Deposits and Electronic Banking

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 556, 557, 561, 563, and 563g

[97-27]

RIN 1550-AB00

Deposits and Electronic Banking

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking and advance notice of proposed

rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to

substantially streamline its deposit-related regulations. This Notice

of Proposed Rulemaking (NPR) follows a detailed staff review of

pertinent regulations and policy statements in the Code of Federal

Regulations (CFR) to determine whether each provision is necessary,

imposes the least possible burden consistent with safety and soundness,

and is clearly written. Today's proposal is issued pursuant to the

Regulatory Reinvention Initiative of the Vice-President's National

Performance Review and section 303 of the Community Development and

Regulatory Improvement Act of 1994.

[[Page 15627]]

In addition, OTS is publishing an advance notice of proposed

rulemaking (ANPR) seeking comment on OTS electronic banking

regulations. OTS is concerned that its current electronic banking

regulations do not adequately address advances in technology and may

impede prudent innovation by federal savings associations.

DATES: Comments must be received on or before June 2, 1997.

ADDRESSES: Send comments to Manager, Dissemination Branch, Records

Management and Information Policy, Office of Thrift Supervision, 1700 G

Street, NW., Washington, DC 20552, Attention Docket No. 97-27. These

submissions may be hand-delivered to 1700 G. Street, NW., from 9:00

a.m. to 5:00 p.m. on business days; they may be sent by facsimile

transmission to FAX Number (202) 906-7755; or by e-mail:

[email protected]. Comments will be available for inspection at

1700 G Street, NW., from 9:00 a.m. until 4:00 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: For Deposits: Edward J. O'Connell,

III, Project Manager, (202) 906-5694, Supervision Policy; or Richard

Blanks, Counsel (Banking and Finance), (202) 906-7037; or Karen

Osterloh, Assistant Chief Counsel, (202) 906-6639. For Electronic

Banking: Paul Glenn, Special Counsel, Chief Counsel's Office, (202)

906-6203, or Paul Robin, Program Analyst, Compliance Policy, (202) 906-

6648, Office of Thrift Supervision, 1700 G Street NW., Washington, DC

20552.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background of the Proposal and Advance Notice of Proposed

Rulemaking

II. Notice of Proposed Rulemaking: Deposits

A. Objectives

B. Historical Overview

C. Proposed Disposition of Deposit-Related Regulations

D. Proposed New Part 557

III. Advance Notice of Proposed Rulemaking: Electronic Banking

A. Electronic Banking Facilities and Data Processing

B. Other Issues

IV. Request for Comments

V. Paperwork Reduction Act of 1995

VI. Executive Order 12866

VII. Regulatory Flexibility Act Analysis

VIII. Unfunded Mandates Act of 1995

I. Background of the Proposal and Advance Notice of Proposed Rulemaking

In a comprehensive review of the agency's regulations in the spring

of 1995, OTS identified numerous obsolete or redundant regulations that

could be quickly repealed. OTS also identified several key regulatory

areas for a more intensive, systematic regulatory burden review. The

first areas reviewed--lending and investment authority, subsidiaries

and equity investments, corporate governance, conflicts of interest,

corporate opportunity and hazard insurance--were selected because they

have a significant impact on thrift operations, and had not been

developed on an interagency basis or been comprehensively reviewed for

many years. OTS has issued comprehensive final regulations on all of

these areas.\1\

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\1\ 61 FR 50951 (September 30, 1996) (Lending and Investment);

61 FR 66561 (December 18, 1996) (Subsidiaries and Equity

Investments); 61 FR 60173 (November 27, 1996) (Conflicts of

Interest, Corporate Opportunity and Hazard Insurance); 61 FR 64007

(December 3, 1996) (Corporate Governance).

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Today's proposal is the first in the next phase of OTS's review of

its regulations. It follows an intensive review of OTS's deposit-

related regulations and policy statements. In developing this proposal,

OTS considered the relevant regulations, agency guidance, legal

interpretations, and requirements of the other federal banking

agencies. Like other OTS regulatory reinvention efforts, this proposal

was prepared in consultation with those who use these regulations on a

daily basis, including OTS regional examination staff.

OTS is also seeking public input on a related area of its

regulations that has had an increasing impact on thrift operations, but

has not been recently amended--electronic banking. OTS has three

regulations affecting electronic banking. These include: 12 CFR 545.138

(Data processing services); 545.141 (Remote service units); and 545.142

(Home banking services). After reviewing these electronic banking

regulations, OTS has decided to solicit public comment through an ANPR

before determining what regulatory amendments may be appropriate. OTS

is concerned that these regulations may not appropriately address

electronic banking services under emerging technologies.

II. Notice of Proposed Rulemaking: Deposits

A. Objectives

The overarching goal of OTS's reinvention initiative is to reduce

regulatory burden on savings associations to the greatest extent

possible, consistent with statutory requirements and safety and

soundness. In the context of deposit-related regulations, we believe

that maximum burden reduction can be achieved by pursuing the following

objectives.

First, we are attempting to eliminate duplication and overlap from

OTS regulations. Several OTS deposit-related regulations address areas

that are covered by Regulations D and DD of the Federal Reserve Board.

These regulations apply to all depository institutions, including

savings associations. Regulation D (Reserve Requirements of Depository

Institutions) 2 contains comprehensive deposit definitions.

Further, Regulation DD (Truth in Savings) 3 applies to all

depository institutions except credit unions.4 This approach has

two benefits--the elimination of regulations from the CFR and reduced

confusion for savings associations.

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\2\ 12 CFR Part 204 (1996).

\3\ 12 CFR Part 230 (1996).

\4\ 12 CFR Part 707 contains separate Truth in Savings

regulations applicable to credit unions.

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Second, as part of its reinvention effort, OTS is endeavoring to

eliminate regulations that are outdated or micromanage thrift

operations. For example, OTS proposes to replace several specific

deposit-related recordkeeping requirements with a general recordkeeping

regulation that is tied more closely to safety and soundness. This

approach, which parallels recent changes in OTS's loan documentation

regulation, will help savings associations take better advantage of

technological advances.5

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\5\ 61 FR 50951, 50982 (to be codified at 12 CFR 560.170).

