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108th Congress                                            Rept. 108-152
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 2

======================================================================



 
            FINANCIAL SERVICES REGULATORY RELIEF ACT OF 2003

                                _______
                                

 July 14, 2003.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Sensenbrenner, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 1375]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to whom was referred the 
bill (H.R. 1375) to provide regulatory relief and improve 
productivity for insured depository institutions, and for other 
purposes, having considered the same, reports favorably thereon 
with an amendment and recommends that the bill as amended do 
pass.

                                CONTENTS

                                                                   Page
The Amendment....................................................     2
Purpose and Summary..............................................     2
Background and Need for the Legislation..........................     2
Hearings.........................................................     3
Committee Consideration..........................................     4
Vote of the Committee............................................     4
Committee Oversight Findings.....................................     4
New Budget Authority and Tax Expenditures........................     4
Congressional Budget Office Cost Estimate........................     4
Performance Goals and Objectives.................................    13
Constitutional Authority Statement...............................    13
Section-by-Section Analysis and Discussion.......................    13
Agency Views.....................................................    18
Changes in Existing Law Made by the Bill, as Reported............    28
Markup Transcript................................................    28
Additional Views.................................................   145
    The amendment adopted by this committee is identical to the 
text reported by the Committee on Financial Services shown in 
their report filed June 12, 2003 (Rept. 108-152, Part 1).

                          Purpose and Summary

    As reported by the Committee on the Judiciary, H.R. 1375, 
the ``Financial Services Regulatory Relief Act of 2003,'' is 
intended to alter or eliminate statutory banking provisions in 
order to reduce the growing regulatory burden on insured 
depository institutions, improve their productivity, and to 
make needed technical corrections to current law. H.R. 1375 
contains a broad range of constructive provisions that, taken 
as a whole, will allow banks and other depository institutions 
to devote more resources to the business of lending to 
consumers and less to the bureaucratic maze of compliance with 
outdated and unneeded regulations. Reducing the regulatory 
burden on financial institutions lowers the cost of credit and 
will help restore vibrancy to the national economy.

                Background and Need for the Legislation

    On May 21, 2003, the Committee on Financial Services 
reported H.R. 1375, the ``Financial Services Regulatory Relief 
Act of 2003.'' \1\ The bill was sequentially referred to the 
Committee on the Judiciary for a period ending not later than 
July 14, 2003. The sections within the jurisdiction of the 
Committee on the Judiciary pertain to the operation of the 
Federal courts, claims against the United States, and for 
regulation of the banking industry as it pertains to antitrust. 
This legislation is substantially identical to H.R. 3951, the 
``Financial Services Regulatory Relief Act of 2002,'' which was 
reported from the Committee on the Judiciary last Congress.\2\
---------------------------------------------------------------------------
    \1\ See H.R. Rep. No.108-152, Part I (2003).
    \2\ See H.R. Rep. No. 107-516, Part II, (2002).
---------------------------------------------------------------------------
    Congress has not passed structural reform of America's 
banking industry since the Financial Institutions Reform, 
Recovery and Enforcement Act (FIRREA) was enacted in 1989. At 
that time, the national banking industry and the broader 
economy were recovering from a savings and loan crisis which 
undermined public confidence in America's financial 
institutions. As a result, Congress enacted FIRREA to help 
restore the integrity and reliability of the banking industry. 
H.R. 1375 addresses many shortcomings in that law. For example, 
economic analysts have estimated that the annual cost of 
compliance with various State and Federal banking regulations 
is nearly $26 billion. While effective regulation of the 
financial services industry is central to the preservation of 
public trust in financial institutions, excessive regulation 
undermines competition and consumer choice, results in higher 
service fees for consumers, and stifles innovation among 
competing institutions.
    H.R. 1375 provides the following regulatory improvements 
for national banks: (1) removes the prohibition on national and 
State banks expanding across State lines by opening branches; 
(2) allows the use of subordinated debt instruments to meet 
eligibility requirements for national banks to benefit from 
subchapter S tax treatment; (3) eliminates duplicative and 
costly reporting requirements on banks regarding lending to 
bank officials; (4) changes the exemption from the prohibition 
on management interlocks for banks in metropolitan statistical 
areas from $20 million in assets to $100 million; and (5) 
streamlines bank merger application regulatory requirements.
    The legislation provides the following regulatory 
improvements for savings associations: (1) gives savings 
associations parity with banks with respect to broker-dealer 
and investment adviser Securities and Exchange Commission (SEC) 
registration requirements; (2) removes auto lending and small 
business lending limits and expands business lending limit for 
Federal thrifts; (3) allows Federal thrifts to merge with one 
or more of their non-thrift subsidiaries or affiliates, as 
national banks; (4) permits Federal thrifts to invest in 
service companies without regard to geographic restrictions; 
and (5) gives Federal thrifts the same authority as national 
and State banks to make investments primarily designed to 
promote community development.
    H.R. 1375 provides the following regulatory improvements 
for credit unions: (1) allows privately insured credit unions 
to apply for membership to the Federal Home Loan Bank system; 
(2) expands the investment authority of Federal credit unions; 
(3) permits offering of check cashing and money transfer 
services to eligible members; (4) increases the limit on 
investment by Federal credit unions in credit union service 
organizations from 1 percent to 3 percent of shares and 
earnings; and (5) raises the general limit on the term of 
Federal credit union loans from 12 to 15 years, and (6) allows 
for expedited consideration of credit union mergers.
    In addition, H.R. 1375 provides the following regulatory 
improvements for Federal financial regulatory agencies: (1) 
provides agencies the discretion to adjust the examination 
cycle for insured depository institutions to permit the most 
efficient use of agency resources; (2) allows the agencies to 
share confidential supervisory information concerning an 
examined institution; (3) modernizes agency record keeping 
requirements to allow use of optically imaged or computer 
scanned images; (4) clarifies agency authortiy to suspend or 
prohibit individuals charged with certain crimes from 
participation in the affairs of any depository institution and 
not only the institution with which the individual is 
associated; (5) allows bank examiners to receive credit cards 
from examined depository institutions if issued under the same 
terms and conditions as generally offered to the public; and 
(6) authorizes the Federal Deposit Insurance Corporation (FDIC) 
to take enforcement actions and impose civil monetary penalties 
of up to $1 million per day on any individual, corporation, or 
other entity for misrepresentation of FDIC insurance coverage. 
These improvements will allow financial institutions to devote 
more resources to the business of lending to consumers and less 
to compliance with outdated and unneeded regulations. Reducing 
the regulatory burden will serve to lower credit costs for 
consumers and help invigorate the national economy.

