The Agencies have completed the first decennial review of their regulations. This report to Congress includes both the Agencies' comment summary and their discussion and analysis of significant issues identified during the EGRPRA review process. The report also describes legislative initiatives that would further reduce unnecessary regulatory burden on insured depository institutions, including, in some cases, references to current initiatives being considered by Congress. Separately, the Agencies have published in the Federal Register a summary of comments received, together with the Agencies' identification and response to significant issues raised by the commenters. Finally, since the inception of the EGRPRA review process in 2003, the Agencies have individually and collectively started a number of burdenreducing initiatives. This report describes those accomplishments.

Throughout the EGRPRA process, NCUA participated in the planning and comment solicitation process with the federal banking agencies. Because of the unique circumstances of federally insured credit unions and their members, however, NCUA established its own regulatory categories and publication schedule and published its notices separately. NCUA's notices were consistent and comparable with those published by the federal banking agencies, except on issues unique to credit unions. In keeping with this separate approach, the discussion of NCUA's regulatory burden reduction efforts and analysis of significant issues is set out separately in Part II of this report. The summary of comments received by NCUA is contained in Appendix IIB.

The Agencies' EGRPRAmandated review coincided with work in the 109th Congress on regulatory relief legislation. Each Agency presented testimony to congressional oversight committees about priorities for regulatory burden relief and described the burdenreducing impact of legislative proposals that were under consideration by Congress. The Agencies' ongoing work on the EGRPRA review laid the foundation for them to achieve consensus on a variety of burdenreducing legislative proposals. A number of these proposals were enacted as part of the Financial Services Regulatory Relief Act of 2006 (FSRRA), which was signed into law on October 13, 2006.\3\ Appendix IA of this report highlights key burdenreducing provisions included in that legislation. \3\ Pub. L. 109351.
B. The Federal Banking Agencies' EGRPRA Review Process

1. Overview of the EGRPRA Review Process

Consistent with the requirements of EGRPRA, the federal banking agencies first categorized their regulations, and then published them for comment at regular intervals, asking commenters to identify for each of the categories regulations that were outdated, unnecessary or unduly burdensome.\4\
\4\ As noted above, the NCUA developed its own categories of regulations and published its notices separately from the bank regulatory agencies. Details relating to its regulatory categories and its burden reduction efforts are set out Part II of this report. The summary of comments received by NCUA is attached as Appendix II B of this report.

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The 131 regulations were divided into 12 categories, listed below alphabetically:

Semiannually, the federal banking agencies published different categories of regulations. The first Federal Register notice was published on June 16, 2003. It sought comment on the agencies' overall regulatory review plan as well as the following initial three categories of regulations for comment: Applications and Reporting; Powers and Activities; and International Operations.\5\ The federal banking agencies requested public comment about the proposed categories of regulation, the placement of the rules within each category and the agencies' overall plan for reviewing all of their regulations. \5\ 68 FR 35589.

The federal banking agencies adjusted the proposed publication schedule due to concerns raised that the consumer regulation category encompassed so many different regulations that it would prove too burdensome to respond adequately within the comment period timeframe. As a result, the agencies divided that category into two notices with smaller groups of regulations for review and comment.

There were a total of six Federal Register notices, each issued at approximately sixmonth intervals with comment periods of 90 days. In response to these comment requests, the agencies received more than 850 letters from bankers, consumer and community groups, trade associations and other interested parties.

There were numerous recommendations to reduce regulatory burden or otherwise improve existing regulations. Each recommendation was carefully reviewed and analyzed by the staffs of the appropriate federal banking agency or agencies to determine whether proposals to change specific regulations were appropriate.

To further promote public input, the federal banking agencies also cosponsored 10 outreach sessions for bankers, as well as 3 outreach sessions for consumer and community groups, in cities around the country. The agencies then sponsored three joint banker and consumer/ community group focus meetings in an effort to develop greater consensus among the parties on legislative proposals to reduce regulatory burden. (Please refer to Appendix IB for a more complete discussion of the federal banking agencies' EGRPRA review process as well as a table indicating the timing and categories of regulations that were published for comment as part of the EGRPRA process.) 2. Significant Issues Arising From the EGRPRA Review and the Federal Banking Agencies' Responses

Section 2222 of EGRPRA requires a summary of the significant issues raised by the public comments and the Agencies' responses and comments on the merits of such issues and analysis of whether the Agencies are able to address the issues by regulation or whether legislation is required. Several significant issues received substantial federal banking agency support and were successfully included in the FSRRA during the 109th Congress. Below is a summary of the significant issues and relevant comments received by the federal banking agencies together with the banking agencies' recommendations.
a. Bank Secrecy Act/Currency Transaction Report

Issues:
(1) Should the $10,000 Currency Transaction Report (CTR) threshold be increased to some higher level?
(2) Can the CTR forms be simplified to require less information on each form?
(3) Should the existing CTR exemption process be revised to make it less burdensome on the industry, such as by adopting a ``seasoned customer'' exemption?

