Banks and their accounts are both regulated or controlled by both federal and state. There are state and federal statutes that govern the same. In the early eighties, the federal government controlled a few aspects when it came to governing banks, for example, the government decided the percentage of repo rate. In this article, we will be discussing bank regulations in the United States of America.
Laws:
Federal Statutes
- Laws regulating Federal Savings and Loan Associations – 12 U.S.C. §§ 1461 – 1470
- The Expedited Funds Availability Act – 12 U.S.C. §§ 4001 – 4010
- Garn-St. Germain Depository Institutions Act – 12 U.S.C. § 371a
- Federal Deposit Insurance Corporation – 12 U.S.C. §§ 1811 – 1832
Other Portions of the U.S. Code:
- 12 U.S.C.- Banks and Banking
- Chapter 2 – National Banks
- Chapter 3 – Federal Reserve System
- Chapter 5 – Crimes and Offenses
- Chapter 16 – FDIC
- 18 U.S.C. §§ 212 – 215 – Criminal Offenses
- 28 U.S.C. § 1348 – Banking Associations as Parties to Civil Litigation
Federal Agency Regulations
- Title 12 of the Code of Federal Regulations contains federal agency regulations that concern banks and banking.
- Chapter I of that title contains regulations promulgated by the Comptroller of the Currency, Department of the Treasury.
- Chapter II, regulations governing the Federal Reserve System.
- Chapter III, the regulations of the Federal Deposit Insurance Corporation.
- Other chapters contain the regulations of the Export-Import Bank, Farm Credit Administration, Natural Credit Union Administration, Federal Financing Bank, Federal Finance Institutions Examination Council, Farm Credit System Insurance Corporation, Thrift Depositor Protection Oversight Board, and the Resolution Trust Corporation.
State Statutes
- Article 3 of the Uniform Commercial Code
- Article 4 of the Uniform Commercial Code
- Article 4A of the Uniform Commercial Code
- Article 5 of the Uniform Commercial Code
- Article 8 of the Uniform Commercial Code
- Uniform Commercial Code as Adopted in Various States
- State Statutes Dealing with Financial Institutions
Apart from the bank regulatory agencies the U.S. maintains separate securities, commodities, and insurance regulatory agencies at the federal and state level, unlike Japan and the United Kingdom (where regulatory authority over the banking, securities and insurance industries is combined into one single financial-service agency).[1] Banks and other financial institutions must inform a consumer of their policy regarding personal information and must provide an “opt-out” before disclosing data to a non-affiliated third party.[2] Concerning Know Your Customer rules and Bank Secrecy Act regulations, financial institutions are encouraged to keep track of customers employment status and other business dealings, including whether or not the financial activity of customers is consistent with their business activities, and report on customers’ suspect activities to the government.[3]
At its core, financial transparency requires financial institutions to implement certain basic controls:[4]
- they must know who their customers are (so-called know your customerrules),
- they must understand their customers’ normal and expected transactions,
- and they must keep the necessary records and make the necessary reports on their customers.
The Bank Secrecy Act of 1970 (BSA), also known as the Currency and Foreign Transactions Reporting Act, is a U.S. law requiring financial institutions in the United States to assist U.S. government agencies in detecting and preventing money laundering.[5] Office of Foreign Assets Control (OFAC) sanctions apply to all U.S. entities including banks. The FFIEC provides guidelines to financial regulators for verifying compliance with the sanctions.[6] The National Credit Union Share Insurance Fund (NCUSIF) insures all federally chartered credit unions and many state-chartered credit unions (98% as of 2009).[7] Some others are insured by the private guaranty corporation American Share Insurance (156 as of 2009).[8] In 1978 foreign banks operating in the United States were required to hold the same level of reserves under the specifications of the International Banking Act.[9] Until 2011, Regulation Q prohibited banks from paying interest on demand deposit accounts with a demand deposit” account includes many, but not all checking accounts, and does not include Negotiable Order of Withdrawal accounts (NOW accounts).[10]
Are banks subject to consumer protection rules?