                                Hearings

    No hearings were held in the Committee on the Judiciary on 
H.R. 1375.

                        Committee Consideration

    On Wednesday, July 9, 2002, the Committee met in open 
session and ordered favorably reported the bill, H.R. 1375, 
with an amendment, by voice vote, a quorum being present. The 
amendment consisted of the text of the bill as reported by the 
Committee on Financial Services on May 21, 2003.

                         Vote of the Committee

    In compliance with clause 3(b) of Rule XIII of the Rules of 
the House of Representatives, the Committee notes that there no 
recorded votes on H.R. 1375 during the Committee on the 
Judiciary's consideration of the bill.

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of Rule XIII of the Rules 
of the House of Representatives, the Committee reports that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of Rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of House rule XIII is inapplicable because 
this legislation does not provide new budgetary authority or 
increased tax expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of Rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to H.R. 1375, the following estimate and comparison 
prepared by the Director of the Congressional Budget Office 
under section 402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, July 14, 2003.
Hon. F. James Sensenbrenner, Jr., Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1375, the 
Financial Services Regulatory Relief Act of 2003.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Kathy Gramp 
and Jenny Lin, who can be reached at 226-2860.
            Sincerely,
                                       Douglas Holtz-Eakin.

Enclosure

cc:
        Honorable John Conyers, Jr.
        Ranking Member
H.R. 1375--Financial Services Regulatory Relief Act of 2003.

                                SUMMARY

    H.R. 1375 would affect the operations of financial 
institutions and the agencies that regulate them. Some 
provisions would address specific sectors: national banks could 
more easily operate as S corporations or adopt other 
alternative organizational structures; thrift institutions 
would be given some of the same investment, lending, and 
ownership options available to banks; credit unions would have 
new options for investments, lending, mergers, and leasing 
Federal property; and certain privately insured credit unions 
could become members of the Federal Home Loan Bank system. The 
bill would provide the Federal Deposit Insurance Corporation 
(FDIC) with new enforcement authorities and modify regulatory 
procedures governing certain types of transactions, such as the 
establishment of de novo branches and interstate mergers. It 
would also give agencies more flexibility in sharing data, 
retaining records, and scheduling examinations, and would limit 
the legal defenses that the United States could use against 
certain claims for monetary damages.
    CBO estimates that enacting this bill would reduce Federal 
revenues by $37 million over the next 5 years and by a total of 
$117 million over the 2004-2013 period. In addition, we 
estimate that direct spending would increase by $17 million 
over the next 5 years and by a total of $22 million over the 
2004-2013 period.
    H.R. 1375 contains intergovernmental mandates as defined in 
the Unfunded Mandates Reform Act (UMRA), but CBO estimates that 
the cost of complying with those requirements would not exceed 
the intergovernmental threshold established in UMRA ($59 
million in 2003, adjusted annually for inflation).
    H.R. 1375 contains several private-sector mandates. Those 
mandates would affect certain depository institutions, 
nondepository institutions that control depository 
institutions, uninsured banks, bank holding companies and their 
subsidiaries, savings and loan association holding companies 
and their subsidiaries, and Federal Home Loan banks. At the 
same time, the bill would relax some restrictions on the 
operations of certain financial institutions. CBO estimates 
that the aggregate direct cost of complying with the private-
sector mandates in the bill would not exceed the annual 
threshold established in UMRA ($117 million in 2003, adjusted 
annually for inflation).

                ESTIMATED COST TO THE FEDERAL GOVERNMENT

    The estimated budgetary impact of H.R. 1375 is shown in the 
following table. The costs of this legislation fall within 
budget function 370 (commerce and housing credit).


