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Leslie Bonacum
Neil Allen

Financial Services Reform Means A New Way Of Doing Business For Banks And Consumers

(RIVERWOODS, ILL., November 3, 1999) – More than 60 years after legislators first laid out a structure for banking in the U.S., it appears Congress is ready to change the shape and look of financial services offered by banks and to consumers, according to CCH INCORPORATED (CCH), a leading provider of business and financial law information, software and services. It now seems likely that after almost 20 years of discussion and many failed attempts at reform, Congress will pass and the President will sign legislation overhauling the ground rules for banks, thrifts, brokerages and insurance companies.

As congressional and administration negotiators overcome final differences over bill provisions, the financial services industry anxiously awaits passage of legislation aimed at tearing down the barriers between commercial banking, investment banking and insurance that were first erected in a Depression-era law known as the Glass-Steagall Act and reinforced in later legislation.

While certain institutions had circumvented these restrictions to some extent by taking advantage of regulatory loopholes, there has been no simple and straightforward way for American banks to offer the panoply of services routinely offered by their foreign counterparts.

CCH banking law analyst and attorney John Pachkowski notes that under the new system, consumers – whether they are individuals or small or large businesses – will be able to take advantage of "one-stop shopping" for their financial needs, as banks will be able to offer their customers brokerage and insurance services.

"Potentially, you’ll be able to insure your car – or a fleet of vehicles – at the same time you arrange for financing," Pachkowski said.

Staving Off Commercial Companies – an End to Unitary Thrifts?

While the overall theme of the reform legislation is expansive, severe restrictions – perhaps amounting to an eventual death sentence – have been placed on one type of institution known as a "unitary thrift."

Under current law, there are no restrictions on what a unitary thrift holding company can own, or who can own a unitary thrift. Specifically, commercial firms have been permitted to own unitary thrifts.

"This runs counter to the general prohibition against banks affiliating with commercial companies, and the fact is that there is very little difference between a bank and a thrift to the ordinary person," said Pachkowski.

Unitary thrifts were seen as a potential entry-point into financial services by any firm that saw a potential "fit" in offering lucrative financial services to its customers. But the combination of commercial and financial enterprises also raised red flags to legislators and regulators.

"For instance, it could be argued that a commercial company, finding itself in financial straits, could look at the thrift as a source of revenue by requiring the thrift subsidiary to make excessive dividend payments or other transfers. And, indirectly, the thrift may be directed to conduct operations in a way that destabilizes the thrift or otherwise detracts from the thrift's lending and other business operations," Pachkowski said.

In the end, the conferees agreed on provisions that outlaw the future acquisition or creation of new unitary thrifts by commercial enterprises. But applications made before May 5 of this year can still be approved, and Fidelity Investments and Aetna received approval for their unitary thrifts in the days following the conference agreement, and applications were pending from Wal-Mart, Nordstrom, Ford Motor Company and General Motors Corp.


Concerns that large, multi-faceted financial institutions might abuse the information they collect about their customers caused privacy protections to be written into the legislation. For the first time, the bill will give customers a right to "opt out," or refuse permission to have their personal information traded between unaffiliated organizations. But sharing customer information within a family of companies – between a bank and its insurance affiliate, for example, will be allowed.

The legislation also targets pretext calling by third parties – trying to obtain personal customer information through fraud or deception, a practice of many so-called "information brokers." Pretext calling often involves contacting a bank and pretending to be a customer who has forgotten an account number. The pretext caller then obtains account details – often including exact balances and recent transactions – and sells the information to lawyers, collection agencies or other interested parties. Pretext calling will become a federal crime under the bill.

But one of the most highly charged privacy issues – sharing of health information between an insurance company and an affiliated bank – is not addressed at all in the legislation.

"The conferees took out all the medical privacy language from the bill, because the White House wants to deal with this issue separately," Pachkowski said. Critics believe that this omission could harm consumers. For instance, a bank upon discovering that a customer has a fatal disease may refuse to make a 30-year mortgage to that person.

It should be noted that President Clinton unveiled a new set of privacy protections that would prevent doctors, hospitals and health plans from releasing certain health information without a patient’s written consent. This would curb the current practices where data is often released to financial institutions. This set of protections is limited to electronic records and does not cover all paper records.

Community Reinvestment

Another highly charged issue addressed in the final compromise was the Community Reinvestment Act (CRA), which requires financial institutions to make loans in the low-income and minority neighborhoods from which they also receive deposits. Banks must periodically undergo CRA reviews.

A "satisfactory" CRA review will be a prerequisite for national banks to engage in new activities through subsidiaries, and the banking operations of bank holding companies must get a "satisfactory" rating before their parent companies could expand further.

For smaller institutions – those with less than $250 million in assets – the bill offers the possibility of regulatory relief in the form of a longer period between examinations. An institution rated "outstanding" on its CRA review will be subjected to another review only after five years, rather than the normal three between reviews. An institution rated "satisfactory" would go four years before being reviewed again.

In a concession to Sen. Phil Gramm (R-TX), who wanted to repeal the CRA outright, community groups who receive funds in excess of certain amounts from banks must disclose to the banks how those funds are used. Gramm contended that many such payments are in effect payoffs to stave off challenges to mergers or attempts to expand services.

"Woofies" Controversy a Sign of Things to Come?

At one point, the legislation sanctioned a new type of financial entity: wholesale financial institutions, known as "woofies." These were supposed to accept deposits only in excess of the $100,000 – which would not be insured by the FDIC. Questions about just how woofies should be structured and regulated plagued the conferees and drafters, and in the end they were taken out of the bill.

But the number of issues raised about woofies indicates how fluid the financial scene is about to become, according to Pachkowski.

"It’s remarkable that with such high stakes and such a long history of failed legislation, it looks as though all the crucial issues have been resolved," he said, "but how things will play out in real life, with many different federal and state regulators trying to assure the soundness of the new-look institutions is another question entirely."

CCH has been tracking, reporting and analyzing banking law since 1914 and is the publisher of industry-standard reference works such as Federal Banking Law Reports, the Bank Compliance Guide and the Consumer Credit Guide. CCH also owns Bankers Systems, Inc., a leading provider of solutions for training, operations, and regulatory compliance for the financial industry.

Upon passage of the Act, CCH will issue The Financial Services Reform Act of 1999: Law, Explanation and Analysis, which will include the final text of the Act, Committee Reports and explanation and analysis by CCH banking and legal experts.


CCH INCORPORATED, founded in 1913, has served four generations of business professionals and their clients. The company produces over 700 print and electronic products for tax, legal, banking, securities, human resources, healthcare and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S.  The CCH web site can be accessed at

Editors’ Note: Media interested in speaking with CCH banking law analysts, obtaining a banking law timeline or requesting a copy of the CCH publication, can contact Leslie Bonacum at 847-267-7153 or

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