US banking organisations are subject to extensive consumer protection rules at both the federal and state levels, regardless of their chartering authority. At the federal level, banking organisations with assets in excess of US$10 billion, as well as their affiliates, are generally subject to examination by the CFPB (with authority for certain regulatory frameworks retained by the primary federal bank regulators, including the OCC, the FRB or the FDIC), while those with assets of US$10 billion or less are subject to examination by their respective primary federal bank, with respect to the following consumer protection rules:
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fair lending (Equal Credit Opportunity Act, Fair Housing Act);
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consumer credit (Truth in Lending Act, Fair Credit Reporting Act, Military Lending Act, Servicemembers’ Civil Relief Act);
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payday lending, vehicle title loans and high-cost instalment loans fall under the Dodd–Frank Act’s authority to regulate unfair, deceptive or abusive acts or practices (UDAAP);
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mortgage disclosures (Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act);
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deposits, checks, and collections (Truth in Savings Act);
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electronic fund transfers and prepaid cards (Electronic Fund Transfers Act, CARD Act);
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data privacy falls under the privacy provisions of the Gramm–Leach–Bliley Act;
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debt collection (Fair Debt Collection Practices Act); and
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any other act or practice that may be deemed to be ‘unfair’, ‘deceptive’, or ‘abusive’ in accordance with the Dodd–Frank Act’s UDAAP requirements.”[11]
Case Laws
- In the case of American Bank & Trust Co. v. Federal Reserve Bank, 256 U.S. 350 (1921). The court held that, “A federal reserve bank is not a national banking association within § 24, cl. 16, of the Judicial Code, which declares that such associations, for the purposes of suing and being sued, shall (except in certain cases) be deemed citizens of the states where they are located. P. 256 U.S. 357.”[12]
- In the case of Osborn v. Bank of the United States, 22 U.S. 738 (1824). The primary holding in the case was that “when Congress authorized the bank to sue and be sued in federal court, this conferred federal subject matter jurisdiction. Congress has the power to give original or appellate jurisdiction to federal courts as it sees fit, except in those areas where the Constitution has given original jurisdiction to the U.S. Supreme Court. Even though principles of state law may be involved, a federal court still may hear the case because federal law is an essential component of it. All the actions of the bank are controlled by federal law.”[13]
- In the case of McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819). “The Court struck down a Maryland law that sought to levy a tax on the Bank of the United States. Because “the power to tax involves the power to de[1]stroy,” as Chief Justice Marshall famously explained, a state could not lawfully exercise such power over the national bank. Id. at 431. Otherwise, state tax laws could be used “to control the constitutional measures” of the federal government, which the Supremacy Clause does not permit. Id.”[14]
- In Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299, 315 (1978) (quotation marks omitted) held that – created a system of national banks that derive their banking powers from federal law, Congress aimed to “protect [national banks] against possible unfriendly State legislation,”[15]
- Tiffany v. Nat’l Bank of Mo., 85 U.S. 409, 412 (1873), and to prevent the “diverse and duplicative” regulation of national banks that would occur if their banking activities were subject to multiple states’ laws, Watters, 550 U.S. at 13–14.[16]
“The US legal system is divided into federal and state jurisdictions. The federal government consists of three branches: legislative, executive and judicial. The majority of regulators that oversee financial matters (e.g., the Department of Justice (DOJ), the Federal Reserve and the SEC) are parts of the federal government, broadly defined, although states also have their own bank regulatory regimes. The federal government and the state governments are considered to be separate sovereignties and, accordingly, have concurrent legal regimes. Each of the 50 states has an independent court system and its own body of law. As a result, banks are subject to both federal and state law, which apply with equal force but may differ in their requirements, with federal law taking precedence where applicable. Some states take a particularly active role in bank regulation; for example, as would be expected, New York and its Department of Financial Services maintain a dynamic presence in US banking regulation and have done so during the decrease in activity by federal agencies.”[17]
RECENT LEGISLATION[18]
- The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed on 27 March 2020 to provide relief due to the covid-19 pandemic, including financial assistance for businesses.
- On 27 March 2021, President Biden signed into law the covid-19 Bankruptcy Relief Extension Act of 2021, extending key provisions of the CARES Act until 27 March 2022.
- On 15 March 2022, President Biden enacted the Adjustable Interest Rate (LIBOR) Act, which aims to facilitate the orderly transition of legacy London Interbank Offered Rate (LIBOR) contracts that either lack LIBOR fallback provisions entirely or contain inadequate LIBOR fallback provisions, and to limit potential litigation related to the LIBOR transition.
- In May 2022, the Federal Deposit Insurance Corporation (FDIC) and CFPB adopted sweeping guidance on deposit insurance advertising, elaborating on what constitutes false advertising and deceptive practices.
- Congress passed the Clarifying Lawful Overseas Use of Data (CLOUD) Act in 2018, which explicitly requires compliance from communication service providers subject to US jurisdiction regardless of whether the records are located outside of the United States.
Fraud: “Several federal statutes address banking fraud. For instance, 18 U.S.C. § 215 prohibits bank employees from taking bribes, fees, or gifts in exchange for approving a bank loan or extension of credit. Likewise, Section 214 prohibits the offering of these types of bribes. Furthermore, bank officers, agents, or employees who create false bank reports or execute unauthorized transactions face a fine of up to $1 million and a prison term of up to 30 years.
