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TESTIMONY OF

RICKI HELFER
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION

ON

H.R. 1362

fTHE

FINANCIAL INSTITUTIONS REGULATORY
RELIEF ACT OF 1995

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
COMMITTEE ON BANKING AND FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES




10:00 A.M.
THURSDAY MAY 18, 1995
2129 RAYBURN HOUSE OFFICE BUILDING

,

INTRODUCTION
Madam Chairman and members of the Subcommittee, I am pleased
to present the views of the Federal Deposit Insurance Corporation
on H.R. 1362, the Financial Institutions Regulatory Relief Act of
1995, and related issues.

I enthusiastically support the

purposes of the bill and, with a few exceptions, am pleased to
endorse the specific changes in the law.

Over the past 25 years, a variety of new laws and
regulations affecting banks in the areas of safety and soundness,
crime detection, and consumer protection have been imposed on
financial institutions.

While these laws were enacted to protect

consumers and the deposit insurance funds, the cumulative effect
has imposed significant additional costs on the financial
transactions that are essential to sustain a vital and
competitive economy.

At times, the burden falls

disproportionately on insured banks and thrifts, as compared with
other types of financial institutions, resulting in significant
competitive disadvantages.

In addition, regulatory burden

generally has a disproportionate effect on smaller institutions.
One-quarter of the banks supervised by the FDIC have fewer than
13 employees on a full-time basis, a small number to deal with
the complexity and sheer volume of regulatory and legislative
requirements.




2

To begin my testimony today I will share with you the
results of an informal survey of banks conducted by the FDIC on
the potential savings that might be associated with the repeal or
modification of specific legislative or regulatory requirements.
Second, X will comment on the legislation introduced by
Representative Bereuter, H.R. 1362, the Financial Institutions
Regulatory Relief Act of 1995.

Next, I will review current

efforts of the FDIC to alleviate regulatory burden in the safety
and soundness and consumer compliance areas —

some commenced at

our own initiative, others with the impetus of legislation.
Finally, I will propose additional statutory changes to further
reduce regulatory burden on insured institutions.

FDIC SURVEY OF THE COSTS OF SPECIFIC REGULATORY BURDENS

Regulatory burden came into being through accretion.

Each

law and related regulation may be only marginally burdensome, but
taken together their cumulative effect has become greatly
burdensome.

In accordance with section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994, I have
initiated a complete review of the agency's regulations and
policy statements in an effort to identify those that have become
obsolete or those for which the cost to comply substantially
outweighs the intended benefits.




I want to commend Congress for

3
examining the level of burden imposed by statute.

Working

through laws and regulations developed over many years will
reguire time, effort, and considerable attention, but it can and
should be done.

The challenge for Congress and the regulators is

to identify those laws and regulations that may be modified,
streamlined or eliminated without adversely affecting the safety
and soundness of the banking industry or necessary protections
for consumers.

To accomplish this task, we must test regulations

against specific criteria:

1) whether the regulations are

necessary to ensure a safe and sound banking system, 2) whether
the regulations enhance the functioning of the marketplace, or 3)
whether the regulations can be justified on strong public policy
grounds related to consumer protection.

We recently conducted an informal survey of just over 60
institutions that the FDIC supervises in order to gauge the
potential cost savings from the elimination of specific
legislative requirements and regulations currently on the books.
The items included in the survey were based on provisions of
H.R. 1362 that we support and believe would result in
identifiable savings.

The regulatory and legislative

requirements surveyed included:

Truth in Lending and Truth in

Savings disclosures, loan data collection and reporting, auditor
attestation requirements for bank compliance with laws and
regulations, as well as the costs of various applications and
n°tifications.




4
À broad cross-section of institutions by size and location
provided dollar estimates of their costs in meeting 15 very
specific regulatory requirements.

While the survey was informal —

and, therefore, cannot be

used to make industry-wide estimates —
support two general conclusions.

we believe the results

First, smaller institutions

bear higher proportionate costs than larger ones.

When measured

in relation to net income, the estimated costs incurred from the
15 requirements surveyed ranged from over 16 percent at very
small institutions to just over one percent at the largest.

Second, the responses clearly suggest that positive cost
savings could be achieved if the surveyed requirements were
eliminated.

For all recurring requirements included in the

questionnaire, the median cost of compliance per bank was
reported to be approximately $40,000 per year.

In addition,

respondents reported that the median cost estimate of submitting
various non-recurring applications and notifications ranged from
$500 to $20,000 per action.

Taken together, we estimate that the savings from completely
eliminating all requirements covered in the survey could increase
the annual rate of return on assets from 5 to 10 basis points on
a pre-tax basis for institutions the FDIC supervises.

The

results of this survey are discussed in greater detail in




5
Appendix A to this testimony.

The FDIC also is pursuing other

specific efforts to reduce regulatory burden, which are discussed
at the conclusion of the testimony.

H.R. 1362 —

FINANCIAL INSTITUTIONS REGULATORY
RELIEF ACT OF 1995

The bank and thrift regulatory agencies can and should
pursue efforts to reduce regulatory burden within their existing
authority, but we must recognize that a substantial share of the
burden on depository institutions derives directly from statutes
that are beyond the jurisdiction of the agencies to change.

In

this regard, it is incumbent on the agencies to monitor the
effectiveness and impact of applicable statutes and to make
appropriate recommendations to Congress for changes in those
statutes to reduce unnecessary burden and improve effectiveness.
Included in this testimony, and set out in detail in Appendix B,
are the FDIC's suggestions on provisions of law that can and
should be amended or eliminated because they do not conform to
any of the three criteria set out at the beginning of this
testimony.

I also want to commend you Madam Chairman, Representative
Bereuter and this Subcommittee for your considerable efforts at
dealing with regulatory burden.




H.R. 1362, the Financial

6

Institutions Regulatory Relief Act of 1995 is a strong attempt to
address these issues.

In reviewing H.R. 1362, as you have requested, we have
identified provisions that we support as drafted, those we
support but with some modification, and those few that we do not
favor.

FDIC staff recently provided the Subcommittee staff with

technical suggestions on the bill.

Title I —

Reductions in Government Overregulation

Subtitle A —

The Home Mortgage Process

Truth in Lending

The Truth in Lending Act (”TILA”) was

enacted 27 years ago to enable consumers to shop comparatively
for credit by requiring lenders to disclose interest rates and
other information about credit terms and costs in a uniform way.
TILA, as implemented by Regulation Z, has been largely successful
in providing bank customers with comparable information on
interest rates applicable to credit that enhances the effective
functioning of the marketplace.

It also has been successful at

remedying many of the deceptive and misleading lending practices
it was enacted to correct.

Unfortunately, Regulation Z, has

become substantially more complicated, as it has been adapted to
fit the variety of loan products introduced since 1968.

Hence,

the real value of TILA to the efficient functioning of the




7
marketplace and to consumers has been obscured because of the
complexity of the required disclosures.

The complexity of TILA can be demonstrated in a variety of
ways.

First, the Federal Reserve Board's Official Staff

Commentary on Regulation Z, which provides official
interpretations, is longer than the regulation itself.

Second, the complexity of Regulation Z is such that the FDIC
cited more than 2,700 of the 3,500 institutions we examined in
1994 for at least one violation.

The majority of these

violations were technical rather than substantive in nature,
however, and were most often the result of recording errors
rather than material misrepresentations to consumers that would
require reimbursement.

For example, in 1994 only 279

institutions made reimbursements to consumers representing a
total of $2.8 million as a result of violations cited under
Regulation Z.

Third, the banks that responded to our survey indicated that
TILA is a relatively costly law to comply with on an annual
basis.

Specifically, the median reported dollar cost of $10,000

to comply with TILA was almost twice as high as for any other
survey item.
revision.




Clearly, Regulation Z is overdue for major

8

The FDIC is generally supportive of the revisions to TILA
prescribed by subtitle A of H.R. 1362.

I will highlight a few of

the FDIC's views related to these provisions.

First, the FDIC supports the changes to the Real Estate
Settlement Procedures Act ("RESPA”) and TILA prescribed by
sections 101, 102 and 104 of H.R. 1362.

We believe that granting

the Federal Reserve Board the authority to conform TILA with
RESPA, where possible, will reduce regulatory burden for
financial institutions and avoid confusion and complexity for
consumers.

We believe that the Federal Reserve Board should have the
flexibility to streamline or eliminate any TILA disclosures that
do not provide appreciable benefits to consumers.

We also

believe that the Federal Reserve Board should have the authority
to exempt certain transactions from these requirements.

In

addition, the Federal Reserve Board should review the application
of the right of rescission and consider exempting certain
transactions from these provisions where appropriate.

Finally,

we support those provisions which would modify TILA as a result
of the Rodash decision.

Consumers today rarely rescind credit transactions with
insured financial institutions.

In fact, many consumers complain

that the inability to waive their right of rescission is




9
inconvenient and costly since it delays the disbursement of
funds.

Therefore, the FDIC supports exempting certain

refinancing and consolidations of credit secured by first liens
from the right of rescission as contained in section 107 of H.R.
1362.

These transactions would continue to be subject to early

"good faith estimate" disclosures required by RESPA, so consumers
would continue to have the opportunity to evaluate the
implications of their actions.

The FDIC has no objection to section 108 of H.R. 1362.

This

provision would establish a statutory tolerance level for finance
charge errors for closed-end credits secured by real property
equal to one-half of the current one-eighth of one percent
tolerance associated with the disclosure of the annual percentage
rate.

This would result in the same proportional tolerance for

finance charge errors for small loans as it does for large loans,
and would provide greater flexibility to institutions without
substantially changing the practical level of protection afforded
to the consumer.

