Financial Services Update
National Conference of State Legislatures
Standing Committee on Financial Services
Volume 2, Issue #1
January 5, 2005
Financial Services 2004: A State-Federal Year in Review
Preemption remained the mantra of the financial services industry in 2004. Although a wide range of preemption initiatives were entertained by Congress—from insurance to bank branching to mortgage lending—the most lasting measures came on the regulatory front.
OCC Preemption Rules. The Office of the Comptroller of the Currency (OCC) set the tone for 2004 on Jan. 7, 2004, by finalizing new rules to preempt virtually all state laws as they apply to national banks and their operating subsidiaries. Despite widespread opposition to the rules in Congress and among state and consumer groups, Congress did not enact a resolution to overturn the preemption. The matter now turns to the federal judiciary for resolution unless Congress intervenes. One glimmer of hope is a series of three Government Accountability Office reports requested by Reps. Sue Kelly (R, New York) and Luis Gutierrez (D, Illinois) that could prompt renewed attention to the issue when released in 2005. NCSL continues to oppose the rules and participated in a formal GAO interview for the reports on Dec. 15, 2004.
Insurance Reform. U.S. House Financial Services Committee Chairman Michael Oxley (R, Ohio) traveled to New York on March 15, 2004, to outline what he called his “Road Map to State-Based Insurance Regulatory Reform.” Although not officially introduced, in Aug., Chairman Oxley’s staff released a discussion draft of the State Modernization and Regulatory Transparency (SMART) Act—a 17-title bill that would completely overhaul insurance regulation by establishing federal standards and mandates that states would have to meet or face preemption. A PowerPoint summary of the Act is available at the NCSL Financial Services Committee Web site at ttp://www.ncsl.org/standcomm/scfin/scfin.htm.
CRA Rule. In August, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rulemaking that would increase its asset threshold from $250m to $1b for banks that may undergo a streamlined Community Reinvestment Act (CRA) compliance exam. The Office of Thrift Supervision adopted a similar rule in 2004 while the OCC and Federal Reserve have retained the $250m threshold. The FDIC proposal, which would apply to all state-chartered banks, raised concerns among urban renewal and rural development advocates who fear it will undermine the effectiveness of the CRA, which was enacted in 1977 to ensure that banks meet the credit needs of communities in which they operate.
In Brief. On June 30, 2004, the President signed S. 2238 to extend the national flood insurance program to September 30, 2008. In March, the U.S. House overwhelmingly passed the financial services regulatory relief bill (H.R. 1375), which preempted state restrictions on de novo interstate bank branching, but the measure was held up in the Senate for issues related to interstate branching for industrial loan corporations. Key U.S. House panels continued to consider anti-predatory lending legislation (H.R. 833), which would establish federal mortgage lending standards and preempt state laws and broker licensing requirements.
A Look Ahead: The 109th Congress
Although proponents of federal preemption are looking to build on recent gains in the 109th Congress, the financial regulation committees will begin the year with Fannie Mae and Freddie Mac front and center and long list of unfinished business to be tackled when time permits. However, even if legislation on insurance and banking reforms are not enacted during the 109th Congress, developments in 2005 and 2006 will shape their consideration in later years.
GSE Reform. A larger Republican majority in the U.S. Senate may strengthen President Bush’s effort to create a stronger federal regulator to crack down on government sponsored enterprises (GSE), principally Fannie Mae and Freddie Mac, which have been plagued by accounting problems and other missteps. The Senate Banking Committee passed legislation in April 2004, but it stalled in the full Senate. A new bill is expected to create a new, stand-alone regulator with the authority to raise minimum risk-based capital requirements and regulate financial safety and soundness. The U.S. House also is expected to move forward with legislation, but still faces disagreements with the President on the strength of a new regulator. The GSE issue is expected to dominate financial committee attention in 2005.
Anti-Predatory Lending. After undergoing extensive information gathering efforts in 2004, Rep. Bob Ney (R, Ohio) has announced that he will team up with a key subcommittee ranking member, Rep. Paul Kanjorski (D, Pennsylvania), to introduce legislation in 2005 that will preempt state and local lending laws in favor of a national standard. This pairing represents the first true bipartisan effort to find a middle ground on the predatory lending issue.
Regulatory Relief. U.S. Sen. Mike Crapo (R, Idaho) has announced plans for a broader regulatory relief bill that would seek to avoid the controversial elements that prevented passage in the 108th Congress. However, preemption of state interstate bank branching restrictions and age laws for the acquisition of existing branches are certain to be included in the bill.
Terrorism Insurance. The Terrorism Risk Insurance Act of 2002 is scheduled to expire at the end of 2005—a fact that will affect commercial insurance policies written beginning January 1, 2004. Bills will be introduced early during the 109th Congress. There also will be discussion of whether to include group life insurance policies in the federal program.
Preemption Limits. U.S. House Financial Services Committee Ranking Member Barney Frank (D, Massachusetts) has announced that he will introduce legislation that would narrow the OCC preemption of state authority by subjecting national banks to certain state consumer protection laws and empowering states to enforce them. He also would apply state general consumer protection laws, such as unfair and deceptive practices laws, to national banks and exempt operating subsidiaries from OCC preemption. Similar legislation is expected to be introduced in the U.S. Senate.
Insurance Regulation. The 108th Congress concluded an extended period of information gathering by the U.S. House Financial Services Committee and the U.S. Senate Banking Committee and Commerce Committee. Legislative activity is expected to begin in 2005 with the introduction of a modified SMART Act as well as varying proposals to create an optional federal regulator of insurance modeled on the dual banking system. A proposal to create an exclusive federal insurance regulator that was introduced by an outgoing U.S. Senator also may be resurrected. Although there is no expectation that federal insurance reform will be enacted during the 109th Congress, activity over these two years could prove formative down the road as the federal insurance debate matures. Key federal lawmakers are beginning to lay down markers about what kind of federal legislation they prefer and are shifting the debate from whether to act to how. Another wildcard is the effect of recent allegations of wrong-doing by insurance brokers that have been uncovered by New York Attorney General Eliot Spitzer. These revelations could intensify momentum for federal action, shift the debate from deregulation to greater regulation, or both.
Stevens, Inouye to Lead Senate Commerce; Few Changes on Banking
With the new Congress comes changes to committee leadership and members—at least for the U.S. Senate Commerce Committee. Sen. Ted Stevens (R, Alaska) takes over the committee chairmanship from Sen. John McCain (R, Arizona), who remains on the committee but is termed limited as chair. With the retirement of Sen. Ernest Hollings, Sen. Daniel Inouye (D, Hawaii) becomes the new ranking member. The committee also receives new blood with the newly elected Sens. Jim Demint (R, South Carolina) and David Vitter (R, Louisiana) for the GOP and Sens. Ben Nelson (D, Nebraska), a former governor and insurance commissioner, and Mark Pryor (D, Arkansas), a former attorney general and state legislator, for the Democrats. Sen. Richard Shelby (R, Alabama) and Sen. Paul Sarbanes (D, Maryland) continue to serve as chairman and ranking member of the U.S. Senate Banking Committee. In fact, the only Banking Committee changes are the addition of the newly elected Sen. Mel Martinez (R, Florida), the former Housing and Urban Development Secretary, and the loss of Sen. Lincoln Chafee (R, Rhode Island) and Sen. Zell Miller (D, Georgia).
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