                           BASIS OF ESTIMATE

    Most of the budgetary impacts of this legislation would 
result from three provisions: section 101, which would make it 
easier for national banks to convert to S corporation status or 
alternative organization forms; section 214, which would limit 
the government's legal defenses against certain claims for 
monetary damages; and section 302, which would allow certain 
Federal credit unions to lease Federal land at no charge. For 
this estimate, CBO assumes that H.R. 1375 will be enacted in 
the fall of 2003.
    H.R. 1375 also would affect the workload at agencies that 
regulate financial institutions. We estimate that the net 
change in agency spending would not be significant. Based on 
information from each of the agencies, CBO estimates that the 
change in administrative expenses--both costs and potential 
savings--would average less than $500,000 a year over the next 
several years. Expenditures of the Office of the Comptroller of 
the Currency (OCC), the Office of Thrift Supervision (OTS), the 
National Credit Union Administration (NCUA), and the FDIC are 
classified as direct spending and would be covered by fees or 
insurance premiums paid by the institutions they regulate. Any 
change in spending by the Federal Reserve would affect net 
revenues, while adjustments in the budget of the Securities and 
Exchange Commission (SEC) and Federal Trade Commission (FTC) 
would be subject to appropriation.
Revenues
    CBO estimates that enacting H.R. 1375 would reduce Federal 
tax revenues collected from national and State-chartered banks 
and would have an insignificant effect on civil and criminal 
penalties collected for violations of the bill's provisions.
    S Corporation Status. Under this bill, some national banks 
would find it easier to convert from C corporation status to S 
corporation status. Section 101 would allow directors of 
national banks to be issued subordinated debt to satisfy the 
requirement that directors of a bank own qualifying shares in 
the bank. This provision would effectively reduce the number of 
shareholders of a bank by removing directors from shareholder 
status, making it easier for banks to comply with the 75-
shareholder limit that defines eligibility for subchapter S 
election.
    Income earned by banks taxed as C corporations is subject 
to the corporate income tax, and post-tax income distributed to 
shareholders is taxed again at individual income tax rates. 
Income earned by banks operating as S corporations is taxed 
only at the personal income tax rates of the banks' 
shareholders and is not subject to the corporate income tax. 
The average effective tax rate on S corporation income is lower 
than the average effective tax rate on C corporation income. 
CBO estimates that enacting this provision would reduce 
revenues by a total of $36 million over the next 5 years and by 
$100 million over the 2004-2013 period.
    Based on information from the Federal Reserve Board, the 
OCC, and private trade associations, CBO expects that most of 
the banks that would be affected are small, although banks and 
bank holding companies with assets over $500 million would also 
be affected. In addition, States are likely to amend the rules 
for State-chartered banks to match those for national banks. 
CBO expects that most conversions to Subchapter S status would 
occur between 2004 and 2006 and that national banks would 
convert earlier than State-chartered banks.
    Business Organization Flexibility. Under section 110 of 
this bill, the Comptroller of the Currency could allow national 
banks to organize in noncorporate form, for example as Limited 
Liability Corporations (LLCs) as defined by State law. LLCs 
generally choose to be taxed as partnerships. Only a few States 
currently allow banks to organize as LLCs, however, and the 
Internal Revenue Service (IRS) currently taxes State-chartered 
bank-LLCs as C corporations. LLCs have more organizational 
flexibility than S corporations while retaining the corporate 
characteristic of limited liability.
    Income earned by banks taxed as C corporations is subject 
to the corporate income tax, and post-tax income distributed to 
shareholders is taxed again at individual income tax rates. 
Income earned by partnerships--like that earned by S 
corporations--is taxed only at the personal income tax rates of 
the partners and is not subject to the corporate income tax. 
The average effective tax rate on partnerships is lower than 
the average effective tax rate on C corporation income but is 
similar to the average effective tax rate on S corporation 
income.
    Based on information from the OCC, the FDIC, and private 
trade associations, CBO believes that it is quite possible that 
the OCC would alter its regulations to allow national banks to 
organize in noncorporate form. We expect that, over the next 
decade, most States that do not currently allow banks to 
organize as LLCs will begin allowing them to do so in order to 
be competitive. Under H.R.1375, future IRS tax treatment of 
bank-LLCs is uncertain. CBO assumes that the IRS may allow 
bank-LLCs to be taxed as partnerships at some point in the next 
decade. The estimated revenue effects of section 110 reflect 
CBO's estimate of the likelihood of such IRS actions. CBO 
anticipates that banks forming as LLCs would most likely be 
newly chartered institutions and that, over the next decade, 
only a very limited number of banks would convert from C 
corporation or S corporation status to LLCs taxed as 
partnerships.
    CBO estimates that enacting this provision would reduce 
Federal revenues by a total of $1 million over the next 5 years 
and by $17 million over the 2004-2013 period.
    Civil and Criminal Penalties. H.R. 1375 would make all 
depository institutions--not just insured institutions--subject 
to certain civil and criminal fines for violating rules 
regarding breach of trust, dishonesty, and certain other 
crimes. It also would authorize the FDIC to take enforcement 
action or impose civil penalties of up to $1 million a day on 
any individual, corporation, or other entity that falsely 
implies that deposits or other funds are insured by the agency. 
Based on information from the FDIC, CBO expects that 
enforcement actions would likely deter most individuals or 
institutions from violating rules regarding breach of trust, 
dishonesty, or certain other crimes. As a result, we estimate 
that any additional penalty collections under those provisions 
would not be significant.
Direct Spending
    CBO estimates that enacting H.R. 1375 would increase direct 
spending by a total of about $15 million over the 2004-2013 
period to pay for increased litigation costs and larger 
payments for ``goodwill'' claims against the government. The 
bill also would reduce offsetting receipts collected from 
credit unions that lease Federal facilities, and it could 
affect the cost of deposit insurance.
    Monetary Damages in Goodwill Cases. Section 214 would 
preclude the use of certain legal defenses in claims for 
damages against the United States arising out of the 