Context: The $10,000 threshold for filing CTRs has not changed since the requirement was first established by the Department of the Treasury some 30 years ago. Financial institutions are required to report currency transactions in excess of $10,000. These reports are filed pursuant to requirements implemented in rules issued by the Department of the Treasury and are filed with the Internal Revenue Service. In addition to the appropriate federal supervisory agency for the financial institution (including the Board, FDIC, OCC, and OTS), the Financial Crimes Enforcement Network (FinCEN), Federal Bureau of Investigation (FBI), and other federal law enforcement agencies use CTR data. The FBI and other law enforcement bodies have stated that CTR requirements serve as an impediment to criminal attempts to legitimize the proceeds of a crime. Moreover, they serve as a key source of information about the physical transfer of currency, at the point of the transaction.

Comments: Many of the written and oral comments received during the EGRPRA process reflected widespread concern that the reports' effectiveness had become degraded over time, because everlarger numbers of transactions met or surpassed the threshold, resulting in growing numbers of CTR filings. Many commenters and participants in the outreach meetings expressed concern that, with the increased number of CTR filings, the federal banking and law enforcement agencies were not able to make effective use of the information being provided. Commenters noted that the low threshold for CTR filings created more regulatory burden for banks. One commenter noted that certain policies such as requiring banks to continue filing for exempt status for transactions between themselves were unnecessary.

Several commenters raised concerns about the burdens associated generally with the CTR process and the utility of the information that depository institutions must provide. To ease some of this burden, commenters urged the adoption of a broader ``seasoned customer'' exemption, as well as other reforms in the CTR process. The federal banking agencies received several comments about the difficulties of obtaining a CTR exemption under current procedures. Some bankers contended that it was easier for a bank to file a Suspicious Activity Report (SAR) than to undertake the determination that a customer qualified for an exemption from the CTR filing requirement. One commenter suggested that the Agencies grant exemptions through a one time filing (and eliminate the yearly filing requirement).

Although the federal banking agencies received extensive comments on the burdens associated with the CTR filing process, there were no concrete suggestions as to what types of information were unnecessary in the context of a CTR filing. One commenter suggested that lowering the threshold would reduce duplicative paperwork burden, while another noted that the process of requesting an exemption from CTR reporting was too complicated. Another commenter suggested replacing
[[Page 62039]]

daily CTR filings with monthly cash transaction reporting.

Current Initiatives: Congress recently enacted legislation that requires the Government Accountability Office (GAO) to conduct a study of the CTR process. Section 1001 of the FSRRA requires the Comptroller General of the United States to conduct a study and submit a report to Congress within 15 months of enactment of the legislation on the volume of CTRs filed. The FSRRA also requires the Comptroller General to evaluate, on the basis of actual filing data, patterns of CTRs filed by depository institutions of various sizes and locations. The study, which will cover a period of three calendar years before the legislation was enacted, will identify whether, and the extent to which, CTR filing rules are burdensome and can or should be modified to reduce burden without harming the usefulness of such filing rules to federal, state, and local antiterrorism, law enforcement, and regulatory operations.

The study will examine the:

1. Extent to which financial institutions are taking advantage of the exemption system available;

2. Types of depository institutions using the exemption system, and the extent to which the exemption system is used;

3. Difficulties that limit the willingness or ability of depository institutions to reduce their CTR reporting burden by taking advantage of the exemption system;

4. Extent to which bank examination problems have limited the use of the exemption system;

5. Ways to improve the use of the exemption system, including making the exemption system mandatory so as to reduce the volume of CTRs unnecessarily filed;

6. Usefulness of CTR for law enforcement, in light of advances in information technology;

7. Impact that various changes in the exemption system would have on the usefulness of CTR; and

8. Changes that could be made to the exemption system without affecting the usefulness of CTR.

The study is to contain recommendations, if appropriate, for changes in the exemption system that would reflect a reduction in unnecessary costs to depository institutions, assuming a reasonably full implementation of the exemption system, without reducing the usefulness of the CTR filing system to antiterrorism, law enforcement, and regulatory operations.

The GAO produced a report in April 2006 that looked at Bank Secrecy Act (BSA) enforcement and made three recommendations to improve coordination among FinCEN and the federal banking agencies:

1. As emerging risks in the money laundering and terrorist financing area are identified, the federal banking agencies and FinCEN should work together to ensure that these are effectively communicated to both examiners and the industry through updates of the interagency examination manual and other guidance, as appropriate;

2. To supplement the analysis of shared data on BSA violations, FinCEN and the federal banking agencies should periodically meet to review the analyses and determine whether additional guidance to examiners is needed; and

3. In light of the different terminology the federal banking agencies use to classify BSA noncompliance, FinCEN and the federal banking agencies should jointly assess the feasibility of developing a uniform classification system for BSA violations.\6\
\6\ See ``Bank Secrecy Act: Opportunities Exist for FinCEN and the Banking Regulators to Further Strengthen the Framework for Consistent BSA Oversight,'' Report to the Committee on Banking, Housing and Urban Affairs, U.S. Senate, U.S. Government

Accountability Office, at pages 1920 (April 2006).

The federal banking agencies have undertaken several initiatives that address the GAO's recommendations to improve coordination among the agencies and FinCEN regarding BSA enforcement, including the measures outlined below.

