Eyes on the States: Rhode Island Amends Arson-Query Law That Put Its 6

Rhode Island lawmakers have weakened a controversial law that forced state-chartered banks to ask mortgage applicants whether they've ever been convicted of arson.

During its just-completed session, the state General Assembly modified a section of the insurance code that required Rhode Island's six state banks to get a signed affidavit for any loan secured by real estate.

State banks cried foul soon after the law was enacted in 1995 because the requirement did not apply to national banks or any thrift.

"Customers were questioning it, saying, 'I didn't have to do this at other banks where I applied,'" said Dennis L. Algiere, vice president of compliance at $877 million-asset Washington Trust Co., Westerly. Mr. Algiere is also a state senator.

"Frankly, I never understood this law," he added. "Not as a banker, and not as a legislator, either."

The idea came from a similar proposal introduced the same year in Massachusetts, sources said. The bill failed in the Bay State but passed in Rhode Island.

The new measure amends the law from "every institution shall require" to "every institution may require" applicants to disclose whether they have been convicted of arson.

The law also created an inconvenience for commercial customers. State banks were required to get a signed statement from every partner, director, or majority shareholder in a company before approving a business loan-even if the partners were based out of town.

"If a company didn't want to go through the hassle, there were plenty of national banks and Massachusetts banks that could give them the same loan," said William A. Farrell, chief counsel of the Rhode Island Bankers Association. "It was a nightmare for state banks."

Donald C. McQueen, chief lending officer at Bank Rhode Island, East Providence, said he is glad the law has been changed but added that the original law had not cost his $570 million-asset bank much business.

"Most people applying for mortgages" found the requirement incredible, Mr. McQueen said. "But we explained to them that it was the law, and I don't think it deterred people from moving forward."

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