Home Mortgage Disclosure Act

Section 116 of H.R. 1362

amends the Home Mortgage Disclosure Act ("HMDA") by increasing
from $10 million to $50 million in assets the size of
institutions that are exempt from reporting.

This threshold

would be adjusted annually to reflect the impact of increases in
the Consumer Price Index.




This section also provides the Federal

10

Reserve Board with the authority to exempt institutions if it
determines that the compliance burden outweighs the usefulness of
the data required to be disclosed.

This exemption would not be

available to an institution where the Federal Reserve Board, by
order, has found a reasonable basis to believe it is not
fulfilling its obligations to serve the housing needs of its
community.

The FDIC supports section 116 of the bill, as it would
substantially reduce regulatory burden on small banks, without
significantly reducing the level of data reported on residential
lending.

Currently, 3,187 FDIC-supervised banks are required to

report under HMDA.

Raising the reporting threshold to $50

million would exempt 33 percent of these reporters, but would
result in a total reduction in the level of data reported by
FDIC-supervised institutions of only six percent.

The resulting

cost savings to smaller individual institutions, however, would
be material.

As indicated in Table II of Appendix A, the median

cost for surveyed institutions with assets less than $50 million
is about $119 per application compared to a median cost of nearly
$18 for institutions with total assets greater than $50 million.

We also support the provision that relieves the burden
associated with having HMDA data available at each branch
location.
data.




The public will still have the ability to access the

Institutions would be required to provide notice at their

11

branch locations that the information is available for review at
the institution's home office, or the data will be provided
directly to members of the public requesting it either in paper
or electronic format no later than 15 days after receipt of a
written request.

Subtitle B —

Community Reinvestment Act Amendments

In July of 1993, President Clinton asked the federal bank
regulatory agencies to undertake sweeping reform of the Community
Reinvestment Act ("CRA") regulations to reduce unnecessary
regulatory burden and focus the CRA examination program on more
objective, performance-based assessment standards.

For the past

22 months, the agencies have worked jointly to produce
comprehensive reform of the CRA regulations.

To initiate the

process, the agencies held hearings in seven locations across the
country during 1993, and heard from hundreds of witnesses
including representatives from financial institutions, the
business community, consumer and community groups, and state and
local government officials.

Proposed regulations were circulated

twice for public comment, which together produced almost 14,000
letters.

From this outpouring of public comment, the agencies

developed a final CRA rule, which was approved by each agency in
April.




12

The FDIC believes the new CRA rule accomplishes the goals
established at the outset, particularly in the area of reducing
regulatory burden.

The new CRA rule provides for an effective

and meaningful evaluation of the performance of an institution
without burdensome paperwork and recordkeeping requirements and
without undue reliance on ratios and formulas.

In keeping with

the original intent of the CRA, the new rule encourages
institutions to meet the credit needs of their communities,
consistent with safety and soundness.

The new rule accomplishes these goals in several ways.
First, the new CRA rule emphasizes performance in lending,
investment and service, rather than process and paperwork, and
provides institutions with considerable flexibility in meeting
the credit needs of their communities.

The new rule eliminates

the requirement that institutions prepare CRA statements, review
them annually and document them in the minutes of the board of
directors' meetings.

Institutions are no longer required to

justify the basis for community delineations or to document
efforts in marketing or ascertaining community credit needs.
Resources formerly devoted to such procedural requirements —
time, money and personnel —

are now available for making loans

and investments and providing services in the community.

Second, the new CRA rule distinguishes between large and
small institutions by providing a streamlined examination process




13
and an exemption from data collection on loans to small business
and small farms for independent banks and thrifts with assets
under $250 million, or banks and thrifts with assets under $250
million that are members of a holding company with total assets
under $1 billion.

Under the new streamlined examination

procedure, regulators will determine whether an institution's
loan-to-deposit ratio and lending record are reasonable relative
to its size, financial condition and management expertise, and
the credit needs of its community.

The streamlined examination

will provide meaningful regulatory relief to over 80 percent of
the banking industry.

In addition, all institutions, regardless of size, have the
option of being evaluated on the basis of a strategic plan.

A

strategic plan must specify measurable goals and be aired for
public comment in advance of adoption.

After any comments

received have been addressed, the institution must submit the
plan for agency review.

Thereafter, the institution will be

evaluated based upon how well it meets or exceeds the goals it
has established for itself in the strategic plan.

This approach

encourages greater management involvement in an institution's
effort to meet the credit needs of its community and reduces the
CRA compliance burden on the institution.

The FDIC believes the new CRA regulation provides meaningful
relief in the area of regulatory burden, particularly for small




14
institutions.

The streamlined examination and the focus on

lending rather than creating a paper trail, as well as the
reduced reporting requirements when compared with the previously
proposed regulations, will reduce substantially the burden the
CRA previously placed on small and large institutions alike.

The FDIC is concerned that several provisions of H.R. 1362
would preempt many of the most positive changes effected by the
new CRA rule.

First, we urge the Subcommittee to reconsider the

need to include the "small town, small bank exemption" provision
in section 122 of the bill.

This provision would exempt from CRA

examination financial institutions in which the main office and
each branch is located in a town, political subdivision or other
government unit with a population of less than 30,000 and is not
part of a metropolitan statistical area, and the institution and
its parent holding company have aggregate assets of not more that
$100,000.

The FDIC firmly believes that the new CRA rule

substantially reduces the compliance burden for small banks.

The

new streamlined examination methods are designed specifically to
provide maximum flexibility for institutions and to ensure
consistency in evaluation criteria, while substantially reducing
the burden of compliance on small institutions.

Periodic

examination of all institutions, regardless of size or rating, is
an effective way to ensure that insured institutions are
providing credit and service in their communities consistently
over time.




15
Second, we do not favor the creation of the selfcertification process prescribed by section 123 of H.R. 1362.
This section would apply to institutions currently rated
"satisfactory" or "outstanding" with less than $250 million in
assets that have not been found to have engaged in a pattern or
practice of illegal discrimination under the Fair Housing Act or
the Equal Credit Opportunity Act during the previous five years.
A self-certification process would preempt the implementation of
the new streamlined examination for small banks contained in the
new CRA regulation.

The new streamlined assessment method

specifically focuses examination criteria for small banks on the
goal of the CRA, and promotes consistent, meaningful ratings.
However, with self-certification, there would be no way to ensure
consistency in ratings across banks, as each institution could
base its self-certification on different criteria and there would
not be an opportunity for sufficient regulatory review of the CRA
performance of an institution.

For example, a self-certification

process raises numerous practical questions, such as: (1) what
criteria would an institution use to base its self-certification
on;

(2) how long would the self-certification remain valid; and,

(3) how would the regulatory agencies verify the rating the
institution has* given itself.

The streamlined examination provided for in the final
regulation is the result of the deliberative process undertaken
by

agencies to promote consistency in ratings and to




16
alleviate the compliance burden CRA examinations have imposed on
small institutions.

It is clear from the extensive positive

feedback the agencies have received on this particular aspect of
the new CRA rule that the streamlined examination is directly
responsive to the concerns of small institutions.

Therefore, the

FDIC strongly urges the Subcommittee to reconsider any type of
self-certification provision, and to allow the new CRA rule to
demonstrate its effectiveness in reducing burden.

Section 124 of H.R. 1362 provides for a public comment
period at the time of the examination of an institution, and
permits both banks and members of the community to seek
reconsideration of a CRA rating before it becomes "conclusive"
for purposes of applications for deposit facilities.

The FDIC

believes that the potential for heated public debate at the time
of the examination could undermine the process which has been
specifically designed to render an objective, balanced assessment
of the CRA performance of an institution.

Under the new CRA

regulation, the agencies will determine a rating on the basis of
objective, performance-based standards.

Institutions have the

opportunity to seek reconsideration of their ratings informally
and through the formal appeals process established by their
primary regulator.

In addition, the FDIC believes that section 124 of H.R. 1362
would impose requirements that could effectively increase burden




17
on banks.

Since many institutions are involved in the

examination process on a more frequent and regular basis than
they are involved in the applications process, creating an
opportunity for public appeal of examination ratings as
prescribed by section 124 could increase the burden on all
institutions.

The FDIC believes that because the new examination

procedures focus on results rather than process there will be
much greater confidence in the CRA rating of an institution, and
less reason for protests.

In addition, from the FDIC's perspective, the safe harbor
created by section 124 of H.R. 1362 is not necessary at this
time.

The FDIC rarely receives CRA protests.

Of the 2,749

applications subject to CRA on which the FDIC took action in
1994, only eight were protested on CRA grounds.

In addition, when the FDIC considers an application from a
state-chartered institution, we must consider a variety of
factors prescribed by the Federal Deposit Insurance Act.

These

statutory factors include, but are not limited to, the financial
history and condition of the institution and the convenience and
needs of the community to be served.

Although the CRA rating of

an institution is important in this process, particularly in
assessing the degree to which the institution is serving the
convenience and needs of the community, it is not conclusive.




18
In summary, the FDIC believes that it is appropriate to
provide incentives so that institutions will strive to excel in
meeting the credit needs of their communities.

However, we urge

the Subcommittee to allow the agencies to implement the new rule
and to evaluate its effectiveness in improving CRA performance
and reducing regulatory burden before instituting any statutory
changes to the CRA, such as a small town, small bank exemption,
self-certification or safe harbor.

After the new CRA rule has

been fully implemented and its impact assessed, the agencies may
consider then whether additional incentives are appropriate.

The FDIC also is concerned with sections 121 and 127 of H.R.
1362.

These sections of the bill would prohibit the agencies

from imposing additional recordkeeping and/or reporting
requirements when examining institutions or in implementing the
CRA.