implementation of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989 (FIRREA). CBO estimates that 
enacting this provision would increase the cost of litigating 
and resolving such claims by a total of $15 million over the 
next 5 years.
    Background on Goodwill Cases. Under section 214, courts 
could not dismiss a claim arising out of the implementation of 
FIRREA on the basis of res judicata, collateral estoppel, or 
similar defenses if the defense was based on a decision, 
opinion, or order of judgment entered by any court prior to 
July 1, 1996. On that date, the Supreme Court decided United 
States v. Winstar Corp., 518 U.S. 839 (1996), holding that the 
government became liable for damages in breach of contract when 
the accounting treatment of ``supervisory goodwill'' that it 
had previously approved was prevented by enactment of FIRREA. 
About 100 ``goodwill'' cases against the government are still 
pending before the courts, with claims totaling about $20 
billion. CBO estimates that, under current law, such claims 
will cost the government about $1.5 billion over the 2004-2013 
period. Judgments, settlements, and litigation expenses for 
such claims are paid from the FSLIC Resolution Fund, and such 
payments do not require appropriation action.
    By eliminating some defenses currently available to the 
United States in such cases, section 214 would increase the 
likelihood that some claims would reach a hearing on the 
merits, thereby allowing cases to proceed further in the 
judicial process than may otherwise be likely. According to the 
Department of Justice (DOJ) and the FDIC, this provision would 
affect only a few of the goodwill cases; claims in the affected 
cases could total about $200 million. (This provision also 
could affect cases in which the FDIC is the plaintiff as the 
receiver of a failed thrift, but any monetary awards to the 
FDIC would be intragovernmental payments and would have no net 
effect on the Federal budget.)
    Estimated Cost of This Provision. CBO expects that enacting 
section 214 would increase the cost of litigation and potential 
settlements or judgments against the United States. Whether 
those costs are large or small would depend on the role those 
defenses would otherwise play in the outcome of each case. For 
example, the cost could be significant if the loss of those 
defenses resulted in a judgment for plaintiffs on the merits 
but could be negligible if the judgment were against the 
plaintiffs.
    For this estimate, CBO assumes that defenses of res 
judicata and collateral estoppel would be just two of several 
possible defenses and other factors affecting awards of 
monetary damages and that barring them would therefore have a 
small effect on the potential costs of such claims. We estimate 
that enacting this provision would increase expected payments 
for such claims by about $10 million--or 5 percent of the 
roughly $200 million in claims that might be affected by this 
provision. Given the pace of such litigation, we expect that 
those added costs would occur in 2007 and 2008. In addition, 
CBO estimates that DOJ's administrative costs would increase by 
an average of about $1 million a year as a result of the added 
time and workload associated with those cases. This estimate is 
based on historical trends in the cost of litigating such 
claims.
    Nongoodwill Cases. Because section 214 would not limit the 
affected claims to goodwill cases, this provision also could 
affect other types of claims for monetary damages arising out 
of the implementation of FIRREA that meet the criteria in the 
bill. This provision could encourage the filing of such claims 
that were resolved prior to July 1, 1996; however, DOJ is 
currently unaware of any such claims.
    Offsetting Receipts From Federal Leases. Section 302 would 
allow Federal agencies to lease land to Federal credit unions 
without charge under certain conditions. Under existing law, 
agencies may allocate space in Federal buildings without charge 
if at least 95 percent of the credit union's members are or 
were Federal employees. Some credit unions, primarily those 
serving military bases, have leased Federal land to build a 
facility. Prior to 1991, leases awarded by the Department of 
Defense (DoD) were free of charge and for terms of up to 25 
years; a statutory change enacted that year limited the term of 
such leases to 5 years and required the lessee to pay a fair 
market value for the property. According to DoD, about 35 
credit unions have leased land since 1991 and are paying a 
total of about $525,000 a year to lease Federal property. Those 
proceeds are recorded as offsetting receipts, and any spending 
of those payments is subject to appropriation.
    CBO expects that enacting this provision would result in a 
loss of offsetting receipts from all credit union leases. Those 
lessees currently paying a fee would stop making those payments 
after they renew their current leases, all of which should 
expire within the next 5 years. In addition, credit unions that 
have long-term, no-cost leases would be able to renew them 
without becoming subject to the fees they otherwise would pay 
under current law. CBO estimates that enacting this provision 
would cost a total of about $2 million over the next 5 years 
and an average of about $700,000 annually after 2008.
    Deposit Insurance. Several provisions in the bill could 
affect the cost of Federal deposit insurance. For example, the 
bill would streamline the approval process for mergers, 
branching, and affiliations, which could give eligible 
institutions the opportunity to diversify and compete more 
effectively with other financial businesses. In some cases, 
such efficiencies could reduce the risk of insolvency. It is 
also possible, however, that some of the new lending and 
investment options could increase the risk of losses to the 
deposit insurance funds.
    CBO has no clear basis for predicting the direction or the 
amount of any change in spending for insurance that could 
result from the new investment, lending, and operational 
arrangements authorized by this bill. The net budgetary impact 
of such changes would be negligible over time, however, because 
any increase or decrease in costs would be offset by 
adjustments in the insurance premiums paid by banks, thrifts, 
or credit unions.
Spending Subject to Appropriation
    Section 201 provides thrift institutions with exemptions 
from broker-dealer and investment-advisor registration 
requirements similar to those accorded banks. Section 313 
provides similar exemptions for federally insured credit 
unions. Based on information from the SEC, CBO estimates that 
the budgetary effects of those exemptions would not be 
significant.
    Section 312 would exempt federally insured credit unions 
from filing certain acquisition or merger notices with the FTC. 
Under current law, the FTC charges filing fees ranging from 
$45,000 to $280,000, depending on the value of the transaction. 
The collection of such fees is contingent on appropriation 
action. Based on information from the FTC, CBO estimates that 
this exemption would have no significant effect on the amounts 
collected from such fees.