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Third, OTS wants to remove regulations that merely restate existing

statutory authority. It has been the long-standing position of OTS and

its predecessor agency, the Federal Home Loan Bank Board (FHLBB), that

specific regulations are not required to permit federal savings

associations to engage in activities authorized by the Home Owner's

Loan Act (HOLA).6 Rather, the role of OTS regulations should be to

impose necessary conditions or limitations on those statutorily

authorized activities. Section 5(b) of the HOLA states that a federal

savings association may raise funds through a variety of types of

accounts, ``[s]ubject to the terms of its charter and regulations of

the Director [of OTS].'' 7 Either the association's charter or OTS

regulations may set out the rights afforded accountholders. Thus,

unless OTS regulations or the institution's charter restrict the type

of accounts a federal savings association may offer, an association may

offer whatever types of statutorily authorized accounts it deems

appropriate.

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\6\ 12 U.S.C. 1461-1470.

\7\ 12 U.S.C. 1464(b).

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[[Page 15628]]

Fourth, OTS believes that it should maintain a clear and consistent

position on the preemptive effect of federal regulation on the deposit-

related activities of savings associations. It is particularly

necessary to reiterate this position as existing regulations are

restructured, amended, converted into guidance, or deleted. OTS has

long held that, with certain narrow exceptions, state laws or

regulations that purport to affect the deposit activities of federal

savings associations are preempted.8 Preemption in this area is

essential to OTS's regulation of the operations of federal savings

associations because deposit taking is one of the most important

functions of a savings association. None of the changes discussed today

should be construed as evidencing an intent by OTS to change this long-

held position. Whether OTS retains a specific regulation addressing a

particular aspect of deposit taking or deletes the provision to

streamline its regulations and reduce regulatory burden, the agency

intends to occupy the entire field of deposit regulation for federal

savings associations.

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\8\ See OTS Op. Chief Counsel (October 11, 1991).

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This approach is consistent with court decisions that provide that

OTS has authority over federal thrifts from their ``cradle to [their]

corporate grave.'' 9

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\9\ Fidelity Federal Savings and Loan Ass'n v. del la Cuesta,

458 U.S. 141, 145, quoting California v. Coast Federal Savings and

Loan Ass'n, 98 F. Supp. 311, 316 (S.D. Cal. 1951).

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This proposed rule includes a general deposit preemption provision.

This provision restates long-standing preemption principles applicable

to federal savings associations, as developed in a long line of court

cases and legal opinions by OTS and the FHLBB. The agency hopes that

the increased clarity and specificity of the proposal will reduce

confusion and the need for frequent preemption inquiries in the future.

Finally, OTS is removing certain regulations and policy statements

that merely reiterate universally recognized deposit-related incidental

powers of federal savings associations, such as the ability to use

insured banks as collecting and paying agents and the ability to

provide ``deposit assurance'' on certain direct deposits.

With these goals in mind, all OTS deposit-related regulations will

be consolidated, streamlined, and moved into a new part 557. This

action will make the deposit-related regulations easier to locate and

follow.

B. Historical Overview

Since enactment of the HOLA, federal savings associations have been

authorized to raise funds through a variety of accounts, and to issue

passbooks, certificates, or other evidence of accounts.10 In 1982,

the Garn-St Germain Depository Institutions Act (DIA) expanded this

authority to permit federal thrifts to accept demand accounts.11

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\10\ 12 U.S.C. 1464(b).

\11\ Pub. L. 97-320, 96 Stat. 1469 (October 15, 1982).

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Historically, the FHLBB, through its regulations, affirmatively

approved specific deposit-related activities. This approach has shifted

in recent years as a result of changes in the applicable statutes and

advances in business and technology. Now thrifts may undertake any

activity permitted by statute, unless a regulation limits or restricts

the authority. Accordingly, it is no longer necessary to retain

regulations specifically approving deposit-related activities.

Additionally, many of the deposit-related regulations originated

with the FHLBB, in its capacity as the operating head of the former

Federal Savings and Loan Insurance Corporation (FSLIC), which insured

thrift deposits. Since OTS is not the insurer of thrift deposits, these

regulations are no longer needed.

Finally, certain FHLBB-era regulations have now been superseded by

more recent statutes, such as the Truth in Savings Act,12 and by

Federal Reserve Board regulations applicable to all insured

institutions. Consequently, many of the policy and legal reasons for

certain regulations no longer exist.

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\12\ 12 U.S.C. 4301 et seq.

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C. Proposed Disposition of Deposit-Related Regulations

Part 545 Operations (Federal Savings Associations)

Section 545.10 Savings Deposits or Shares

Section 545.10 states that OTS approves savings deposits or shares

that comply with the provisions of subsection (b) of section five of

title III of the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (``FIRREA'') 13 (12 U.S.C. 1464(b)), the

federal savings association's charter, and OTS rules and regulations

relating to the type, form, return, and maturity of deposits or shares.

OTS proposes to delete this paragraph. OTS ``approval'' of deposits or

shares is not required by 12 U.S.C. 1464(b), which authorizes federal

savings associations to raise funds through various types of accounts

and issue evidence of such accounts.

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\13\ Pub. Law 101-73, 103 Stat. 183 (August 9, 1989).

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Section 545.11 Issuance of Accounts

Section 545.11(a) requires a federal savings association to obtain

and maintain FDIC insurance prior to doing business. OTS proposes to

delete this subsection and rely on the statutory requirement that

federal savings associations must obtain and maintain FDIC insurance.

See 12 U.S.C. 1462(4), 1818(a)(1).

Section 545.11(b) provides that federal savings associations may

issue accounts as defined in Sec. 561.2. OTS proposes to replace the

detail of this subsection with a more general statement of authority in

new Part 557.

Section 545.11(c) sets forth the status and priority of savings

deposits and accounts in the event of a liquidation, dissolution or

winding up of the association. OTS proposes to delete this subsection

because these priorities are set forth by statute. See 12 U.S.C.

1821(d)(11) and 1464(b)(1)(B).

Section 545.12 Demand Deposit Accounts

Section 545.12(a) states that a federal savings association may

accept demand deposit accounts from any person. OTS proposes to delete

this subsection because 12 U.S.C. 1464(b)(1)(A) contains the authority

for issuance of demand deposit accounts.