First, the FDIC is concerned that section 121 could be

interpreted as limiting our ability to have access to loan data
in the course of an examination.

Such limitations would

cr^*i-caH y impair our ability to conduct meaningful examinations,
and would establish a precedent that could in general undermine
the examination process whether for compliance or safety and
soundness examinations.

We recommend clarifying these provisions

in a way that ensures that the agencies' access to relevant
lending data during the examination process is not called into
question.




19
Second, section 127 would prohibit the agencies from
requiring institutions to collect and report loan data required
under the new CRA regulation.

The new CRA regulation imposes •

some additional data collection and reporting requirements on
large banks.

This is balanced, however, by the usefulness of the

information collected.

The data, which will be collected on

small business and small farm loans, will give a more
comprehensive view of how the reporting institutions are meeting
the credit needs of their communities.

Only 2,000 banks out of

10,600 would be required to collect and report the data.

HMDA data alone presents an incomplete view of the lending
of a bank, since it only focuses on mortgage lending.

The small

business and small farm loan data will help to complete the
picture of how an institution meets the credit needs of its
community.

This will benefit many institutions that are not

given full credit today in their CRA ratings for the entire scope
of their lending efforts.

To limit burden, the data collection

requirements for large banks are streamlined, and do not require
loan-by-loan reporting.

Instead, information will be collected

and reported by census tract but will be publicly disclosed in
the aggregate by the agencies, not by the banks.

Overall, the

data collection and reporting requirements of the new CRA rule
were designed to minimize the burden on the reporting
institutions, and are less burdensome than the requirements
contained in the two prior proposed regulations.




20

Once again, we urge the Subcommittee to reconsider the
aspects of H.R. 1362 that would affect efforts to implement the
new CRA regulation.

The final regulation is greatly improved

over the current regulation, as well as the two prior CRA
proposals, in terms of the level of burden on financial
institutions.

The FDIC believes everyone will benefit from the

full implementation of the CRA reforms.

Subtitle C —

Consumer Banking Reforms

Truth in Savings

The Truth in Savings Act ("TISA") requires

institutions to provide accurate and uniform disclosures and
terms of advertising to enable consumers to shop comparatively
for financial savings products.

While TISA provides the consumer

with some valuable information, Regulation DD is overly
complicated.

Section 131 of H.R. 1362 would substantially

streamline TISA.

Institutions would only be required to disclose

the method they use to calculate the interest rate.

While the FDIC supports reducing the complexity and
regulatory burden imposed by TISA, we caution the Subcommittee
that such a sweeping amendment would eliminate some of the
initial disclosures that provide meaningful assistance to bank
customers in their effort to comparison shop for deposit
products.

For example, institutions would not be compelled to

disclose minimum balance requirements, service charges or




21

penalties for early withdrawal of funds.

While it would seem

logical for banks to disclose this information to their customers
as a matter of good business, it was the lack of such disclosures
that in large part prompted the enactment of TISA.

We recommend

that the Subcommittee consider legislation that directs the
Federal Reserve Board to review Regulation DD and revise those
specific sections that do not enhance the ability of consumers to
make informed decisions about deposit accounts and products.

Unauthorized Electronic Funds Transfers

Section 132 of H.R.

1362 addresses unauthorized electronic funds transfers and the
liability of consumers in these instances.

The FDIC has no

objection to this section, but would recommend that language be
included to clarify what actions on the part of the consumer
would be deemed to contribute substantially to unauthorized use.

Subtitle D —

Equal Credit Opportunity Act Amendments

Self-testing

The goal of fair lending laws is to ensure

that the free flow of credit is not impaired by market
distortions created by illegal discrimination on repugnant
grounds, such as race, national origin, sex or age.

The best way

to ensure that this goal is met is by enlisting the help of all
financial institutions in identifying and correcting illegal
discriminatory behavior.

Hence, the FDIC strongly supports the

use of self-analysis, including self-testing, by financial




22

institutions as the most comprehensive approach to assuring
compliance with fair lending laws and to effecting corrective
action that resolves any problems.

The FDIC also supports the

recent decision of the Federal Reserve Board to propose
amendments to Regulation B to permit, but not require, financial
institutions to request information on race, color, gender,
religion and national origin from all applicants.

We believe

this information will assist institutions in reviewing their
overall lending patterns to ensure that they are treating all
customers in a fair, nondiscriminatory manner.

The FDIC supports the provisions of section 145 that would
shelter an institution's self-testing results from discovery by
an applicant in any proceeding or civil action as this will
further encourage institutions to monitor their lending
practices.

However, we note that under the normal rules of

discovery, if an institution elects to use the result of its
self-testing in its defense, this protection should be waived.

There are, however, other aspects of section 145 that we ask
the Subcommittee to reconsider.

Section 145 amends sections

706(g) and 706(k) of ECOA to prevent the regulators from
referring any evidence of substantive fair lending violations to
the Department of Justice or to the Department of Housing and
Urban Development if the institution discovered the violation
through self-testing.




We believe this language, as drafted, is

23
too broad.

This provision would prohibit an agency from making

a referral even if the institution had not taken or initiated
corrective action to remedy the problems discovered through self—
testing.

We recommend amending section 145 of H.R. 1362 to

provide the agencies with discretion to refer those cases where
the institution has not initiated or effected corrective action.
The FDIC would welcome the opportunity to work with the
Subcommittee staff to develop language to accomplish this.

Credit Scoring

Section 146 of H.R. 1362 provides that a

creditor is in compliance with ECOA with respect to any credit
decisions made that are based solely on a statistically sound
credit scoring system as defined by the Federal Reserve Board.
The FDIC has no objection to this section, as long as it is
understood to refer to a credit scoring system that does not
disproportionately impact a protected class of persons without a
clear business justification and there is no evidence of illegal
discrimination.

Subtitle E —

Consumer Leasing Act Amendments

According to section 152 of H.R. 1362, the purpose of this
subtitle is to assure simple, meaningful disclosure of leasing
terms to enable a consumer to comparison shop for leasing
arrangements and to be protected from inaccurate and unfair
leasing practices.




Section 153 amends chapter 5 of the Consumer

24
Credit Protection Act which covers consumer leasing by directing
the Federal Reserve to draft regulations or staff commentary to
update and clarify the current disclosures to carry out the
purposes established in section 152.

The Federal Reserve

currently implements these consumer leasing provisions in
Regulation M.

The FDIC supports the expressed purposes of this subtitle,
but believes that the Subcommittee should reconsider the methods
prescribed in sections 153 through 155 to achieve these goals.
For example, section 154 would provide consumers with a
streamlined, tabular presentation of certain disclosures, and
importantly would add "capitalized cost" to the list of required
disclosures.

However, this tabular presentation of disclosures

would be in addition to, not in place of, the disclosures
currently required by Regulation M.

This would be duplicative

for the lessor and potentially more confusing for consumers who
would receive two sets of similar, but not identical,
disclosures.

We recommend that the Subcommittee reconsider the

approach taken in this subtitle to simplify and enhance these
important disclosures to consumers.

The FDIC will work with the

other regulatory agencies and the Subcommittee staff to
accomplish this.




25
Title II —

streamlining Government Regulations

Subtitle A —

Regulatory Approval Issues

Regulatory Issues
H.R. 1362.

The FDIC supports sections 201 and 202 of

Section 201 provides an exception to the notice

requirements for proposals by a well-capitalized and well-managed
bank holding company to engage in a nonbank activity or to
acquire the shares or assets of a nonbanking company.

Section

202 provides a streamlined process for bank acquisitions by wellcapitalized and well-managed bank holding companies.

Such

acquisitions would be deemed approved within 15 business days, or
fewer if the Federal Reserve Board approves.

Both sections are

consistent with the regulatory philosophy of the FDIC of
encouraging institutions to become and remain well-capitalized
and well-managed.

Applications

With respect to section 207 of the bill, the

FDIC supports the elimination of prior approval for the
establishment of a domestic branch by institutions that operate
safely and soundly.

Today, the establishment or relocation of a

branch is not the major business decision it once was.

The bank

regulatory agencies have sufficient other enforcement tools to
stop unsafe or unsound expansion.




26
In 1994, the FDIC approved over 1,350 applications to
establish or relocate a branch, including three that were
protested on CRA grounds.

None of the three were denied.

Given

this record, there is simply no justification on either safety
and soundness or community service grounds for continuing to
require institutions to endure the costs and delays, however
short, that are associated with the preparation and processing of
applications for prior approval to establish a branch.

In addition, we suggest that the scope of section 207 be
broadened to include applications to relocate a branch as well as
to establish a branch.

As a corollary, we suggest that

institutions only be required to give the FDIC or their primary
federal regulator a simple notice of the location of the new or
relocated branch.

It is necessary for the regulators to know the

location of all branches in order to schedule examinations and to
prepare for emergencies.

Eliminate Branch Applications for ATMs

The FDIC also

supports section 208 of the bill, which would exclude automated
teller machines from the definition of "domestic branch."

We do

not see a compelling reason for an agency to approve these
facilities in advance or even to have prior notice of their
establishment.

It is time for the statutes to catch-up to

changed technology.

The FDIC approved over 700 applications for

these facilities in 1994 and volume will likely pick up in the




27
future.

Eliminating the prior approval requirement will

significantly reduce burden for the industry and the agency.

Reporting Requirements and Certain Exemptions

The FDIC

supports section 210 of the bill, which would revise section 32
of the Federal Deposit Insurance Act ("FDI Act") to eliminate
notice requirements in certain cases involving a new member of a
bank's board of directors or senior executive officer.

