ABA/BPI/CBA response to FDIC proposal to amend 12 CFR §370

Dear Mr. Feldman:

The American Bankers Association, The Bank Policy Institute, and the Consumer BankersAssociation (collectively, the Associations) are pleased to submit this response to the Notice ofProposed Rulemaking (Proposal) from the Federal Deposit Insurance Corporation (FDIC) to revise12 CFR §370, “recordkeeping for timely deposit insurance determination” (Part 370). We supportthe intent of the Proposal ‒ to clarify its requirements, better align the burdens of the rule with itsbenefits, and make technical corrections ‒ consistent with the purpose of Part 370 ‒ to allow theFDIC to resolve expeditiously a failing institution with a large number of deposit accounts.

After consulting with representatives from all of the institutions currently subject to Part 370(covered institutions or CIs), the Associations support most of the proposed amendments. However, some changes and additions to these amendments would better align Part 370 with thestated aim of the Proposal: to reduce the compliance burden on CIs, in recognition that adherenceto the rule will continue to impose immense expense and burden on CIs. We recommend that amendments to Part 370 should ‒

• retain the current language in §370.4(b)(2)(iii) so that CIs are required to maintain only the“pending reason” code for certain trust deposit accounts;
• eliminate the requirement to maintain unique identifiers for grantors of trusts under§370.4(b)(2)(ii);
• exempt clearing deposit accounts from Part 370 treatment;
• authorize for omnibus settlement deposit accounts and American Depository Receipts(ADRs) the same treatment as for “official items” under §370.4(c);
• not require under §370.4(d)(1) or elsewhere in Part 370 information technology (IT) systemcapability to restrict access to credit balances on loans or on equivalent deposit balances forthe corresponding loan customers;
• set a cutoff threshold under proposed §370.4(d)(2)(i) below which credit balances on open-end loans would not be required in the credit balance files;
• allow the same treatment under §370.5(b)(1) for all mortgage servicing deposit accounts,regardless of whether they are maintained at a CI by the CI itself or by an external servicer;
• confirm that “transactional features” does not apply to deposit accounts maintained with aCI by a broker-dealer for its customers under a program that permits them to transfer fundsin connection with their securities accounts, as long as such transfers are not permitteddirectly from the deposit accounts and debits in the securities accounts resulting from suchtransfers may be satisfied by transfers from their deposit accounts at the CI to separatedeposit accounts of the broker-dealer at the CI or elsewhere;
• provide for “qualified certification” under §370.10(a)(1) where areas of noncompliancehave been identified and recognized by the FDIC;
• permit under §370.10(d) at least 18 months to return to compliance with Part 370 afterenactment of a law that leaves CIs non-compliant, and under §370.10(e) at least two yearsto return to compliance after an acquisition or merger; and
• make the government ID field in the Output files optional to include when available (e.g.,for CS Gov ID in the Customer File and Output Files Structure in Appendix B).

Additionally, the Associations urge the FDIC to consider the optional, focused approach tocompliance with Part 370 that is outlined at the end of this letter

These recommendations and analysis of the Proposal follow.

1. Voluntary Compliance with 12 CFR §370

As proposed, under new §370.2(d)(3), a non-CI bank would be authorized to comply voluntarilywith Part 370, and thereafter not be subject to §360.9, after it submits the reports provided forunder §370.10(a).

The Associations note that a bank might voluntarily submit to compliance with Part 370 if anaffiliated bank is subject to the rule and the holding company finds it efficient to comply across theorganization. Otherwise, a bank might elect to comply so that it can have and make available todeposit customers precise values for insured balances that are calculated through a processconfirmed by FDIC review. We therefore support this modification to Part 370.

2. Alternative Recordkeeping Requirements for Certain Trust Accounts

Under the Proposal, the FDIC would eliminate §370.4(a)(1)(iv) and thereby permit “alternativerecordkeeping” for irrevocable trust deposit accounts for which a CI acts as trustee and are insuredpursuant to 12 CFR §330.12 (DIT accounts). In other words, the bank would not need to provide aunique identifier for beneficiaries entitled to deposit insurance, nor for the grantor if the accountdoes not have transactional features. In addition, §370.4(b)(2)(iii) would be amended to require CIsto maintain for certain trust deposits records corresponding “right and capacity” codes, eliminatingthe requirement to record “pending reason” codes.

The Associations support the amendment to permit “alternative recordkeeping” for DIT accounts.We understand that most banks maintain significant information on trusts for which they act astrustee, including information on grantors and beneficiaries. However, this information, especiallyfor beneficiaries, may not be complete at all times due to changes in beneficiary status that mayaffect deposit insurance coverage. Ultimately, the decision about the insurance status of a particulartrust will likely be determined with individualized review of the beneficiaries and other facts andcircumstances, a process that the “alternative recordkeeping” provision facilitates.

With respect to the proposed changes in §370.4(b)(2)(iii), we respectfully request that the currentlanguage be retained so that a CI would need to maintain only “pending reason” codes for certaintrust deposit accounts. Provisions in the trust agreement may alter the “right and capacity” of a trustwithout the bank’s knowledge, especially when it is not trustee. For example, the bank may not beinformed that a revocable trust has turned irrevocable. However, the bank will know the reasonwhy it does not have current information on all beneficiaries, and therefore would be able to recordthe “pending reason” code.