Section 545.12(b) prohibits a federal savings association from

paying interest on a demand deposit. OTS proposes to delete this

subsection because 12 U.S.C. 1464(b)(1)(B)(i) contains this

prohibition. This section also provides that finders' fees offered in

accordance with 12 CFR 561.16(b) are not payments of interest. OTS

proposes to transfer the finders' fee exception to the Thrift

Activities Handbook.

Section 545.12(c) indicates that demand deposit accounts include

only those accounts that are payable on demand within the meaning of 12

CFR 563.6. This provision is unnecessary in light of the deletion of

paragraphs (a) and (b). For guidance in interpreting 12 U.S.C.

1464(b)(1)(A) and (b)(1)(B)(1), institutions should refer to the

definition of demand deposit contained in Regulation D.14

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\14\ This proposal does not address deposit-related definitions

currently contained in OTS regulations. OTS is planning a

comprehensive review of all regulatory definitions later this year.

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Section 545.13 Account Records

Section 545.13(a) states that a federal savings association must

comply with Secs. 563.1 and 563.170(c)(8), and that accounts must be

evidenced by a written agreement with transactions confirmed by

issuance of a receipt or

[[Page 15629]]

advice. OTS proposes to delete this subsection. The cross-references

are no longer appropriate because Sec. 563.1, which formerly dealt with

forms of accounts, was amended in 1992 to refer to a de novo savings

association's charters and by-laws, 15 and Sec. 563.170(c)(8) has

been recently removed. 16 The term ``advice'' is no longer a part

of transactional terminology. Moreover, OTS would replace the specific

recordkeeping requirements for written agreements and receipts by a

more general recordkeeping regulation in new Part 557. Nothing in this

proposed revision would prohibit a savings association from the normal

business practice of providing receipts for transactions. However, the

proposed change may allow federal savings associations to take better

advantage of technological and marketplace advances in telephonic and

electronic banking.

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\15\ 57 FR 14344 (Apr. 20, 1992).

\16\ 61 FR 50951 (September 30, 1996).

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Section 545.13(b)(1) provides that a federal savings association

may treat the holder of record of an account as the owner, regardless

of any notice to the contrary, until the account is transferred on the

federal association's books. Under this section, accounts are only

transferable on the association's books on proper application by the

transferee and acceptance of the transferee as accountholder on terms

approved by the board of directors. OTS proposes to modify and

incorporate this subsection into new Part 557.

Under Sec. 545.13(b)(2), a federal savings association may issue

negotiable certificate accounts in bearer form without recording

ownership on the books of the federal savings association. OTS proposes

to replace this subsection with the more general recordkeeping

requirement in new Part 557. We note that the FDIC has a regulation

concerning negotiable certificates of deposits where the depository

institution has defaulted. If any deposit obligation of an insured

institution is evidenced by a negotiable instrument, the FDIC will

recognize the owner as if that person's name were on the records of the

institution if the instrument was negotiated to such owner prior to the

date of default of the institution. See 12 CFR 330.4(b)(4) (1996).

Section 545.13(c) recites authority for federal savings

associations to use insured banks as collecting and paying agents for

its accounts. OTS proposes to delete this subsection because these

incidental powers are uniformly recognized and do not need to be

codified in regulatory text.

Section 545.14 Determination and Distribution of Earnings

Under Sec. 545.14(a), a federal savings association may issue

savings accounts earning interest at different rates of return. These

rates may be fixed at the time the account is issued or may vary on any

basis specified at the time the deposit is accepted, subject to 12 CFR

563.10. OTS proposes to incorporate this subsection in new Part 557.

Section 545.14(b) states that a federal savings association may

distribute earnings on savings accounts as provided in its charter and

bylaws and the terms of the account. OTS proposes to incorporate this

subsection into new Part 557.

Section 545.14(c) prohibits the distribution of earnings on share

accounts until the federal savings association has provided for the

payment of expenses and for the pro rata portion of credits to

reserves, as required by the federal savings association's charter and

12 CFR Part 567. The term ``reserve credits'' is an archaic reference

to the transfer of a portion of net income to a restricted capital

account. Charters for mutual share institutions had required this

transfer. OTS proposes to delete this subsection because modern federal

charters no longer provide for mutual share institutions.

Part 556 Statements of Policy

Section 556.12 Deposit Assurance of Direct Deposit of Social Security

Payments

This Statement of Policy states that the implied powers of a

federal savings association include the provision of ``deposit

assurance'' in connection with the Social Security Administration's

direct deposit program. A federal savings association provides deposit

assurance when it credits a social security beneficiary's account with

payment on its due date, whether or not the payment has been received

by the association.

The Statement of Policy advises federal savings associations to

implement safeguards and controls to address the risks of the program.

The policy statement further notes that Regulation E (Electronic Fund

Transfers) 17 applies to the program.

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\17\ 12 CFR Part 205 (1996).

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OTS proposes to delete this Statement of Policy because insured

depository institutions universally provide deposit assurance of social

security payments. OTS will consider whether handbook guidance would be

useful to reiterate the need for adequate institutional safeguards and

controls and the applicability of Regulation E.

Part 563 Operations

Section 563.2 Simple Form of Certificate; Passbooks

Section 563.2 sets forth the requirements for a simple form of

certificate account. A mutual savings association may issue a simple

form of savings or investment certificate or a passbook if, in

accordance with State law, the association's charter, constitution, or

bylaws includes a clear provision indicating that: (i) All shareholders

are members and share equally in earnings and in assets pro rata to

paid-in value, plus credited dividends; and (ii) the savings

association may not charge any fee for the privilege of becoming,

remaining, or ceasing to be a member of the savings association. This

simple form is not required to contain any membership certificate or

any statement of the dividend, withdrawal, or other rights of members.

OTS proposes to delete this section because it is outdated. Savings

associations will continue to be subject to the disclosure requirements

of Regulation DD.