The FDIC

regards the existing requirements as unnecessary impediments to
the routine management of depository institutions.

It is

entirely appropriate that, as revised, the prior notice
requirement is confined to institutions that are either
undercapitalized or otherwise in a troubled condition.

Subtitle B —

streamlining of Government Regulations

Branch Closures

We fully support the branch closure

provisions of section 222 of the bill.

These provisions

substantially mirror the federal regulators' interagency policy
statement on branch closings and would reduce regulatory burden
by eliminating the need to give prior notice of decisions to
close automated teller machines, to relocate branches within the
same neighborhood, and to close certain branches acquired through
mergers.




28
amendments to the Depository Institutions Management
Interlocks Act

The FDIC does not object to section 223 which

would provide a small market share exemption for management
interlocks where the affected institutions or their holding
companies, together with their affiliates, hold in the aggregate
no more than 20 percent of the deposits in each relevant
geographic banking market, as defined by the Board of Governors
of the Federal Reserve System.

We suggest, however, that the

appropriate federal regulator, rather than the Federal Reserve
Board, define the relevant geographic markets.

Each agency

already makes independent determinations in merger cases and
should be able to do so for this purpose.

Elimination of Appraisal Subcommittee

Section 224 of the

bill would abolish the Appraisal Subcommittee and transfer
certain of its functions to the Federal Financial Institutions
Examination Council ("FFIEC").

We fully support this approach.

There is no justification for a separate semi-autonomous
Appraisal Subcommittee to perform functions that can be performed
just as well by the FFIEC.

We suggest that the language make

clear that the Subcommittee would be obligated to return funds to
the Treasury after it has wound-up its affairs in an orderly
manner and has satisfied its obligations and commitments to
creditors and others, including the current grant to the
Appraisal Foundation.

We fully expect that the FFIEC will work

cooperatively with the Appraisal Foundation to help it develop




29
alternative funding sources and to help maintain appraisal
standards and appraiser qualifications at current high levels to
ensure the safety of loans secured by real property.

Insider Lending

Section 225 of the proposal would

liberalize the requirements governing insider lending.

We

support the creation of an exemption for extensions of credit
available to a wide group of employees.

Similarly, we support

eliminating reporting requirements related to loans that
executive officers receive from other banks that exceed limits
available at their own bank, as well as the requirement that
corporate quarterly reports include information on loans to
officers.

We would go further, however, by amending section

22(g) of the Federal Reserve Act to allow home equity loans of up
to $100,000 and loans secured by readily marketable assets.

In

addition, we suggest amending section 22(g)(4) of the Federal
Reserve Act, which requires each agency to promulgate separate
regulations to provide for additional exceptions to the "other
loans" category.

A uniform Federal Reserve regulation would

suffice.

Examinations

Section 226 would extend the maximum

permissible examination cycle for certain small institutions from
12 or 18 months to 24 months.

We believe extending the

examination cycle in this manner would tend to establish 24
months as the norm for the time between examinations, which we




30
believe would not be prudent.

It was the FDIC's experience in

the mid-1980s, that examination cycles were lengthened for
smaller institutions on the theory that they did not present
systemic risk problems.

In fact, serious problems developed in

the interim and those problems went undetected for some time.

In

some cases, they ultimately caused significant losses to the
deposit insurance funds.

Although we are in a relatively stable

period at the moment, it also has been our experience that
conditions in the industry can deteriorate rather quickly,
especially in the highly competitive and rapidly changing
environment of today.

Moreover, the regulators are most

effective when the examination process is used to encourage sound
banking practices and strong management and to observe the
philosophy and practices of management and the changes that occur
over time between examinations.

We believe examinations every

two years may not be frequent enough for those purposes.

At the same time, we are mindful of the need to reduce
supervisory regulatory burden, especially on smaller, wellcapitalized and well-managed institutions.

We believe this is

best accomplished, however, by streamlining the process,
increasing offsite monitoring to reduce onsite examination time,
and staffing the examination with no more examiners than needed
in order to keep to the necessary minimum demands on the
resources of the institution and its management.




31
We know that bankers are concerned about the burden of
examinations.

The FDIC recently began surveying bankers for

suggestions on ways to improve the quality and effectiveness of
safety and soundness examinations.

The effort, which is expected

to run for one year, is aimed at detecting and changing aspects
of the examination process that are ineffective or inefficient.
Over the next year, approximately 3,500 FDIC-supervised
commercial banks and savings banks are expected to undergo safety
and soundness examinations.

At the end of these examinations,

the institutions will be given a three—page survey that asks
questions about the appropriateness and thoroughness of
examination procedures? the quality and professionalism of the
FDIC team that conducted the review; and the usefulness of the
written and oral reports from the FDIC regarding examination
findings.

Respondents will have the option to remain anonymous

or to give their names so that the FDIC can seek follow-up
information or clarifications.

Participants also will be able to

speak with a senior management official of the FDIC to discuss
any additional problems or issues.

We also are asking our banks if they prefer having safety
and soundness examinations conducted concurrent with or at
different times than compliance examinations.

Concurrent

examinations may not be practical for all institutions, as space
constraints and personnel resources may be insufficient to
facilitate simultaneous examinations.




The FDIC recognizes that

32
an examination can be disruptive to the normal business of a
bank, particularly for smaller institutions, and we are making an
effort to develop examination schedules that will accommodate the
preferences expressed by banks with respect to concurrent or
separate examinations whenever practical.

While it is too early in the survey process to provide even
preliminary results, we expect that the program will provide a
valuable source of information on how the FDIC can minimize the
regulatory burden on banks while, at the same time, improve the
effectiveness and quality of our safety and soundness examination
program.

As a result of these efforts, we urge the Subcommittee to
reconsider the need and justification for extending the
examination cycle beyond 18 months.

We also note parenthetically

that many states follow a 12- or 18-month examination cycle so
that FDIC coordination with state examinations can more readily
be maintained if an 18-month examination cycle is retained.

Repeal of Unnecessary Reporting Requirements

The FDIC has

no objection to section 230 of H.R. 1362, which would repeal
requirements for reporting small business and small farm loans on
the Report of Condition and Income ("Call Reports").

The CRA

regulatory reform effort has considered those reporting




33
requirements extensively and has required reporting only by
larger institutions for CRA purposes.

Regulatory Burden Review

The FDIC supports the thrust and

purpose of section 232 of the bill, which would require an FFIECled review of all agency regulations no less frequently than
every 10 years.

Such a review is entirely appropriate.

Indeed,

it will be the FDICAs policy to review regulations as often as
every five years to assure that they continue to serve the
intended purposes effectively and efficiently without undue
burden to financial institutions.

We are concerned, however,

that the mandated procedures and overlay of the FFIEC may prove
awkward and time consuming and thereby impede the ongoing efforts
of the agencies to review their regulations independently and to
work jointly to make uniform all regulations and guidelines
implementing common statutory or supervisory policies.

The FFIEC

can serve an important function by providing interagency
coordination and consistency in the efforts of bank regulators to
reduce regulatory burden, as long as the efficiency of its
involvement is assured.

In addition, we support section 229 of the bill that
requires the regulatory agencies to review the extent to which
current regulations require institutions to produce unnecessary
internal written policies and to eliminate such requirements




34
where appropriate.

We plan to include this review as part of our

overall review of regulations.

Country Risk Requirements

The FDIC has no objection to

section 233 which would amend the International Lending
Supervision Act ("ILSA”) in two respects.

First, section 233

would amend section 905 of ILSA to provide the agencies with
discretion to require special reserves in certain circumstances
versus mandating such reserves under the existing law.

We do not

perceive this change as substantive and anticipate that the FDIC
will continue to require special reserves as necessary.

Second,

section 233 would repeal section 905A of ILSA which requires the
agencies to review the risk exposure of banking institutions
arising from medium- and long-term loans to any highly indebted
country and to provide direction to such .institutions regarding
any necessary additions to general and special reserves.

Section

905A also provides very specific guidance to the agencies in
determining risk exposure.

Section 904A was added by the

Financial Institutions Reform, Recovery and Enforcement Act of
1989.

This specific mandate is unnecessary, given our authority

to assess reserves under Section 904 and other supervisory
authorities.

The FDIC will continue to assess the risk exposure

of institutions we supervise to all types of foreign lending and
require additions to general or special reserves as necessary.




35
Regulatory Impact on Cost of Credit and Credit Availability
We support the thrust of section 234 that removes the requirement
that auditors of banks attest to the institution's assertions
regarding internal controls and compliance with designated laws
and regulations.

It also allows for a minority of membership on

an institution's audit committee to consist of insiders and
allows the agencies to grant a waiver to some or all of the
independent audit committee requirements.

However, we suggest

that the provision calling for individual regulators to issue
regulations on this exemption is unnecessarily burdensome and
confusing.

The FDIC, after consultation with the other agencies,

currently is responsible for issuing audit regulations for all
FDIC-insured institutions.

Due Process Protections

Section 235 of the bill would

affect the FDIC in administrative proceedings when it is acting
in its regulatory capacity, when it is acting as conservator or
receiver, or in its corporate capacity as an assignee of assets
a receiver of a failed insured depository institution.

The

bill would apply a more stringent standard than currently applies
to the FDIC when it seeks to obtain pre-judgement attachment of
assets or other injunctive relief.

Section 235 of the bill would

require the FDIC to show immediate or irreparable injury as a
condition for obtaining such relief.




36
We oppose this provision to the extent it would affect our
roles as conservator, receiver, and corporate liquidator of a
failed financial institution under section 11(d)(19) of the FDI
Act.

The law as it stands does not deprive borrowers or other

defendants, such as directors and officers of failed
institutions, of due process protections.

