House Report 109-356 - FINANCIAL SERVICES REGULATORY RELIEF ACT OF 2005

[House Report 109-356]
[From the U.S. Government Publishing Office]

109th Congress Rept. 109-356
HOUSE OF REPRESENTATIVES
2d Session Part 2

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FINANCIAL SERVICES REGULATORY RELIEF ACT OF 2005

_______

February 16, 2006.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed

_______

Mr. Sensenbrenner, from the Committee on the Judiciary, submitted the
following

R E P O R T

[To accompany H.R. 3505]

[Including cost estimate of the Congressional Budget Office]

The Committee on the Judiciary, to whom was referred the
bill (H.R. 3505) to provide regulatory relief and improve
productivity for insured depository institutions, and for other
purposes, having considered the same, report favorably thereon
with an amendment and recommend that the bill as amended do
pass.
The amendment adopted by this committee is identical to the
text reported by the Committee on Financial Services shown in
their report filed December 17, 2005 (Rept. 109-356, Part 1).

TABLE OF CONTENTS

Page
The Amendment.................................................... 1
Purpose and Summary.............................................. 2
Background and Need for the Legislation.......................... 2
Hearings......................................................... 4
Committee Consideration.......................................... 4
Vote of the Committee............................................ 4
Committee Oversight Findings..................................... 4
New Budget Authority and Tax Expenditures........................ 4
Congressional Budget Office Cost Estimate........................ 4
Performance Goals and Objectives................................. 12
Constitutional Authority Statement............................... 12
Section-by-Section Analysis and Discussion....................... 12
Changes in Existing Law Made by the Bill, as Reported............ 15

The Amendment

The amendment adopted by this committee is identical to the
text reported by the Committee on Financial Services shown in
their report filed December 17, 2005 (Rept. 109-356, Part I).

Purpose and Summary

As reported by the Committee on the Judiciary, H.R. 3505,
the ``Financial Services Regulatory Relief Act of 2005,'' is
intended to alter or eliminate statutory banking provisions in
order to reduce the growing regulatory burden on insured
depository institutions, improve their productivity, and to
make needed technical corrections to current law. H.R. 3505
contains a broad range of constructive provisions that, taken
as a whole, will allow banks and other depository institutions
to devote more resources to the business of lending to
consumers and less to the bureaucratic maze of compliance with
outdated and unneeded regulations. Reducing the regulatory
burden on financial institutions lowers the cost of credit and
will help restore vibrancy to the national economy.