Section 563.3 Long Form of Membership Certificate

Under Sec. 563.3, a savings association must include certain

specified statements in all share, membership, deposit certificates,

passbook, or other instrument evidencing a withdrawal instrument that:

(i) Pay a different rate of dividends or interest to different classes

of shares or securities; (ii) prefer any one or more classes of shares

or securities; or (iii) charge any fee for the privilege of becoming,

remaining, or ceasing to be a saver or investor in the savings

association.

Like Sec. 563.2, this section is outdated and unnecessary in light

of the disclosure requirements in Regulation DD. Accordingly, OTS

proposes to delete this provision.

Section 563.6 Payment of Accounts on Demand

Section 563.6 prohibits a savings association from issuing any

account, or advertising or representing that it will pay holders of its

accounts, on demand. Demand accounts, tax and loan accounts, note

accounts, and United States Treasury general accounts are not subject

to this prohibition. This section also sets forth various definitions

of the term ``accounts payable on demand.''

OTS proposes to delete this section and instead rely on the

disclosure requirements applicable under

[[Page 15630]]

Regulation DD, and on statutory provisions authorizing savings

associations to issue demand deposits (12 U.S.C. 1464(b)(1)(A)(i)) and

prohibiting the payment of interest on demand deposits (12 U.S.C.

1464(b)(1)(B)(i)). These statutory provisions should be interpreted in

a manner that is consistent with the definition of demand deposit

contained in Regulation D.

Section 563.7 Fixed-Term Accounts (Certificate Accounts)

Under Sec. 563.7(a), a savings association may offer certificate

accounts in such form as the board of directors of the savings

association may authorize by resolution. Further, with respect to any

time deposit, a savings association may impose a penalty for early

withdrawal.

Section 563.7(b) authorizes a savings association to pay earnings

on a certificate account at a rate, or anticipated rate of return,

determined when the deposit is accepted. The rate may be fixed or be

based on a schedule, index, or formula specified at the time the

account is accepted.

Section 563.7(c) prohibits an association from accepting a fixed-

term account for a term of less than seven days. This paragraph also

prohibits an institution from issuing any certificate account unless

the association has complied with the chartering provisions of

Sec. 563.1.

Section 563.7(d) states that a certificate may prohibit withdrawal

prior to maturity except in the cases of death or incompetence.

OTS proposes to modify this section. While the provisions of

paragraph (b) would be retained in the new regulation at Sec. 557.3,

the remainder of this section would be deleted to avoid duplication and

redundancy. Institutions issuing such certificate accounts must comply

with the disclosure requirements contained in Regulation DD and should

rely on the definitions applicable to such accounts contained in

Regulation D.

Section 563.9 Eurodollar Deposits

This regulation addresses the issuance of Eurodollar deposits. When

this provision was added, FHLBB regulations on pooled accounts and

other restrictions did not apply to Eurodollar deposits. These

restrictions have been removed for all accounts. OTS, therefore,

proposes to delete this section because it is no longer necessary. This

approach is consistent with the regulations of the other banking

regulators which do not specifically address regulatory treatment of

Eurodollar deposits.

Section 563.10 Earnings-Based Accounts

Section 563.10 provides extensive definitions and limitations

regarding earnings-based accounts. In an earnings-based account, the

payment of interest is determined by reference to an index based upon

the profitability, earnings, cash flow, appreciation, or return on

assets owned by, or under the control of, the savings association.

OTS proposes to delete this section because it is unnecessary and

duplicative of disclosure requirements contained in Regulation DD.

D. Proposed New Part 557

OTS proposes to adopt a new Part 557 that will ultimately include

all of the agency's deposit-related regulations. The agency believes

that this organization will make its relevant deposit-related

regulations easier to locate. The proposed deposit-related regulation

is discussed below.

Section 557.1 General Authority (Proposed)

This proposed section states that new Part 557 is issued under OTS

general rulemaking and supervisory authority under the HOLA. The

proposed section also cites the general authority for federal savings

associations' deposit-related activities. It states that a federal

savings association may raise funds through deposits and issue evidence

of such accounts as authorized under section 5(b) of the HOLA, the

savings association's charter, and regulations issued by OTS.

Section 557.2 Applicability of Law (Proposed)

As discussed in Section II.A. above, deposit-related activities are

core activities in which federal savings associations engage. Federal

preemption of state laws purporting to affect deposit-related

activities is critical to the agency's mandate under HOLA sections 4(a)

and 5(a) to provide for the safe and sound operation of federal savings

associations in accordance with the best practices of thrift

institutions in the United States.

This proposed section sets forth OTS's long-standing position on

the federal preemption of state laws purporting to affect the deposit-

related activities of federal savings associations. This position has

been developed in caselaw and legal opinions by OTS and its

predecessor, the FHLBB, and is currently reflected in Sec. 545.2.

Because the deposit-related activities regulations will be moved from

Part 545 and, thus, separated from Sec. 545.2, OTS proposes to include

new Sec. 557.2 to confirm and carry forward its existing preemption

position. The agency believes that the increased clarity and

specificity of Sec. 557.2 will reduce confusion and the need for

frequent preemption inquiries in the future.

The proposed section on preemption has three paragraphs. Paragraph

(a) explicitly states the agency's intent to occupy the field of

deposit-related activities for federal thrifts and articulates the

statutory and regulatory basis for this preemption. Paragraph (b)

contains a list of examples of preempted state laws, drawn from case

law and OTS precedent. This paragraph emphasizes that the list is not

intended to be exhaustive. Paragraph (c) describes certain types of

state laws that OTS does not intend to preempt. These categories

include: contract and commercial law, tort law, and criminal law. Such

laws will not be preempted to the extent that they only incidentally

affect the deposit-related activities of federal savings associations

or are otherwise consistent with the purpose of paragraph (a).

When analyzing the status of state laws under new Sec. 557.2, the

first step will be to determine whether the type of law in question is

listed among the illustrative examples of preempted state laws under

paragraph (b). If so, the analysis will end there; the law is

preempted. If the law is not covered by paragraph (b), the next

question is whether the law affects deposit-related activities. If it

does, then, in accordance with paragraph (a), the presumption arises

that the law is preempted. This presumption can be reversed only if the

law can clearly be shown to fit within the confines of the types of

state laws that are not preempted, as described in paragraph (c). For

these purposes, paragraph (c) is intended to be interpreted narrowly.