Under the auspices of the FFIEC BSA/AntiMoney Laundering (AML) Working Group, the federal banking agencies, FinCEN, and the Conference of State Bank Supervisors (CSBS) continue to meet monthly to address all facets related to BSA/AML policy, examination consistency, training, and issues associated with BSA compliance. Under the auspices of their General Counsels, the federal banking agencies have developed and published an Interagency Statement on Enforcement of BSA/AML Requirements to help ensure consistency among the agencies in BSA enforcement activities.\7\ The federal banking agencies and FinCEN also work together to issue appropriate guidance to financial institutions on how to meet BSA/AML compliance requirements. One example of a joint product is the FFIEC BSA/AML Examination Manual that was issued to ensure consistency in BSA/AML examinations by providing a uniform set of examination procedures. The manual is a compilation of existing regulatory requirements, supervisory expectations, and sound practices in the BSA/AML area. The manual provides substantial guidance to institutions in establishing and administering their BSA/AML programs and is updated to incorporate emerging risks in the money laundering and terrorist financing area, as deemed appropriate by the federal banking agencies in consultation with FinCEN.\8\ In addition, the federal banking agencies have individually and jointly held frequent outreach sessions for the industry to discuss such guidance and emerging issues.
\7\ See Interagency Statement on Enforcement of Bank Secrecy Act/AntiMoney Laundering Requirements, July 19, 2007.
\8\ The FFIEC BSA/AML Examination Manual was issued in 2005 and revised in 2006; further revisions are underway for issuance in August 2007.

Finally, as part of the legislative process leading up to the enactment of the FSRRA, Congress considered, but did not enact, other statutory proposals for CTR relief. The current Congress also is continuing to consider such initiatives and a bill to provide for a seasoned customer exemption from CTR filing (H.R. 323, the Seasoned Customer CTR Exemption Act of 2007) passed the House of Representatives on January 23, 2007. This is similar to a provision passed by the House in 2006.

The federal banking agencies continue to work with FinCEN, as the administrator of the BSA, to effectively oversee antimoney laundering compliance and ensure the safety and soundness of the financial institutions they regulate and to find ways to achieve these goals while eliminating unnecessary regulation. Recently, Secretary of the Treasury Paulson announced a Treasury initiative to administer the BSA in a more efficient and effective manner. The federal banking agencies will continue their close coordination with FinCEN to improve its communications with the industry. Moreover, the agencies will continue to work with Congress to analyze proposed legislative changes and provide recommendations and comments as requested.

Recommendation: The Board, FDIC, OCC, and OTS appreciate the comments received concerning the CTR exemption process. The federal banking agencies believe that any changes must be carefully balanced with the critical needs of law enforcement for necessary information to combat money laundering, terrorist financing, and other financial crimes. Any changes to the exemption process must not jeopardize or detract from law
[[Page 62040]]
enforcement's mission.\9\ The federal banking agencies further believe that, in light of the attention and study given to this issue by Congress and in other forums, it would be premature to adopt changes in this area before the reports and recommendations are complete. Therefore, the agencies are not recommending any changes at this time but may do so once the GAO finalizes its report.
\9\ The FBI has advised that to dramatically alter currency transaction reporting requirementswithout careful, independent studycould be devastating and a significant setback to
investigative and intelligence efforts relative to both the global war on terrorism and traditional criminal activities. Statement of Michael Morehart Section Chief, Terrorist Financing Operations, Counterterrorism Division, Federal Bureau of Investigation, before the Senate Committee on Banking, Housing and Urban Affairs, April 4, 2006; see also, Statement of Kevin DelliColli, Deputy Assistant Director, Financial & Trade Investigations Division, Office of Investigations, U.S. Immigration and Customs Enforcement, Department of Homeland Security, before the Senate Committee on Banking, Housing and Urban Affairs, April 4, 2006.

b. AntiMoney Laundering/Suspicious Activity Report

Issue: Should the federal banking agencies, together with FinCEN, revise or adopt policies relating to SARs to help reduce the number of defensive SARs that are being filed?

Context: Financial institutions must report known or suspected criminal activity, at specified dollar thresholds, or transactions over $5,000 that they suspect involve money laundering or attempts to evade the BSA. SARs play an important role in combating money laundering and other financial crimes.

Comments: Many commenters stated that SAR filing requirements were burdensome and costly. Some commenters complained that they filed numerous SARs and rarely, if ever, heard back from law enforcement. They questioned whether they were simply filing these forms into a ``black hole.'' One commenter noted that SAR filings make CTR filings redundant. Commenters complained both in writing and during the EGRPRA bankers' outreach meetings that the filing of SARs and the development of an effective SAR monitoring system add to compliance costs for banks and imposed a significant regulatory burden on them.

Current Initiatives: The federal banking agencies, in cooperation with FinCEN, seek to pursue effective SAR policies that contribute to efforts to track money laundering transactions while minimizing burden on regulated institutions that must file such reports. The federal banking agencies believe it is important to provide clear guidance to financial institutions on all SAR filing issues and will continue to work with FinCEN to do so.\10\ In considering what further changes to make to SAR policies, it is important to closely coordinate with law enforcement so as not to undermine efforts to combat money laundering and curtail other illicit financial transactions.
\10\ For example, in 2007 FinCEN issued tips for SAR form preparation and filing that addressed a variety of issues, including what constitutes supporting documentation for a SAR. See ``SAR Activity Review, Trends, Tips & Issues,'' Issue 11, May 2007.

As noted in the GAO's 2006 report on BSA oversight by the federal banking agencies, all of the Agencies have implemented extensive BSA/ AML training for examiners, including joint training through the FFIEC.\11\ The federal banking agencies have also stepped up their hiring of examiners to meet the need for greater BSA/AML compliance. The extensive training federal banking agencies have implemented has resulted in greater examiner expertise on BSA/AML matters.