Background and Need for the Legislation

On November 16, 2005, the Committee on Financial Services
reported H.R. 3505, the ``Financial Services Regulatory Relief
Act of 2005.'' \1\ The bill was sequentially referred to the
Committee on the Judiciary for a period ending not later than
December 31, 2005. On December 31, 2005, the sequential
referral was extended for a period ending not later than
February 3, 2006, and later extended for a period ending not
later than February 24, 2006. The sections within the
jurisdiction of the Committee on the Judiciary pertain to the
operation of the Federal courts, criminal law enforcement, and
the regulation of the banking industry as it pertains to
antitrust. This legislation is substantially similar to H.R.
1375, the ``Financial Services Regulatory Relief Act of 2003,''
which was reported from the Committee on the Judiciary last
Congress.\2\
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\1\ See H.R. Rep. No. 109-356, Part I (2005).
\2\ See H.R. Rep. No. 108-152, Part II, (2003).
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Congress has not passed structural reforms to America's
banking industry since the Financial Institutions Reform,
Recovery and Enforcement Act (FIRREA) was enacted in 1989. At
that time, the national banking industry and the broader
economy were recovering from a savings and loan crisis that
undermined public confidence in America's financial
institutions. As a result, Congress enacted FIRREA to help
restore the integrity and reliability of the banking industry.
H.R. 3505 addresses many shortcomings in that law. For example,
economic analysts have estimated that the annual cost of
compliance with various State and Federal banking regulations
is nearly $36 billion. While effective regulation of the
financial services industry is central to the preservation of
public trust in financial institutions, excessive
regulationundermines competition and consumer choice, results in higher
service fees for consumers, and stifles innovation among competing
institutions.
H.R. 3505 provides the following regulatory improvements
for national banks: (1) removes the prohibition on national and
State banks expanding across State lines by opening branches;
(2) allows the use of subordinated debt instruments to meet
eligibility requirements for national banks to benefit from
subchapter S tax treatment; (3) eliminates duplicative and
costly reporting requirements on banks regarding lending to
bank officials; (4) changes the exemption from the prohibition
on management interlocks for banks in metropolitan statistical
areas from $20 million in assets to $100 million; and (5)
streamlines bank merger application regulatory requirements.
The legislation provides the following regulatory
improvements for savings associations: (1) gives savings
associations parity with banks with respect to Securities and
Exchange Commission (SEC) broker-dealer and investment adviser
registration requirements; (2) removes auto lending and small
business lending limits and expands business lending limit for
Federal thrifts; (3) allows Federal thrifts to merge with one
or more of their non-thrift subsidiaries or affiliates, as
national banks; (4) increases the aggregate limit on commercial
real estate loans by Federal thrifts from 400 to 500 percent of
capital; and (5) gives Federal thrifts the same authority as
national and State banks to make investments primarily designed
to promote community development.
H.R. 3505 provides the following regulatory improvements
for credit unions: (1) allows privately insured credit unions
to apply for membership to the Federal Home Loan Bank system;
(2) expands the investment authority of Federal credit unions;
(3) permits offering of check cashing and money transfer
services to eligible members; (4) increases the limit on
investment by Federal credit unions in credit union service
organizations from 1 percent to 3 percent of shares and
earnings; (5) raises the general limit on the term of Federal
credit union loans from 12 to 15 years; and (6) allows for
expedited consideration of credit union mergers.
In addition, H.R. 3505 provides the following regulatory
improvements for Federal financial regulatory agencies: (1)
provides agencies the discretion to adjust the examination
cycle for insured depository institutions to use agency
resources in the most efficient manner; (2) increases from $250
million to $1 billion the asset size of well-capitalized, well-
managed banks eligible for an 18-month exam schedule and allows
banks with less than $1 billion in assets to file short-form
call reports; (3) authorizes the agencies to share confidential
supervisory information concerning an examined institution; (4)
modernizes agency recordkeeping requirements to allow use of
optically imaged or computer scanned images; and (5) clarifies
that agencies may suspend or prohibit institution-affiliated
parties charged with certain crimes from participation in the
affairs of any depository institution and not only the
institution with which the individual is or was associated.
H.R. 3505 also addresses some financial institutions'
concerns regarding duplicative and burdensome anti-money
laundering requirements. Title VII seeks to make a number of
changes--some statutory and others directing swift regulatory
changes--to balance law enforcement's needs to prevent
terrorist financing and money laundering with the industry's
very real concerns about excessive burdens. The bill
streamlines the process by which legitimate businesses with
large cash-based operations may be exempted from certain
requirements to file ``currency transaction reports'' (CTRs) on
``seasoned customers,'' and directs the Secretary of the
Treasury to prescribe regulations under which the filing
institution may retain the exemption if the institution is
acquired or merged. The bill also contains provisions to ease
or eliminate inconsistent or duplicative requirements to file
Suspicious Activity Reports (SARs), and directs the Secretary
to devise computer-based methods of filing required reports
electronically.
These improvements will allow financial institutions to
devote more resources to the business of lending to consumers
and less to compliance with outdated and unneeded regulations.
Reducing the regulatory burden will serve to lower credit costs
for consumers and help invigorate the national economy.

Hearings

The Committee on the Judiciary held no hearings on H.R.
3505.

Committee Consideration

On December 17, 2005, the House Committee on the Judiciary
received a sequential referral of H.R. 3505. On February 15,
2006, the Committee met in open session and ordered favorably
reported the bill H.R. 3505 to the full House by voice vote, a
quorum being present.

Vote of the Committee

In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee notes that there
were no recorded votes during the Committee consideration of
H.R. 3505.

Committee Oversight Findings

In compliance with clause 3(c)(1) of rule XIII of the Rules
of the House of Representatives, the Committee reports that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.

New Budget Authority and Tax Expenditures

Clause 3(c)(2) of rule XIII of the Rules of the House of
Representatives is inapplicable because the provisions of this
legislation within the jurisdiction of the Judiciary Committee
do not provide new budgetary authority or increased tax
expenditures.

