Action on Legislation Financial Modernization

The House-Senate conference committee on financial reform is scheduled to vote today and Friday on a compromise bill.

Under the compromise unveiled Tuesday, banks would have to disclose payments that they make to community groups as part of CRA commitments. It would require banks to have at least a "satisfactory" CRA rating to merge with an insurance or securities company, but the merged entity would not be threatened with divestiture or other penalties if the bank's rating slipped. CRA exams would be administered every five years to banks with less than $250 million of assets and situated in a metropolitan area, or for any rural bank, unless the institution filed certain types of applications, including an application to merge.

The bill would let banks underwrite securities and conduct low-risk activities in a direct subsidiary but not underwrite insurance, do merchant banking, or develop real estate. Subsidiaries would be limited to 5% of the bank's assets, or $20 billion. Banks with more than $1 billion of assets would have to issue subordinated debt that was highly rated by independent agencies.

The bill would require financial institutions to have and annually disclose privacy policies and give customers the opportunity to block sharing of confidential data with third parties. Customers could not block data sharing among holding company affiliates.

The bill would bar applications by nonfinancial companies for new unitary thrifts.

The financial reform bill passed the House 343 to 86 on July 1. A similar bill passed the Senate on May 6 on a 54-to-44 vote. Both bills would let banks, securities firms, and insurance companies buy each other. Bankruptcy

Senate Majority Leader Trent Lott on Sept. 21 fell seven votes short of the necessary 60 to keep Democrats from procedurally tying up the bankruptcy reform bill. The vote nearly eliminated its chances of passage this year.

However, in early October the House and Senate voted a nine-month extension of Chapter 12 bankruptcy protection for farmers, which had expired Sept. 30. President Clinton signed that legislation Oct. 9.

Sen. Charles E. Grassley, the bankruptcy bill's sponsor, and Sen. Robert Torricelli, D-N.J., had said they were close to working out a compromise to draw more Democratic support. And Sen. Torricelli was preparing an amendment that would have imposed disclosure requirements on credit card companies, including giving customers a standard example of how long it would take to pay off a given balance by making minimum monthly payments.

But the bill was stalled by broader political fights over increasing the minimum wage and other issues, as well as the pressing demands of spending bills and other matters. The Senate could resume consideration next year, but the political waters in an election year will be choppy.

The Senate Judiciary Committee approved the bill in April. It would let bankruptcy judges force debtors who could afford to pay $15,000 or 25% of unsecured credit over five years to file under Chapter 13 of the bankruptcy code. Creditors also could ask judges to force a consumer into Chapter 13, rather than eliminating their debts in Chapter 7. The industry favors the stricter House bill, which passed in May on a veto-proof vote of 313 to 108. Tax Legislation:

President Clinton on Sept. 23 vetoed a tax bill that included rollbacks of estate and personal capital gains taxes, which would have benefited banks. On Aug. 5 the House and Senate had adopted legislation that would have cut taxes $792 billion over 10 years, but the President said the money would have been better spent beefing up Social Security and Medicare. Significant tax legislation appears to be dead until after the 2000 elections.

The tax bill would have phased out estate and gift taxes, and would have reduced capital gains rates to 18% from 20% for higher-income people. Caps on annual contributions to 401(k) plans would have risen to $15,000 from $10,000; on individual retirement accounts to $5,000 from $2,000; and on education IRAs to $2,000 from $500. Also, more banks would have been eligible to become S corporations. New Legislation Money Laundering:

House Banking Committee Chairman Jim Leach introduced bipartisan legislation on Sept. 21 in response to allegations that Russian criminals had laundered billions of dollars through Bank of New York and other financial institutions. Sen. Charles E. Schumer, R-N.Y., offered the companion bill on Sept. 29.

Under the legislation, a U.S. bank could not open or maintain an account for a foreign person or company unless the bank identified and kept a record of the account's true owners. The bill would also prohibit U.S. banks from hosting correspondent accounts for foreign banks that were not adequately supervised by or chartered to do business in their host country. Certain restrictions would also apply to payable-through accounts.

To aid law enforcement authorities, the legislation would add several crimes -- including violent offenses, bribery of a public official, theft of public funds, or misuse of international aid -- to the list of those that could trigger money-laundering charges. Another provision would make it a crime for bank customers to falsify their identity in connection with a financial transaction.

Meanwhile, Rep. Maxine Waters, D-Calif., introduced legislation on Sept. 22 that would let courts double monetary penalties for violators in areas with high levels of money-laundering activity, force banks to identify the holders of commingled and offshore accounts, and require broker-dealers to file suspicious-activity reports as banks do.

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