[House Report 115-1007]
[From the U.S. Government Publishing Office]


115th Congress }                                          { REPORT
                        HOUSE OF REPRESENTATIVES
  2d Session   }                                          { 115-1007

======================================================================
 
       BANK SERVICE COMPANY EXAMINATION COORDINATION ACT OF 2017

                                _______
                                

November 2, 2018.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 3626]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 3626) to amend the Bank Service Company Act to 
provide improvements with respect to State banking agencies, 
and for other purposes, having considered the same, report 
favorably thereon with amendments and recommend that the bill 
as amended do pass.
    The amendments (stated in terms of the page and line 
numbers of the introduced bill) are as follows:
  Page 4, line 1, strike ``the examination duties'' and insert 
``examinations''.

  Page 4, beginning on line 3, strike ``, and consult with''.

  Page 4, line 8, strike ``and''.

  Page 4, line 12, strike the period and insert ``; and''.

  Page 4, after line 12, insert the following:

                  (F) by adding at the end the following:
  ``(g) Rule of Construction.--Nothing in this section shall be 
construed as granting authority for a State banking agency to 
examine a bank service company where no such authority exists 
in State law.''.

                          Purpose and Summary

    On July 28, 2017, Representative Roger Williams introduced 
H.R. 3626 the ``Bank Service Company Examination Act''. The 
legislation, as amended, would amend the Bank Service Company 
Act (BSCA) [P.L. 89-554] to enable the sharing of supervisory 
information with state banking or supervisory agencies and 
improve coordination with state banking agencies to avoid the 
duplication of examination activities, reporting requirements, 
and requests for information.

                  Background and Need for Legislation

    Technology Service Providers (TSPs)\1\ are used by banks to 
fulfill their day-to-day operations, including loan and deposit 
taking, payment processing, and assisting with cybersecurity. 
There are two types of TSPs, those that are separate businesses 
that partner with banks, and those that are organized by banks 
to provide services to banks. Federal and state financial 
regulators are able to examine TSPs for safety and soundness; 
however cooperative state-federal examination efforts are 
hampered by ambiguity in the current law when it comes to 
sharing supervisory information and exam results.
---------------------------------------------------------------------------
    \1\TSPs commonly include money service businesses (MSBs), fintech 
companies, IT security, and call centers, among others.
---------------------------------------------------------------------------
    Along with promoting better communication among regulators, 
it is important to maintain the appropriate level of oversight 
for new risks to the financial system. The 2017 Annual Report 
of the Financial Stability Oversight Council (FSOC) notes that 
financial institutions increasingly rely on technology for 
greater efficiency and to improve their services.\2\ With 
greater investment in technology and interconnectedness among 
platforms, however, is the potential for greater cybersecurity 
vulnerabilities. As the FSOC report concludes, ``if severe 
enough, a cybersecurity failure could have systemic 
implications for the financial sector and the U.S. economy more 
broadly.''\3\ For this reason, FSOC recommends enhanced 
coordination to ``both reduce potentially conflicting and 
duplicative regulatory oversight and promote more consistency 
in cybersecurity.''\4\ Specifically, the report recommends that 
``Congress pass legislation that . . . encourages coordination 
among the federal and state regulators in the oversight of 
[third-party service] providers.''\5\ While access to new 
financial products and services as well as greater operating 
efficiency for financial institutions is positive, it is 
imperative that financial regulators are able to identify 
emerging risks when they develop. Increased exam coordination 
and information sharing ensure that no gaps exist where 
weaknesses can produce risks to the financial system.
---------------------------------------------------------------------------
    \2\2017 Annual Report of the Financial Stability Oversight Council. 
(Dec. 2017). Available at https://www.treasury.gov/initiatives/fsoc/
studies-reports/Documents/FSOC_2017_Annual_Report.pdf.
    \3\Id. at 7.
    \4\Id. at 9.
    \5\Id.
---------------------------------------------------------------------------