Any doubt should be resolved in favor of preemption.

Section 557.3 Interest and Earnings (Proposed)

This proposed section states that a savings association may pay

interest on a savings account at a rate or anticipated rate of return

determined when the account is accepted, as provided in its charter and

bylaws and the terms of the account. The rate or anticipated rate on a

savings account may be fixed, or may vary according to a schedule,

index, or formula specified when an account is accepted.

Section 557.4 Account Records (Proposed)

This proposed section replaces the specific recordkeeping

requirements of the existing regulations with more general

requirements. This section states

[[Page 15631]]

that each savings association should establish and maintain deposit

documentation practices and records that demonstrate appropriate

administration and monitoring of its deposit-related activities. A

savings association's records should include adequate evidence of the

ownership, balances, and transactions involving the account. Further,

the proposed section provides that a federal savings association may

treat the holder of record of an account as the owner, regardless of

any notice to the contrary, until the account is transferred on the

association's records.

III. Advance Notice of Proposed Rulemaking: Electronic Banking

OTS seeks comments on whether its regulations are sufficiently

flexible to permit federal savings associations to engage in

appropriate electronic banking activities, consistent with safety and

soundness, the Truth in Lending Act,18 Regulation E, and other

relevant statutes and regulations. OTS has received numerous inquiries

on electronic banking issues. For example, federal savings associations

have asked whether they may provide banking services over the Internet,

whether they may open accounts or issue loans from machines in remote

locations, what steps must an association operating on the Internet

take to comply with the Community Reinvestment Act (CRA), and whether

savings associations may open accounts on the Internet for depositors

living abroad.

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\18\ 15 U.S.C. 1601 et seq.

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This advance notice of proposed rulemaking requests comments on:

(1) Electronic banking facilities and data processing activities; and

(2) more general issues relating to electronic banking.

A. Electronic Banking Facilities and Data Processing

Three OTS regulations affect a thrift's ability to engage in

electronic banking activities. Two of these regulations describe the

types of facilities through which federal thrifts may deliver services

to their customers. 12 CFR 545.141 (Remote service units); 545.142

(Home banking services). The third regulation, the data processing

regulation, 12 CFR 545.138, provides the general authority to engage in

certain electronic banking activities. To the extent that these

regulations do not reflect current activities and technologies, OTS is

interested in how the regulations might be updated. Each area of

concern is discussed more fully below.

Facilities

OTS regulations permit a federal savings association to deliver

services to customers at various kinds of facilities. These include:

home offices, branches, agency offices, data processing or

administrative offices, remote service units (RSUs), and home banking.

Recently, OTS has been asked to address whether an automated loan

machine (ALM) is a branch office or some other type of facility. This

issue has raised more general questions about how the agency should

treat new electronic technologies.

Several associations have informed OTS that they plan to establish

networks of ALMs located away from their home or branch offices. Each

ALM would permit a customer to apply for a consumer loan up to a

specific limit by entering certain information by keypad into a machine

resembling an automated teller machine (ATM). This information would be

transferred immediately by wire to the institution's main-frame

computer. The main-frame computer would analyze the information under a

credit-scoring program, and would check the information electronically

with credit-reporting bureaus. If the information meets the credit-

scoring criteria, the computer program would approve the loan. The ALM

then would print out a cashier's check and appropriate loan disclosure

forms. Under the proposals outlined to OTS, the loan would not be

treated as closed until the check was endorsed and presented to the

institution for payment. If the loan were disapproved by the computer

program, the ALM would print out all necessary denial disclosures. The

process is expected to take about ten minutes.

This procedure raises the question whether each ALM is a branch.

This is significant because the rules governing the establishment and

operation of a branch or an RSU are different. An ALM might appear to

meet the definition of a ``remote service unit'' at 12 CFR 545.141(a),

except that the regulation expressly prohibits an RSU from

``establish[ing] a loan account.'' 12 CFR 545.141(b). A facility not

covered by the RSU regulation or other specific classification is, by

default, a branch. See 12 CFR 545.92(a).

The prohibition against establishing a loan account at an RSU

appears to date from a judicial decision over twenty years ago.

Bloomfield Fed. Sav. & Loan Ass'n. v. American Community Stores Corp.,

396 F. Supp. 384 (D. Neb. 1975). In Bloomfield, the plaintiff

challenged the establishment of ATMs by a federal thrift by asserting

that the thrift had failed to comply with the FHLBB's procedures for

opening new branches. The court noted that the FHLBB held broad

authority to define a branch, but had limited this definition to a

full-time and permanent office at which any business of a thrift may be

transacted. Since the FHLBB's regulations stated that an RSU could

engage in specific activities and these activities did not include

opening savings accounts or originating, processing, or approving

loans, the court concluded that the planned ATMs (which were part of an

RSU pilot project) were not branches. Therefore, the thrift did not

have to comply with the branching procedures.

In 1981, the FHLBB simplified the RSU regulation by deleting

enumerated activities for RSUs. In its place, the FHLBB added an

explicit statement that an RSU could not be used to open a savings

account or establish a loan account. See 46 FR 8440 (1981). This

statement is found in current OTS regulations at 12 CFR 545.141(b).

Bloomfield suggests that OTS would have to revise its regulations

governing branches and other facilities to broaden the RSU regulation.

OTS solicits comment on whether such revisions would be appropriate.

A review of the facility regulations also may be appropriate in the

home banking context. Currently, it is not clear whether a full range

of banking services may be offered under the home banking services

regulation. 12 CFR 545.142. This regulation was drafted when home

banking was limited to monitoring balances, transferring funds between

accounts at the same institution, and directing payments from an

existing checking account in lieu of sending checks by mail. Because a

thrift's role in these activities was strictly clerical, the definition

of home banking services was limited to ``the transfer of funds of

financial information'' and ``the performance of other transactions

initiated by the customer.'' 12 CFR 545.142.

It is not clear whether Sec. 545.142 would cover the opening of new

accounts or the processing of credit applications. The phrase

``transactions initiated by a customer'' might encompass these new

services, but the common meaning of that phrase may limit it to

transactions involving existing accounts. With technological advances

making it feasible for thrifts to make risk-based decisions on an

electronic basis (e.g., credit scoring), OTS solicits comment on the

appropriate scope of the home banking services definition.

