Members of the House Financial Services Committee were very receptive to ICBA's messages on the regulatory agencies' proposed guidance on commercial real estate and the Basel II capital proposal.  In testimony before the committee, ICBA Federal Legislation Committee member Jim McKillop, president and CEO of the Independent Bankers' Bank of Florida, said regulators should withdraw the current version of the CRE proposal.  He also recommended that the regulators allow a "standardized approach" for Basel II banks to reduce costs and complexity and address competitive disparities between Basel II and Basel I banks. 

McKillop called for regulators to conduct another study to determine the competitive impact of revised Basel I rules.  He contended that, unless the regulators adopt a Basel IA that would allow community banks to better align their capital with risk, they would be at a competitive disadvantage.

Ranking Committee Democrat, Barney Frank (D-Mass.) said the burden of proof is on the regulators to demonstrate that the standardized approach should not be available to the large Basel II banks.  Rep. Bernie Sanders, running as an independent for the Senate in Vermont, said that the Basel II regulations should not give big banks an advantage over small banks. 

On the proposed CRE guidance, Subcommittee Chairman Spencer Bachus (R-Ala.) expressed concern that a cutoff of real estate lending could lead to a recession.  Frank was particularly critical of the fact that the CRE guidance would apply to—and discourage funding for—multi-family housing projects.  He cited loss figures that demonstrated that such lending has been particularly safe and sound. 

Rep. Jeb Hensarling (R-Tex.) complained that the proposed CRE guidance was an unwarranted restriction on banks' freedom to serve their communities.  Rep. Sue Kelly (R-N.Y.) compared the CRE guidance to the guidance issued on money service businesses.  She noted that the MSB guidance led to a cutoff of bank services to those companies.

During the question and answer period, Hensarling called on McKillop to explain the changes in the risk management tools that banks have adopted since real estate lending problems cropped up 20 years ago.  McKillop said that community bankers in particular are close to their borrowers and markets, and are in an especially good position to monitor CRE lending.  He said bankers closely monitor loan-to-value ratios.

Hensarling asked the bankers to respond to the regulators' assertion that the CRE guidance would not impose caps on lending, just increased scrutiny.  McKillop said he and other bankers that have been through recent exams are finding that the proposed guidance is already being applied and is limiting banks' lending. 

McKillop noted that another effect of the proposed CRE guidance could be a directive that banks increase their capital.  He noted that this was the only regulation he could recall that—by its operation—could have this direct result.

The hearing sent a clear message to the regulators that the Financial Services Committee is skeptical of their approaches to each of these issues, and that this skepticism is shared by committee members from both parties.

Congress is scheduled to adjourn by the end of the month.  With control of the House and Senate at stake, members will be out on the campaign trail in full force in October.

Congress has just a few days left to finish its agenda (a lame duck session is planned following the election, but no one knows how long that session will last).  Here is a rundown of the bills important to community banks, and their prospects for enactment this year.

Regulatory Relief.  Every time this bill seems primed for enactment, it hits another snag.  Most recently, it was the SEC's objection to a Senate provision requiring the SEC to consult with bank regulators on its rule on bank securities activities.  The cost of another Senate provision allowing the Fed to pay interest on sterile reserves means the bill cannot be considered under expedited rules in the House.

Still, we are hopeful the bill can be enacted this year—either before Congress adjourns for the elections, or in the lame duck session.  Most observers feel that none of the remaining issues are deal-breakers, and too much time and effort has gone into this legislation to allow it to die.  Look for action this year on this ICBA-backed legislation, which includes three provisions from ICBA's Community First Act (CFA).

GSE Reform.  There has been a flurry of negotiations on GSE regulatory reform recently, following little movement for nearly a year to reconcile differences between the House and Senate bills.  The bills are similar in many respects, however, differences in the way they treat portfolio limits on Fannie and Freddie caused an impasse. 

The Senate bill, supported by the administration, would force the GSEs to slash their portfolios by prescribing the kinds of assets the GSEs may hold.  Fannie Mae recently estimated that the Senate bill would reduce its holdings to $30-100 billion, down from more than $700 billion.  The ICBA-supported House bill would give the new regulator the authority to adjust the size for safety and soundness reasons, but would not force such drastic cuts.  Severe cuts in Fannie's and Freddie's portfolios could affect their earnings, raise interest rates, dampen an already soft housing market, and reduce the value of GSE investments held by banks.