These laws not only regulate the behavior of banks, but there are several laws that protect banks from being defrauded. A person who attempts to defraud a bank or obtain money or property owned by a bank by means of fraud faces up to 30 years in jail and a fine of up to $1 million. Also, the same penalties exist for those who knowingly make false statements to obtain loans or extensions of credit.”[19]
Other Acts and Amendments:
- In addition to this, the FIRREA amendments of 1989 require the collection and disclosure of data about applicant and borrower characteristics to assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.[20]
- The Home Mortgage Disclosure Act(or HMDA, pronounced HUM-duh) is a United States federal law that requires certain financial institutions to provide mortgage data to the public and was enacted by Congress in the year 1975.[21] It does not prohibit any specific activity of lenders, and it does not establish a quota system for mortgage loans to be made in any Metropolitan Statistical Area (MSA) or other geographic area as defined by the Office of Management and Budge[22]
New or changed contents of the HMDA data collection for 2018[23] and onward:
- Credit score;
- NMLSIdentification of the loan originator;
- Application channel;
- Applicant or co-applicant age;
- Combined loan-to-value (CLTV) ratio;
- Borrower’s debt-to-income (DTI) ratio;
- Borrower-paid origination charges;
- Points and fees;
- Discount points;
- Lender credits;
- Loan term;
- Prepayment penalties;
- Non-amortizing loan features;
- Interest rate; and
- Rate spread for all loans.
- The Equal Credit Opportunity Act(ECOA) is a United States law (codified at 15 U.S.C. 1691 et seq.), enacted 28 October 1974,[24] that makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract).[25]
- The Truth in Lending Act(TILA) of 1968 is a United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed.[26]
- The Bank Secrecy Act of 1970 requires that businesses “keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, and regulatory matters,” according to the Internal Revenue Service.[27] Cash payments over $10,000 received by a trade or business, as well as money held in foreign banks and financial accounts, are of particular interest to law enforcement agencies charged with policing potential money laundering activities.[28]
- Glass Steagall Act of 1933 – the most important thing it brought to the table that’s still around the Federal Deposit Insurance Corporation (FDIC), an independent federal agency that insures bank deposits in the event that a bank fails.[29] Today the FDIC insures most Americans’ bank accounts up to certain limits.[30]
- The National Bank Act of 1864 – This act created the Office of the Comptroller of the Currency, which was tasked with chartering, vetting, and supervising all national banks.[31]
- Federal Reserve Act of 1913 – Commonly referred to as “The Fed,” the Federal Reserve’s job was to foster economic stability by serving as the country’s central bank.[32]
- The Federal Deposit Insurance Corporation Improvement Act of 1991 (P.L. 102-242, 105 STAT. 2236). Also known as FDICIA. “FDICIA greatly increased the powers and authority of the FDIC. Major provisions recapitalized the Bank Insurance Fund and allowed the FDIC to strengthen the fund by borrowing from the Treasury. The act mandated a least-cost resolution method and prompt resolution approach to problem and failing banks and ordered the creation of a risk-based deposit insurance assessment scheme. Brokered deposits and the solicitation of deposits were restricted, as were the non-bank activities of insured state banks. FDICIA created new supervisory and regulatory examination standards and put forth new capital requirements for banks. It also expanded prohibitions against insider activities and created new Truth in Savings provisions.”[33]
- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. (P.L. 103-328, 108 STAT. 2338). “Permits adequately capitalized and managed bank holding companies to acquire banks in any state one year after enactment. Concentration limits apply and CRA evaluations by the Federal Reserve are required before acquisitions are approved. Beginning June 1, 1997, allows interstate mergers between adequately capitalized and managed banks, subject to concentration limits, state laws and CRA evaluations. Extends the statute of limitations to permit the FDIC and RTC to revive lawsuits that had expired under state statutes of limitations.”[34]
- The Gramm-Leach Bliley Act of 1999 (P.L. 106-102, 113 STAT 1338) (pdf version from GPO) “Repeals last vestiges of the Glass Steagall Act of 1933. Modifies portions of the Bank Holding Company Act to allow affiliations between banks and insurance underwriters. While preserving the authority of states to regulate insurance, the act prohibits state actions that have the effect of preventing bank-affiliated firms from selling insurance on an equal basis with other insurance agents. Law creates a new financial holding company under section 4 of the BHCA, authorized to engage in: underwriting and selling insurance and securities, conducting both commercial and merchant banking, investing in and developing real estate and other “complimentary activities.” The Act imposes criminal penalties on anyone who obtains customer information from a financial institution under false pretenses.[35]