Congressional Budget Office Cost Estimate

In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, the Committee sets forth, with
respect to the bill, H.R. 3505, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act of
1974:
February 16, 2005.
Hon. F. James Sensenbrenner Jr.,
Chairman, Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3505, the
Financial Services Regulatory Relief Act of 2005.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Kathleen
Gramp (for federal costs), Pam Greene (for revenues), Sarah
Puro (for the state and local impact), and Judith Ruud (for the
private-sector impact).
Sincerely,
Donald B. Marron,
Acting Director.
Enclosure.

H.R. 3505--Financial Services Regulatory Relief Act of 2005

Summary: H.R. 3505 would affect the operations of financial
institutions and the agencies that regulate them. Some
provisions would address specific sectors: national banks could
more easily operate as S corporations or adopt other
alternative organizational structures; thrift institutions
would be given some of the same investment, lending, and
ownership options available to banks; credit unions would have
new options for investments, lending, mergers, and leasing
federal property; and certain privately insured credit unions
could become members of the Federal Home Loan Bank system. The
bill would provide the Federal Deposit Insurance Corporation
(FDIC) with new enforcement authority and modify regulatory
procedures governing certain types of transactions. It also
would give financial regulatory agencies more flexibility in
sharing data, retaining records, and scheduling examinations.
Finally, the bill would direct the Secretary of the Treasury to
develop various reports, regulations, and programs related to
currency transactions.
CBO estimates that enacting this bill would reduce federal
revenues by $64 million over the 2006-2011 period and by a
total of $167 million over the 2006-2016 period. In addition,
we estimate that direct spending would increase by $2 million
over the 2006-2011 period and by a total of $7 million over the
2006-2016 period. Provisions affecting programs funded by
annual appropriations would cost another $4 million in 2007,
CBO estimates, assuming appropriation of the necessary amounts.
H.R. 3505 contains intergovernmental mandates as defined in
the Unfunded Mandates Reform Act (UMRA), but CBO estimates that
the cost of complying with the requirements would be small and
would not exceed the threshold established in UMRA ($64 million
in 2006, adjusted annually for inflation).
H.R. 3505 contains several private-sector mandates as
defined in UMRA. Those mandates would affect some depository
institutions controlled by commercial firms, certain depository
institutions and institution-affiliated parties, nondepository
institutions that control depository institutions, uninsured
banks, bank holding companies and their subsidiaries, and
savings and loan association holding companies and their
subsidiaries. At the same time, the bill would relax some
restrictions on the operations of certain financial
institutions. CBO estimates that the aggregate direct costs of
complying with the private-sector mandates in the bill would
not exceed the annual threshold established by UMRA ($128
million in 2006, adjusted annually for inflation).
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 3505 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).

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By fiscal year, in millions of dollars--
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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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CHANGES IN REVENUES

Estimated Revenues: \1\
S Corporation Status........................................ * -6 -11 -14 -16 -13 -14 -15 -16 -17 -18
Business Organization Flexibility........................... 0 * * -1 -1 -2 -2 -4 -5 -6 -6
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Total................................................... * -6 -11 -15 -17 -15 -16 -19 -21 -23 -24

CHANGES IN DIRECT SPENDING

Estimated Budget Authority...................................... * * * * 1 1 1 1 1 1 1
Estimated Outlays............................................... * * * * 1 1 1 1 1 1 1

CHANGES IN SUBJECT TO APPROPRIATION

Estimated Authorization Level................................... 0 4 0 0 0 0 0 0 0 0 0
Estimated Outlays............................................... 0 4 0 0 0 0 0 0 0 0 0
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\1\ Negative revenues indicate a reduction in revenue collections.
Note.--* = Revenue loss or spending cost of less than $500,000.

Basis of estimate: Most of the budgetary impacts of this
legislation would result from three provisions: section 101,
which would make it easier for national banks to convert to S
corporation status or alternative organization forms; section
302, which would allow certain federal credit unions to lease
federal land at no charge; and title VII, which would direct
the Secretary of the Treasury to complete various studies,
programs, and regulatory proceedings. For this estimate, CBO
assumes that H.R. 3505 will be enacted during fiscal year 2006.
H.R. 3505 also would affect the workload at agencies that
regulate financial institutions. We estimate that the net
change in agency spending would not be significant. Based on
information from each of the agencies, CBO estimates that the
change in administrative expenses--both costs and potential
savings--would average less than $500,000 a year over the next
several years. Expenditures of the Office of the Comptroller of
the Currency (OCC), the Office of Thrift Supervision (OTS), the
National Credit Union Administration (NCUA), and the FDIC are
classified as direct spending and would be covered by fees or
insurance premiums paid by the institutions they regulate. Any
change in spending by the Federal Reserve would affect net
revenues, while adjustments in the budgets of the Department of
the Treasury, Securities and Exchange Commission (SEC), and
Federal Trade Commission (FTC) would be subject to
appropriation.