The authority to seek

temporary injunctive relief in the form of asset freezes without
having to show irreparable and immediate loss allows the FDIC, in
appropriate cases, to move quickly to prevent fraudulent
conveyances or concealment of assets.

The statutory power

provided under section 11(d)(19) is consistent with similar
statutory injunctive provisions where Congress deems a type of
action to merit relief from this common law requirement.

There are times, such as soon after a failure, when we
urgently require an injunction to prevent dissipation of assets.
On such occasions, we might not yet have sufficient information
to satisfy the irreparable and immediate injury standard, and in
some cases it can be difficult to establish irreparable harm when
money damages, as opposed to land or some other unique asset, are
at issue.

Congress wanted special status to be applied to cases

involving money damages when deposit insurance funds were at
risk.

Without that authority, the FDIC may be powerless to

prevent dissipation of assets.

A consequence could be that

losses to the deposit insurance funds from bank failures would
increase.




37

Due process protections for borrowers and other defendants
are assured under the existing law.

Under sections 8 and 11 of

the FDI Act, the FDIC must still establish in court that an asset
freeze is in the public interest, that the FDIC has a substantial
likelihood of winning its case, and that the inconvenience to the
defendant is outweighed by the potential harm to the FDIC as
receiver or in another capacity.

Moreover, the law in its

present form has a limited impact because the asset freeze is
temporary and does not determine ultimate entitlement.

Assets

are placed under court supervision, and defendants may still
obtain money for legal expenses, or sell the assets for adequate
consideration after obtaining prior court approval.

Present law

is intended to prevent parties from making fraudulent or abusive
transfers or dissipation of assets until the FDIC's suit for
collection can be heard by a court on the merits.

Thus, due

process rights are fully protected.

Culpability Standards for Outside Directors

The FDIC

strongly opposes section 236, which would exclude outside
directors from the definition of "institution affiliated party"
for purposes of various enforcement actions.

Such directors

would be excluded from this definition unless the federal banking
agencies can first prove that the director "knowingly" or
"recklessly" participated in:
regulation?




1) a violation of law or

2) a breach of fiduciary duty? or 3) any unsafe or

38
unsound practice that caused or was likely to cause more than
minimal financial loss to, or significant adverse effect on, the
insured depository institution.

This treatment puts outside

directors on a par with independent contractors, such as
attorneys, appraisers, or accountants who render services to
institutions under contract.

We believe that outside directors owe a higher duty of care
to a bank than do independent contractors and should be held to
the same standard of care as inside directors for purposes of
administrative enforcement jurisdiction.

For example, our

experience has shown that "outside" directors can engage in selfdealing transactions almost as easily as inside directors.

The unbiased and arms-length approach of outside directors
is essential to the proper oversight of management and the
policies of the institution.

Outside directors should be

prepared to meet their full fiduciary responsibilities or not
serve in this capacity.

To the extent that factors unique to the

outside directors should affect individual cases, these factors
are already considered by the FDIC, as stated in the Statement
Concerning the Responsibility of Bank Directors and Officers that
the FDIC issued in December of 1992.

Moreover, the "knowing"

standard would be extremely difficult to meet since it requires
the banking agencies to prove what was on a person's mind at the
time they took the action.




39
Rules on Deposit Taking

The FDIC supports section 237 which

amends section 29(g)(3) of the FDI Act to correct a technical
problem in the current law that places restrictions on the
interest rates that adequately capitalized banks may provide on
deposits..

At present the law defines as a "deposit broker” an

institution which solicits deposits by paying interest higher
than that paid by other institutions in the soliciting bank's
market.

If an institution is only "adequately capitalized" it

must obtain a waiver to take brokered deposits, but even then
cannot pay significantly above what other institutions are
offering in the marketplace.
circularity.

The bill would correct this

The changes would allow adequately capitalized

banks to operate a money desk without our prior waiver.

We

believe we have adequate supervisory tools to deal with any
abuse.

Transition Period for New Regulations

Section 238 would

amend the Riegle Community Development and Regulatory Improvement
Act of 1994 to change the transition period for new regulations
that impose additional reporting, disclosure, or other new
requirements on insured depository institutions, from a calendar
quarter to a semi-annual period.

We believe that delaying the transition period for new
regulations from quarterly to semi-annually is too long, where
institutions have had notice and an opportunity for comment.




40
Most regulations implement statutes and a six-month delay can
cause confusion on whether the old or new regulations are in
place.

Our experience is that more specific guidance on the

meaning and application of a new statute is ordinarily needed
sooner rather than later, and is often requested by regulated
institutions.

Title III —

Lender Liability

The FDIC strongly supports section 301 of H.R. 1362, which
would protect lenders from liability for the clean-up of
hazardous substance contamination for which they had no
responsibility.

By clarifying and limiting the environmental

liability of a lender that holds a security interest or
forecloses on property contaminated by a hazardous substance, a
lender will be in a better position to assess the potential risks
associated with the extension of credit.

By assisting lenders in

understanding the circumstances under which they could be liable,
lenders should be able to make better credit decisions.

We

support provisions that would clarify situations under which
lenders would be liable for contaminated property.

The section would similarly protect the FDIC as receiver
from liability for contamination that it did not cause or
contribute to and would extend that protection to the first
subsequent purchaser of property from the FDIC unless that person




41
was otherwise liable or potentially liable for the contamination.
These provisions should greatly assist the FDIC in winding-up the
affairs of failed depository institutions in an orderly and
timely fashion.

THE FDIC'S SPECIFIC BURDEN REDUCTION EFFORTS TO DATE

As discussed earlier, regulatory burden falls
disproportionately on small institutions.

In recent years, the

FDIC has become increasingly sensitive to the issue of regulatory
burden because state nonmember banks are typically small —
have 25 or fewer employees; a third, 13 or fewer.

half

We are

continuing to review our regulations, policies, and procedures
and seek to simplify or eliminate them where appropriate.

In

doing so, we have also recognized that the banks with the best
examination ratings need a lighter regulatory hand than those
that give us concern.

I will highlight previous and ongoing

efforts of the FDIC to identify and change areas where burden can
be reduced without impairing regulation for safety and soundness
purposes or necessary consumer protections.

Safety and Soundness Examinations

The FDIC has acted to minimize the burden of its safety and
soundness examination program through careful allocation of
resources, a simpler and better focused examination report format




42
and an increased emphasis on coordination with other federal and
state bank supervisors.

For example, as permitted by statute,

well-capitalized insured depository institutions below $250
million in total assets are subject to less frequent examinations
if they are rated 1 under the CAMEL rating system, as are wellcapitalized CAMEL 1- and 2- rated institutions with total assets
of $100 million or less.

To promote better consistency among

examinations, the FDIC has adopted a Uniform Report of
Examination form with the other Federal banking agencies.

To minimize the burden of duplicative and overlapping
examinations, the FDIC coordinates its safety and soundness
examinations with state banking authorities and in most cases
alternates responsibility for examinations of CAMEL 1- and 2rated institutions with state authorities.

We also coordinate

safety and soundness examinations of subsidiary banks of large
multibank holding companies with other federal and state bank
supervisors to eliminate overlap.

We have also worked with the

Federal Reserve Board and with state regulators to develop a
coordinated and unified supervisory program for U.S. operations
of foreign banking organizations.

In addition, the FDIC and other federal regulators recently
reached an agreement with the National Association of Securities
Dealers to coordinate the examination of broker-dealers




43
affiliated with insured depository institutions operating on bank
premises.

Compliance Examinations

The FDIC has also undertaken initiatives in the consumer
compliance area to minimize and reduce the burden on banks.

With

the creation of a new Division of Compliance and Consumer Affairs
in 1994, the FDIC began a comprehensive review of its compliance
examination activities to identify specific areas for
modification.

To reduce the time and burden associated with on­

site compliance examinations, we are streamlining the process by
providing examiners with better analytical tools and computer
software.

For example, to reduce the time examiners spend on­

site in banks conducting compliance examinations, the FDIC is
expanding and enhancing its off-site pre-examination analysis.
The use of specialized data integration software will enable
examiners to perform a substantial amount of loan portfolio
analysis at the field office, instead of in the bank.

In conjunction with our efforts to streamline the compliance
examination function we will be surveying a cross-section of
banks over the next month to solicit their views about how that
process may be improved.

The responses we receive will be

compared with a survey conducted again in twelve months to enable




44
us to measure the success of the modifications we are
implementing in the compliance examination process.

To ensure a consistent application of the new CRA
examination criteria, the agencies will be working together
through the FFIEC to develop standardized procedures and to
coordinate examiner training.

Through this joint effort, we can

ensure a we11—executed implementation of the new regulation.

Regulation Review and streamlining

As mentioned earlier, in accordance with section 303 of the
Riegle Community Development and Regulatory Improvement Act of
1994, the FDIC is undertaking a comprehensive review of its
regulations and policy statements to streamline, eliminate or
modify them where possible.

The purpose of the review is to

improve efficiency and reduce unnecessary costs, as well as to
eliminate inconsistencies and duplicative requirements.

We have

developed a schedule for an orderly review of the various
regulations and policy statements and have targeted several for
early attention.

Where appropriate, we are working on an

interagency basis to review comparable regulations and policies
at all the agencies on a uniform basis.

In this regard, we claim

an early success in the new CRA regulation.




45
As I noted at the outset, through a broad range of other
previous initiatives that parallel the goals of section 303, the
FDIC has sought to change or modify existing regulations to
reduce the regulatory burden on banks while improving the
regulation of safety and soundness.