        ESTIMATED IMPACT ON STATE, LOCAL, AND TRIBAL GOVERNMENTS

    H.R. 1375 would preempt certain State laws and place new 
requirements on certain State agencies that regulate financial 
institutions. Both the preemptions and the new requirements 
would be mandates as defined in UMRA. CBO estimates that the 
cost of those mandates taken together would not exceed the 
threshold established in UMRA ($59 million in 2003, adjusted 
annually for inflation).
    Section 209 would preempt certain State securities laws by 
prohibiting States from requiring agents representing a Federal 
savings association to register as brokers or dealers if they 
sell deposit products (CDs) issued by the savings association. 
Such a preemption would impose costs (in the form of lost 
revenues) on those States that currently require such 
registration. Based on information from representatives of the 
securities industry and securities regulators, CBO estimates 
that losses to States as a result of this prohibition would 
total less than $1 million a year.
    Section 301 would authorize certain privately insured 
credit unions to apply for membership in a Federal Home Loan 
Bank (FHLB). Part of the application process would require 
State regulators of credit unions to determine whether an 
applicant is eligible for Federal deposit insurance. This 
requirement would be a mandate, but because the regulators 
already make that determination under State law, the additional 
cost to comply with the requirement would be minimal.
    Upon becoming members, those credit unions would be 
eligible for loans from the FHLB. To preserve the value of 
those loans, section 301 would preempt certain State contract 
laws that otherwise would allow defaulting credit unions to 
avoid certain contractual obligations. Because those credit 
unions are not currently eligible for membership in a Federal 
home loan bank, and accordingly, have no contracts for credit, 
this preemption, while a mandate, would impose no costs on 
State, local, or tribal governments.
    Section 302 would require State regulators of credit unions 
to provide certain information when requested by the NCUA. 
Because this provision would not require States to prepare any 
additional reports, merely to provide them to NCUA upon 
request, CBO estimates that the cost to States would be 
minimal.
    Section 401 would expand an existing preemption of State 
laws related to mergers between insured depository institutions 
chartered in different States. Current law preempts State laws 
that restrict mergers between insured banks with different home 
States. This section would expand that preemption to cover 
mergers between insured banks and other insured depository 
institutions or trust companies with different home States. 
This expansion of a preemption would be a mandate under UMRA 
but would impose little or no cost on States.
    Section 401 also would preempt State laws that regulate 
certain fiduciary activities performed by insured banks and 
other depository institutions. The bill would allow banks and 
trusts of a State (the home State) to locate a branch in 
another State (the host State) as long as the services provided 
by the branch are not in contravention of home State or host 
State law. Further, if the host State allows other types of 
entities to offer the same services as the branch bank or trust 
seeking to locate in the host State, home State approval of the 
branch would not be in contravention of host State law. This 
provision could preempt laws of the host State but would impose 
no costs on them.
    Section 619 provides that, except where expressly provided 
in a cooperative agreement, only the bank supervisor of the 
home State of an insured State bank may impose supervisory fees 
on the bank. To the extent that State laws permit such charges, 
this provision would preempt State authority. However, based on 
information from the Conference of State Bank Supervisors, 
under current practice, host States rarely if ever charge such 
fees, and therefore, we estimate that enacting this provision 
would have no significant effect on State revenues.

                 ESTIMATED IMPACT ON THE PRIVATE SECTOR

    H.R. 1375 contains several private-sector mandates as 
defined by UMRA. At the same time, the bill would relax some 
restrictions on the operations of certain financial 
institutions. CBO estimates that the aggregate direct costs of 
mandates in the bill would not exceed the annual threshold 
established in UMRA ($117 million in 2003, adjusted annually 
for inflation).
Mandates
    The bill would impose mandates on depository institutions 
controlled by companies other than depository institution 
holding companies; nondepository institutions that control 
insured depository institutions; uninsured banks; bank holding 
companies and their subsidiaries; savings and loan association 
holding companies and their subsidiaries; and Federal Home Loan 
Banks. Mandates in the bill include an expansion of the 
authority of the FDIC over certain insured depositories and 
companies that control insured depositories, a prohibition on 
participation in the affairs of financial institutions of 
people convicted of certain crimes, and additional reporting 
requirements for FHLBs.
    Expansion of the FDIC's Authorities. The Gramm-Leach-Bliley 
Act allowed new forms of affiliations among depositories and 
other financial services firms. Consequently, insured 
depository institutions may now be controlled by a company 
other than a depository institution holding company (DIHC). 
H.R. 1375 would amend current law to give the FDIC certain 
authorities concerning troubled or failing depository 
institutions held by those new forms of holding companies.
    Under current law, if the FDIC suffers a loss from 
liquidating or selling a failed depository institution, the 
FDIC has the authority to obtain reimbursement from any insured 
depository institution within the same DIHC. Section 407 would 
expand the scope of the FDIC's reimbursement power to include 
all insured depository institutions controlled by the same 
company, not just those controlled by the same DIHC.
    The cost of this mandate would depend, among other things, 
on the probability of failure of the additional institutions 
subject to this authority and the probability that the FDIC 
would incur a loss as a result of those failures. The new 
authority would apply only to a handful of depository 
institutions. Based on information from the FDIC, CBO estimates 
that the cost of this mandate would not be substantial.
    In addition, section 408 would allow the FDIC to prohibit 
or limit any company that controls an insured depository from 
making ``golden parachute'' payments or indemnification 
payments to institution-affiliated parties of troubled or 
failing insured depositories. (Institution-affiliated parties 
include directors, officers, employees, and controlling 
shareholders. Institution-affiliated parties also include 
independent contractors such as accountants or lawyers who 
participate in violations of the law or undertake unsound 
business practices that may cause a financial loss to, or 
adverse effect on, the insured depository institution.)
    Based on information from the FDIC, CBO expects that only a 
few institutions would be covered by the new authority. In the 
event that the FDIC exercises this authority, CBO expects that 
the cost to institutions of withholding such payments would be 
administrative in nature and minimal, if any.
    Prohibitions on Convicted Individuals. Current law 
prohibits a person convicted of a crime involving dishonesty, a 
breach of trust, or money laundering from participating in the 
affairs of an insured depository institution without FDIC 
approval. The bill would extend that prohibition so that 
uninsured banks, bank holding companies and their subsidiaries, 
and savings and loan holding companies and their subsidiaries 
could not allow such persons to participate in their affairs 
without the prior written consent of their designated Federal 
banking regulator.
    Assuming that those institutions already screen potential 
directors, officers, and employees for criminal offenses, the 
incremental cost of complying with this mandate would be small.
    Reporting Requirements for Federal Home Loan Banks. Section 
616 would require the Federal Home Loan Banks to report the 
compensation and expenses paid to directors in their annual 
reports. CBO expects that the cost of complying with this 
mandate would be minimal.

                         PREVIOUS CBO ESTIMATE

    On June 11, 2003, CBO transmitted a cost estimate for H.R. 
1375 as ordered reported by the House Committee on Financial 
Services on May 21, 2003. H.R. 1375 as approved by the House 
Committee on the Judiciary is identical to the version of the 
bill reported by the House Committee on Financial Services.