Who Regulates the U.S. Banking System? “Banks in the U.S. are regulated by a number of federal and state agencies, depending primarily on how they are chartered. The Office of the Comptroller of the Currency regulates national banks, while the Federal Reserve regulates state-chartered banks that are members of the Federal Reserve System; it also regulates bank holding companies, among others.”[36] The Federal Deposit Insurance Corporation regulates state banks that are not members of the Federal Reserve System and state-chartered banks are also regulated by their respective states.[37]
Who Benefits From U.S. Banking Laws? “It would be easy to say that everyone benefits from strong bank regulation—although there are some banks and other institutions that would prefer a less regulated system. For the average American consumer, bank regulations serve to protect the money they have saved and to make it possible for them to borrow money when they need it at fair terms. For business owners, bank regulations provide those same protections while also giving them guidelines to stay in compliance with the law. Finally, the U.S. government benefits from proper bank regulation, since it can more easily manage the next crisis.”[38]
[1] "Financial Services Agency". The Japanese Government. [2] "Federal Reserve Bank: Regulation P compliance guide". Federalreserve.gov. [3] "Bank Secrecy Act Examination Manual" (PDF). Federal Reserve Board of Governors. September 1999. pp. 190–193. [4] "Remarks From Under Secretary of Terrorism and Financial Intelligence David S. Cohen on 'Addressing the Illicit Finance Risks of Virtual Currency'". United States Department of the Treasury. March 18, 2014. [5] Vértesy, László (2007). "The Place and Theory of Banking Law - Or Arising of a New Branch of Law: Law of Financial Industries". Collega. 2-3. XI. SSRN 3198092. [6] [1] Archived May 27, 2010, at the Wayback Machine [7] [2] Archived March 23, 2010, at the Wayback Machine [8] Ibid. [9] Ahorny, Joseph; Saunders, Anthony; Swary, Itzhak (1985). "The Effects of the International Banking Act on Domestic Bank Profitiability and Risk". Journal of Money, Credit, and Banking. 17 (4): 493. doi:10.2307/1992444. JSTOR 1992444. [10] "eCFR — Code of Federal Regulations". Ecfr.gpoaccess.gov. October 9, 2012. Archived from the original on February 7, 2012. [11] In brief: banking regulatory framework in USA - Lexology [12] American Bank & Trust Co. v. federal reserve bank :: 256 U.S. 350 (1921) :: Justia US Supreme Court Center [13] Osborn v. Bank of the United States :: 22 U.S. 738 (1824) :: Justia US Supreme Court Center [14] Alex Cantero, Saul R. Hymes, and Ilana Hrwayne-Gidansky v. Bank Of America, N.A. retrieved from: Microsoft Word - Cantero BIO - 2.16(8410624.14) (supremecourt.gov) [15] Ibid 13. [16] Ibid. [17] Cleary Gottlieb Steen & Hamilton LLP, In review: Recent Banking Litigation Developments in the USA. Retrieved from: In review: recent banking litigation developments in USA - Lexology [18] Below points have been taken from: Cleary Gottlieb Steen & Hamilton LLP, In review: Recent Banking Litigation Developments in the USA. Retrieved from: In review: recent banking litigation developments in USA - Lexology [19] Banking Law | Banking and Finance Law Center | Justia [20] Consumer Financial Protection Bureau's Supervision and Exam Manual [21] Home Mortgage Disclosure Act of 1975 [22] Consumer Financial Protection Bureau's Supervision and Exam Manual [23] "Filing Instruction Guide for HMDA data collected in 2018" (PDF). [24] "15 U.S. Code § 1691 - Scope of prohibition". Legal Information Institute. Cornell Law School. [25] Dlabay, Les R.; Burrow, James L.; Brad, Brad (2009). Intro to Business. Mason, Ohio: South-Western Cengage Learning. p. 470. ISBN 978-0-538-44561-0. The Equal Credit Opportunity Act prohibits creditors from denying a person credit because of age, race, sex, or marital status. [26] Dlabay, Les R.; Burrow, James L.; Kleindl, Brad (2009). Intro to Business. Mason, Ohio: South-Western Cengage Learning. p. 469. ISBN 978-0-538-44561-0. [27] Internal Revenue Service. "Bank Secrecy Act, [28] Office of the Comptroller of the Currency. "Bank Secrecy Act (BSA)." [29] Federal Reserve History. "Banking Act of 1933 (Glass-Steagall)." [30] Federal Deposit Insurance Corporation. "Deposit Insurance FAQs." [31] Office of the Comptroller of the Currency. "Founding of the OCC & the National Banking System." [32] Federal Reserve System. "Federal Reserve Act." [33] Microsoft Word - Major Banking Laws.doc (flofr.gov) [34] Ibid. [35] Id. [36] A Primer on Important U.S. Banking Laws (investopedia.com) [37] Office of the Comptroller of the Currency. "Who Regulates My Bank?" [38] A Primer on Important U.S. Banking Laws (investopedia.com)