The breadth and scope of

efforts is illustrated by the following examples of recent
actions taken to reduce burdensome supervisory requirements:

•

The FDIC has implemented pursuant to statute a prompt

corrective action regimen under which well-capitalized and wellmanaged institutions are freed of prohibitions and restrictions
otherwise applicable to under-capitalized institutions.

•

Institutions with a CAMEL rating of 1 or 2, and that

exceed $5 billion in total assets, are eligible for the holding
company exception when complying with the FDIC's rules and
regulations regarding annual audits.

These institutions may now

use the holding company's audit committee and submit holding
company reports in order to satisfy the FDIC's requirements.
Thus, such an institution is no longer required to have its own
separate audit committee and need not file annual reports
prepared at the institution level as previously had been
required.

•

The FDIC adopted a final rule clarifying regulatory

capital treatment for net unrealized holding gains and losses on




46
"available-for-sale” securities.

Including unrealized gains and

losses in regulatory capital could cause bank capital levels to
be unnecessarily volatile, without appreciable benefit to the
safety and soundness of the banking system.

The FDIC's rule

excludes most of these unrealized gains and losses from Tier 1
capital, thereby minimizing the possibility that temporary
fluctuations in market interest rates could cause an institution
to fall below its minimum capital requirements.

•

The FDIC has acted to waive, under certain conditions,

burdensome disclosure requirements related to a bank's commission
on securities transactions for bank customers.

This waiver

eliminates a disparity in the rules for state nonmember banks in
relation to other banks, which are not required to provide the
disclosures.

In addition, it alleviates the problem many banks

faced in determining the amount of their fee in advance or
immediately after a trade.

The FDIC's new waiver authority

conforms to authority the Federal Reserve Board and Comptroller
of the Currency already have.

•

Statutes requiring regulations on real estate lending,

safety and soundness standards and external audits and
attestations have been implemented with simple, short regulations
and supplemented with less draconian supervisory guidelines.




47
•

The FDIC recently withdrew a proposed rule on contracts

that may be adverse to a bank's interests.

We determined that

potential abuses can be handled through normal supervision and
existing authority and that it is therefore not necessary to
implement additional regulations pursuant to section 30 of FDI
Act.

•

Banks rated satisfactory or better for CRA purposes have

a streamlined and expedited application process when establishing
or relocating an automated teller machine instead of filing a
formal application and awaiting approval.

•

The FDIC adopted a final rule reducing the amount of

risk-based capital that FDIC-supervised banks must maintain for
low-level recourse transactions.

For risk-based capital

purposes, when assets are transferred with recourse, capital
normally must be held against the full outstanding amount of the
transferred assets regardless of the level of recourse retained
by the transferor.

The final rule relieves banks of this

excessive regulatory capital burden by limiting the amount of
risk-based capital required to be held in low level recourse
transactions to the maximum amount of loss possible under the
recourse agreement.

•

In 1992 the FDIC, under the auspices of the FFIEC,

adopted a uniform policy concerning the frequency and timing of




48
changes to Call Reports and similar reports filed by other
depository institutions.

Changes in regulatory reporting

requirements impose a burden on institutions because they must
make modifications to their recordkeeping and reporting system to
accommodate the reporting changes.

Limiting the frequency of

changes and providing lead time between the announcement of the
change and its effective date reduce regulatory burden.

Under

the interagency policy, changes in regulatory reporting
requirements are to be announced prior to the start of the
calendar year in which the revisions will take effect, thereby
giving institutions at least 90 days advance notice.

•

The FDIC Board adopted a formal appeals process on

March 21, 1995, that provides FDIC-supervised institutions with
an avenue to appeal material supervisory determinations including
CAMEL, compliance and CRA ratings, the adequacy of loan loss
reserve provisions and cited violations of law or regulation.

•

The FDIC has adopted a new approach for collecting

deposit insurance premiums.

Effective April 1, 1995, for the

semiannual assessment period beginning July 1, 1995, the
assessment amount will be calculated by the FDIC rather than by
each institution.

This will improve the accuracy of the

computations and relieve institutions of the burden of performing
the calculations.




Furthermore, assessments will be collected via

49
direct debits initiated by the FDIC through automated clearing
house processes which reduces paperwork for insured institutions.

Our efforts to identify areas for regulatory relief are
ongoing and we continue to seek out opportunities to make further
inroads into burden reduction.

ADDITIONAL REGULATORY RELIEF MEASURES

Appendix B provides a description of additional statutory
changes that we believe would help to reduce regulatory burden.
Our proposed amendments add to the efforts of the Subcommittee to
reduce burden without compromising safety and soundness.

For

example, we recommend repealing section 39 of the FDI Act that
requires federal banking agencies to prescribe operational and
managerial standards for all insured depository institutions.
The standards required by section 39 are widely viewed as
unnecessary micromanagement of financial institutions.

Another recommendation, that is mentioned earlier in the
testimony, is to amend section 22(g) of the Federal Reserve Act
to expand the statutory exceptions to the restrictions on loans
to executive officers to include home equity lines of credit.
This amendment would provide flexibility in lending to executive
officers without compromising safety and soundness.




50
We have provided language on these and additional
suggestions for reducing burden in seven other areas to the
Subcommittee staff and would be pleased to assist them further in
regulatory and legislative relief efforts.

CONCLUSION

Let me again state that we are encouraged that Congress is
committed to reducing regulatory burden.

The FDIC too is engaged

in an intensive effort to identify regulations and policies that
may be modified, streamlined or eliminated, without compromising
safety and soundness or essential consumer protections.

We are

pleased that Congress is engaged in efforts to identify statutory
requirements that also add to the level of burden without
compensating benefits.

We encourage Congress to continue to review the many laws
and resulting regulations that institutions find most burdensome.
This review should be subject to the criteria I referred to at
the outset of my testimony:

1)

whether the laws are necessary

to ensure a safe and sound banking system, 2)

whether the laws

enhance the functioning of the marketplace, or 3)

whether the

laws can be justified on strong public policy grounds related to
consumer protection.

Against these criteria, the laws should be

reviewed with respect to their underlying premises and whether
they achieve their purposes.




In addition, the costs and any

51
side-effects should be examined to determine whether there are
simpler, less-costly and more straightforward means of achieving
those ends.

The regulatory burden on the banking industry grew
incrementally over a number of decades —

rule by rule,

requirement by requirement, report by report.

The time has come

to search through the baggage to determine what is really
necessary to carry forward.

We welcome the opportunity to work

with you Madam Chairman, this Subcommittee, and the Congress in
this important effort.




APPENDIX A
Costs of Selected Regulatory and Legislative Requirements:
An Informal Survey
In conjunction with current efforts to reevaluate the benefits and costs of various legislative and
regulatory requirements for the banking industry, the FDIC conducted an informal, voluntary survey
of a small group of banks it supervises. (A copy of the questionnaire is attached.) Each institution
was asked to estimate its total cost— both direct and indirect— of compliance with the requirements
contained in the survey. A cross section of institutions was chosen with regard to size and location.
Sixty-one banks participated, representing every region of the country. The smallest participant had
assets of only $4.6 million at year-end 1994; the largest had $9.2 billion of total assets. Random
sampling could not be used with only 61 banks, so the results are representative of only the
institutions selected, but not the banking industry generally.
This study differed from others that have been conducted in recent years. For reasons of time and
burden on the institutions surveyed the FDIC focused only on specific provisions for regulatory relief
generally supported by the FDIC rather than on overall regulatory cost or broad categories of
regulation or legislation. Respondents were asked only to report costs associated with specific
requirements that would not otherwise be incurred.

Recurring Regulatory Costs
The annual cost estimates for the recurring legislative and regulatory requirements included in the
survey are presented in Table 1. The reported costs of compliance for each question varied
considerably among institutions; therefore, median values (the midpoint of estimates received) are
used to describe the results. This measure was chosen because it is not affected by extremes in
either direction.
T able 1
FDIC REGULATORY BURDEN SURVEY
E s tim a te d R e c u r r in g C o s ts I n c u r r e d b y a S in g le B a n k : S e le c te d I n itia tiv e s
Cost as Percent
of N et Income
(Median for
Reporting
Institutions)

Legislative Initiatives

M edian
Annual
D ollar Cost
for Reporting
Institutions

T ruth in L ending A ct beyond basic interest rate inform ation

$10,000

T ruth in Savings A ct beyond basic interest rate inform ation

5,400

0.67

Savings from consolidation o f R E S PA /T IL disclosure requirem ents

5,000

0.38

R ight-of-R escission provision o f T ruth in L ending A ct

2,500

0.20

A ccountant attestations on internal controls & regulatory com pliance

3,000

0.28

Pass-through insurance disclosures to em ployee benefit plan depositors

1,250

0.08

Federal R eserve A ct reporting o f loans to executive officers

550

0.04

Federal D eposit Insurance A ct reporting o f bank stock collateral

250

0.01

Sm all business and agricultural credits reporting

500

0.05

3,000

1.46

H M D A lim it raised to $50 m illion (for applicable institutions only)
T o ta l R e c u r r in g R e g u la to ry C o sts




$42394

1.03%

335%

Consumer and Supervisory Issues. Several questions dealt with various aspects of consumer
protection requirements. For instance, respondents indicated that the median cost of providing
customers with Truth in Lending information over and above disclosure of the basic, annual
percentage rate was $10,000 per annum. The comparable figure for Truth in Savings was $5,400.
Lower estimated costs were reported for the overlapping information requirements in RESPA and
Truth in Lending and for the cost of right of rescission under Truth in Lending. To put these dollar
figures in perspective, in no case did the reported cost of any specific regulation exceed 1.1 percent
of net income in 1994 for the relevant institutions.
Other questions focused on supervisory issues. For instance, the median cost of obtaining an
outside auditor to attest to an institution’s assertions regarding its compliance with internal controls,
regulations, and legal requirements was reported to be $3,000. No other question regarding
supervisory issues yielded median cost estimates that exceeded $1,250.
Reporting Burden. With respect to reporting burden, the cost of providing data on small loans
to business and agriculture was less than $500 for half of the respondents. On a per loan reported
basis, the median cost was $1.70. A proposal has been offered to increase the cutoff for the Home
Mortgage Disclosure Act (HMDA) reporting exemption from an asset level of $10 million to $50
million. Banks in the $10 million to $50 million range estimated that the median cost of collecting,
reporting, and making public HMDA data was $3,000 per year (just under 1.5 percent of net income).
The responses regarding HMDA costs are presented in Table 2. The median cost per application
received was $119.

