XXVI of the 
Standing Rules of the Senate, the Committee makes the following 
statement regarding the regulatory impact of the bill.
    S. 1405 reduces the regulatory burdens on financial 
institutions by eliminating and streamlining various regulatory 
and statutory requirements and prohibitions. In addition, many 
provisions of the bill would lower the cost of regulation by 
reducing the regulatory hurdles that hinder efficient corporate 
governance.

                        CHANGES IN EXISTING LAWS

    In the opinion of the Committee, it is necessary to 
dispense with the requirements of paragraph 12 of the rule XXVI 
of the Standing Rules of the Senate in order to expedite the 
business of the Senate.

                        COST OF THE LEGISLATION

    Senate rule XXVI, section 11(b) of the Standing Rules of 
the Senate, and section 403 of the Congressional Budget 
Impoundment and Control Act, require that each committee report 
on a bill containing a statement estimating the cost of the 
proposed legislation, which has been prepared by the 
Congressional Budget Office. The estimate is as follows:

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, February 25, 1999.
Hon. Phil Gramm,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the Financing 
Regulatory Relief and Economic Efficiency Act of 1999.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Carolyn 
Lynch (for revenues), Mary Maginniss (for federal spending), 
and Patrice Gordon (for the private-sector impact).
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

Financial Regulatory Relief and Economic Efficiency Act of 1999

    Summary: The Financial Regulatory Relief and Economic 
Efficiency Act of 1999 (FRREE) would make numerous changes to 
the relationship between financial institutions and the federal 
agencies that are responsible for regulatory and monetary 
policy. Most significantly, the bill would permit the Federal 
Reserve System to pay interest on reserves held on deposit at 
the Federal Reserve, and it would repeal the provision of law 
that prohibits depository institutions from paying interest on 
commercial demand deposits. The bill also would eliminate the 
requirement that the Federal Deposit Insurance Corporation 
(FDIC) retain a ``special reserve'' for the Savings Association 
Insurance Fund (SAIF), and it would raise the pay of the 
Chairman and six other members of the Board of Governors of the 
Federal Reserve System.
    CBO estimates that the bill would reduce federal revenues 
by $661 million over the period from 2000 through 2004. 
Consequently, pay-as-you-go procedures would apply to the 
legislation. The provisions regarding interest on reserves and 
interest on commercial demand deposits account for the 
budgetary effect. The provisions to remove the requirement that 
the FDIC maintain a separate reserve balance for the SAIF and 
to raise the pay for the Board of Governors of the Federal 
Reserve System are estimated to have an insignificant budgetary 
effect. CBO also estimates that no significant budgetary 
effects would result from the remaining provisions, which 
largely clarify or streamline certain rules and procedures.
    FRREE contains no intergovernmental mandates as defined in 
the Unfunded Mandates Reform Act (UMRA) and would have no 
significant effects on the budgets of state, local, or tribal 
governments. FRREE contains no private-sector mandates as 
defined by UMRA. The bill would change existing laws in ways 
that could lower the costs to depository institutions of 
complying with existing federal requirements.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of FRREE is shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                                   By fiscal years, in millions of dollars
                                                           -----------------------------------------------------
                                                                                                          2005-
                                                              2000     2001     2002     2003     2004     2009
----------------------------------------------------------------------------------------------------------------
                                              CHANGES IN REVENUES a

Interest on Required Reserves and Business Demand Deposits     -214     -161      -91      -95     -100     -571
----------------------------------------------------------------------------------------------------------------
a The bill would also affect direct spending, but by amounts of less than $500,000 a year.

    The major budgetary effect of FRREE would be a decrease in 
the payment of profits from the Federal Reserve System to the 
Treasury. The Federal Reserve remits its profits to the 
Treasury, and those payments are classified as governmental 
receipts, or revenue, in the federal budget. Any additional 
income or costs to the Federal Reserve, therefore, can affect 
the federal budget. The Federal Reserve's largest source of 
income is interest from its holdings of Treasury securities. In 
effect, the Federal Reserve invests in Treasury securities the 
reserve balances and issues of currency that comprise the bulk 
of its liabilities. Since the Federal Reserve pays no interest 
on reserves or currency, and the Treasury Department pays the 
Federal Reserve interest on its security holdings, the Federal 
Reserve earns profits.
    By allowing the Federal Reserve to pay interest on 
reserves, the bill, according to CBO's analysis, would reduce 
the Federal Reserve's profits and thereby reduce federal 
revenues by $661 million over the period from 2000 to 2004. The 
estimate includes an anticipated response by depository 
institutions and depositors that would increase the amount of 
demand deposits and, therefore, required reserves. CBO 
estimates that this response would reduce, but not eliminate, 
the expected loss in federal revenues.
    Basis of estimate: The estimates assume that the provisions 
would become effective at the beginning of fiscal year 2000, 
unless otherwise specified.