\11\ See footnote 6, pages 5059.

In addition, the Department of the Treasury Inspector General directed FinCEN to undertake a SAR data quality review, which FinCEN subsequently shared with the federal banking agencies. The federal banking agencies indicated at the time that they found the analysis of the SAR filings to be useful in enabling financial institutions to address relevant problems or issues. FinCEN has publicly indicated that there is no evidence to suggest that the SAR filings include significant numbers of ``defensively filed'' SARs; rather, reviews show useful and properly filed reports.\12\
\12\ See the prepared remarks of Robert W. Werner, Director, FinCEN, before the American Bankers Association/American Bar Association Money Laundering Enforcement Conference, October 9, 2006, available on FinCEN's Web site (http://www.fincen.gov/werner_statement_10092006.html .

Recommendation: The federal banking agencies, along with FinCEN, seek to pursue effective SAR policies that contribute to efforts to track suspicious transactions while minimizing burden on regulated institutions that are required to file such reports. It is important to provide clear guidance to financial institutions on all SAR filing issues and to continue to work with FinCEN to do so. In considering what further changes to make to SAR policies, the Agencies believe that it is important to coordinate closely with law enforcement so as not to undermine efforts to combat money laundering and curtail other illicit financial transactions.
c. Patriot Act

Issues:
(1) Can the federal banking agencies provide greater guidance as to the types of identification that are acceptable under a bank's Customer Identification Program (CIP)?
(2) Can the recordkeeping requirements under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001\13\ (PATRIOT Act) be revised to reduce burden?

\13\ Pub. L. No. 10756, October 26, 2001.

Context: Department of the Treasury and federal banking agency regulations require depository institutions to obtain identification information from customers as a condition to opening/maintaining account relationships.\14\ The regulation requires every depository institution to have a written CIP. The CIP must include riskbased procedures to enable the depository institution to form a reasonable belief that it knows the true identity of each customer. With respect to individuals, the regulation requires institutions to obtain, at a minimum, the name, date of birth, and address of the prospective customer, as well as an identification number, such as a tax identification number (for a U.S. person) or, in the case of a nonU.S. person, a tax ID number, passport number and country of issuance, alien registration number, or the number and country of any other identification number evidencing nationality or residence and containing a photograph of the individual or similar safeguard. For entities such as a corporation, the institution must also obtain a principal place of business, local office, or other physical location from the business applicant. The CIP must also contain procedures for verifying that the customer does not appear on a designated government list of terrorists or terrorist organizations. However, to date, the government has not designated such a list for purposes of CIP compliance.

\14\ See generally 31 CFR 103.121.

The CIP regulations further require institutions to verify the identity of customers within a ``reasonable time'' after an account is opened. Institutions may conduct such verification through documents, nondocumentary methods, or some combination of the two. An institution's CIP likewise must address situations where the institution is unable to verify a customer's identity.

Comments: During the EGRPRA process, the federal banking agencies received extensive comments
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concerning the CIP under the PATRIOT Act. Many commenters noted the burden that the requirements impose on institutions and asserted that these requirements can cause inconvenience, even for longtime customers of a financial institution. Commenters had a number of suggestions for improved guidance, including: (1) Amending the definition of ``established customer'' to clarify that it refers to a customer from whom the bank has already obtained the information required by 31 CFR 103.121(b)(2)(i); (2) providing greater clarity about the types of identification that are acceptable; and (3) amending the definition of ``nonU.S. persons'' to refer only to foreign citizens who are not U.S. resident aliens.

The purpose of the CIP requirements is to aid in addressing both money laundering and terrorist financing. It can be crucial to have good records about the identity of customers in order to help prosecute cases involving money laundering or terrorist financing. Existing rules already contain detailed guidance about the types of identification that can be used to satisfy the requirements of the PATRIOT Act. In addition, the CIP does not apply to existing customers of the financial institution provided that the financial institution has a reasonable belief that it knows the true identity of the person.

With respect to recordkeeping requirements, the regulations issued pursuant to section 326 of the PATRIOT Act require institutions to keep records of their efforts to verify the identity of customers for five years after the account is closed. Many institutions commented during the EGRPRA process that this recordkeeping requirement was burdensome.

Current Initiatives: The federal banking agencies have worked in close collaboration with FinCEN in an effort to ensure that the requirements imposed by the PATRIOT Act are appropriate and necessary, and the agencies will continue to work with FinCEN to enhance the effectiveness of the Act's requirements while looking for ways to reduce the burden on financial institutions. For example, the federal banking agencies together with securities and futures industry regulators have worked to provide additional guidance on the application of the CIP rule. This guidance, in the form of frequently asked questions, has been updated as necessary to respond to industry questions and can be found on FinCEN's Web site (http://www.fincen.gov/faqsfinalciprule.pdf ). The guidance that applies to depository
institutions is also incorporated into the FFIEC BSA/AML Examination Manual.

Recommendation: While the federal banking agencies jointly issued the regulations at 31 CFR 103.121 with the Department of the Treasury, the agencies cannot unilaterally revise the regulation. While the agencies regularly discuss PATRIOT Act issues with their counterparts in FinCEN and the Department of the Treasury, the authority to amend many of the recordkeeping rules required under the PATRIOT Act is solely within the jurisdiction of the Department of the Treasury. Nonetheless, the comments will be a helpful contribution to the discussion of the issues.
d. Interest on Demand Deposits (Regulation Q) and NOW Account Eligibility

Issues:
(1) Should the prohibition against payment of interest on demand deposits be eliminated?
(2) Should the NOW account eligibility rules be liberalized?