Accordingly, OTS solicits comments on whether the definitions of

RSUs and

[[Page 15632]]

home banking services are sufficient to encompass the full range of

electronic banking activity. In this regard, we note that federal

savings associations have specific statutory authority to establish

RSUs as provided in OTS regulations pursuant to 12 U.S.C.

1464(b)(1)(F).19 OTS is also interested in whether that statutory

language raises particular issues for the industry. OTS anticipates

that these comments will help the agency to better understand industry

and customer expectations concerning the nature of such facilities.

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\19\ We note that banks previously had to file branch

applications before establishing ATMs and remote service units.

Section 2205 of the Economic Growth and Regulatory Paperwork

Reduction Act of 1996 (Title II of Pub. L. 104-208) eliminated that

requirement.

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Permissible Activities

OTS also solicits comment on whether its current regulations

authorizing data processing activities permit a federal savings

association to optimize the latest technology. The data processing

activities of federal savings associations are covered by 12 CFR

545.138. This regulation was issued when data processing was limited to

the non-discretionary functions of processing and storing data. Today,

a financial institution can make risk-based decisions solely through

electronic means. Accordingly, it may be appropriate for OTS to revise

this regulation. In addition, the current OTS data processing

regulation limits the ability of a federal savings association to sell

or market services, software, and excess capacity. All of these

restrictions may not be necessary, especially since the comparable

interpretative ruling for national banks is less restrictive. See 61 FR

4849, at 4853 (February 9, 1996).

Data Processing. Under the current data processing regulation, the

processing of data generally encompasses a record-keeping, rather than

a risk assessment, function. This restrictive view presents

difficulties in applying the OTS regulation to thrifts utilizing the

emerging technologies.

This limited view of data processing originated in 1965 in the

FHLBB regulation that first authorized federal thrifts to engage in

data processing services. In that regulation, the FHLBB defined ``data

processing services'' as ``the maintenance of bookkeeping, accounting,

or other records primarily by mechanical or electronic methods.'' See

12 CFR 545.14-2 (1966) (emphasis added). This view of data processing

as an electronic form of recordkeeping continues, despite substantial

revisions to the data processing regulation in 1983. These 1983

revisions expanded the kinds of data that could be processed to include

data that involved ``financial, economic, or related to thrift, home

financing, or the activities of depository institutions.'' 20 The

FHLBB did not, however, expand the definition of ``processing'' because

technological improvements had not made it possible to make risk-based

decisions entirely through electronic means. The current OTS data

processing regulation is substantially the same as the 1983 FHLBB rule.

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\20\ 48 FR 7831 (1983).

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In a recent review of its related data processing provisions, the

OCC concluded that its use of the term ``data processing'' failed to

capture the potential of electronic banking. Recognizing that

individual banks ``are engaging, and will engage, in an increasing

range of activities through electronic means and facilities beyond

simply `data processing','' the OCC deleted that term from its

interpretative ruling. Instead, the OCC interpretative ruling refers to

``electronic means and facilities.'' 21 This term clearly will

encompass new technology that enables a depository institution to make

risk-based judgments electronically.

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\21\ 61 FR at 4853, 4865 (February 9, 1996) (to be codified at

12 CFR 7.1019).

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Sales of Facilities and Software. The OTS data processing

regulation provides federal savings associations with authority to

provide data processing and data transmission services, to sell by-

products incident to those services, and to sell excess capacity. Each

authority is subject to significant constraints. Several of these

constraints do not apply to national banks.

The authority to provide data processing and data transmission

services is found at Sec. 545.138(b). Under this provision, a federal

savings association may perform all processing functions on data

submitted by a purchaser. This authority, however, is subject to data

and customer restrictions. For example, the data to be processed must

be ``financial, economic, or related to thrift, home financing, or the

activities of depository institutions.'' 12 CFR 545.138(b)(1). In

addition, the thrift must provide services primarily for itself, other

depository institutions, parents or subsidiaries of depository

institutions, or customers of the thrift. Sales of such services to

others may not exceed half of the total data processing services

provided by the thrift. See 12 CFR 545.138(b)(2).

Incident to its data processing authority, a federal thrift may

also sell ``by-products'' of data processing--typically software. 12

CFR 545.138(c)(1). Again, this authority is subject to certain

restrictions. For example, the software must be originally developed

for the thrift's own use, and the by-products may not be substantially

enhanced for purposes of marketing.

Finally, the thrift may sell its excess capacity. In connection

with such sales, the thrift may only furnish access to facilities and

provide necessary operating personnel. The association may not

artificially create excess capacity by acquiring equipment or

facilities whose capacity is substantially greater than that necessary

to accommodate the thrift's present or expected future needs for

providing permissible data processing services. 12 CFR 545.138(c)(2).

By contrast, national banks have broader authority to sell

electronic services, products, and excess capacity. The recently

promulgated OCC interpretative ruling for national banks provides:

A national bank may perform, provide, or deliver through

electronic means and facilities any activity, function, product, or

service that it is otherwise authorized to perform, provide, or

deliver. A national bank may also, in order to optimize the use of

the bank's resources, market and sell to third parties electronic

capacities acquired or developed by the bank in good faith for

banking purposes.22

\22\ 61 FR 4865 (to be codified at 12 CFR 7.1019).

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With respect to the provision of data processing or electronic

services, a national bank has fewer customer restrictions.23 As

noted above, a federal thrift may only sell such services to other

depository institutions, parents or subsidiaries of depository

institutions, or its loan or deposit customers. The OCC interpretative

ruling also does not expressly restrict the types of data that may be

processed, although the limitation to services that a bank ``is

otherwise authorized to perform'' may have an effect that is similar to

OTS restrictions.

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\23\ The OCC also recently has opined that a national bank may,

as an action incidental to the business of banking, sell Internet

access to non-customers. See OCC Legal Op. (August 19, 1996).

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Software sales by national banks are permissible if the software is

``acquired or developed * * * in good faith for banking purposes.''