                         ESTIMATE PREPARED BY:

Federal Costs: Kathy Gramp and Jenny Lin (226-2860)
Federal Revenues: Pam Greene (226-2680)
Impact on State, Local, and Tribal Governments: Victoria Heid 
    Hall (225-3220)
Impact on the Private Sector: Judith Ruud (226-2940)

                         ESTIMATE APPROVED BY:

Robert A. Sunshine
Assistant Director for Budget Analysis

G. Thomas Woodward
Assistant Director for Tax Analysis

                    Performance Goals and Objectives

    H.R. 1375 does not authorize funding. Therefore, clause 
3(c)(4) of Rule XIII of the Rules of the House of 
Representatives is inapplicable.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of Rule XIII of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in article I, section 8 of the Constitution.

               Section-by-Section Analysis and Discussion

    The following section-by-section analysis describes the 
sections of H.R. 1375 as reported that fall within the rule X 
jurisdiction of the Committee on the Judiciary. For a 
description of the other sections of the bill, please refer to 
the report of the Committee on Financial Services.\3\
---------------------------------------------------------------------------
    \3\ See H.R. Rep. No.108-152 Part I (2003).
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                        TITLE I--NATIONAL BANKS

Section 106. Clarification of Waiver of Publication Requirements for 
        Bank Merger Notices.
    Section 106 amends the National Bank Consolidation and 
Merger Act (12 U.S.C. Sec. Sec. 215(a) and 215(a)(2)) to 
provide the Comptroller with authority to waive the publication 
of notice requirement for bank mergers if the Comptroller 
determines that an emergency justifies such a waiver or if 
shareholders of the association or State bank agree by 
unanimous action to waive the publication requirement for their 
respective institutions.

               TITLE II--SAVINGS ASSOCIATIONS PROVISIONS

Section 203. Mergers and Consolidations of Federal Savings Associations 
        with Nondepository Institution Affiliates.
    This section amends the Home Owners Loan Act (12 U.S.C. 
Sec. 1464) to permit a Federal savings association to merge 
with any nondepository institution affiliate of the savings 
association.
Section 213. Citizenship of Federal Savings Associations for 
        Determining Federal Court Diversity Jurisdiction.
    This section amends the Home Owners' Loan Act (12 U.S.C. 
Sec. 1464) to establish that a Federal savings association 
shall be considered--for purposes of establishing diversity 
jurisdiction--a citizen only of the State where the savings 
association locates its main office. Diversity jurisdiction 
requires complete diversity among all parties to a lawsuit, 
i.e. that all parties be citizens of different States, and for 
there to be a minimum sum of $75,000 in controversy. Since they 
are chartered by the Federal Government and not incorporated in 
a State, it has been held that federally-chartered savings 
associations that conduct business in more than one State are 
not considered to be a citizen of any State. In contrast, 
federally-chartered savings associations that confine their 
business to a single State are considered to be a citizen of 
that State. This section will provide parity among federally-
chartered savings associations. This section also ensures 
greater parity between federally-chartered savings associations 
and national banking associations by providing that each is 
considered to be a citizen of the State where it is located for 
purposes of diversity jurisdiction.
Section 214. Applicability of Certain Procedural Doctrines.
    This section amends Section 11A(d) of the Federal Deposit 
Insurance Act (12 U.S.C. Sec. 1821a(d)) by prohibiting courts 
from dismissing a claim for monetary damages against the United 
States, or any agency or official thereof, where any recovery 
would be paid from the Federal Savings & Loan Insurance 
Corporation (FSLIC) Resolution Fund or any supplements thereto, 
where liability is alleged to be based upon actions of the 
FSLIC or the Federal Home Loan Bank Board prior to their 
respective dissolutions, where the claim arose from the 
implementation of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989 (FIRREA), on the basis of res 
judicata, collateral estoppel, or similar issue preclusion 
defenses if the defense is based upon a decision, opinion, or 
order of judgment entered by a court prior to the U.S. Supreme 
Court's decision in United States v. Winstar.\4\ During the 
savings and loan crisis of the 1980's, Federal thrift 
regulators sought to avoid incurring additional deposit 
insurance liabilities by encouraging healthy thrifts and 
outside investors to acquire ailing thrifts through 
``supervisory mergers.'' In exchange, the Federal thrift 
regulators pledged to treat a failed thrift's negative net 
worth as supervisory goodwill and include it in calculating 
regulatory capital. In 1989, Congress enacted FIRREA, 
prohibiting thrifts from counting supervisory goodwill as 
regulatory capital. In the 1996 Winstar decision, the Supreme 
Court held that the government entered into contracts with the 
acquiring thrifts and breached those contracts by implementing 
FIRREA's prohibitions on including supervisory goodwill in 
calculating regulatory capital. Section 214 seeks to ensure 
that all institutions entitled to pursue claims against the 
government under Winstar's reasoning are afforded an 
opportunity to have their claims adjudicated on the merits.
---------------------------------------------------------------------------
    \4\ 518 U.S. 839 (1996).
---------------------------------------------------------------------------

                   TITLE III--CREDIT UNION PROVISIONS

Section 312. Exemption from Pre-merger Notification Requirement of the 
        Clayton Act.
    This section amends the Clayton Act to exempt credit unions 
from provisions of the Hart-Scott-Rodino Antitrust Improvements 
Act of 1976 (15 U.S.C. Sec. 18a) which require certain acquired 
and acquiring persons--including federally insured credit 
unions--to file a notification and report form with the Federal 
Trade Commission (FTC) to provide advance notification of 
mergers and acquisitions when the value of the transaction 
exceeds $50 million.