Table 2
FDIC REGULATORY BURDEN SURVEY

HMDA Costs For Selected Size Categories

Institution Size
(Assets)

M edian Annual
D ollar Cost for
Reporting Institutions

Cost as Percent
o f Net Income
(Median for Reporting
Institutions)

Special M easures
(Median for Reporting
Institutions)

$10 to $25 m illion

$ 2 ,3 0 0

1.19%

$ 97.31 / A pplication

$10 to $50 m illion

3,000

1.46

$118.80 / A pplication

G reater than $50 m illion
(Institutions not affected by
current proposals)

22,000

0.25

$ 17.52 / A pplication

Total Recurring Costs. For all recurring requirements included in the survey, the median annual
cost of compliance was reported to be approximately $40,000 per institution (3.35 percent of net
income). If those requirements had not been in place, the responses suggest that half the institutions
would have seen a pre-tax increase in their return on assets of more than 5 basis points.

Differences by Size o f Institution
The FDIC survey confirmed the findings of other studies which have shown that small institutions
generally bear a higher proportional regulatory burden than large ones. Smaller institutions reported
that a clearly higher proportion of their budgets is devoted to meeting the recurring requirements

2



FDIC REGULATORY BURDEN SURVEY

Median Recurring Costs for Reporting Institutions: Selected Initiatives
Cost/Net Income (Percent)

L ess Than
$10 M illion

$10 Million$25 Million

$25 Million$50 Million

$50 Million$250 M illion

$250 Million- G reater Than
$1 Billion
$1 Billion

Asset Size

addressed in the survey. Specifically, the proportion of net income devoted to these items ranged
from over 16 percent at the smaller institutions to just over one percent at the largest. As may be
seen in Table 2, the cost to comply with HMDA requirements was proportionally higher for small
institutions than for larger ones.

The Cost o f Various Apptications/Notifications
Respondents also were asked to estimate the cost of various applications and notifications that
they periodically submit to the FDIC (see Table 3). The estimates for these items ranged from a
median cost of $500 for a notification of a change in senior management to $20,000 for reporting

Table 3
FDIC REGULATORY BURDEN SURVEY

Estimated Costs: Selected Applications/Notifications

Legislative Initiatives
E stablishm ent o r relocation o f a branch
C hange in senior executive officer or
B oard o f D irectors
E xercise o f trust pow ers
“P hantom ” m e rg e r o r corporate
reorganization
FD IC perm ission to conduct activities not
allow ed national banks




Num ber of
Institutions
Responding to
Question

M edian
Annual
D ollar Cost
for Reporting
Institutions

C o sta s
Percent of
Net Income
(Median for
Reporting
Institutions)

40

$5,000

0.15%

39
14

500
1,000

15

20,000

13

2,500

u .w
0.02

u .u /

3

major corporate reorganizations. These estimates were based on a subset of the institutions queried,
as not all participants had experience in all types of actions.

Overall Costs
Because the survey was informal and voluntary, it could not employ a statistically-representative
sample of institutions. Thus, it is not possible to provide statistically-based industry-wide estimates
of the potential cost savings from the elimination of the requirements in question. However, to
approximate the larger scale of savings for all FDIC-supervised institutions, the figures from the
participating banks were generalized to all such institutions. (All FDIC-supervised institutions to
which that requirement was applicable were assigned the same proportional costs as those responding
to the survey.) For applications and notifications, the overall cost was obtained by multiplying the
actual number of filings with the FDIC in 1994, times the estimated per unit cost. Because of the
variability of the estimates received, a range of costs was developed based on the median and mean
answers in each category.
Using the median cost estimate for each category, the total compliance costs for all questions in
the survey for FDIC-insured institutions would sum to approximately $500 million in 1994. Because
several institutions reported unusually high estimates of costs for each question, the mean estimate
was always higher than the median for each question. Using the mean estimates as a basis for
aggregating, the total cost of compliance for those selected requirements for all FDIC-supervised
institutions was slightly more than $1 billion. Therefore, the range of costs for compliance of
FDIC-supervised institutions can be credibly set at $500 million to $1 billion. These figures compare
to total net income of all FDIC-supervised institutions for 1994 of $12.6 billion.

Results Relative to Other Surveys
In recent years two other surveys of banking institutions were undertaken regarding the costs of
regulations. These surveys covered a much broader range of regulations than did the FDIC survey.
In 1991, the American Bankers Association (ABA) asked a sample of their members about the “cost
of regulation” in general; their industry-wide estimate based on the survey answers was $10.7 billion.
The Independent Bankers Association of America (IBAA), which surveyed its community banks in
1992 on 13 broad regulations, estimated that compliance costs for all such institutions were $3.2
billion.
Because the questions asked by the FDIC were much narrower and more specific than those
contained in the two earlier surveys, our cost estimates are proportionately lower. Moreover, the
cost estimates involved a much different set of institutions. Each estimate of total cost was related
to total assets of the relevant population of banking institutions to facilitate comparison of the various
results. After that adjustment, the estimates from the FDIC survey ranged from 15 to 30 percent of
the industry-wide ABA figure of total compliance costs and from 10 to 20 percent of the IBAA figure
for all community banks. This was probably a reasonable result given the more limited scope of the
FDIC survey.

4




SURVEY QUESTIONS ON REGULATORY BURDEN

1.

What is the overall, estimated annual cost to your institution of Home Mortgage
Disclosure Act (HMDA) data collection, review, and reporting, including the cost of
making the results available to the public?

2.

What is the overall, estimated annual cost of all other disclosures required by the Truth
In Lending Act beyond the disclosure of the basic, annual percentage rate?

3.

What is the:
a.

Percentage of home loans and lines of credit subject to rescission under the Truth
In Lending Act that has been rescinded at your institution in recent years?
%

b.

Overall, estimated annual cost of compliance with the right-of-rescission provision
of the Truth In Lending Act?
$ _________________

4.

What is the amount of estimated, annual savings which could be attained from the
coordination and/or consolidation (i.e., elimination of overlaps as well as of differences
in definitions and coverage) of disclosure requirements of the RESPA and the Truth in
Lending Act?




5.

What is the overall, estimated annual cost of providing customers with the disclosures
required by the Truth in Savings Act, over and above those revealing the rate and method
used to calculate interest?
$ ___________________

6.

You currently are required to report data on various types and size categories of small
business and agricultural credits on the June call report. What is the overall, estimated
annual cost of having to comply with this reporting requirement?
$ ___________________

Note: Banks are required to report on Part II of Schedule RC-C of the June call both the
number, and amount outstanding, of business loans with original amounts of $1 million or less
and of outstanding farm loans with original amounts of $500,000 or less. Included are loans
secured by nonfarm, nonresidential properties, commercial and industrial loans, loans secured
by farm land, and other loans to farmers.

7.

8.

What is the anticipated cost of providing required disclosures to employee benefit plan
administrators regarding the availability of pass-through deposit insurance coverage on
employee benefit plan deposits (effective July, 1995 as outlined in FIL-14-95)?
a.

Initial cost

$ ______________

b.

On-going cost

$ ______________

Section 36 of the FDI Act requires attestation by an institution’s independent public
accountant to management’s assertions regarding internal controls and compliance with
FDIC regulations and federal laws. What is the overall, estimated annual cost of
compliance with this requirement?

$ ___________________
Note: Section 36 (c) of the FDI Act requires an institution’s independent public accountant to
attest to, and report separately on, the assertions of the institution’s management contained in
any internal control report required by Section 36(b)(2) of the Act. Section 36(e) of the FDI Act
requires the institution’s independent public accountant to apply procedures agreed upon by the
FDIC to objectively determine the extent of compliance of the institution with laws and
regulations designated by the FDIC.




9.

Proposals have been made regarding the streamlining of notice and application processes.
What is the overall, estimated cost of preparation and submission of an application or
notice for:
a.

Establishment/relocation o f a branch?
$

b.

Change in senior executive officer/board of directors (pursuant to Section 32 of
the FDI Act)?
$

c.

Exercise of trust powers?
$

d.

’’Phantom" merger/corporate reorganization?
$

e.

An application to conduct activities not permissible for national banks (pursuant
to Section 24 of the FDI Act)?
$ __________________

10

What is the estimated, annual cost to your institution of maintaining and reporting data
required by Section 22 (g) of the Federal Reserve Act regarding loans to executive
officers-both from outside sources and from your institution?
$ ___________________ _

Note: Section 22(g)(6) of the Federal Reserve Act requires executive officers to report to their
Board of Directors, detailing the extensions of credit from another institution whenever me
aggregate amount of those extensions exceed the permissible limits from their own institution.
Section 22(g)(6) is made applicable to insured nonmember banks through Section 18(j
FDI Act. Section 22(g)(9) of the Federal Reserve Act requires that each institution include w
its call report data on all loans to executive officers since the filing of the previous cal repo
made pursuant to Section 22(g).