Context: The prohibition against payment of interest on demand deposits is a statutory prohibition and an amendment enacted by Congress would be necessary to repeal the prohibition. Section 19(i) of the Federal Reserve Act provides that no bank that is a member of the Federal Reserve System may, directly or indirectly, by any device whatsoever pay any interest on any demand deposit. Similar statutory provisions apply to nonmember banks and to thrift institutions. The Board's Regulation Q implements section 19(i) and specifies what constitutes ``interest'' for purposes of section 19(i). As a practical matter, the effect of section 19(i) is to prevent corporations and for profit entities from holding interestbearing checking accounts. This is because federal law separately permits individuals and nonprofit organizations to have interestbearing checking accounts, known as ``negotiable order of withdrawal,'' or NOW, accounts. (See 12 U.S.C. 1832.)

Comments: Several commenters suggested that the prohibition against the payment of interest on demand deposits be eliminated. One commenter stated that, if the statutory prohibition against payment of interest on demand deposits were repealed, the Board should allow a twoyear phasein period, during which depository institutions could offer MMDAs (savings deposits) with the capacity to make up to 24 preauthorized or automatic transfers per month to another transaction account.

Current Initiatives: For the past several years, Congress has considered, but not enacted, legislation that would repeal the prohibition in section 19(i) against the payment of interest on demand deposits. Some of this legislation also would have made certain changes with respect to NOW accounts.

Recommendation: The federal banking agencies support legislation that would repeal the prohibition against payment of interest on demand deposits in section 19(i) and related statutes. Such legislation would allow corporate and forprofit entities, including small businesses, to have the extra earning potential of interestbearing checking accounts and would eliminate a restriction that currently distorts the pricing of checking accounts and associated bank services. The federal banking agencies, however, do not have a joint position at this time on whether to expand NOW account eligibility and, as such, are making no joint recommendation with respect to this issue. We will continue to work with Congress on these important matters.
e. Home Mortgage Disclosure Act (Regulation C)

Issues:
(1) Should the tests for coverage of financial institutions be changed to exempt more institutions from the reporting requirements of the Home Mortgage Disclosure Act (HMDA)? If so, how?
(2) Should revisions be made to the data that are required to be reported under HMDA, such as revising the reporting requirements for higherpriced loans?

Context: The purpose of HMDA is to provide the public with mortgage lending data to help determine whether financial institutions are serving the housing needs of their communities, assist public officials in distributing public sector investment so as to attract private investment to areas where it is needed, and to assist in identifying possible discriminatory lending patterns and enforcing
antidiscrimination statutes. HMDA requires banks, savings associations and credit unions that make ``federally related mortgage loans,'' as defined by the Board, to report data about their mortgage lending if they have total assets that exceed an asset threshold that is now set by statute (indexed for inflation in 2007 at $36 million) and a home or branch office in a metropolitan statistical area. Board Regulation C, which implements HMDA, clarifies that these institutions are subject to HMDA reporting for a given year if, in the preceding calendar year, they made at least one ``federally related mortgage loan,'' which is [[Page 62042]]
defined to be a home purchase loan or refinancing of a home purchase loan (1) made by an institution that is federally insured or regulated or (2) insured, guaranteed, or supplemented by a federal agency or (3) intended for sale to Fannie Mae or Freddie Mac. Each federal banking agency enforces the requirements of HMDA with respect to the institutions for which such agency is the primary federal supervisor.

Comments: Commenters have suggested revising the coverage tests for HMDA reporting requirements so that fewer institutions are subject to reporting, such as by raising the statutory asset test or exempting institutions that make only a de minimis number of mortgage loans in a year. Commenters asserted these changes could be made within the framework of HMDA, which provides the Board authority to make exceptions to the statute's requirements in certain circumstances. Moreover, the Board could also recommend that Congress consider making changes in the coverage tests that are not now authorized under HMDA.

Current Initiatives: With respect to whether revisions should be made to the data reporting requirements under HMDA, such as revising the reporting requirements for higherpriced loans, the Board completed a multiyear review of Regulation C in 2002. As part of this process, the Board considered numerous comments from the public on additional data to be reported under HMDA relating to the pricing of loans and ways to improve and streamline the data collection and reporting requirements of Regulation C. As a result of the review, the Board made several changes to HMDA reporting requirements, including adding reporting requirements for higherpriced loans. In determining whether to add each new data requirement, the Board carefully weighed what data would be most beneficial in improving HMDA analysis against the operational/compliance costs to industry in collecting the data. The revisions to Regulation C became effective on January 1, 2004.

Recommendation: Any expansion of the coverage tests that results in fewer institutions subject to HMDA reporting requirements would warrant a careful analysis that would include weighing the benefits of reduced reporting for institutions against the loss of HMDA data. The more financial institutions that are exempted from HMDA data reporting requirements, the more difficult it would be for the federal banking agencies, other government officials and interested parties to monitor and analyze aggregate trends in mortgage lending, and compare the mortgage lending of particular institutions to the mortgage lending of all other lenders in a given geographic area or product market. It would also be more difficult for supervisors to identify institutions, loan products, or geographic markets that show disparities in the disposition of loan applicants by race, ethnicity or other characteristics and that require further investigation under the fair lending laws.