          CURRENT FEDERAL LAW GOVERNING BANK SERVICE COMPANIES

    The Bank Service Company Act (BSCA), originally enacted in 
1962, is the primary federal statute that governs TSPs and 
authorizes federal banking agencies to examine TSPs for the 
services they provide financial institutions to assess the 
potential risks they pose to individual client banks and the 
broader banking system.\6\ Currently 38 state banking 
regulators are also able to examine TSPs under the authority of 
state law, with additional states indicating they may consider 
legislation; however the BSCA is silent on the ability of state 
and federal banking regulators to share discoveries from their 
exams of bank service companies, including TSPs. While the BSCA 
does not bar state regulators from participating in exams with 
federal regulators, the law has been interpreted as a barrier 
to information sharing and regulatory coordination. This has 
led to frustration from state and federal regulatory 
authorities over the inability to fully share exam information, 
which could reveal weaknesses of individual institutions and 
allow agencies to use their limited resources more effectively.
---------------------------------------------------------------------------
    \6\12 U.S.C. 1867(a) permits federal banking agencies to examine a 
service company that is owned in whole or in part by a bank or multiple 
banks and 12 U.S.C. 1867(c) permits federal banking agencies to examine 
TSPs that have contractual obligations with a bank.
    \6\36 state banking agencies currently have authority under state 
law to examine TSPs.
---------------------------------------------------------------------------
    As the BSCA is silent about the ability to share 
examination information, Congress should amend the statute so 
as not to frustrate collaboration amongst financial regulators. 
Appropriate sharing of regulatory exams allows agencies to use 
their limited resources more effectively by avoiding 
duplicative examinations and unnecessary regulatory burden. The 
effective sharing of regulatory examination results among 
agencies reveals many of the risks and weaknesses of individual 
institutions as well as the larger banking system. The 
legislation, as amended, is explicit that it would amend the 
BSCA to enhance coordination, and does not grant authority to 
states where none exists otherwise. H.R. 3626 is smart 
legislation because the bill seeks to clarify any vagueness in 
the BSCA. And as the Conference of State Bank Supervisors 
commented, ``State financial regulators have strongly advocated 
for legislation to enhance state and federal regulators' 
ability to share information on banks' technology vendors and 
coordinate exams. H.R. 3626 will make both state and federal 
oversight more efficient and effective and reduce regulatory 
burden.''

                                Hearings

    The Subcommittee on Financial Institutions held a hearing 
examining matters relating to H.R. 3626 on February 15, 2018.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
July 24, 2018 and ordered H.R. 3626 to be reported favorably as 
amended by a recorded vote of 56 yeas to 0 nays (recorded vote 
no. FC-200), a quorum being present. Before the motion to 
report was offered, the Committee adopted an amendment offered 
by Mr. Williams by voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House as amended. The motion 
was agreed to by a recorded vote of 56 yeas to 0 nays (Record 
vote no. FC-200), a quorum being present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, 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.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 3626 
will enhance both state and federal regulators' abilities to 
coordinate their examinations of Technology Service Providers, 
in order to help reveal potential risks and weaknesses of 
individual institutions as well as in the larger banking 
system.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, September 4, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3626, the Bank 
Service Company Examination Coordination Act of 2017.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Sarah Puro.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 3626--Bank Service Company Examination Coordination Act of 2017

    H.R. 3626 would require the federal financial regulators, 
the Federal Deposit Insurance Corporation (FDIC), the Office of 
the Comptroller of the Currency (OCC), and the Federal Reserve 
to coordinate with state banking regulators regarding their 
relationships and examinations of certain companies that banks 
contract with to perform services.
    H.R. 3626 would impose small administrative costs on the 
federal financial regulators because they would be required to 
increase their current level of coordination with state banking 
regulators. Administrative costs to the FDIC and OCC are 
recorded in the budget as an increase in direct spending. 
However, those agencies are authorized to collect premiums and 
fees from the institutions they regulate in order to cover 
administrative expenses. Thus, the net cost to those agencies 
would be negligible. Costs incurred by the Federal Reserve 
reduce remittances to the Treasury, which are recorded in the 
budget as revenues. Using information from the affected 
regulators about any additional administrative costs to 
implement H.R. 3626, CBO estimates that the net budgetary 
effects would be insignificant over the 2019-2028 period.
    Because enacting H.R. 3626 could affect direct spending and 
revenues; pay-as-you-go procedures apply.
    CBO estimates that enacting H.R. 3626 would not 
significantly increase net direct spending or on-budget 
deficits in any of the four consecutive 10-year periods 
beginning in 2029.
    H.R. 3626 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA).
    If the FDIC and OCC increases fees to offset the costs 
associated with implementing the bill H.R. 3626 would increase 
the cost of an existing mandate on private entities required to 
pay those fees. CBO expects cost of the mandate would be well 
below the annual threshold for private-sector mandates 
established in UMRA ($160 million in 2018, adjusted annually 
for inflation).
    The CBO staff contacts for this estimate are Sarah Puro 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                    Duplication of Federal Programs