Paying interest on reserve balances

    Paying interest on the reserves that depository 
institutions hold on deposit at the Federal Reserve (``required 
and excess reserve balances'') would shift profits from the 
Federal Reserve to depository institutions and reduce 
government receipts. The budgetary effect can be divided into 
two components. First, the bill would cause the Federal Reserve 
to pay interest on the level of its required reserve balances 
expected under current law, reducing its net income and, 
therefore, governmental receipts. The reduced receipts would be 
offset only partially by increased corporate income tax 
receipts from the higher profits of depository institutions. 
Second, the payment of interest on reserves held at the Federal 
Reserve and on commercial demand deposits held at depository 
institutions would cause demand balances at depository 
institutions to increase. That increase would raise the level 
of reserve balances at the Federal Reserve, which would invest 
them at a rate higher than it would pay on them. This change in 
projected reserves would increase governmental receipts on net, 
but would only partially offset the loss caused by the payment 
of interest on reserves projected under current law.

                             REVENUE EFFECT OF ALLOWING INTEREST ON RESERVE BALANCES
----------------------------------------------------------------------------------------------------------------
                                                                   By fiscal years, in millions of dollars
                                                           -----------------------------------------------------
                                                                                                          2005-
                                                              2000     2001     2002     2003     2004     2009
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Federal Reserve Revenue...................................     -285     -215     -121     -127     -133     -761
Income Tax Revenue........................................       71       54       30       32       33      190
                                                           -----------------------------------------------------
      Total, Revenue Effect...............................     -214     -161      -91      -95     -100     -571
----------------------------------------------------------------------------------------------------------------