It has been two years since institutions began reporting and disclosing data relating to the new reporting items. With so few years of reporting data available, it is too early to assess the effectiveness of the new data items and consider how the reporting requirements could be changed. Any changes would have to take into account both the burden on financial institutions and the benefits of the new data to policymakers and the public. The Board and other federal banking agencies will, however, carefully consider these issues after more experience has been gained with the new reporting requirements. Several statutory changes to HMDA reporting were considered by Congress as part of its consideration of the FSRRA, including proposals to expand the HMDA exemptions. While the federal banking agencies took differing positions on these proposals, all of the agencies recognize that any statutory changes to HMDA reporting must be carefully balanced to ensure that consumer protection and access to HMDA data for appropriate consumer purposes are not diminished.
f. Truth in Lending Act (Regulation Z)

Issues:
(1) Should the consumer disclosures required under the Truth in Lending Act (TILA), as well as those required under the Real Estate Settlement Procedures Act of 1974 (RESPA), be simplified in an effort to make them more understandable?
(2) Should the statutory right of rescission be eliminated for all homesecured lending or for certain transactions (such as refinancings with new creditors where no new money is provided or refinancings involving ``sophisticated borrowers'')? Alternatively, should consumers be able to more freely waive their threeday right of rescission for homesecured lending?

Consumer Loan Disclosures

Context: Ensuring that consumer disclosures, including those in mortgage transactions covered by TILA and RESPA, are effective and understandable is important in carrying out the purposes of the statutes. The volume of paperwork in such transactions has increased greatly due in part to reasons other than the required disclosures, such as liabilityprotection concerns of lenders. Nevertheless, it is essential to review the disclosure requirements periodically to consider whether disclosures are achieving their intended purposes. The Board's Regulation Z implements TILA, and each Agency enforces the requirements of TILA with respect to the institutions for which such agency is the primary federal supervisor.\15\
\15\ See Part II of this report for a discussion of comments submitted by credit unions to NCUA on this topic.

Comments: Regulation Z was one of the most heavily commentedupon regulations during the EGRPRA review process. A general comment from many industry commenters was that consumers are frustrated and confused by the volume and complexity of documents involved in obtaining a loan (especially a mortgage loan), including the TILA and RESPA disclosures. Some commenters acknowledged that the increased volume and complexity of loan documents also stemmed from lenders' attempts to address liability concerns. Many commenters requested that the required loan disclosures be provided in a manner that would facilitate consumer understanding of the loan terms. (For a more complete summary of the comments received, see the discussion of comments received for TILA/ Regulation Z in Appendix IC of this report.)

Current Initiatives: The Board is conducting a multistage review of Regulation Z, which implements TILA. In 2004, the Board issued an advance notice of proposed rulemaking (ANPR) requesting public comment on all aspects of the regulation's provisions affecting openend (revolving) credit accounts, other than homesecured accounts, including ways to simplify, reduce or improve the disclosures provided under TILA.\16\ The next stage of the review is expected to be a review of the disclosures for mortgage loan transactions (both openend and closedend) as well as other closedend credit, such as automobile loans. The multistage review will consider revisions to the disclosures required under TILA to ensure that disclosures are provided to consumers on a timely basis and in a form that is readily understandable.

\16\ See 69 FR 70925, December 8, 2004.

Recommendation: The federal banking agencies have all testified [[Page 62043]]
before Congress on the need to simplify and streamline consumer loan disclosures. Among other things, the Board's review will consider ways to address concerns about information overload, which can adversely affect how meaningful disclosures are to consumers. The Board will use extensive consumer testing to determine what information is useful to consumers to address concerns about information overload. After the Board's review and regulatory changes are in place, the agencies will consider what, if any, legislative changes may be necessary.

Revisions to the Right of Rescission

Context: Under TILA, consumers generally have three days after closing to rescind a loan secured by a principal residence. Among other things, the right of rescission does not apply to a loan to purchase or build a principal residence or a consolidation or refinancing with the same lender that already holds the mortgage on the residence and in which no new advances are being made to the consumer. The statute authorizes the Board to permit consumers to waive this right, but only to meet bona fide personal financial emergencies (see 15 U.S.C. 1635(d); 12 CFR 226.15(e) and 226.23(e)).

The right of rescission is intended to provide consumers a meaningful opportunity to fully review the documents given to them at a loan closing and determine if they want to put their home at risk under the repayment terms described in the documents. Thus, substantial revision to the statutory threeday right of rescission, either through allowing waivers more freely or exempting the requirement for some or all homesecured loans, would require careful study. Currently, consumers are presented with a substantial amount of documents at closing, and the final cost disclosures provided at closing may differ materially from earlier cost disclosures provided to the consumer. Under these circumstances, consumers may benefit by having the opportunity to review the terms and conditions of the loan after the loan closing. The threeday right of rescission is particularly important, and the ability to freely waive that right may potentially be more problematic, for loan products and borrowers who are more susceptible to predatory lending practices.

