Bank regulation in the United States

 

 

 

Bank regulation in the United States is highly fragmented compared with other G10 countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its organizational structure, it may be subject to numerous federal and state banking regulations. Unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency), the U.S. maintains separate securities, commodities, and insurance regulatory agencies—separate from the bank regulatory agencies—at the federal and state level.

The U.S also has one of the most highly-regulated banking environments in the world, focusing on privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending and the promotion of lending to lower-income populations. Individual cities also enact their own financial regulation laws (for example, defining what constitutes usury lending).

 

 

Regulatory authority
A bank's primary federal regulator could be the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Office of Thrift Supervision. Within the Federal Reserve Board are 12 districts centered around 12 regional Federal Reserve Banks, each of which carries out the Federal Reserve Board's regulatory responsibilities in its respective district. Credit unions are subject to most bank regulations and are supervised by the National Credit Union Administration. The Federal Financial Institutions Examination Council establishes uniform principles, standards, and report forms for the other agencies.

State-chartered banks are also subject to the regulation and supervision of the state regulatory agency of the state in which they were chartered. State regulation of state-chartered banks applies, in addition to federal regulation. For example, a California state bank that is not a member of the Federal Reserve System would be regulated by both the California Department of Financial Institutions and the FDIC. Likewise, a Nevada state bank that is a member of the Federal Reserve System would be jointly regulated by the Nevada Division of Financial Institutions and the Federal Reserve.

State banking laws apply to state-chartered banks and certain non-bank affiliates of federally-chartered banks.

By statute, and in accordance with judicial interpretation of statutes and the United States Constitution, federal banking statutes (and the regulations and other guidance issued by federal banking regulatory agencies) often preempt state laws regulating certain activities of nationally-chartered banking institutions and their subsidiaries. Specific exceptions to the general rule of federal preemption exist such as some contract law, escheat law, and insurance law.

One example of Office of Thrift Supervision preemption begins with Section 550.136(a) of the OTS Regulations, providing that “...OTS occupies the field of the regulation of the fiduciary activities of Federal savings associations...Accordingly, Federal savings associations may exercise fiduciary powers as authorized under Federal law, including this part, without regard to State laws that purport to regulate or otherwise affect their fiduciary activities, except to the extent provided in 12 U.S.C. 1464(n)...or in paragraph (c) of this section.” 12 U.S.C. 1464(n) authorizes fiduciary activities for federal savings associations, and specifies certain state law requirements that are applicable to federal savings associations. Section 550.136(c) lists six types of state laws that, in certain specified circumstances, are not preempted with respect to Federal savings associations.

 

Privacy

Regulation P governs the use of a customer's private data. Banks and other financial institutions must inform a consumer of their policy regarding personal information, and must provide an "opt-out" before disclosing data to a non-affiliated third party. The regulation was enacted in 1999.

The Right to Financial Privacy Act (RFPA) (12 U.S.C. 3401 et seq.) is a United States federal law that gives the customers of financial institutions the right to some level of privacy from government searches. Before the Act was passed, the United States government did not have to tell customers that they were accessing their records, and customers did not have the right to prevent such actions. It came about after the United States Supreme Court, in United States v. Miller, 425 U.S. 435(1976), held that financial records are the property of the financial institution with which they are held, rather than the property of the customer.

The USA PATRIOT Act of 2001 amended the RFPA

Anti-money laundering and anti-terrorism

Further information: Bank Secrecy Act, USA PATRIOT Act, and Office of Foreign Assets Control


The Bank Secrecy Act (BSA) requires financial institutions to assist government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion or other criminal activities.

Section 326 of the USA PATRIOT Act allows financial institutions to place limits on new accounts until the account holder's identity has been verified.

Office of Foreign Assets Control (OFAC) sanctions apply to all U.S. entities including banks. The FFIEC provides guidelines to financial regulators for verifying compliance with the sanctions
 

 

 

Consumer protection

Further information: Truth in Savings Act, Electronic Fund Transfer Act, and Expedited Funds Availability Act
The Truth in Savings Act (TISA), implemented by Regulation DD, established uniformity in disclosing terms and conditions regarding interest and fees when giving out information and when opening a new savings account. On passing the law in 1991, Congress noted it would help promote economic stability, competition between depository institutions, and allow the consumer to make informed decisions.

The Expedited Funds Availability Act (EFAA) of 1987, implemented by Regulation CC, defines when standard holds and exception holds can be placed on checks deposited to checking accounts, and the maximum length of time the money can be held. A bank's hold policy can be less stringent than the guidelines provided, but it cannot exceed the guidelines.

The Electronic Fund Transfer Act of 1978, implemented by Regulation E, established the rights and liabilities of consumers as well as the responsibilities of all participants in electronic funds transfer activities.

