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Advocacy Alert- 012/09/2002

Farm Credit System update

It became obvious during a number of visits with CBA members that there were concerns about some Production Credit and Federal Land Bank Associations (which comprise the Farm Credit System) still granting loans for purely investment, non-farming purposes. Because of those concerns, the matter was brought to the attention of CBA's Agricultural Lending Committee which approved a survey that was sent to our members last month. We thought you might be interested in a summary of that survey and the strategy CBA is taking to address our members' concerns.

• Inappropriate loans were primarily made for commercial real estate purposes. They included construction and take out loans for an office building that will be leased, loans to health clubs and loans on restaurants.

• The loan size was between $700,000 and $5,000,000

• The problem seems to be dependent on how aggressive a local PCA or FLB is in a given area. The biggest problems appear to be in the Stockton area and in the Yuba City/Marysville area.

We are asking all member banks to be watchful and to immediately notify Bob Longatti, vice president of Member Relations (blongatti@calbankers.com) if they come across questionable loans made or being made by FCS associations.

Upon obtaining specific information we immediately file a protest with the Farm Credit Administration. We have already sent a letter to the FCA through Leland Chan, our general counsel, regarding one loan and the FCA has responded that a review will now take place. If they do not resolve the cases to our satisfaction then we will consider advancing the issue more aggressively. If you have any questions, please contact Bob Longatti at blongatti@calbankers.com.

CBA identity theft brochure available

CBA's "Preventing Identity Theft" brochure is now available to all CBA member institutions and affiliate members. The brochure provides customers with tips on how to avoid becoming a victim of identity theft, initial steps to take if a consumer is or suspects he is a victim of identity theft, and also reminds consumers of the many privacy protections they have under California law. This tool is very useful in helping banks connect with its customers on a sensitive and timely issue. Remember, many of your customers may be more interested in the subject as a result of the large ID theft ring that was just discovered and dismantled in New York - a story that gained national attention. Included in this edition of Monday Courier is a copy of the brochure and an order form. If you have any questions or if you are interested in adding your bank's logo to the brochure, please contact Laura Thornton at 916/441-7377 ext. 213 (or at lthornton@calbankers.com).

Congress adjourns, flood insurance, SBA loans, terrorism insurance addressed

The final days of the 107th Congress left the banking industry and many others frustrated as even seemingly non-controversial essential legislation failed to clear the lame duck Congress.

Flood Insurance
FEMA issued instructions to its flood insurance servicing agents pertaining to the lapse in coverage occasioned by the fact that the federal flood insurance program expires on December 31 and that Congress failed to extend it before adjourning. It is widely anticipated, and the FEMA memorandum reiterates, that Congress will extend the program in the early days of the 108th Congress and that it will be made retroactive to January 1, 2003. In short, it is anticipated that losses even from events occurring after January 1 will be covered, provided a premium has been paid. The FEMA memorandum states that if premiums have been received by December 31, 2002, there will be no interruption in coverage in the case of renewals of existing policies and that new policies may be processed up to that date. For premiums received after December 31, agents are told to hold the proceeds and to notify applicants that there can be no new policies or renewals until Congress acts and that the date of the new insurance will be in accordance with the terms of the existing policy or what the Congress does.

Sec. 7(a) Small Business Loans
The failure to obtain House action on legislation that would have provided for the reinstatement of the $100,000 guarantee level under the popular Sec. 7(a) small business loan program was particularly disappointing to California bankers (and small business borrowers) given the fact that more than 60 percent of the California congressional delegation joined on a letter to Speaker Hastert urging legislation to fix the funding problem. In the end, objections from House Budget Chairman Nussle stopped the legislation from moving forward. Sources indicate that OMB is now amenable to changing the basis by which it estimates losses under the program which could enable the SBA to reinstate former guarantee levels, but there is uncertainty as to whether they can make the necessary adjustments without authorizing legislation.

Bankruptcy
Meanwhile, frustration is hardly an adequate word to describe the feelings of those who have been working to pass a bankruptcy reform bill for more than four years. Having passed both the House and Senate at least three times, the industry could never get both Houses to pass the same legislation at the same time. The bill went down again on an agonizing House vote. Conservative Republicans who could not tolerate the Schumer amendment denying bankruptcy protection to those fined for harming abortion facilities, joined Democrats who found fault with the merits of the legislation despite the fact that many of them voted for the bill when it first cleared the House. So painful was the outcome that many in the industry are questioning whether its resurrection next year would be worth the effort. The ABA will place a high priority next year on privacy, and on fending off the realtors. The credit card industry, which has been the principal proponent of the legislation, may not be willing to make the financial commitment next year. Also looming is the prospect of deposit insurance reform legislation which incoming Senate Banking Committee Chairman Richard Shelby says he backs.