The threeday right of rescission plays an important role in protecting consumers, and this may be the case even in refinancings with new creditors where no additional funds are advanced. Refinancings occur for many reasons and may have terms that place the consumer's home more at risk. For example, to obtain a lower initial monthly payment, a consumer may refinance a 30year fixedrate, homesecured loan with a loan that has an adjustable rate, that provides for interestonly payments or a balloon payment, or that has a longer loan term. Depending on the consumer's circumstances, these changes may place the consumer's home more at risk or otherwise be less favorable to the consumer. If their refinancing is with a new creditor, consumers can use the threeday rescission period to review the terms of these loans. Therefore, even in a refinancing with no new funds advanced, the right to rescind a transaction with a new creditor can be important to consumers. Issues concerning the right of rescission will be considered in the course of the Regulation Z review discussed above.

Comments: Many industry commenters contended that the right of rescission was an unnecessary and burdensome requirement, and they suggested either eliminating the right of rescission or allowing consumers to waive the right more freely than under the current rule (which requires a bona fide personal emergency). Representatives of consumer and community groups called the right of rescission one of the most important consumer protections and urged the regulators not to weaken or eliminate that right.

Recommendation: The Board will consider issues concerning the right of rescission in the course of the Regulation Z review discussed above. In addition, in 2006 Congress considered regulatory burden relief proposals and ultimately enacted the FSRRA. At that time, suggestions were made to include amendments to TILA that would expand the circumstances under which a consumer could waive the threeday right of rescission. All of the federal banking agencies opposed or expressed concern about waiving this important consumer protection right without adequate safeguards to ensure that consumers are protected from the abuses that may occur from expanding the waiver authority.

g. Regulation O

Issue: While the FSRRA eliminated certain Regulation O reporting requirements, several commenters also asked whether the insider lending limits should be increased to parallel those permitted under some state laws.

Context: Sections 22(g) and 22(h) of the Federal Reserve Act impose various restrictions on extensions of credit by a member bank to its insiders. By statute, these restrictions also apply to nonmember state banks and savings associations. The Board's Regulation O implements sections 22(g) and 22(h) of the Federal Reserve Act for member banks. Regulation O governs any extension of credit by a member bank to an executive officer, director, or principal shareholder of (1) the member bank, (2) a holding company of which the member bank is a subsidiary, or (3) any other subsidiary of that holding company. Regulation O also applies to any extension of credit by a member bank to a company controlled by such a person and a political or campaign committee that benefits or is controlled by such a person. Each federal banking agency enforces the requirements of Regulation O with respect to the institutions for which such agency is the primary federal supervisor.

Section 22(g) of the Federal Reserve Act specifically prohibits a member bank from making extensions of credit to an executive officer of the bank (other than certain mortgage loans and educational loans) that exceed ``an amount prescribed in a regulation of the member bank's appropriate federal banking agency.'' Regulation O currently limits the amount of such ``other purpose'' loans to $100,000.

Comments: A number of industry commenters requested a review of Regulation O reporting and threshold requirements because they view them as overly burdensome and somewhat ambiguous, with outdated dollar amounts that need updating to reflect today's economy.

Recommendation: The federal banking agencies currently have the statutory authority to raise the limit on ``other purpose'' loans for institutions under their supervision if the federal banking agencies were to determine that such action was consistent with safety and soundness. In this regard, the Board plans to consult with the other agencies on a proposal to increase the Regulation O limit on other purpose loans as part of its upcoming comprehensive review of Regulation O.
h. Corporate Governance/SarbanesOxley Act of 2002

Issues:
(1) Should banks that are not publicly traded and that have less than $1 billion in assets be exempt from the SarbanesOxley Act of 2002\17\ (SOX)?
\17\ Pub. L. 107204, July 30, 2002.
(2) Should banks that comply with part 363 of the FDIC's rules be exempt from section 404 of SOX?\18\
\18\ 15 U.S.C. 7262.
(3) Should the exemption for compliance with the external [[Page 62044]]
independent audit and internal control requirements of 12 CFR 363 be raised from $500 million to $1 billion?

Context: SOX was enacted to improve corporate governance and financial management of public companies in order to better protect investors and restore investor confidence in such companies. Section 404 of SOX applies directly to public companies only, including insured depository institutions and their parent holding companies that are public companies, and indirectly to institutions that are subsidiaries of holding companies that are public companies. Section 404 of SOX does not apply to institutions that are not ``publicly traded,'' such as nonpublic companies or subsidiaries of nonpublic companies. Section 404 of SOX requires the management and external auditors of all public companies to assess the effectiveness of internal controls over the company's financial reporting.

Part 363 of the FDIC's regulations establishes annual audit and reporting requirements for all insured depository institutions with $500 million or more in total assets. Part 363 requires all insured depository institutions with $500 million or more to have an annual audit of their financial statements conducted by an independent public accountant (external auditor). Part 363 also requires that the management and external auditors of institutions with $1 billion or more in total assets attest to internal controls over financial reporting. To be considered ``independent,'' Guideline 14 to part 363, which was adopted by the FDIC in 1993, states that the external auditor ``should be in compliance with the [American Institute of Certified Public Accountants'] Code of Professional Conduct and meet the independence requirements and interpretations of the [Securities and Exchange Commission] and its staff.'' Title II of SOX imposed additional auditor independence requirements on external auditors of public companies, which the Securities and Exchange Commission (SEC) has implemented through rulemaking. Thus, the external auditors of nonpublic institutions that are subject to part 363 are expected to comply with SOX's auditor independence requirements and the SEC's implementing rules.