Treasury Secretary Paulson has tried to broker a deal on portfolio limits, and Senate Banking Committee Chairman Shelby (R-Ala.) has indicated a willingness to compromise.  House Financial Services Committee Chairman Oxley (R-Ala.) wrote Secretary Paulson urging him to redouble his efforts, and 64 of the 70 members of Oxley's panel signed a letter to the Senate Banking Committee urging compromise.  In a flurry of meetings this past week involving members, staff and administration personnel, work on the issue continued.  Any enactment of a bill would likely wait till the lame duck session.

Internet Gambling.  A bill prohibiting the use of credit cards or other forms of payment for internet gambling passed the House in July.  However, the bill has stalled in the Senate.  ICBA would like to see the bill amended to protect community banks from additional layers of regulatory burden.  As written, the bill could be an enforcement nightmare for community banks, subjecting them to injunctions and requiring them to ferret out and block payments to internet gambling operations.  A version of this bill may be included in the defense authorization conference report.

Data Security.  Following several high-visibility data breaches earlier this year, it seemed Congress was poised to respond with legislation.  However, data security legislation has hit a few snags, most having less to do with substance than with jurisdiction.  In the House, the Financial Services Committee passed a bill, but so did the Energy and Commerce Committee.  In the Senate, competing bills vied for attention in the Judiciary Committee, and the Banking Committee has produced a bill that has yet to be put to a vote.

All bills seek to create uniform national rules for data protection.  ICBA prefers the House Financial Services Committee and the Senate Banking Committee approaches, which recognize existing GLBA standards and give enforcement authority to banking regulators, rather than the FTC.  However, until these significant jurisdictional issues are resolved, don't hold your breath on this one.

BSA and Sarb-Ox Relief.  Two ICBA-backed bills introduced earlier this year will not see action as time runs out.  The Seasoned Customer CTR Exemption Act of 2006, introduced by Reps. Bachus and Frank, would improve existing procedures for financial institutions to exempt seasoned customers from CTR filing requirements. 

The Competitive and Open Markets that Protect and Enhance the Treatment of Entrepreneurs (COMPETE) Act, introduced by Rep. Feeney in the House and Sen. DeMint in the Senate, would permit smaller public companies (with market cap under $700 million or product revenue of under $125 million) to voluntarily opt-out of SOX 404 compliance. This would cover the vast majority of ICBA public company members. 

ICBA will make both of these bills high priorities in the next Congress.

The clock is ticking on a new estate tax compromise, although Ways and Means Chairman Bill Thomas (R-Calif.) held out hope that his committee could still introduce a bill before the House adjourns at the end of the month.   House Majority Leader John Boehner, (R-Ohio) was less optimistic, saying "it's doubtful" that any tax legislation will come to the floor before the recess for November elections.

While the House has passed ICBA-backed compromise estate tax legislation, the Senate remains the roadblock and has failed in two separate attempts to get over the 60-vote hurdle necessary to pass meaningful estate tax relief.  A shrinking timetable and Senate negotiators' inability to come up with a new tax package that would attract 60 votes have decreased the chances of any addition tax bill clearing Congress before the recess.  A final shot at passing popular tax relief measures is likely to take place in the December lame duck congressional session.

ICBA has asked the Securities and Exchange Commission to defer for two years the Sarbanes-Oxley Section 404 due dates for internal control reports and audits for non-accelerated filers to give community banks sufficient time to understand and apply changes to auditing guidance.

In a comment letter, ICBA commended the SEC for proposing to defer the Section 404 due dates for non-accelerated filers, but said a one-year deferral would not give non-accelerated filers and their auditors sufficient time to benefit from changes that the Public Company Accounting Oversight Board plans to make to Auditing Standard No. 2 to help address concerns that Section 404 auditing costs are unnecessarily excessive for smaller companies.  ICBA recommended the SEC defer the Section 404 due dates for at least two more years.

Without the deferral, non-accelerated, calendar-year filers would have to file the management internal control report in the 2006 annual report and the auditor's attestation in the 2007 annual report.  If the SEC delays the due dates by two years, calendar-year filers will have until their 2008 annual reports to file their management internal control reports and until their 2009 annual reports to file the auditor's attestation report.  ICBA said that the deferral is needed to give management time to understand and apply the upcoming SEC/PCAOB guidance, as well as the recent guidance issued by the Committee of Sponsoring Organizations.

ICBA has urged the Securities and Exchange Commission and the Public Company Accounting Oversight Board to revise their current internal control auditing standard for publicly held companies to make it clearer, more risk-based and tiered to the size and complexity of a company.