Revenues

CBO estimates that enacting H.R. 3505 would reduce federal
tax revenues collected from national and state-chartered banks
and would have an insignificant effect on civil and criminal
penalties collected for violations of the bill's provisions.
S Corporation Status. Under this bill, some national banks
would find it easier to convert from C corporation status to S
corporation status. Section 101 would allow directors of
national banks to be issued subordinated debt to satisfy the
requirement that directors of a bank own qualifying shares in
the bank. This provision would effectively reduce the number of
shareholders of a bank by removing directors from shareholder
status, making it easier for banks to comply with the 100-
shareholder limit that defines eligibility for subchapter-S
election.
Income earned by banks taxed as C corporations is subject
to the corporate income tax, and post-tax income distributed to
shareholders is taxed again at individual income-tax rates.
Income earned by banks operating as S corporations is taxed
only at the personal income-tax rates of the banks'
shareholders and is not subject to the corporate income tax.
The averageeffective tax rate on S-corporation income is lower
than the average effective tax rate on C-corporation income. CBO
estimates that enacting this provision would reduce revenues by a total
of $60 million over the 2006-2011 period and by $140 million over the
2006-2016 period.
Based on information from the Federal Reserve Board, the
OCC, and private trade associations, CBO expects that most of
the banks that would be affected are small, although banks and
bank holding companies with assets over $500 million would also
be affected. In addition, states are likely to amend the rules
for state-chartered banks to match those for national banks.
CBO expects that most conversions to subchapter-S status would
occur between 2006 and 2008 and that national banks would
convert earlier than state-chartered banks.
Business Organization Flexibility. Under section 109 of
this bill, the Comptroller of the Currency could allow national
banks to organize in noncorporate form, for example as Limited
Liability Companies (LLCs) as defined by state law. LLCs
generally choose to be taxed as partnerships. Only a few states
currently allow banks to organize as LLCs, however, and the IRS
currently taxes state-chartered bank-LLCs as C corporations.
LLCs provide more organizational flexibility than S
corporations while retaining the corporate characteristic of
limited liability.
Income earned by banks taxed as C corporations is subject
to the corporate income tax, and post-tax income distributed to
shareholders is taxed again at individual income tax rates.
Income earned by partnerships--like that earned by S
corporations--is taxed only at the personal income-tax rates of
the partners and is not subject to the corporate income tax.
The average effective tax rate on partnerships is lower than
the average effective tax rate on C-corporation income but is
similar to the average effective tax rate on S-corporation
income.
Based on information from the OCC, the FDIC, and private
trade associations, CBO views that it is quite possible that
the OCC would alter its regulations to allow national banks to
organize in noncorporate form. CBO expects that, over the next
decade, most states that do not currently allow banks to
organize as LLCs will begin allowing them to do so out of
competitiveness concerns. CBO also expects that the IRS is
likely to reconsider allowing pass-through tax treatment to
banks organized as LLCs and may allow such tax treatment at
some point in the next decade. CBO believes that banks forming
as LLCs would most likely be newly chartered institutions. Over
the next decade, only a very limited number of banks would
convert from C corporation or S corporation status to LLCs
taxed as partnerships.CBO estimates that enacting this
provision would reduce revenues by a total of $4 million over the 2006-
2011 period and by $27 million over the 2006-2016 period.
Civil and Criminal Penalties. H.R. 3505 would make all
depository institutions--not just insured institutions--subject
to certain civil and criminal fines for violating rules
regarding breach of trust, dishonesty, and certain other
crimes. It also would authorize the FDIC to take enforcement
action or impose civil penalties of up to $1 million a day on
any individual, corporation, or other entity that falsely
implies that deposits or other funds are insured by the agency.
Based on information from the FDIC, CBO expects that
enforcement actions would likely deter most individuals or
institutions from violating rules regarding breach of trust,
dishonesty, or certain other crimes. As a result, we estimate
that any additional penalty collections under those provisions
would not be significant.