              TITLE IV--DEPOSITORY INSTITUTION PROVISIONS

Section 402. Statute of Limitations for Judicial Review of Appointment 
        of a Receiver for Depository Institutions.
    This section amends the National Bank Receivership Act (12 
U.S.C. Sec. 191), the Federal Deposit Insurance Act (12 U.S.C. 
Sec. 1821(c)(7)), and the Federal Credit Union Act (12 U.S.C. 
Sec. 1787(a)(1)), to establish a uniform 30-day statute of 
limitations for national banks, State chartered non-member 
banks, and credit unions to challenge decisions by the Office 
of the Comptroller of the Currency, Federal Deposit Insurance 
Corporation, and the National Credit Union Administration to 
appoint a receiver. Current law generally provides that 
challenges to a decision by the Federal Deposit Insurance 
Corporation or the Office of Thrift Supervision to appoint a 
receiver for an insured State bank or savings association must 
be raised within 30 days of the appointment. (See 12 U.S.C. 
Sec. Sec. 1821(c)(7) & 1464(d)(2)(B)). However, there is no 
statutory limitation on national banks' ability to challenge a 
decision by the Office of the Comptroller of the Currency to 
appoint a receiver of an insured or uninsured national bank. As 
a result, the general 6-year statute of limitations currently 
applies to national banks in these instances. This protracted 
time period severely limits the Office of the Comptroller of 
the Currency's authority to manage insolvent national banks 
that are placed in receivership and the ability of the Federal 
Deposit Insurance Corporation to wind up the affairs of an 
insured national bank in a timely manner with legal 
certainty.\5\
---------------------------------------------------------------------------
    \5\ James Madison, Ltd. v. Ludwig 82 F.3d 1085 (1996).
---------------------------------------------------------------------------

                  TITLE VI--BANKING AGENCY PROVISIONS

Section 607. Streamlining Depository Institution Merger Application 
        Requirements.
    This section amends the Federal Deposit Insurance Act (12 
U.S.C. Sec. 1828) to require the Attorney General to provide 
within 30 days a report on the competitive factors associated 
with a depository institution merger to a requesting agency. 
This section reduces this period to 10 days if the requesting 
agency advises the Attorney General that an emergency exists 
requiring expeditious action.
Section 609. Shortening of Post-approval Antitrust Review Waiting 
        Period for Bank Acquisitions and Mergers with the Agreement of 
        the Attorney General.
    Currently, banks and bank holding companies must delay 
consummating any bank acquisition or merger for at least 15 
days after the transaction has been approved by a Federal 
banking agency. This waiting period is designed to allow the 
Attorney General to challenge the transaction, if the Attorney 
General believes the transaction would significantly harm 
competition. Section 609 would allow the banking agency to 
reduce the waiting period to 5 days, but only in cases where 
the Attorney General has agreed in advance that the acquisition 
or merger would not have serious anti-competitive effects. In 
such circumstances, a longer waiting period is not needed to 
allow the Attorney General to review the transaction and merely 
delays the ability of the banking organizations to achieve 
their business objectives. This section does not shorten the 
time period for private parties to challenge the banking 
agency's approval of the transaction under the Community 
Reinvestment Act or banking laws.
Section 613. Examiners of Financial Institutions.
    This section amends 18 U.S.C. Sec. 212 to establish a fine 
and a prison sentence not more than 1 year, or both, as well as 
a further sum equal to the amount of the credit extended, for 
an officer, director or employee of a financial institution who 
extends credit to any examiner which the examiner is prohibited 
from accepting. In addition, this section authorizes limited 
waivers from the prohibition on examiners accepting credit from 
a bank being examined, if the examiner fully discloses the 
nature and circumstances of the loan and receives a 
determination from the examiner's employer that the loan would 
not affect the integrity of the examination. Examiners are 
permitted to receive credit cards on terms and conditions no 
more favorable to the examiner than those generally applicable 
to other consumers.
Section 615. Enforcement Against Misrepresentations Regarding FDIC 
        Deposit Insurance Coverage.
    This section amends 18 U.S.C. Sec. 709 to authorize the 
FDIC to take enforcement actions and impose civil monetary 
penalties of up to $1 million per day on any individual, 
corporation, or other entity for misrepresentation of FDIC 
insurance coverage. This section does not prohibit the 
imposition of otherwise applicable sanctions for its violation, 
and sets time periods within which the FDIC may assess and 
recover such civil penalties.

                              Agency Views


         Changes in Existing Law Made by the Bill, as Reported

    The bill was referred to this committee for consideration 
of such provisions of the bill and amendment as fall within the 
jurisdiction of this committee pursuant to clause 1(k) of Rule 
X of the Rules of the House of Representatives. The changes 
made to existing law by the amendment reported by the Committee 
on Financial Services are shown in the report filed by that 
committee (Rept. 108-152, Part 1).

                           Markup Transcript



                            BUSINESS MEETING

                        WEDNESDAY, JULY 9, 2003

                  House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:00 a.m., in 
Room 2141, Rayburn House Office Building, Hon. F. James 
Sensenbrenner, Jr., [Chairman of the Committee] presiding.