    Interest Payments on Reserves Projected Under Current Law. 
Because depository institutions currently do not earn a return 
on reserve balances, they have an incentive to minimize such 
balances. Required reserve balances measured almost $30 billion 
at the end of 1993, but have since fallen sharply to about $8 
billion today. The widely-reported expansion of consumer sweep 
accounts has caused this decline. In typical sweep accounts, 
banks shift their depositors' funds from demand deposits, 
against which reserves are required, into other depository 
accounts, against which no reserves are required. The banks 
shift the funds back to the demand deposit accounts the next 
business day, or when needed by thedepositor. Sweep accounts 
for business demand deposits have existed in various forms since the 
early 1970s and have had the same effect of reducing required reserves. 
Recent advances in computer technology have now made the shifting of 
funds feasible for many consumer (``retail'') accounts as well. Under 
current law, CBO expects the expansion of retail sweep accounts to 
continue and, based on its January 1999 baseline, required reserve 
balances to decline further to about $5.0 billion by 2002. Thereafter, 
CBO projects them to rise gradually with growth in the economy.
    FRREE would permit the Federal Reserve to pay interest on 
reserve balances. The Federal Reserve would be allowed to 
choose the interest rate, although the rate chosen could not 
exceed the general level of short-term interest rates. The 
Federal Reserve has indicated that, given the authority, it 
would pay interest on required reserve balances and it would 
choose an interest rate near the key short-term rate, the 
federal funds rate. The rate likely would be roughly 10 basis 
points lower than the federal funds rate to account for the 
lack of risk. The Federal Reserve has indicated, however, that 
it would choose not to pay interest on excess reserves unless 
required reserve balances fell to such a low level that 
interest on excess reserves was needed in order to build 
reserves. CBO assumes, therefore, that the Federal Reserve 
would pay interest only on required reserves, at a rate near 
the federal funds rate. Based on its January 1999 baseline 
assumptions, CBO projects the federal funds rate to average 
about 4.75 percent during the 10-year period from 2000 through 
2009. CBO assumes that the payment of interest on reserves 
would start early in fiscal year 2000. CBO projects that the 
bill would cause the Federal Reserve to pay interest to 
depository institutions of about $325 million in 2000 on the 
$7.0 billion of required reserve balances expected under 
current law. Such interest payments would decline to about $280 
million in 2001 and $230 million in 2002 because of lower 
reserve balances. Over the period from 2000 through 2004, such 
interest payments would total about $1.3 billion. Those 
payments would reduce the profits of the Federal Reserve--and 
thus its payment to the Treasury--by the same amount.
    Because receipts of interest by depository institutions 
presumably would increase their profits by the same amount that 
the Federal Reserve's profits declined, overall profits in the 
economy would remain unchanged. Assuming that depository 
institutions face a marginal tax rate on corporate income of 25 
percent, we estimate that corporate income tax receipts would 
increase by about $80 million in 2000 and $330 million through 
2004 as a result of the additional interest income. That 
increase in receipts would offset one-quarter of the reduction 
in governmental receipts from reduced Federal Reserve profits. 
Thus, the net revenue loss to the federal government from the 
interest payments with no change in projected reserves would be 
about $245 million in fiscal year 2000 and approximately $1.0 
billion over the period form 2000 through 2004.
    It is possible that, instead of retaining the additional 
interest income, depository institutions would pass some of the 
increased profits through to their businesses and consumer 
customers by raising interest rates on deposits or lowering 
rates on loans. If a complete passthrough did occur, then the 
customers--not the depository institutions--would accrue the 
income and pay the additional taxes. The increase in income tax 
revenues would be roughly similar to that estimated without 
such a passthrough assumption.
    Projected Impact of the Bill on the Volume of Reserves. If 
the Federal Reserve paid interest on required reserve balances 
and depository institutions were allowed to pay interest on 
business demand deposits, there would be a second budgetary 
effect that would reduce--but not eliminate--the net revenue 
loss from the payment of interest. In particular, based on a 
survey by the Board of Governors of the Federal Reserve System, 
we would expect reserve balances to increase because depository 
institutions would close a significant share of their retail 
and business sweep accounts and, as a result, maintain a higher 
level of required reserves. By doing so, the institutions could 
eliminate the costs of maintaining the sweep accounts and 
receive a return on their required reserves. However, closing 
the sweep accounts could reduce the earnings of banks because 
the return on required reserves--approximately the federal 
funds rate--likely would be lower than what they could receive 
with free use of the funds from the sweep accounts.
    CBO assumes that, by 2002, depository institutions would 
eliminate 30 percent of both retail and business sweep accounts 
currently in existence, and half of those that otherwise would 
be established. Although FRREE would not permit the payment of 
interest on business demand deposits until January 1, 2001, the 
bill would allow businesses to deposit funds in a new money 
market account (MMDA) upon enactment of the bill through 
December 31, 2000. Depositors in those accounts would receive 
interest and be permitted up to 24 transactions in any month. 
Because reserve requirements would also apply to those 
accounts, they would be similar in many ways to interest-
bearing demand deposits. Despite the similarities, during this 
transition period CBO assumes a slower rate of closing of 
business sweep accounts than if interest were immediately 
allowed on business demand deposits. As a result of the 
closings of retail and business sweep accounts, demand deposits 
on which required reserves are calculated would increase at 
depository institutions. CBO therefore projects that required 
reserve balances would increase above the level expected under 
current law, by about $10 billion in 2001 and $19 billion by 
2004.
    Although the Federal Reserve would pay interest on the 
added reserves at approximately the federal funds rate, it 
would invest the reserves in Treasury securities, earning a 
rate of return in excess of the federal funds rate by an amount 
estimated at 0.65 of a percentage point. As a result of the 
rate differential, the Federal Reserve would generate 
additional profits of about $450 million through 2004 and 
return them to the Treasury as governmental receipts. Other 
corporate profits, including those of the firms that generate 
the computerized sweep accountsoftware and the depository 
institutions, would decline on net, however, by the same amount as the 
increase in the Federal Reserve's profits. (Again, overall profits in 
the economy would be unchanged.) The reduced profits of corporations 
would cause corporate income tax receipts to fall, assuming the same 
marginal tax rate of 25 percent, by about $115 million through 2004. 
The overall net effect of the added reserves would be to increase 
governmental receipts by about $30 million in 2000 and $340 million 
over the 2000-2004 period. This effect, therefore, offsets about 35 
percent of the five-year revenue loss estimated to occur if there were 
no change in projected reserves.
    The overall estimated budgetary effect of the provisions 
allowing interest on reserve balances and interest on 
commercial demand deposit accounts is a reduction in revenues 
of $214 million in 2000 and $661 million over the 2000-2004 
period. Over the period from 2005 through 2009, the overall 
revenue loss would total $571 million, making the 10-year 
revenue loss slightly more than $1.2 billion.