Direct spending

CBO estimates that enacting H.R. 3505 would increase direct
spending by $2 million over the 2006-2011 period and about $7
million over the 2006-2016 period by reducing offsetting
receipts collected from credit unions that lease federal
facilities. Enacting the bill also could affect the cost of
deposit insurance, but CBO has no basis for estimating the
amount of any change.
Credit Union Leases. Section 302 would allow federal
agencies to lease land to federal credit unions without charge
under certain conditions. Under existing law, agencies may
allocate space in federal buildings without charge if at least
95 percent of the credit union's members are or were federal
employees. Some credit unions, primarily those serving military
bases, have leased federal land to build a facility. Prior to
1991, leases awarded by the Department of Defense (DoD) were
free of charge and for terms of up to 25 years; a statutory
change enacted that year limited the term of such leases to
five years and required the lessee to pay a fair market value
for the property. According to DoD, about 35 credit unions have
leased land since 1991 and are paying a total of about $525,000
a year to lease federal property. Those proceeds are recorded
as offsetting receipts, and any spending of those payments is
subject to appropriation.
CBO expects that enacting this provision would result in a
loss of offsetting receipts from all credit union leases. Those
lessees currently paying a fee would stop making those payments
after they renew their current leases, all of which should
expire within the next five years. In addition, credit unions
that have long-term, no-cost leases would be able to renew them
without becoming subject to the fees they otherwise would pay
under current law. CBO estimates that enacting this provision
would cost a total of about $2 million over the next six years
and an average of about $700,000 annually after 2011.
Deposit Insurance. Several provisions in the bill could
affect the cost of federal deposit insurance. For example, the
bill would streamline the approval process for mergers,
branching, and affiliations, which could give eligible
institutions the opportunity to diversify and compete more
effectively with other financial businesses. In some cases,
such efficiencies could reduce the risk of insolvency. It is
also possible, however, that some of the new lending and
investment options could increase the risk of losses to the
deposit insurance funds.
CBO has no clear basis for predicting the direction or the
amount of any change in spending for insurance that could
result from the new investment, lending, and operational
arrangements authorized by this bill. The net budgetary impact
of such changes would be negligible over time, however, because
any increase or decrease in costs would be offset by
adjustments in the insurance premiums paid by banks, thrifts,
or credit unions.

Spending subject to appropriation

H.R. 3505 also would affect spending for activities funded
by annual appropriations. CBO estimates implementing those
provisions would cost about $4 million in 2007, assuming
appropriation of the necessary amounts.
Title VII would direct the Secretary of the Treasury to
develop and implement various measures related to the reporting
of currency transactions. Based on information from the
Treasury, CBO estimates that it would cost about $4 million to
complete the regulations, reports, and programs required by the
bill, assuming appropriation of the necessary amounts.
In addition, section 201 provides thrift institutions with
exemptions from broker-dealer and investment-advisor
registration requirements similar to those accorded banks.
Section 313 provides similar exemptions for federally insured
credit unions. Based on information from the SEC, CBO estimates
that the budgetary effects of those exemptions would not be
significant.
Finally, section 312 would exempt federally insured credit
unions from filing certain acquisition or merger notices with
the FTC. Under current law, the FTC charges filing fees ranging
from $45,000 to $280,000, depending on the value of the
transaction. The collection of such fees is contingent on
appropriation action. Based on information from the FTC, CBO
estimates that this exemption would have no significant effect
on the amounts collected from such fees.
Estimated impact on State, local, and tribal governments:
H.R. 3505 contains intergovernmental mandates as defined in
UMRA, because it would preempt certain state laws and place new
requirements on certain state agencies that regulate financial
institutions. CBO estimates that the cost of complying with the
requirements would be small and would not exceed the threshold
established in UMRA ($64 million in 2006, adjusted annually for
inflation).
Provisions in section 209 would preempt certain state
securities laws by prohibiting states from requiring agents who
represent a federal savings association to register as brokers
or dealers if they sell deposit products (CDs) issued by the
savings association. Such a preemption would impose costs (in
the form of lost revenues) on those states that currently
require such registration. Based on information from
representatives of the securities industry and securities
regulators, CBO estimates that losses to states as a result of
this prohibition would total less than $1 million a year.
Other provisions of the bill would place requirements on
state regulators of credit unions to review documents related
to federal deposit insurance and to provide certain information
to the NCUA. Also, section 401 would extend certain preemptions
of state laws related to mergers between insured depository
institutions chartered in different states and preempt state
laws that regulate certain fiduciary activities performed by
insured banks and other depository institutions. Section 619
provides that only certain bank supervisors may impose
supervisory fees on the bank. Based on information from
industry authorities and state entities, CBO estimates that
these provisions would impose minimal costs, if any, on state,
local, and tribal governments.
Estimated impact on the private sector: H.R. 3505 contains
several private-sector mandates as defined by UMRA. At the same
time, the bill would relax some restrictions on the operations
of certain financial institutions. CBO estimates that the
aggregate direct costs of mandates in the bill would not exceed
the annual threshold established in UMRA ($128 million in 2006,
adjusted annually for inflation).
Mandates in the bill include a prohibition of interstate
branching by certain depository institutions controlled by
commercial firms, an expansion of the authority of federal
bankingagencies over insured depository institutions and
institution-affiliated parties with respect to safety and soundness
enforcement, and restrictions on participation in the affairs of
financial institutions of people convicted of certain crimes or the
subject of certain criminal proceedings.