24 This is more expansive than the comparable authority for

federal savings associations in two respects. First, the national

bank's software must be developed ``in good faith for banking

purposes,'' rather than for the bank's own use. Second, nothing

prohibits a national bank from substantially enhancing its software for

marketing

[[Page 15633]]

purposes, provided the software retains its banking purpose.

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\24\ 61 FR 4865 (to be codified at 12 CFR 7.1019).

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National banks also appear to have broader authority to sell excess

capacity. Unlike thrifts, banks are not limited to providing only

access and operating personnel. In addition, the OCC interpretative

ruling does not prohibit a national bank from creating excess capacity

for the purpose of selling it.

Because the OCC's data processing interpretative ruling is

substantially more expansive than OTS's regulation, OTS seeks comment

on whether it should amend its data processing regulation to contain

similar provisions.

Other Issues

Stored-Value Cards

OTS also requests comment on the appropriate regulatory response to

stored-value cards. These devices provide for the storage and transfer

of money on credit-card-like devices featuring a magnetic strip or

embedded computer chip. The systems created to handle these cards, and

the legal obligations that attach to the issuers, users, and others may

vary in different situations. OTS regulations are silent on stored-

value technology.25

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\25\ OTS has concluded that, pursuant to the incidental powers

doctrine, an association may market and sell one type of stored-

value card. OTS Op. Chief Counsel (August 21, 1996) (prepaid

telephone cards).

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These cards currently are the subject of analysis at the other

banking agencies. The Federal Reserve Board is assessing the

application of Regulation E to stored-value cards.26 The Federal

Deposit Insurance Corporation has released a legal opinion addressing

whether the funds underlying a stored-value card are an insured

deposit,27 and has held a public hearing on other questions

concerning stored-value cards and electronic banking.28 The OCC

has recently issued guidance on the risks associated with stored-value

cards.29

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\26\ See 61 FR 19696 (May 2, 1996).

\27\ See FDIC Gen Counsel Op. No. 8, 61 FR 40490 (Aug. 2, 1996).

\28\ See 61 FR 40494 (Aug. 2, 1996).

\29\ See OCC Bulletin No. 96-48 (Sept. 10, 1996).

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Stored-value cards present a variety of issues. While OTS would

like to receive comment on all aspects of this technology, commenters

are requested to address the following questions: How extensively will

the industry use stored-value cards? Do certain kinds of stored-value

programs present greater safety and soundness concerns than others? Do

stored-value cards present special issues that OTS should consider in

examining the liabilities of a savings association? What kind of OTS

guidance, if any, is appropriate for the industry?

Community Reinvestment Act

The ``borderless'' nature of electronic banking will also affect

thrift responsibilities under the CRA, which encourages regulated

financial institutions to help meet the credit needs of the local

community in which they are chartered, consistent with safety and

soundness. Comments are requested on all aspects of this issue,

including the following questions. If a savings institution uses

electronic banking as its sole method of customer contact and solicits

deposits and loans throughout the United States, in what community is

it chartered to do business for CRA purposes? If an institution has

brick and mortar branches but also conducts a significant portion of

its business electronically with customers beyond the jurisdiction of

the branches, how should its community be defined? Should an

institution's community under CRA be defined by the location of its

customers, its offices, or both? How does an institution demonstrate

that it is serving the credit needs of a widely dispersed customer base

or when there is little or no geographic proximity between its deposit

customers and its loan customers?

Additional Issues for Comment

OTS does not wish to limit comment to the above-cited issues and

regulations. Rather, OTS welcomes all comments regarding any aspect of

electronic banking, including the following:

(1) What OTS regulations should be eliminated or modified because

they impede the use of safe and sound electronic technology?

(2) Should OTS impose any restrictions or requirements on banking

operations offered over the Internet? For example, should OTS mandate a

specific level of encryption, or should OTS rely on general safety and

soundness principles to govern a safe system of operation?

(3) Should OTS-regulated institutions be permitted to open customer

accounts over the Internet for individuals residing outside the United

States or transfer funds over the Internet for account-holders to bank

accounts outside the United States? What other restrictions should be

imposed?

(4) What new technologies are being developed for electronic

banking and how will these technologies impact the regulation of

savings institutions?

(5) Should OTS address consumer protection rules in addition to the

CRA in connection with a rulemaking on electronic banking?

IV. Request for Comments

OTS invites comment on all aspects of the proposal as well as

specific comments on the proposed changes. Additionally, OTS seeks

comments on all aspects of the ANPR.

V. Paperwork Reduction Act of 1995

The OTS invites comments on:

Whether the proposed collection of information contained in this

notice of proposed rulemaking is necessary for the proper performance

of the agency's functions, including whether the information has

practical utility;

The accuracy of the agency's estimate of the burden of the proposed

information collection;

Ways to enhance the quality, utility, and clarity of the

information to be collected; and

Ways to minimize the burden of the information collection including

the use of automated collection techniques or other forms of

information technology.

Respondents/recordkeepers are not required to respond to this

collection of information unless it displays a currently valid OMB

control number.

The reporting and recordkeeping requirements contained in this

notice of proposed rulemaking have been submitted to the Office of

Management and Budget for review in accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on all aspects of

this information collection should be sent to the Office of Management

and Budget, Paperwork Reduction Project (1550), Washington, D.C. 20503

with copies to the OTS, 1700 G Street, NW., Washington, D.C. 20552.

The recordkeeping requirements contained in this notice of proposed

rulemaking are found at 12 CFR 557.4. The reporting requirements are

found in the Federal Reserve Board's Regulation DD, 12 CFR Part 230. In

part 557, OTS relies on the disclosure requirements applicable to

savings associations under Regulation DD. The information is needed by

the OTS in order to supervise savings associations and develop

regulatory policy. The likely respondents/recordkeepers are OTS-

regulated savings associations.

Estimated number of respondents/recordkeepers: 1,343.

Estimated average annual burden hours per recordkeeper/respondent:

1484.

Estimated total annual reporting/recordkeeping burden: 1,993,459.6.

Start-up costs to respondents/recordkeepers: None.

Records are to be maintained for the period of time the account is

open, plus three years.

[[Page 15634]]

VI. Executive Order 12866

The Director of OTS has determined that this proposed rule does not

constitute a ``significant regulatory action'' for the purposes of

Executive Order 12866.