Other Legislation:
With strong White House backing, the lame duck Congress did pass legislation providing federal backing for terrorism insurance, along with the home land security bill during the lame duck session.

OTS sends warning, it has exclusive jurisdiction over national banks

OTS reminded the national banking industry, but the message was intended for ambitious state legislatures, that it has exclusive jurisdiction over national banks with respect to supervision, regulation, pre-emption of state laws as well as compliance with both federal and state laws. The warning was intended to throw down the gauntlet, and may even have been precipitated by Jackie Speier's questionnaire to some of California's largest banks asking for detailed information regarding their privacy practices and policies. The OTS advisory was quite specific that national banks should consult with OCC if state officials ask formal questions or even contact them about how the application of state laws might affect their operations, and strongly suggests that state officials should contact OTS on matters like this. The advisory, signed by First Senior Deputy Comptroller Julie Williams, was clear and unequivocal, and may yet arouse the ire of states rights advocates on Capitol Hill (which may be the reason OCC waited until after the Congressional adjournment), but it leaves little doubt that national banks will have a strong ally in the OCC in shielding them from the application or state enforcement of troublesome state laws, like privacy.

Industry and Home Loan Banks to FHFB chairman Korsmo: "Don't cede authority to SEC!"

At an unusual hearing this week before the Federal Housing Finance Board (FHFB), the Federal Home Loan Banks and industry representatives who were permitted to submit written testimony, sounded a unanimous message in urging the Board not to cede any jurisdiction to the SEC. Treasury Undersecretary, Peter Fisher, has called on GSEs to provide SEC disclosures, and Fannie Mae and Freddie Mac have voluntarily agreed to provide disclosures of their equity, but not their debt issues. FHFB Chairman Korsmo has been eager to please and he has informally proposed that the System, should comply with '33 and '34 Act Disclosure requirements and that the SEC have full jurisdiction. Three Bank presidents and a fourth witness representing the Seattle Bank and its members argued that because the System has no publicly traded stock, and is a cooperative, there should be no SEC role. None argued against providing full, accurate, transparent and enhanced disclosures, but insisted that the FHFB should be the sole regulator, much as banks and thrifts provide SEC like disclosures to their federal regulators. Korsmo was non-commital at the hearing. He said no final decisions had been made, but that SEC would be involved in resolving the issue. He did not provide reassurance that there would be no SEC disclosures. Of greatest concern to the System is the possibility that there might have to be SEC disclosures every time the System issues debt. This, worries the industry, could add tremendous cost and complexity.

FDIC does not assess a BIG premium in first half of 2003

FDIC did not assess a first half of 2003 BIF premium when its board met earlier this month. Many were concerned that the Corporation might opt for a small premium in order to garner more support for deposit insurance reform legislation. It was a very close call for Chairman Powell and his fellow board members, but in the end, the FDIC called it as it saw it and refrained, for the moment from assessing a premium. Powell indicated that if the ratio does fall below 1.25%, FDIC could assess a premium during the second half of 2003. The Corporation did not have final deposit figures and therefore there was no official ratio, but based on evidence before it, the staff estimated that the BIF ratio stands right at 1.25% suggesting that there was, once again, but marginal growth in insured deposits. Only in the first quarter of 2002 was there a significant spike in insured deposits, because of the requirement that BIF-insured institutions calculate the total amount of insurance on trust accounts. Otherwise, because free riders have stopped riding (their deposits have declined over the last few quarters), earnings on the fund have covered the growth that has taken place.

Bankers Legislative Conference and Washington D.C. visit

Included in this issue of the Monday Courier is a registration form to attend CBA's annual Bankers Legislative Conference in Sacramento. This year, the event will be held March 4 - 5 and will mark the 50th anniversary of the Bankers Legislative Conference. The BLC presents all CBA members with the opportunity to meet face-to-face with their elected officials in the Capitol, to discuss those issues most important to the banking industry. Given the high-profile issues CBA is sure to face in the upcoming legislative session, it is more important than ever that more bankers participate in the Bankers Legislative Conference. Please contact Yvette Ernst at yernst@calbankers.com or 916/441-7377 ext. 214 if you have any questions.

CBA has also secured the dates for its trip to Washington, D.C. in 2003 - September 16-18. CBA sends a delegation of bankers every other year to our nation's capital to meet face-to-face with members of the California congressional delegation. We have heard from Rep. Michael Oxley, who chairs the Senate Financial Services Committee, that California's bankers are nearly silent at the federal level, and cited it as a major shortcoming of our federal legislative efforts. We need to rectify this situation immediately and make our presence known in Washington. More information on the visit will be provided shortly, but in the meantime, mark your calendars for this important event.