    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section cites H.R. 3626 as the Bank Service Company 
Examination Coordination Act of 2017.

Section 2. Bank Service Company Act improvements

    This section amends the Bank Service Company Act by 
providing for coordination between state and federal banking 
agencies in regards to their examinations. Additionally Section 
2 provides for reasonable and timely notice to consult with the 
State banking agency; and ``to the fullest extent possible, 
coordinate and avoid duplication of examination activities, 
reporting requirements, and requests for information.''

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, and existing law in which no 
change is proposed is shown in roman):

                        BANK SERVICE COMPANY ACT


                      short title and definitions

  Section 1.
  (a) Short Title.--This Act may be cited as the ``Bank Service 
Company Act''.
  (b) For the purpose of this Act--
          (1) the term ``appropriate Federal banking agency'' 
        shall have the meaning provided in section 3(q) of the 
        Federal Deposit Insurance Act (12 U.S.C. 1813(q));
          (2) the term ``State banking agency'' shall have the 
        same meaning given the term ``State Bank Supervisor'' 
        under section 3 of the Federal Deposit Insurance Act;
          [(2)] (3) the term ``bank service company'' means--
                  (A) any corporation--
                          (i) which is organized to perform 
                        services authorized by this Act; and
                          (ii) all of the capital stock of 
                        which is owned by 1 or more insured 
                        depository institutions; and
                  (B) any limited liability company--
                          (i) which is organized to perform 
                        services authorized by this Act; and
                          (ii) all of the members of which are 
                        1 or more insured depository 
                        institutions.
          [(3)] (4) the term ``Board'' means the Board of 
        Governors of the Federal Reserve System;
          [(4)] (5) the term ``depository institution'' means, 
        except when such term appears in connection with the 
        term ``insured depository institution'', an insured 
        bank, a savings association, a financial institution 
        subject to examination by the appropriate Federal 
        banking agency or the National Credit Union 
        Administration Board, or a financial institution the 
        accounts or deposits of which are insured or guaranteed 
        under State law and are eligible to be insured by the 
        Federal Deposit Insurance Corporation or the National 
        Credit Union Administration Board;
          [(5)] (6) Insured depository institution.--The terms 
        ``depository institution'' and ``savings association'' 
        have the same meanings as in section 3 of the Federal 
        Deposit Insurance Act;
          [(6)] (7) the term ``invest'' includes any advance of 
        funds to a bank service company, whether by the 
        purchase of stock, the making of a loan, or otherwise, 
        except a payment for rent earned, goods sold and 
        delivered, or services rendered prior to the making of 
        such payment;
          [(7)] (8) the term ``limited liability company'' 
        means any company, partnership, trust, or similar 
        business entity organized under the law of a State (as 
        defined in section 3 of the Federal Deposit Insurance 
        Act) which provides that a member or manager of such 
        company is not personally liable for a debt, 
        obligation, or liability of the company solely by 
        reason of being, or acting as, a member or manager of 
        such company;
          [(8)] (9) the term ``principal investor'' means the 
        insured depository institution that has the largest 
        dollar amount invested in the equity of a bank service 
        company. In any case where two or more insured 
        depository institutions have equal dollar amounts 
        invested in a bank service company, the company shall, 
        prior to commencing operations, select one of the 
        insured depository institutions as its principal 
        investor and shall notify the depository institution's 
        appropriate Federal banking agency of that choice 
        within 5 business days of its selection; and
          [(9)] (10) the terms ``State depository 
        institution'', ``Federal depository institution'', 
        ``State savings association'' and ``Federal savings 
        association'' have the same meanings as in section 3 of 
        the Federal Deposit Insurance Act.