Prohibition of interstate branching by subsidiaries of commercial firms

The bill would prohibit interstate branching by industrial
loan companies or industrial banks or certain other depository
institutions that are controlled by firms that derive 15
percent or more of their revenues from nonfinancial activities.
The prohibition would not apply to such institutions that
became insured depository institutions before October 1, 2003.
This mandate only applies to a handful of institutions,
none of which currently operates any branches. While the
mandate does take away their option to open branches in other
states, according to government and industry sources, the
affected institutions had no immediate plans to use the option
to branch. Consequently, CBO estimates that there would be
little or no direct cost to comply with this mandate.

Enhanced safety and soundness enforcement

The bill would expand some of the authorities of federal
banking agencies with respect to troubled or failing
institutions, and institution-affiliated parties. Based on
information from the FDIC, the cost to the private sector of
these expanded authorities would be small.
The Gramm-Leach-Bliley Act allowed new forms of
affiliations among depositories and other financial services
firms. Consequently, insured depository institutions may now be
controlled by a company other than a depository institution
holding company (DIHC). The bill would amend current law to
give the FDIC certain authorities concerning troubled or
failing depository institutions held by those new forms of
holding companies.
Cross-Guarantee Authority. Under current law, if the FDIC
suffers a loss from liquidating or selling a failed depository
institution, the FDIC has the authority to obtain reimbursement
from any insured depository institution within the same DIHC.
Section 407 would expand the scope of the FDIC's reimbursement
power to include all insured depository institutions controlled
by the same company, not just those controlled by the same
DIHC.
The cost of this mandate would depend, among other things,
on the probability of failure of the additional institutions
subject to this authority and the probability that the FDIC
would incur a loss as a result of those failures. The new
authority would apply only to a handful of depository
institutions. Based on information from the FDIC, CBO estimates
that the cost of this mandate would not be substantial.
Golden Parachute Authority and Nonbank Holding Companies.
Section 408 would allow the FDIC to prohibit or limit any
company that controls an insured depository from making
``golden parachute'' payments or indemnification payments to
institution-affiliated parties of troubled or failing insured
depositories. (Institution-affiliated parties include
directors, officers, employees, and controlling shareholders.
Institution-affiliated parties also include independent
contractors such as accountants or lawyers who participate in
violations of the law or undertake unsound business practices
that may cause a financial loss to, or adverse effect on, the
insured depository institution.)
Based on information from the FDIC, CBO expects that only a
few institutions would be covered by the new authority. In the
event that the FDIC exercises this authority, CBO expects that
the cost to institutions of withholding such payments would be
administrative in nature and minimal, if any.

