A key privacy clause in the financial reform bill passed by the House discriminates against small banks and should be cut, a community banker testified Tuesday.

Robert N. Barsness, the chairman of $95 million-asset Prior Lake State Bank in Minnesota, said a provision letting customers block information exchanges with third parties would place community banks on an unequal footing with larger banks.

Many small banks rely heavily on outside providers for basic services, he said. By contrast, the bill would not let customers block information sharing with bank affiliates.

Mr. Barsness, who is also president of the Independent Community Bankers of America, called the loophole a "special carve-out" for big banks.

"The (privacy) problems that have been encountered have been in large banks," he said during the first of two days of hearings on privacy, sponsored by House Banking's financial institutions subcommittee. "The logic of this (bill) escapes me."

Mr. Barsness recommended that the customer opt-out provision be dropped from the financial reform bill to create parity. More time is needed to craft a fair and reasonable set of protections, he said.

Also testifying was Robert R. Davis, director of government relations at America's Community Bankers. Mr. Davis said the thrift trade group does not oppose the bill's opt-out provision, so long as certain exceptions remain.

He recommended several other revisions. Financial institutions should only have to notify customers once of the opportunity to block information sharing, he said. Mr. Davis also warned lawmakers not to explicitly or unwittingly create a legal right to privacy that could lead to litigation. Finally, he suggested adding a provision that would make federal privacy law supersede any state laws.

Subcommittee Chairwoman Marge Roukema, R-N.J., said the House bill does not address all privacy concerns and promised more hearings. But she did not indicate whether additional protections should be addressed in financial reform or other legislation.

The hearing concludes today with testimony from bank regulators, trade groups, and Treasury Under Secretary for Domestic Finance Gary Gensler.

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