           *       *       *       *       *       *       *


        prior approval for investments in bank service companies

  Sec. 5. (a) No insured depository institution shall invest in 
the capital stock of a bank service company that performs any 
service under authority of subsection (c), (d), or (e) of 
section 4 of this Act without prior notice, as determined by 
the appropriate Federal banking agency, in consultation with 
the State banking agency, for the insured depository 
institution.
  (b) No insured depository institution shall invest in the 
capital stock of a bank service company that performs any 
service authorized only under authority of section 4(f) of this 
Act and no bank service company shall perform any activity 
authorized only under section 4(f) of this Act without the 
prior approval of the Board.
  (c) In determining whether to approve or deny any application 
for prior approval or whether to approve or disapprove any 
notice under this section, the Board or the appropriate Federal 
banking agency, as the case may be, is authorized to consider 
the financial and managerial resources and future prospects of 
any insured depository institution and bank service company 
involved, including the financial capability of the insured 
depository institution to make a proposed investment under this 
Act, and possible adverse effects such as undue concentration 
of resources, unfair or decreased competition, conflicts of 
interest, or unsafe or unsound banking practices.
  (d) In the event the Board or the appropriate Federal banking 
agency, as the case may be, fails to act on any application 
under this section within ninety days of the submission of a 
complete application to the agency, the application shall be 
deemed approved.

           *       *       *       *       *       *       *


          regulation and examination of bank service companies

  Sec. 7. (a) A bank service company shall be subject to 
examination and regulation by the appropriate Federal banking 
agency or State banking agency of its principal investor to the 
same extent as its principal investor. The appropriate Federal 
banking agency of the principal shareholder or principal member 
of such a bank service company may authorize any other [Federal 
banking agency that supervises any other shareholder or member] 
Federal or State banking agency that supervises any other 
shareholder or member of the bank service company to make such 
an examination.
  (b) A bank service company shall be subject to the provisions 
of section 8 of the Federal Deposit Insurance Act (12 U.S.C. 
1818) as if the bank service company were an insured depository 
institution. For this purpose, the appropriate Federal banking 
agency shall be the appropriate Federal banking agency of the 
principal investor of the bank service company.
  (c) Notwithstanding subsection (a) of this section, whenever 
a depository institution that is regularly examined by an 
appropriate Federal banking agency or a State banking agency, 
or any subsidiary or affiliate of such a depository institution 
that is subject to examination by that agency, causes to be 
performed for itself, by contract or otherwise, any services 
authorized under this Act, whether on or off its premises--
          (1) such performance shall be subject to regulation 
        and examination by [such agency] such Federal or State 
        agency to the same extent as if such services were 
        being performed by the depository institution itself on 
        its own premises, and
          (2) the depository institution shall notify each 
        [such agency] such Federal or State agency of the 
        existence of the service relationship within thirty 
        days after the making of such service contract or the 
        performance of the service, whichever occurs first.
  (d) Availability of Information.--Information obtained 
pursuant to the regulation and examination of service providers 
under this section or applicable State law may be furnished by 
and accessible to Federal and State agencies to the same extent 
that supervisory information concerning depository institutions 
is authorized to be furnished to and required to be accessible 
by Federal and State agencies under section 7(a)(2) of the 
Federal Deposit Insurance Act (12 U.S.C. 1817(a)(2)) or State 
law, as applicable.
  (e) Coordination With State Banking Agencies.--Where a State 
bank is principal shareholder or principal member of a bank 
service company or where a State bank is any other shareholder 
or member of the bank service company, the appropriate Federal 
banking agency, in carrying out examinations authorized by this 
section, shall--
          (1) provide reasonable and timely notice to the State 
        banking agency; and
          (2) to the fullest extent possible, coordinate and 
        avoid duplication of examination activities, reporting 
        requirements, and requests for information.
  [(d)] (f) The Board and the appropriate Federal banking 
agencies, in consultation with State banking agencies, are 
authorized to issue such regulations and orders as may be 
necessary to enable them to administer and to carry out the 
purposes of this Act and to prevent evasions thereof.
  (g) Rule of Construction.--Nothing in this section shall be 
construed as granting authority for a State banking agency to 
examine a bank service company where no such authority exists 
in State law.

                                  [all]