Special Reserve for SAIF

    The bill would repeal the requirement for the Savings 
Association Insurance Fund to retain a special reserve fund. 
CBO expects that the cost of that repeal would total less than 
$500,000 in any year.
    The Deposit Insurance Funds Act of 1996 required the 
Federal Deposit Insurance Corporation to set aside, on January 
1, 1999, all balances in the SAIF in excess of the required 
reserve level of $1.25 per $100 of insured deposits. The 
reserve funds become available to pay for losses in failed 
institutions only if the SAIF's reserve balance subsequently 
falls below 50 percent of the required reserve level, and the 
FDIC determines that it is expected to remain at that level for 
a year.
    In January 1999, the FDIC allocated $1 billion of the 
SAIF's balances to the special reserve. CBO's baseline assumes 
administrative costs and thrift failures will remain 
sufficiently low to avoid raising assessment rates on SAIF-
insured institutions through 2004. We expect that the SAIF's 
fund balances of about $10 billion will continue to earn 
interests, and that the fund's ratio of reserves to insured 
deposits will climb each year, reaching over 1.4 percent by 
2004.
    Although CBO's baseline estimates do not assume that the 
cost of thrift failures in any year would exceed the net 
interest earned by the SAIF, unanticipated thrift failures 
could result in a drop of the SAIF's reserve ratio below 1.25 
percent. The baseline reflects CBO's best judgment as to the 
expected value of possible losses during a given year, but 
annual losses will likely vary from the levels assumed in the 
CBO baseline. Thus, some small probability exists that thrift 
failures could increase sufficiently to drive the reserve ratio 
below the required level of 1.25 percent, but not so low as to 
trigger use of the special reserve.
    When the balance of an insurance fund dips below the 
required ratio, the FDIC is forced to increase assessments for 
deposit insurance to restore the fund balance to the required 
level. Thus, if thrift losses were to exceed baseline estimates 
by a significant amount, we would expect the FDIC to increase 
insurance rates in order to maintain the SAIF's fund balance. 
Eliminating the special reserve would add to the fund balances 
and would make it less likely that the FDIC would have to raise 
insurance premiums. The probability that this change would 
affect premium rates is quite small, however, and therefore CBO 
expects that the cost of forgone deposit insurance premiums 
that could result from eliminating the special reserve would 
total less than $500,000 in any year.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. CBO 
estimates that FRREE would reduce receipts by $1,232 million 
over the period from 2000 through 2009, as shown in the 
following table. All of the effect on receipts is caused by the 
provisions authorizing the Federal Reserve to pay interest on 
required reserves and depository institutions to offer business 
demand deposit accounts. For the purposes of enforcing pay-as-
you-go procedures, only the effects in the current year, the 
budget year, and the succeeding four years are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    By fiscal years, in millions of dollars--
                                                       -------------------------------------------------------------------------------------------------
                                                         1999     2000     2001     2002     2003     2004     2005     2006     2007     2008     2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays....................................       0        0        0        0        0        0        0        0        0        0        0
Changes in receipts...................................       0     -214     -161      -91      -95     -100     -104     -109     -114     -119     -125
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The budget excludes from pay-as-you-go calculations 
expenses associated with maintaining the deposit insurance 
commitment. CBO believes that the costs related to eliminating 
the SAIF's special reserves would not qualify for that 
exemption and thus would count for pay-as-you-go purposes. We 
estimate that the increase in cost resulting from the 
possibility that SAIF will lose future premium income would be 
less than $500,000 annually.
    Estimated impact on State, local, and tribal governments: 
FRREE contains no intergovernmental mandates as defined in UMRA 
and would have no significant effects on the budgets of state, 
local, or tribal governments.
    Estimated impact on the private sector: Many provisions in 
FRREE would change existing laws in ways that could lower the 
costs to depository institutions of complying with existing 
federal requirements. The bill would also authorize the Federal 
Reserve to pay interest on reserve balances held on deposit at 
the Federal Reserve. In addition, the bill would authorize the 
Board of Governors of the Federal Reserve System to prescribe 
regulations concerning the responsibilities of correspondent 
banks that maintain balances at the Federal Reserve on behalf 
of other institutions. (Commercial banks, Federal Home Loan 
Banks, and corporate credit unions, for example, serve as 
correspondent banks for many depository institutions that are 
not members of the Federal Reserve.)
    Based on information provided by the Board of Governors of 
the Federal Reserve System, CBO expects the Federal Reserve 
would not use its authority to issue regulations unless 
problems arose in the crediting and distribution of interest 
earnings. Thus, this provision would not impose a private-
sector mandate as defined by UMRA. If the Federal Reserve 
determined a rule was necessary, it would most likely require 
correspondent banks to pass the interest earnings back to the 
institutions for which they maintain required balances at the 
Federal Reserve. The cost to the correspondent banks of 
complying with such a rule would be negligible.
    Estimate prepared by: Federal Revenues: Carolyn Lynch. 
Federal Spending: Mary Maginniss. Impact on the Private Sector: 
Patrice Gordon.
    Estimate approved by: Tom Woodward, Assistant Director for 
Tax Analysis. Robert A. Sunshine, Deputy Assistant Director for 
Budget Analysis.

                                
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