           *         *         *         *         *

    Chairman Sensenbrenner. Now pursuant to notice, I call up 
the bill H.R. 1375, the ``Financial Services Regulatory Relief 
Act of 2003'' for purposes of markup and move its favorable 
recommendation to the House. Without objection, the bill will 
be considered as read and open for amendment at any point. The 
text of the bill as reported by the Committee on Financial 
Services, which the Members have before them, will be 
considered as read, considered as the original text for 
purposes of amendment, and open for amendment at any point.
    [The Committee Print for H.R. 1375 follows:]
      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


      
      

  


    Chairman Sensenbrenner. The Chair has a long-winded 
statement which he will put in the record, without objection.
    [The statement of Mr. Sensenbrenner follows:]
  Prepared Statement of the Honorable F. James Sensenbrenner, Jr., a 
         Representative in Congress From the State of Wisconsin
    The ``Financial Services Regulatory Relief Act of 2003'' was 
reported by the Committee on Financial Services on May 21, 2003 and was 
sequentially referred to the Judiciary Committee for a period ending 
not later than July 14, 2003. This legislation is nearly identical to 
H.R. 3951, the ``Financial Services Regulatory Relief Act of 2002,'' 
which was reported from this Committee last Congress.
    H.R. 1375 makes several changes to existing law to provide a 
measure of relief to highly regulated financial institutions. The 
legislation contains regulatory improvements for savings associations, 
credit unions, and federal financial regulatory agencies.
    The following sections contain matters within the Rule X 
jurisdiction of the Judiciary Committee: Section 106 of the legislation 
clarifies bank merger notice requirements, while Section 203 of the 
bill allows a Federal savings association to merge with any 
nondepository institution affiliate of the savings association.
    Section 213 of the legislation ensures that all federal thrifts are 
considered to be a citizen of a State for purposes of establishing 
diversity jurisdiction. This provision extends to federal savings 
associations that operate across State lines the same possibility of 
establishing diversity jurisdiction currently enjoyed by national 
banks, State-chartered banks, and savings associations. Currently, 
federally-chartered savings associations that conduct businesses in 
more than one State may, under some circumstances, be considered to not 
be a citizen of any State in which they operate.
    Section 214 of the legislation requires federal courts to ensure 
that all institutions having claims for relief under the Supreme 
Court's 1996 Winstar decision be permitted to have those claims 
considered on the merits. The provision is an equitable one.
    It is intended to ensure that financial institutions which took 
over failed thrifts in the 1980's only after receiving specific 
material assurances from federal regulators--terms that the Supreme 
Court ruled were later breached by the federal government--have the 
ability to present their claims for breach of contract in federal 
court.
    Section 312 of the legislation, would exempt credit unions from 
having to file Hart-Scott-Rodino pre-merger antitrust review.
    Section 402 establishes a uniform 30-day statute of limitations on 
various financial institutions to appeal decisions by the Comptroller, 
FDIC, and National Credit Union Administration to appoint a receiver.
    Section 607 streamlines merger applications for depository 
institutions while Section 609 would shorten the post-approval process 
during which banks can complete merging or acquiring another bank if 
the Attorney General agrees in advance that the acquisition or merger 
would not have serious anticompetitive effects. Finally, Section 615 
would allow for the imposition of up to $1 million a day fine on any 
individual or corporation for misrepresentation of FDIC insurance 
coverage.
    H.R. 1375 represents meaningful reform of a financial services 
industry in need of structural regulatory modernization, and I urge 
your support.
    I now turn to Mr. Conyers for his opening remarks.

    Chairman Sensenbrenner. Without objection, all Members may 
put statements in the record. And are there amendments? The 
gentlewoman from California, do you have an amendment to this 
bill?
    [No response.]
    Chairman Sensenbrenner. Okay. Are there amendments?
    If not, the Chair notes the presence of a reporting quorum. 
All those in favor of reporting the bill favorably will say 
aye? Opposed, no?
    The ayes appear to have it. The ayes have it, and the bill 
is reported favorably.
    Without objection, the Chairman is authorized to move to go 
to conference pursuant to House rules. Without objection, the 
staff is directed to make any technical and conforming changes, 
and all Members will be given 2 days as provided by House rules 
in which to submit additional, dissenting, supplemental, or 
minority views.
    And the Committee is recessed until 10:00 a.m. tomorrow.
    [Whereupon, at 4:54 p.m., the Committee was recessed, to 
reconvene at 10:00 a.m., Thursday, July 10, 2003.]
                            Additional Views

    We generally support the version of H.R. 1375 as reported 
out of the Committee on the Judiciary, but we have one 
reservation about a provision that was not addressed at the 
Committee markup. Section 609 of H.R. 1375 amends section 11(b) 
of the Bank Holding Company Act of 1956, 12 U.S.C. 
Sec. 1849(b), and section 18(c)(6) of the Federal Deposit 
Insurance Act, 12 U.S.C. Sec. 1828(c)(6), by reducing the 
minimum waiting period from 15 calendar days to five calendar 
days for banks and bank holding companies to merge with or 
acquire other banks or bank holding companies. Although no 
amendment was offered at the Committee, we feel that this 
provision should be struck from the bill.
    Community organizations have raised concerns about this 
provision, which reduces to 5 days the pre-merger, mandatory 
15-day waiting period with the Attorney General's approval. 
During the course of a bank merger process, both the Federal 
financial supervisory agency and the Department of Justice 
review the merger proposal for competitive concerns. After a 
Federal banking agency approves a merger, DOJ has 30 days to 
decide whether to challenge the merger approval on antitrust 
grounds. At a minimum, the merging banks must now wait 15 days 
before completing their merger. Currently, banking law allows 
third parties (other than Federal banking agencies or DOJ) to 
file suit during the post-approval waiting period. As proposed, 
section 609 would reduce the minimum 15-day waiting period to 5 
days when DOJ indicates it will not file suit challenging the 
merger approval order.
    We believe this provision is anti-Community Reinvestment 
Act (``CRA'') and strips the organizations' right to seek 
judicial review of Federal bank merger approval orders. Without 
such review, community organizations will be deprived of 
impartial means and mechanisms for ensuring that CRA 
performance obligations are taken into account when considering 
merger approvals. Community-based organizations use such suits 
to obtain information about the merger and ensure that the 
merger will not result in disproportionate branch closures in 
low-income or minority communities. We believe they play an 
important role in the public interest and would like to 
reaffirm our desire that the mandatory 15-day waiting period 
remain and that section 609 be struck from the bill.

                                   John Conyers, Jr.
                                   Maxine Waters.
                                   William D. Delahunt.
                                   Tammy Baldwin.
                                   Linda T. Sanchez.