Financial Services Reform Legislation of 1999, the Gramm-Leach-Bliley Act of 1999
Barry A. Abbott, Andre W. Brewster, Charles P. Ortmeyer
The Gramm-Leach-Bliley Act includes three other titles. Title IV concerns unitary savings and loan holding companies; Title VI covers modernization of the Federal Home Loan Bank System, and Title VII contains a group of miscellaneous provisions, some of which are likely to be of great importance to our clients. Below is a listing of those provisions of these three titles that we believe are most important for our clients to know about.
14. Unitary Savings and Loan Holding Companies. The Act prohibits new unitary savings and loan holding companies from engaging in non-financial activities or affiliating with non-financial entities. The prohibition applies to a company that becomes a unitary savings and loan holding company pursuant to an application filed with the OTS after May 4, 1999. Grandfathered unitary thrift companies retain the authority to engage in non-financial activities.
15. Federal Home Loan Bank System Modernization. The Act reforms the Federal Home Loan Bank System in several ways. Membership in the System by Federal savings associations will be voluntary instead of mandatory. Small bank members are given expanded access to Federal Home Loan Bank advances. Governance of the Federal Home Loan Banks is decentralized from the Federal Housing Finance Board to the individual Federal Home Loan Banks. The Act establishes a new capital structure for Federal Home Loan Banks, to encourage the Banks to build more permanent, longer-term capital. The Resolution Funding Corporation obligation of the Federal Home Loan Banks (a vestige of the savings and loan crisis) is changed from a fixed dollar amount to a fixed percentage of annual net earnings.
16. EFT Fee Disclosures at Host ATMs. The Act includes a specific provision for posting any fees charged at host ATM’s both physically on the machine and (if the ATM has the technical capacity) on the ATM screen (the posting on all ATM machines is mandatory in 2005). The bill provides for a waiver of liability if someone other than the machine operator removes or damages the disclosure that appears on the machine. As with other provisions of the Act, a study is to be conducted, this time by the Comptroller General of the United States, concerning the feasibility of ATM machine listing all fees (including those of the user’s account holding institution) on the ATM screen prior to the consumer consummating any ATM transaction.
17. Community Reinvestment Act. The CRA provisions, addressed in Subtitle B of Title VII of the Act, proved the thorniest of issues. Senator Gramm has for some time been very concerned about the scope of CRA, and he negotiated aggressively to include these provisions in the bill. Subtitle B does two main things. First, there is a "sunshine" rule, requiring public disclosure of all CRA agreements entered into between an insured depository institution or affiliate and a non‑governmental entity or person. Second, for regulated financial institutions with assets of $250 million or less, regulatory examinations for CRA compliance will be stretched out to either once every four years (if the institution has most recently received a "satisfactory" CRA rating) or once every five years (if the institution has most recently received an "outstanding" CRA evaluation). The Subtitle also requires a Federal Reserve Board study about the default rates, the delinquency rates, and the profitability of loans made in conformity with CRA. In addition, the Treasury Department has been instructed to conduct a study and provide recommendations concerning the extent to which CRA has actually led to adequate services, as envisioned by the CRA, being provided to low‑ and moderate-income neighborhoods and to people of modest means.
18. Other Regulatory Improvements. Subtitle C of Title VII covers several issues, including:
a. expanding small bank access to Subchapter S tax treatment;
b. requiring "plain language" of all federal banking agencies in their proposed and final rulemakings;
c. specific authorization to the Federal Reserve to release confidential supervisory information (including examination reports) to federal or state regulators and "to any other person that the Board determines to be proper";
d. provisions to provide technical assistance to so-called "microenterprises" (an entity that has fewer than five employees and which generally lacks access to conventional loans, equity and other banking services);
e. interest rate preemption provisions concerning interstate branches of insured depository institutions;
f. some relief from Section 23B of Federal Reserve Act for the purchase of certain securities by an affiliate of a bank that is a principal underwriter of the securities; and
g. provisions that allow a federal savings association with branches in one or more states to convert into one or more national or state banks, as long as the resulting national and state banks will meet all financial, management, and capital requirements applicable to the resulting national and state banks.
The miscellaneous provisions also include requirements for additional studies, including a study to be completed by the Federal banking agencies within two years regarding the delivery of financial services. The study is to evaluate which regulations assume there will be person-to-person contact and what steps should be taken to adapt those regulations to online banking and lending.
The Comptroller General is also to deliver a study to Congress within one year concerning the conflict of interest faced by the Federal Reserve in regulating institutions providing payment systems while at the same time providing competitive payment system services.
The Act also includes a "sense of the Congress" statement that financial products should be offered in a "nondiscretionary, nongender-specific manner." While seemingly harmless, and of no legal effect, this could raise questions in the future about the use of gender in insurance ratings and charges (including with regard to annuities), and may merit continued monitoring.
Barry A. Abbott
André W. Brewster
Charles P. Ortmeyer
Telephone: (415) 434-1600
Other Financial Services Group Members:
Steve A. Druskin
Charles E. Hall
John C. Munch
Denis T. Rice
Jeffrey L. Schaffer
Mark D. Whatley