11.

Section 7(j)9 of the FDI Act requires reporting of credit extensions secured by 25 percent
or more of any class of stock of an insured depository institution. What is the overall,
estimated annual cost of this reporting requirement?
$ ___________________

Note: Section 7(j)9 of the FDI Act requires any financial institution and any affiliate that has
credit outstanding which is secured directly or indirectly by 25 percent or more of any class of
shares of another insured depository institution to file a report with its federal banking agency.
A copy also is required to be filed with the appropriate federal banking agency of the institution
whose stock secures such extensions of credit.

12.

Are there any other areas of banking law or regulation which you feel are particularly
costly to your institution that you feel should be eliminated?

Regulation

_____________________________________________________________

Estimated annual cost

Regulation

_____________

Estimated annual cost




$ ______________

$

APPENDIX B

ADDITIONAL REGULATORY RELIEF MEASURES

The FDIC also believes the following additional statutory
changes would help significantly to reduce regulatory burden.

We

recommend their inclusion in the bill.
.

Repeal section 39 of the FDI Act. Section 39 requires the
Federal banking agencies to prescribe standards, by
regulation or guideline, for all insured depository
institutions relating to asset quality, earnings, stock
valuation, various operational and managerial matters, and
compensation. The standards required to be prescribed by
the agencies represent an extraordinary foray into the
micromanagement of a depository institution and are
unnecessary to ensure safety and soundness. Not only are
the standards difficult and burdensome for the agencies to
establish, but the agencies already have sufficient
authority to deal with abuses and unsafe or unsound
practices on a case**by—case basis under section 8 of the FDI
Act and other provisions of law and regulation. The
guidelines which the agencies may issue in satisfaction of
this statute are likely to be more confusing than helpful.

•

Repeal section 37(a)(3)(D) of the FDI Act. Section
37(a)(3)(D) requires the Federal banking agencies to develop
jointly a method for insured depository institutions to
provide supplemental disclosure of the estimated fair values
of their assets and liabilities, to the extent feasible and
practicable, in any balance sheet, financial statement,
report of condition, or other report of any insured
depository institution required to be filed with a Federal
banking agency.
Section 37(a)(3)(D) has not only been difficult and
burdensome for the agencies to implement but also places
additional regulatory burden on insured depository
institutions by requiring them to disclose a variety of
information, much of which the agencies already are able to
obtain. For example, financial statements that are filed
annually with the agencies by institutions subject to the
audit and reporting requirements of section 36 of the FDI
Act (i.e., institutions with $500 million or more in assers;
and any other institution with financial statements prepare
in accordance with Generally Accepted Accounting Principles




2

already include information on the fair value of their
financial instruments. While not all of an institution's
assets and liabilities are financial instruments, the vast
majority are. Other real estate (which is one of the more
significant assets that is not a financial instrument) is
carried on an institution's balance sheet at an amount that
does not exceed fair value less estimated selling costs.
Also, certain securities are carried at fair value on the
balance sheet and, for those securities that are not carried
at fair value on the balance sheet, supplemental disclosure
of their fair value is provided.
In addition, institutions with assets in excess of $100
million will be required to disclose the fair value of their
off-balance sheet derivatives beginning March 31, 1995. For
institutions subject to section 36 of the FDI Act (i.e.,
institutions that pose the largest risk to the insurance
funds), the fair value disclosures required by section
37(a)(3)(D) essentially duplicate much of the information
that they already disclose. For the few assets and
liabilities for which fair value is not currently disclosed,
it may not be feasible or practicable to determine fair
value. Moreover, the agencies have the authority under
section 36 of the FDI Act to require fair value disclosure
as they determine to be necessary.
•

Amend section 11(a)(1)(D) of the FDI Act. Section 11(a) of
the FDI Act prohibits the FDIC from providing pro rata or
"pass-through" deposit insurance coverage to employee
benefit plan deposits that are accepted by an insured
depository institution at a time when the institution may
not accept brokered deposits under section 29 of the FDI
Act. Consequently, if an institution accepts employee
benefit plan deposits at a time when it is unable to accept
brokered deposits (i.e., when it is undercapitalized), such
deposits would only be insured up to $100,000 per plan (as
opposed to $100,000 per participant or beneficiary). Under
existing law, the depositor, rather than the institution,
would be penalized for the institution's behavior.
By limiting "pass-through" coverage on employee benefit plan
deposits, the burden is placed on plan administrators every
time a deposit is made to inquire as to an institution's
capital category and ability to accept brokered deposits
before placing plan deposits with the institution, even
though many plan administrators may not be aware of such
restrictions. Even if they are aware of such restrictions,
plan administrators must inquire each time as to the
institution's continuing ability to provide "pass-through"
coverage. Not only are the "pass-through" restrictions
burdensome and unfair to plan administrators and
Participants, but they also are burdensome to the




3
institution by subjecting it to frequent requests for
information concerning its ability to offer "pass-through"
insurance to employee benefit plan deposits.
We suggest amending section 11(a)(1)(D) of the FDI Act to
prohibit undercapitalized institutions from accepting
employee benefit plan deposits. The effect of the suggested
amendment would be to provide "pass-through" deposit
insurance coverage to employee benefit plan deposits that
are accepted by an institution that violates the law and
accepts such deposits at a time when it is undercapitalized.
Under the amendment, the institution, rather than the
depositor would be penalized, which is consistent with the
way brokered deposits are treated under the law.
.

Repeal section 29A of the FDI Act.
Section 29A requires
deposit brokers to file notices with the FDIC and imposes
certain recordkeeping and reporting requirements on deposit
brokers. The FDIC believes that the requirements of section
29A serve no useful supervisory purpose and that the receipt
and use of brokered deposits can be monitored through call
reports and the examination process. The effect of repeal
would be to reduce the burden on deposit brokers who have no
reason to know what their clients are doing with the
brokered funds, and on any institutions that may be acting
as deposit brokers, as well as on the FDIC in receiving and
maintaining reports filed by deposit brokers. Repeal would
in no way change the existing restrictions on depository
institutions accepting brokered deposits. The amendment
would also eliminate what appears to be an incipient problem
whereby individuals or entities file the notice with the
FDIC that they are acting as deposit brokers and claim or
misrepresent themselves to potential customers as
"registered," "licensed," or "approved" by the FDIC.

•

conform the interest-rate limitations contained in section
29 of the FDI Act. As currently drafted, section 29
contains three separate and dissimilar provisions that limit
the rate of interest payable by insured institutions that
are not well-capitalized.
The first of these provisions is section 29(e) which
prohibits an adequately capitalized institution that has
received a waiver to accept brokered deposits or an
institution for which the FDIC has been appointed
conservator from paying interest on brokered deposits that
significantly exceeds the rate paid on deposits of similar
maturity in the institution's normal market area or the
national rate paid on deposits of comparable maturity, for
deposits accepted outside the institution's normal market
area.




4
The second provision limiting interest rates is section
29(g)(3). This section provides that anv insured depository
institution (other than a well-capitalized institution) that
solicits deposits by offering significantly higher rates of
interest than the prevailing rates in the institution's
normal market area is deemed to be a "deposit broker." This
provision essentially limits the rate that institutions that
are not well-capitalized may pay on deposits obtained
without the intermediation of a third-party broker.
The third provision limiting interest rates is section
29(h). This section prohibits an undercapitalized
institution from soliciting deposits by offering rates of
interest that are significantly higher than the prevailing
rates of interest in the institution's normal market areas
or in the market area in which such deposits would otherwise
be accepted.
Computing effective yields in an institution's normal market
area or in any particular area is conceptually difficult.
There is a need to simplify and harmonize these provisions
by eliminating the references to "normal market area" and
"market area in which such deposits would otherwise be
accepted" and replacing these "point-of-origin" or
"geographically-determined" interest rate restrictions with
a single interest-rate restriction that is independent of
the geographic origin of the deposit.
•

Repeal section 30 of the FDI Act. Section 30 prohibits an
insured depository institution from entering into a written
or oral contract with any person to provide goods, products,
or services to or for the benefit of the institution if the
performance of such contract would adversely affect its
safety or soundness.
Since enactment of section 30, there has been a significant
decrease in the types of activity that the statute was
intended to eliminate (i.e., abuses involving contracts made
by or on behalf of an insured depository institution that
seriously jeopardize or misrepresent its safety or
soundness). This decrease is due in part to increased
awareness of the potential for contracts to be structured in
a manner that is adverse to an institution's safety or
soundness and the use of alternative supervisory actions by
the agencies to address such abuses if they arise. Not only
has section 30 been difficult and burdensome to implement,
but the agencies already possess adequate supervisory
authority under section 8 of the FDI Act and other
provisions of law and regulation to address adverse
contracts.




5
.

Amend section 22 la\ of the Federal Reserve Act. Section
22(g) of the Federal Reserve Act prohibits a member bank
from extending credit to its executive officers except in
the amounts, and for the purposes, and upon the conditions
specified therein. Section 18(j)(2) of the FDI Act and
section 11(b) of the Home Owners' Loan Act make such
restrictions applicable to nonmember banks and savings
associations, respectively. Among the exceptions to the
prohibition on loans to executive officers specified in
section 22(g) are loans secured by a first lien on a
dwelling of an executive officer which is expected to be
owned by the executive officer and loans to finance the
education of the children of an executive officer. We
suggest expanding the statutory exceptions to the
restrictions on loans to executive officers to include home
equity lines of credit up to $100,000 and loans secured by
readily marketable assets up to 50 percent of fair value.
The effect of such amendments would be to provide additional
flexibility in lending to executive officers without
compromising safety and soundness standards.