Restrictions on convicted individuals

Current law prohibits a person convicted of a crime
involving dishonesty, a breach of trust, or money laundering
from participating in the affairs of an insured depository
institution without FDIC approval. The bill would extend that
prohibition so that uninsured banks, bank holding companies and
their subsidiaries, and savings and loan holding companies and
their subsidiaries could not allow such persons to participate
in their affairs without the prior written consent of their
designated federal banking regulator.
Assuming that those institutions already screen potential
directors, officers, and employees for criminal offenses, the
incremental cost of complying with this mandate would be small.
Previous CBO estimate: On December 8, 2005, CBO transmitted
a cost estimate for H.R. 3505 as ordered reported by the House
Committee on Financial Services on November 16, 2005. The two
versions of the bill are identical, but CBO updated the
estimate of costs to reflect a later date of enactment and
CBO's new baseline projections of corporate tax revenues.
The intergovernmental and private-sector mandates in both
versions of the bill are the same.
Estimate prepared by: Federal Spending: Kathleen Gramp.
Federal Revenues: Pam Greene. Impact on State, Local, and
Tribal Governments: Sarah Puro. Impact on the Private Sector:
Judith Ruud.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis, and G. Thomas Woodward, Assistant
Director for Tax Analysis.

Performance Goals and Objectives

The Committee states that pursuant to clause 3(c)(4) of
rule XIII of the Rules of the House of Representatives, H.R.
3505 is intended to alter or eliminate statutory banking
provisions in order to reduce the growing regulatory burden on
insured depository institutions, improve their productivity,
and to make needed technical corrections to current law.

Constitutional Authority Statement

Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds the authority for
this legislation in art. 1, Sec. 8 of the Constitution.

Section-by-Section Analysis and Discussion

The following section-by-section analysis contains a
description of principal provisions contained in H.R. 3505 as
reported within the jurisdiction of the Committee on the
Judiciary. H.R. 3505 was reported from the Committee on
Financial Services on November 16, 2005. For a discussion of
the provisions within the jurisdiction of the Committee on
Financial Services, please see H.R. Rept. 109-356, Part I.

TITLE I--NATIONAL BANKS

Section 106. Clarification of Waiver of Publication Requirements for
Bank Merger Notices

Section 106 amends the National Bank Consolidation and
Merger Act (12 U.S.C. Sec. 215(a) and 215(a)(2)) to provide the
Comptroller with authority to waive the publication of notice
requirement for bank mergers if the Comptroller determines that
an emergency justifies such a waiver or if shareholders of the
association or State bank agree by unanimous action to waive
the publication requirement for their respective institutions.

TITLE II--SAVINGS ASSOCIATIONS

Section 203. Mergers and consolidations of Federal Savings Associations
with nondepository institution affiliates

This section amends the Home Owners Loan Act (12 U.S.C.
Sec. 1464) to permit a Federal savings association to merge
with any nondepository institution affiliate of the savings
association.

Section 213. Citizenship of Federal Savings Associations for
determining Federal court diversity jurisdiction

This section amends the Home Owners' Loan Act (12 U.S.C.
Sec. 1464) to establish that a Federal savings association
shall be considered--for purposes of establishing diversity
jurisdiction--a citizen only of the State where the savings
association locates its main office. Diversity jurisdiction
requires complete diversity among all parties to a lawsuit,
i.e. that all parties be citizens of different States, and for
there to be a minimum sum of $75,000 in controversy. Since they
are chartered by the Federal government and not incorporated in
a State, it has been held that federally-chartered savings
associations that conduct business in more than one State are
not considered to be a citizen of any State. In contrast, a
federally-chartered savings association that confines its
business to a single State is considered to be a citizen of
that State. This section will provide parity among federally-
chartered savings associations. This section also ensures
greater parity between federally-chartered savings associations
and national banking associations by providing that each is
considered to be a citizen of the State where it is located for
purposes of diversity jurisdiction.

TITLE III--CREDIT UNIONS

Section 312. Exemption from pre-merger notification requirement of the
Clayton Act

This section amends the Clayton Act to exempt credit unions
from provisions of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (15 U.S.C. Sec. 18a) which require certain acquired
and acquiring persons--including federally insured credit
unions--to file a notification and report form with the Federal
Trade Commission (FTC) to provide advance notification of
mergers and acquisitions when the value of the transaction
exceeds $50 million.