Withdrawal limits and reserve requirements

Further information: Regulation D (FRB)
Establishes reserve requirement guidelines
Regulates certain early withdrawals from certificate of deposit accounts
Defines what qualifies as DDA/NOW accounts. See Reg. Q to see eligibility rules for interest-bearing checking accounts
Defines limitations on certain withdrawals on savings and money market accounts
Unlimited transfers or withdrawals if made in person, by ATM, by mail, or by messenger
In all other instances, there is a limit of six (6) transfers or withdrawals. No more than three (3) of these transactions may be made payable to a third party (by check, draft, point-of-sale, etc.)
Some banks will charge a fee with each excess transaction
Bank must close accounts where this transaction limit is constantly exceeded

Interest on demand deposits

Regulation Q
Regulation Q prohibits banks from paying interest on demand deposit accounts. A "demand deposit" account includes many, but not all checking accounts. Banks, however, may pay interest on Negotiable Order of Withdrawal accounts (NOW accounts) offered to consumers and certain entities, but not to commercial enterprises other than sole proprietors

Lending regulation

 

Consumer protectionFurther information: Home Mortgage Disclosure Act, Equal Credit Opportunity Act, and Truth in Lending Act
The Home Mortgage Disclosure Act (HMDA) of 1975, implemented by Regulation C, requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving one- to four-unit and multifamily dwellings. It also requires branches and loan centers to display a HMDA poster.

The Equal Credit Opportunity Act (ECOA) of 1974, implemented by Regulation B, requires creditors which regularly extend credit to customers—including banks, retailers, finance companies, and bank-card companies—to evaluate candidates on creditworthiness alone, rather than other factors such as race, color, religion, national origin, or sex. Discrimination based on marital status, receipt of public assistance, and age is generally prohibited (with exceptions), as is discrimination based on a consumer's good-faith exercise of his or her credit-protection rights.

The Truth in Lending Act (TILA) of 1968, implemented by Regulation Z, promotes the informed use of consumer credit by standardizing the disclosure of interest rates and other costs associated with borrowing. TILA also gives consumers the right to cancel certain credit transactions involving a lien on the consumer's principal dwelling, regulates certain credit-card practices, and provides a means of resolving credit-billing disputes.

Debt collection

 

Main articles: Fair debt collection, Fair Debt Collection Practices Act, and Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) of 1970 regulates the collection, sharing, and use of customer-credit information. The act allows consumers to obtain a copy of their credit report from credit bureaus that hold information on them, provides for consumers to dispute negative information held and sets time limits, after which negative information is suppressed. It requires that consumers be informed when negative information is added to their credit records, and when adverse action is taken based on a credit report.

Credit cards

 

Unfair or Deceptive Acts or Practices
Provisions addressing credit-card practices aim to enhance protections for consumers who use credit cards and improve credit-card disclosure under the Truth in Lending Act:

Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time
Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges
Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible
Banks would be prohibited from imposing interest charges using the "two-cycle" method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle
Banks would be required to provide consumers a reasonable amount of time to make payments


Lending limits

 

Lending-limit regulations restrict the total amount of loans and credits that a bank may extend to a single borrower. This restriction is usually stated as a percentage of the bank's capital or assets. For example, a national bank generally must limit its total outstanding loans and credits to any single borrower to no more than 15% of the bank's total capital and surplus. Some state banking regulations also contain similar lending limits applicable to state-chartered banks. Both federal and state laws generally allow for a higher lending limit (up to 25% of capital and surplus for national banks) when the portion of the credit that exceeds the initial lending limit is fully secured.

Loans to Insiders (Regulation O) establishes various quantitative and qualitative limits and reporting requirements on extensions of credit made by a bank to its "insiders" or the insiders of the bank's affiliates. The term "insiders" includes executive officers, directors, principal shareholders and the related interests of such parties.

Central banking regulationSee also: History of central banking in the United States


Extensions of Credit by Federal Reserve Banks (Regulation A) establishes rules regarding discount window lending, the extension of credit by the Federal Reserve Bank to banks and other institutions. The Federal Reserve Board made significant amendments to Regulation A in 2003, including amendments to price certain discount-window lending at above-market rates and to restrict borrowing to banks in generally sound condition. In amending the regulation, the Federal Reserve Board noted that many banks had expressed their unwillingness to use discount-window borrowing because their use of such a funding source was interpreted as sign of the bank's financial weakness or distress. The Federal Reserve Board indicated its hope that the 2003 amendments would make discount window lending a more attractive funding option to banks.

Regulation of bank affiliates and holding companiesSee also: Bank holding company
Transactions Between Member Banks and Their Affiliates (Regulation W) regulates transactions, such as loans and asset purchases between banks and their affiliates. The term "affiliate" is broadly defined and includes parent companies, companies that share a parent company with the bank, companies that are under other types of common control with the bank (e.g. by a trust), companies with interlocking directors (a majority of directors, trustees, etc. are the same as a majority of the bank's), subsidiaries, and certain other types of companies. When passed September 18, 1950 Regulation W included a prohibition on installment purchases exceeding 21 months, which was shortened to 15 months on October 16 of the same year.

 

Related:
FDIC Federal Deposit Insurance Corporation

Deposit insurance in United States

Bank regulation in the United States
USA PATRIOT Act

 

 

 


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