2001: What's Ahead for Compliance?

A new Congress is settling into Washington for the next two years. It is the most closely divided body in history, with the split in the Senate so close that for a brief period, while Vice President Gore was still in office, the Democrats held the majority position. Because of this even split between Republicans and Democrats, it promises to be a very interesting two years.

More important for bankers, the House has reorganized its committee structure. The House Banking Committee is no more. Instead, a completely new committee, the House Financial Services Committee, was created by the Republican leadership. This new committee covers the areas that the old House Banking Committee covered, but it also covers securities and insurance matters, formerly under the jurisdiction of the House Commerce Committee. The chair of the new committee, Mike Oxley, a former FBI agent from Ohio, was a member of the House Commerce Committee.

The new House Financial Services Committee's areas of responsibility now are more closely aligned with the jurisdiction of the Senate Banking Committee. The new structure also means that there will be less conflict from matters that used to come under the jurisdiction of both Commerce and Banking. And, many believe the new responsibilities of the House Financial Services Committee are logical given the major changes to the financial industry made by the Gramm-Leach-Bliley Act. But it also means that the Committee will be covering a much broader area than just banking issues.

On the Senate side, Senator Phil Gramm of Texas, chair of the Senate Banking Committee, has laid out an agenda that focuses mostly on securities reform. He made little mention of issues that have been confronting bankers, such as predatory lending and financial privacy, although it is likely that those issues will come to the forefront at some point.

So what are the issues that we can look forward to in the 107th Congress? High on everyone's list is financial privacy. This is a sensitive issue for consumers, and the first privacy notices required by the new privacy regulations are just being issued. Several members of the House and Senate have suggested that more needs to be done to protect consumers, and the media is keeping the issue front and center. The crucial step for bankers right now is to educate all customers about the benefits of information sharing. Unfortunately, many people equate information sharing with telemarketing. Consumers need to understand that information sharing also makes credit more readily available; allows many smaller institutions to provide products and services like credit cards, brokerage services and even mortgages; and help banks protect their customers against fraud.

Related to privacy and information sharing is the matter of identity theft. There are already some provisions in federal law that focus on identity theft issues, such as the ban on pretext calling. But more and more consumers are finding themselves the victims of identity theft and the FTC reports this is a growing problem. As a result, Congress may take further steps to protect consumers. For example, one proposal likely to be on the drawing board again in this Congress is a ban on the use of Social Security numbers for any purpose other than social security. Another proposal from the last session of Congress could institute new requirements for a customer change of address.

Predatory lending is another matter that Congress is likely to address. Congressman John LaFalce (D-NY) has promised to re-introduce legislation to stop predatory practices similar to legislation he proposed in the last session. Many consumer activists will continue their pressure on this issue. Although the Federal Reserve has proposed revisions to Truth-in-Lending and HMDA that are designed to ferret out predatory practices, and while the other regulatory agencies are taking steps to address the issue, Congress is also likely to get into the act. Bear in mind that state legislatures have also been active on this issue. North Carolina was one of the first states to take action, and many are watching the impact that law will have in the coming months, especially how it affects lending to low- and moderate-income borrowers that present higher risk profiles.

Reform of the bankruptcy laws is another issue that is likely to occupy Congress in the coming months, especially if there is an increase in filings due to a dip in the economy. At the very end of the last session, the House and Senate finally agreed to legislation that would have affected bankruptcy filing and forced more borrowers to establish repayment plans. However, President Clinton pocket vetoed the bill. That bill will be reintroduced early in this session of Congress, and President Bush is likely to sign it if it once again passes Congress.

An issue closer to the hearts of many a compliance officer is tracking the number of transactions in a money market account. For some time now, there have been bills in Congress that would allow banks to pay interest on commercial checking accounts. These bills would allow transfers from money market accounts up to 24 times a month, making it much easier for banks, especially smaller institutions, to offer customers sweep accounts without running afoul of the Regulation D restrictions. It's likely that this issue will come into play again in the 107th Congress.

Deposit insurance reform is another issue that, at least for now, is still on the table. Last August, the FDIC introduced an extensive options paper that addressed deposit insurance reform, focusing on pricing, coverage and maintenance of the funds. Much will depend on who leads the FDIC in the Bush Administration, but Congress is likely to consider the issue in the coming months.

And, with the growth in technology, the Federal Reserve is looking at possible legislation on check truncation. While the last Congress adopted the so-called E-Sign bill last year that allows an electronic version of a check to serve as evidence of the existence of the check, there are still issues surrounding the use of an electronic version of a check in the processing of payments. The Federal Reserve is analyzing the issues surrounding electronic checks, including the use of images and substitute checks produced from the electronic version, and hopes to have draft legislation for Congress to consider in the coming months.

Other items likely to be on the Congressional agenda: the role of the government sponsored enterprises (GSEs), especially Fannie Mae and Freddie Mac and money laundering.

One final note: as the Bush Administration assumed the reigns of office, an order went out that some have interpreted as a moratorium on all pending regulations, including the effective date of regulations that have not yet become effective. The order raises many questions about which regulations this will affect and what should be done in the meantime. This won't affect comment deadlines for items already published, although it may effect the production of final regulations from those items out for comment. But the best step for compliance officers is to keep preparing for any regulations that have already been published and operate on the assumption that the published effective dates will apply. The danger of sitting back and not preparing is that you might get caught at the last minute without enough time to do what needs to be done to comply.

One thing is certain: compliance officers have their hands full and are guaranteed to have plenty to do as the 107th Congress gets underway.

Action Steps

Consider the importance of customer education. Review your disclosures and marketing materials to evaluate how effectively they inform the consumer.
Also consider the tone of your disclosures and advertising materials. If you want loyal customers, don't talk down to them.
Review how your bank uses Social Security Numbers. Be ready in case there is legislation prohibiting use of them.
Review the process you use to change a customer's address. Look for accuracy, ease of transaction for the customer, and privacy issues.
Business interest checking may happen. If you want it, gather information to compare the cost of the product to the bank with the loss of customers if you don't offer it.
Put Senator Gramm on your mailing list. Make sure you send him comments and questions you have for the regulators. Indications are that he uses the information he receives.