Comments: Some commenters focused on the increased burden and costs imposed on public companies by SOX, particularly publicly traded community banks. Several commenters recommended requiring such banks to comply only with part 363 and not with SOX section 404. Other commenters were concerned about the burden placed on banks to comply with the auditor independence requirements in SOX under the FDIC's rules for those banks that are not publicly traded and have less than $1 billion in assets. These commenters believed that such requirements make it difficult for banks in small communities to find professionals to help comply with the requirements.

Current Initiatives: On March 5, 2003, the FDIC issued Financial Institution Letter (FIL) 172003 to provide guidance to institutions about selected provisions of SOX, including the actions the FDIC encourages institutions to take to ensure sound corporate governance. On May 6, 2003, the Board, OCC, and OTS collectively issued similar guidance entitled ``Statement on Application of Recent Corporate Governance Initiatives to NonPublic Banking Organizations.'' None of the federal banking agencies established any new mandates for nonpublic institutions as a result of SOX.\19\ In the 2003 guidance, the federal banking agencies encouraged nonpublic institutions to follow the sound corporate governance practices that the Agencies have long endorsed. In addition, the federal banking agencies encouraged all nonpublic institutions to periodically review their policies and procedures relating to corporate governance and auditing matters. These reviews should ensure that policies and procedures are consistent with applicable law, regulations, and supervisory guidance and appropriate to the institution's size, operations, and resources.
\19\ The auditor independence provisions of part 363, which dated back to 1993 and envisioned auditor compliance with the SEC's independence requirements as they might change from time to time, did not constitute a new mandate for nonpublic institutions with $500 million or more in total assets.

Recommendations:

Banks That Are Not Publicly Traded and Have Less Than $1 Billion in Assets. As discussed above, SOX generally does not apply to banks of any size that are not publicly traded or owned by a publicly traded company. Because SOX did not impose any new mandates on nonpublic institutions that have less than $1 billion in assets, the federal banking agencies do not believe any action on this matter is necessary.

Relationship between Part 363 of the FDIC's Rules and Section 404 of SOX. The SEC rules implementing the section 404 requirements took effect at yearend 2004 for ``accelerated filers,'' i.e., generally, public companies whose common equity has an aggregate market value of at least $75 million, but these rules will not take effect until 2007 for public companies that are ``nonaccelerated filers.'' Section 404 does not explicitly authorize the SEC to exempt any public companies from its internal control requirements.

Section 36 of the FDI Act, which was enacted more than 10 years before SOX, imposes annual audit and reporting requirements on certain insured depository institutions. These requirements, as implemented by part 363 of the FDIC's regulations, include assessments of the effectiveness of internal control over financial reporting by management and external auditors. Section 36 of the FDI Act authorizes the FDIC to set the size threshold at which institutions become subject to the audit and reporting requirements of section 36, provided the threshold is not less than $150 million in assets. In November 2005, the FDIC, after consulting with the other federal banking agencies, amended part 363 to require internal control assessments by management and external auditors only of insured depository institutions, both public and nonpublic, with $1 billion or more in total assets.

Part 363 applies to insured depository institutions, but section 404 applies to public companies, which, in most cases, is the parent holding company of a depository institution rather than the depository institution itself. If certain conditions are met, part 363 permits an institution to satisfy the requirement for internal control assessments by management and external auditors at the holding company level. However, when satisfied at the holding company level, part 363 provides that the internal control assessments need only cover ``the relevant activities and operations of those subsidiary institutions within the scope'' of the regulation, such as those subsidiary depository institutions with $1 billion or more in total assets. In contrast, internal control assessments performed under section 404 must cover the entire consolidated organization, including any insured depository institution subsidiaries with less than $1 billion in total assets and subsidiaries that are not depository institutions.

The FDIC and the other federal banking agencies have no authority to exempt institutions that comply with the internal control requirements of part 363 from the internal control requirements of section 404, which the SEC administers. Legislation that amends section 404 would be needed to create such an exemption (unless the SEC were to determine that it had the authority to do so). Moreover, in considering whether or how to craft
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such an exemption, one would need to recognize and take into account the fact that part 363 internal control assessments by management and external auditors are required to be performed only by insured depository institutions and not on a consolidated basis at the parent holding company level. In connection with consideration of proposals to be included in the FSRRA, one proposal would have exempted financial institutions with assets of less than $1 billion from section 404 if subject to section 36 of the FDI Act. The federal banking agencies had differing views on the advisability of such an amendment and will continue to work with Congress to look for ways to reduce burden while ensuring that adequate internal control req

FOR FURTHER INFORMATION CONTACT

OCC: Heidi Thomas, Special Counsel, Legislative and Regulatory Activities Division, (202) 8745090; or Lee Walzer, Counsel, Legislative and Regulatory Activities Division, (202) 8745090, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.

Board: Patricia A. Robinson, Assistant General Counsel, (202) 452 3005; or Michael J. O'Rourke, Counsel, (202) 4523288; or Alexander Speidel, Attorney, (202) 8727589, Legal Division; or John C. Wood, Counsel, Division of Consumer and Community Affairs, (202) 4522412; or Kevin H. Wilson, Supervisory Financial Analyst, Division of Banking Supervision and Regulation, (202) 4522362, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. For users of Telecommunication Device for the Deaf (TDD) only, contact (202) 2634869.