New Legislation Financial Modernization The leaders of the House and Senate Banking Committees are moving quickly on financial reform legislation.
House Banking Chairman Jim Leach introduced a financial reform bill Jan. 6, the first day of the new Congress. The legislation would overhaul the nation's financial laws by letting banks, insurance companies, and securities firms affiliate with each other. It would bar banking organizations-except unitary thrift holding companies that are grandfathered under the bill-from owning nonfinancial businesses. Commercial companies could not purchase unitary thrift holding companies.
Bank operating subsidiaries would be barred from underwriting activities, merchant banking, or real estate development.
In response to Senate Banking Chairman Phil Gramm's concerns, Rep. Leach would scale back a key community reinvestment provision. Banks seeking to affiliate with a securities or insurance company would have to have a "satisfactory" or better rating in their most recent Community Reinvestment Act exam. But merged entities would no longer face divestiture or other penalties if the CRA ratings of their banks subsequently dip below "satisfactory."
Sen. Gramm predicted Tuesday that Senate Banking will approve financial reform by the end of February. However, many questions remain on the details of his plan-particularly a compromise on the CRA-related provisions. Sen. Gramm said the bill would be changed from last year's version to keep up with market developments and that it could be "simplified." He said he also supports letting commercial firms own thrifts or banks but was willing to negotiate on that point.
Rep. John J. LaFalce could offer a streamlined alternative as early as next week. The ranking Democrat on House Banking is circulating a draft that would permit affiliations among banks, insurance companies, and securities underwriters. It calls for functional regulation and consumer protections such as anti-tying provisions and disclosures about the risks of uninsured bank products.
The LaFalce plan sidesteps some sticky issues, such as financial powers for bank operating subsidiaries, insurance sales rules, and the thrift charter's future. It would let a holding company own commercial businesses, provided they produce no more than 15% of annual revenue. Rep. LaFalce is also expected to require a bank seeking to affiliate with an insurance or securities firm to have-and maintain-a "satisfactory" or better Community Reinvestment Act rating. Community Reinvestment Act
Rep. Bill McCollum, R-Fla., introduced two Community Reinvestment Act reform bills Jan. 6.
One would exempt from the law any bank with less than $500 million of assets. Banks still subject to the law would self-certify that they are in compliance. Consumers could challenge the self-certification, and regulators could use their enforcement powers against violators but not reject mergers on CRA grounds.
The second bill would amend the fair-lending laws to explicitly bar banks from refusing to extend credit in any community because of the race or ethnicity of the neighborhood.
Meanwhile, Sen. Gramm and Rep. Marge Roukema, chairwoman of House Banking's financial institutions subcommittee, said they plan to hold hearings on CRA. Privacy
Rep. Leach introduced legislation Jan. 6 that would make it a federal crime to trick banks, or attempt to trick them, into divulging private customer data. It would also make it illegal for someone to ask another person to obtain customer information if he knows that fraud will be used to get it. Violators would face either civil penalties imposed by the Federal Trade Commission or criminal punishment. Criminal penalties would include maximum fines of $250,000 and as many as five years in jail for individuals, and a maximum $500,000 in fines for corporations. The House Banking and Commerce committees approved similar bills last year but failed to resolve conflicting versions. S Corporations
Rep. Marge Roukema, R-N.J., introduced legislation Jan. 6 that would make it easier for small banks to convert to so-called S corporations. The bill would let a company qualify for S corporation status if it had no more than 150 shareholders, up from the current limit of 75. It would also permit investors to hold S corporation stock in individual retirement accounts, exempt investments that banks maintain for supervisory and liquidity purposes from limits on S corporations' passive income, and clarify the treatment of stock that bank directors are required to hold by regulators. Small Business Investment Companies
The House Small Business Committee approved legislation Jan. 7 that Chairman Jim Talent said would broaden the use of small-business investment companies. The bill would simplify current law so that warrants, royalties, and other contingent obligations would be excluded from the calculation of interest charged by SBICs, encouraging these venture capital entities to offer lower interest rates to small businesses. It also would raise to $1 billion in fiscal 1999 and $1.2 billion in fiscal 2000 funding for government guarantees of securities sold by SBICs to meet capital requirements.