In response to the SEC's Concept Release asking for comments on the current Section 404 guidance, ICBA recommended that the PCAOB clarify certain terms used in Auditing Standard No. 2 (AS2) such as "material," "reasonable" and "significant."  ICBA supports the COMPETE Act (HR 5404), introduced by Rep. Tom Feeney (R-Fl.), that directs the SEC and the PCAOB to use in AS2 a 5% de minimus standard (e.g., 5% of profits) for noting material weaknesses.

ICBA also recommended that the application of AS2 be tiered to the size and complexity of the institution, so that, for instance, the same amount and type of testing that is done at a large bank with numerous affiliates and subsidiaries is not done at a community bank.  Documentation and testing should be directed to those areas that pose the most risk and, wherever possible, auditors should rely on the work of internal auditors.  While a risk-based and scalable AS2 probably reduce some of the high costs of SOX Section 404, ICBA still believes that smaller public companies should be partially or fully exempted from Section 404 in order to be competitive with larger companies and foreign competition.   

Cox on SOX Standards.  At a hearing this week before the House Financial Services Committee, SEC Chairman Christopher Cox said his agency was "convinced that there are no irreparable problems with Section 404 implementation" and that the SEC would consider the comments it receives from the Concept Release, and revise AS2 to reduce compliance costs.  Cox said he would consider extending the Section 404 due dates for non-accelerated filers if new guidance was not issued by the end of 2007.

Wal-Mart continues to show an avid interest in international retail banking while maintaining that its proposed U.S. industrial bank would only engage in "back office" operations. 

In August, Wal-Mart applied for a banking license in Mexico, with plans to eventually offer full banking services in its more than 800 stores throughout the country (Mexico, unlike the U.S., has no restrictions on commercial firms owning bank charters).  And now Wal-Mart is about to launch its first credit card in China in conjunction with China's Bank of Communications and HSBC Holdings, which has a 20% stake in the Chinese bank.

This will be the first credit card issued by a foreign retailer in China, which has a rapidly growing and potentially enormous credit card market.  Currently, less than 5% of the more than 1.3 billion people in China have credit cards.  According to news reports, the dual-currency credit card can be used anywhere but will entitle users to special discounts in Wal-Mart stores.  Wal-Mart currently has about 60 stores in China, where most of the products sold in its stores are manufactured.

We find it incongruous that Wal-Mart is launching retail banking operations in foreign countries, but continues to insist that it has no interest in retail banking in the richest consumer nation on earth. 

ICBA told the federal banking agencies and the Federal Trade Commission it is critical to ensure enough flexibility in final identity theft "red flags" rules to prevent them from becoming rigid and quickly outdated.  In a comment letter to the agencies, ICBA acknowledged that examples of possible instances of identity theft are helpful, but warned the agencies not to let examples become a mandatory checklist.

The proposal, issued under the Fair and Accurate Credit Transactions Act of 2003 (the FACT Act), includes an appendix listing 31 possible examples of identity theft.  ICBA pointed out that some of the examples could represent routine transactions.  Therefore, ICBA stressed that banks—especially community banks that know their customers—should be allowed to evaluate whether a red-flag indicator is really identity theft.  ICBA regulatory counsel Robert Rowe noted community banks are already taking steps to protect customers from fraud, including identity theft.

The proposal would require banks to conduct an identity theft risk assessment and develop an Identity Theft Prevention Program.  ICBA suggested the agencies issue guidelines to help community banks with the analysis, similar to those offered for other rules such as the Bank Secrecy Act.  ICBA also urged the agencies to provide enough flexibility so banks can design a program based on their unique products and services and customer base. 

ICBA agreed banks should coordinate the Identity Theft Prevention Program with existing compliance requirements such as customer identification and data security rules, but urged the agencies not to require separate but duplicate policies and procedures.  ICBA also recommended applying the requirement only to consumer accounts. 

President's Task Force on Identity Theft.  Separately, a White House task force on identity theft headed by Attorney General Alberto Gonzales and FTC Chairman Deborah Platt Majoras issued an interim report, recommending a number of steps to help address identity theft. 

Recommendations included: more specific data security guidelines for all government agencies, development of a universal police report for identity theft victims, amendments to federal law to require identity theft criminals to compensate identity theft victims, reducing access to Social Security numbers to limit opportunities for identity theft, and developing alternate methods to Social Security numbers for authenticating identities.  The task force plans to issue a final report later this year to be used to develop a strategic government plan on identity theft.  The report is at www.ftc.gov.

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