VII. Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS

certifies that this proposed rule will not have a significant impact on

a substantial number of small entities. The proposal does not impose

any additional burdens or requirements upon small entities and lowers

several paperwork and other burdens on all savings associations.

VIII. Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law

104-4 (Unfunded Mandates Act), requires that an agency prepare a

budgetary impact statement before promulgating a rule that includes a

federal mandate that may result in expenditure by state, local, and

tribal governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule. As discussed in the preamble,

this proposed rule reduces regulatory burden. OTS has determined that

the proposed rule will not result in expenditures by state, local, or

tribal governments or by the private sector of $100 million or more.

Accordingly, this rulemaking is not subject to section 202 of the

Unfunded Mandates Act.

List of Subjects

12 CFR Part 545

Accounting, Consumer protection, Credit, Electronic funds

transfers, Investments, Reporting and recordkeeping requirements,

Savings Associations.

12 CFR Parts 556 and 561

Savings associations.

12 CFR Part 557

Consumer protection, Reporting and recordkeeping requirements,

Savings associations.

12 CFR Part 563

Accounting, Advertising, Crime, Currency, Investments, Reporting

and recordkeeping requirements, Savings associations, Securities,

Surety bonds.

12 CFR 563g

Reporting and recordkeeping requirements, Savings associations,

Securities.

Accordingly, the Office of Thrift Supervision hereby proposes to

amend 12 CFR chapter V as follows:

PART 545--OPERATIONS

1. The authority citation for part 545 continues to read as

follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.

Secs. 545.10-545.14 [Removed]

2. Sections 545.10, 545.11, 545.12, 545.13, and 545.14 are removed.

PART 556--STATEMENTS OF POLICY

3. The authority for part 556 continues to read as follows:

Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1464, 1701j-3; 15 U.S.C.

1693-1693r.

Sec. 556.12 [Removed]

4. Section 556.12 is removed.

5. Part 557 is added to read as follows:

PART 557--DEPOSITS

Sec.

557.1 General.

557.2 Applicability of law.

557.3 Interest and earnings.

557.4 Account records.

Authority: 12 U.S.C. 1462a, 1463, 1464.

Sec. 557.1 General.

(a) Authority and Scope. This part is issued by OTS under its

general rulemaking and supervisory authority under the Home Owners'

Loan Act, 12 U.S.C. 1462 et seq.

(b) Deposit Powers. A federal savings association may raise funds

through accounts and may issue evidence of such accounts as authorized

by section 5(b)(1) of the HOLA (12 U.S.C. 1464(b)(1)), the terms of its

charter, and OTS regulations.

Sec. 557.2 Applicability of law.

(a) Occupation of Field. Pursuant to sections 4(a) and 5(a) of the

HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is authorized to promulgate

regulations that preempt state laws affecting the operations of federal

savings associations when deemed appropriate: to facilitate the safe

and sound operation of federal savings associations, to enable federal

savings associations to conduct their operations in accordance with the

best practices of thrift institutions in the United States, or to

further other purposes of the HOLA. To enhance safety and soundness and

to enable federal savings associations to conduct their operations in

accordance with best practices and without undue regulatory duplication

and burden, OTS hereby occupies the entire field of deposit-related

regulations for federal savings associations. OTS intends to give the

federal savings associations maximum flexibility to exercise their

deposit-related powers in accordance with a uniform federal scheme of

regulation. Accordingly, federal savings associations may exercise

their deposit-related powers as authorized under federal law, including

this part, without regard to state laws purporting to regulate or

otherwise effect their deposit activities, except to the extent

provided in paragraph (c) of this section. For purposes of this

section, ``state law'' includes any state statute, regulation, ruling,

order, or judicial decision.

(b) Illustrative Examples. The types of state laws preempted by

paragraph (a) of this section include, without limitation, state laws

purporting to impose requirements regarding:

(1) Abandoned and dormant accounts;

(2) Checking accounts;

(3) Disclosure requirements;

(4) Funds availability;

(5) Order of withdrawal from savings accounts;

(6) Service charges and fees, including dishonored checks; and

(7) Special purpose savings services.

(c) State laws that are not preempted. State laws of the following

types are not preempted to the extent that they only incidentally

affect the deposit-related activities of federal savings associations

or are otherwise consistent with the purposes of paragraph (a) of this

section:

(1) Contract and commercial law;

(2) Tort law;

(3) Criminal law; and

(4) Any other law that OTS, upon review, finds:

(i) Furthers a vital state interest; and

(ii) Either has only an incidental effect on deposit-related

activities or is not otherwise contrary to the purposes expressed in

paragraph (a) of this section.

Sec. 557.3 Interest and earnings.

A federal savings association may pay interest on a savings

account, whether in the form of a deposit or share, at a rate or

anticipated rate of return determined at the time that the account is

accepted, as provided in its charter and bylaws and the terms of the

account. The rate or anticipated rate on a savings account either may

be fixed or may vary according to a schedule, index, or formula

specified at the time that an account is accepted.

[[Page 15635]]

Sec. 557.4 Account records.

(a) Each savings association should establish and maintain deposit

documentation practices and records that demonstrate appropriate

administration and monitoring of deposit-related activities. The

savings association's records should include adequate evidence of

ownership, balances, and all transactions involving the account.

(b) A federal savings association may treat the holder of record of

an account as the owner, regardless of any notice to the contrary,

until the account is transferred on the association's records.

PART 561--DEFINITIONS

6. The authority citation for part 561 continues to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a.

Sec. 561.42 [Amended]

7. Section 561.42 is amended by removing the phrase ``Secs. 563.6

and 561.16.''

PART 563--OPERATIONS

8. The authority citation for part 563 continues to read as

follows:

Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,

1817, 1828, 3806.

Secs. 563.2-563.3, 563.6-563.10 [Removed]

9. Sections 563.2, 563.3, 563.6, 563.7, 563.9, and 563.10 are

removed.

Sec. 563g.1 [Amended]

10. Section 563g.1 is amended by removing the last sentence of

paragraph (a)(13).

Dated: March 24, 1997.

By the Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 97-8124 Filed 4-1-97; 8:45 am]

BILLING CODE 6720-01-P