TITLE IV--DEPOSITORY INSTITUTIONS

Section 401. Easing restrictions on interstate branching and mergers

This section removes the prohibition in current law on
national and State banks expanding through de novo interstate
branching. Currently, banks may expand in this fashion only if
a State's law expressly permits interstate branching. This
section clarifies that a State member bank may establish a de
novo interstate branch under the same terms and conditions
applicable to national banks. The authority for a State to
prohibit an out-of-State bank or bank holding company from
acquiring, through merger or acquisition, an in-State bank that
has not existed for at least five years is eliminated. Insured
banks are authorized to acquire by merger or consolidation
another insured depository institution (including a savings
association) or an uninsured trust company that has a different
home State than the acquiring insured bank. Industrial loan
companies (ILCs) controlled by firms that derive 15 percent or
more of their consolidated revenues from non-financial
activities would not be permitted to engage in interstate
branching, unless the ILC became an insured depository
institution prior to October 1, 2003.
This section permits a State bank supervisor to authorize
State trust companies it supervises to act in a fiduciary
capacity on an interstate basis either with or without
interstate offices. Such activities must not be in
contravention of State law, but will not be deemed to
contravene State law to the extent that a host State grants to
its trust institutions the fiduciary powers sought to be
exercised on an interstate basis. This authority parallels
existing authority of national banks and national trust
companies under the National Bank Act.

Section 402. Statute of limitations for judicial review of appointment
of a receiver for depository institutions

This section amends the National Bank Receivership Act (12
U.S.C. Sec. 191), the Federal Deposit Insurance Act (12 U.S.C.
Sec. 1821(c)(7)), and the Federal Credit Union Act (12 U.S.C.
Sec. 1787(a)(1)), to establish a uniform 30-day statute of
limitations for national banks, State chartered non-member
banks, and credit unions to challenge decisions by the Office
of the Comptroller of the Currency, Federal Deposit Insurance
Corporation, and the National Credit Union Administration to
appoint a receiver. Current law generally provides that
challenges to a decision by the Federal Deposit Insurance
Corporation or the Office of Thrift Supervision to appoint a
receiver for an insured State bank or savings association must
be raised within 30 days of the appointment (see 12 U.S.C.
Sec. 1821(c)(7) and Sec. 1464(d)(2)(B)). However, there is no
statutory limitation on national banks' ability to challenge a
decision by the Office of the Comptroller of the Currency to
appoint a receiver of an insured or uninsured national bank. As
a result, the general six-year statute of limitations currently
applies to national banks in these instances. This protracted
time period severely limits the Office of the Comptroller of
the Currency's authority to manage insolvent national banks
that are placed in receivership and the ability of the Federal
Deposit Insurance Corporation to wind up the affairs of an
insured national bank in a timely manner with legal certainty.

TITLE VI--BANKING AGENCIES

Section 603. Penalty for unauthorized participation by convicted
individual

A person convicted of a crime involving dishonesty or a
breach of trust may not participate in the affairs of an
insured depository institution without FDIC approval. Certain
special purpose banks and foreign banking institutions operate
without insured status (e.g., trust banks and foreign
branches). This section extends the prohibition to include
uninsured national and State member banks and uninsured offices
of foreign banks.

Section 609. Clarification of suspension, removal, and prohibition
authority of Federal banking agencies in cases of certain
crimes by institution-affiliated parties

This section clarifies that the appropriate Federal banking
agency may suspend or prohibit individuals who are the subject
of criminal proceedings from participation in the affairs of
any depository institution, instead of only a prohibition from
the insured depository with which the institution affiliated
party is or was associated. The agency may also use the
prohibition authority even when the institution with which the
individuals were associated ceases to exist.

Section 610. Streamlining depository institution merger application
requirements

This section amends the Federal Deposit Insurance Act (12
U.S.C. Sec. 1828) to require the Attorney General to provide
within 30 days a report on the competitive factors associated
with a depository institution merger to a requesting agency.
This section reduces this period to 10 days if the requesting
agency advises the Attorney General that an emergency exists
requiring expeditious action.

Section 613. Prohibition on participation by convicted individual

This section would prohibit a person convicted of a
criminal offense involving dishonesty, a breach of trust, or
money laundering from participating in the affairs of a bank
holding company or an Edge or Agreement Corporation, without
the consent of the Federal Reserve Board, and from
participating in the affairs of a savings and loan holding
company or any of its non-thrift subsidiaries, without the
consent of the Office of Thrift Supervision. Foreign banks and
nonbank subsidiaries of a bank holding company are excluded.

Changes in Existing Law Made by the Bill, as Reported

The bill was referred to this committee for consideration of
such provisions of the bill and amendment as fall within the
jurisdiction of this committee pursuant to clause 1(l) of Rule
X of the Rules of the House of Representatives. The changes
made to existing law by the amendment reported by the Committee
on Financial Services are shown in the report filed by that
committee (Rept. 109-356, Part 1).