The Proposal seeks comment on the practice and ability of CIs to obtain grantor information ontrusts for which the bank is not trustee. Although the grantor’s name may have been recorded in thetrust certification or other documentation when the account was opened, a unique identifier, such as a Social Security number, may not have been required or obtained. Further, whatever identifyinginformation for the grantor was obtained is likely recorded on a records system other than that fordeposits, such as a paper file.

The Associations recognize that deposit insurance calculations for trust deposit accounts cannot becompleted without both grantor and beneficiary information. However, banks do not need to storethis information, as it is obtained during resolution of a bank along with the beneficiary informationrequired for deposit insurance calculations.

Moreover, because CIs are not required to maintain beneficiary information under “alternativerecordkeeping,” the recording of grantor information alone is of no benefit. Requiring CIs to obtainand input grantor information that they do not and are not otherwise required to maintain wouldessentially duplicate much of the post-closing process of contacting trustees to identifybeneficiaries, yet still would not allow CIs to achieve the Part 370 goal of being able to completedeposit insurance calculations.

For these reasons, the Associations request elimination of the requirement to maintain uniqueidentifiers for grantors of trusts under §370.4(b)(2)(ii).

3. Recommended Treatments under 12 CFR §370 for Settlement Deposit Accounts

Current §370.4(c) on “recordkeeping requirements for official items” requires that ‒

"A covered institution must maintain in its deposit account records the information needed for itsinformation technology system to meet the requirements set forth in §370.3 with respect toaccounts held in the name of the covered institution from which withdrawals are made to honora payment instrument issued by the covered institution, such as a certified check, loandisbursement check, interest check, traveler's check, expense check, official check, cashier'scheck, money order, or any similar payment instrument that the FDIC identifies in guidanceissued to covered institutions in connection with this part. To the extent that the coveredinstitution does not have such information, it need only maintain in its deposit account recordsfor those accounts the corresponding “pending reason” code in data field 2 of the pending fileformat set forth in Appendix B (and need not maintain “right and capacity” codes). (Emphasisadded)"

The Associations urge that settlement deposit accounts be afforded the same treatment as “officialitems” under §370.4(c). A settlement account operates in a fashion similar to that of the paper-based payment instruments cited in §370.4(c), where funds are withdrawn from a customer’saccount then held in an internal account “in process” and co-mingled with other-like funds until thebank can send them to a receiving bank. For example, when a customer initiates an inter-bankperson-to-person transaction through online banking, the funds are debited from the customer’sledger balance and placed in a settlement account. For risk reasons, some banks place outgoingfunds in a settlement account for more than a day before remitting them to a receiving bank. Shouldthe bank fail, clawing back allotments from these omnibus accounts would take time and requiremanual intervention, posing the same difficulties in resolution as for “official items.”

Another example of settlement deposit accounts that warrant §370.4(c) treatment akin to “officialitems” is omnibus accounts held by CIs in connection with their business as ADR depositories. AnADR is a negotiable certificate issued by a U.S. bank and traded on a U.S. exchange that representsa specified number of shares in the stock of a foreign issuer. An ADR depositary bank (DR Bank),among other things, distributes ADR dividends and other cash to purchasers of ADRs using aprocess involving intermediaries. The DR Bank receives payment of cash distributions on theforeign shares underlying the ADRs from the foreign share issuer (the DR Bank’s client), convertsthat cash to U.S. dollars, and begins the process of distributing the payments to ADR holders. U.S.dollars are deposited in a deposit account at the DR Bank (the Deposit Account) for a short periodof time, typically three-to-five business days, before the DR Bank begins distributing this cash. Onthe ADR payment date, the DR Bank distributes U.S. dollars to ADR holders of record as reflectedon an ADR share register.

Most ADR investors hold their ADRs through brokers, custodians, or other intermediaries. These“street” positions are reflected in aggregate on the ADR share register as an omnibus position ofCEDE and Co, the nominee name of the Depository Trust Company (DTC). The DR Bank does notknow each DTC participant. Although DR Banks could obtain a list of direct DTC participantsfrom DTC (at cost), those DTC participants are brokers, custodians, banks, and intermediaries only,and are not the ultimate beneficial owners of the ADR dividends, and those DTC participants andintermediaries may be unable or unwilling to disclose their clients (who in some cases are theultimate beneficial owners of the ADR dividends) to the DR Bank. Therefore, identifying theultimate beneficial owner due the dollars temporarily held in a deposit account at the DR Bank isnot feasible. This presents a situation similar to that of accounts held at a bank to honor “officialitems” or settlement accounts, and we believe that the approach outlined in §370.4(c) is similarlyappropriate for ADR accounts.

The account types described above are examples of settlement deposit accounts for which, to theextent the CIs does not have the information needed to meet the requirements of §370.3, it shouldbe permitted to maintain in its deposit account records for those accounts only the corresponding“pending reason” code data field 2 of the pending file format. Similar “official items” treatmentshould be authorized for other types of settlement accounts that serve a range of payment andremittance functions at the CIs.

4. Recommended Treatments under 12 CFR §370 for Clearing Balances

A clearing account at a bank involves funds held in an internal account on the general ledgersystem or system of record that represent transactions and balances that require reconciliation ormanual review before they can be allocated to accounts. In other words, these funds are in clearingaccounts because errors have occurred or they are otherwise in-process such that the propercustomers and account assignments have not yet been confirmed.

The Associations recommended that these accounts be excluded from Part 370 processing; theyshould instead be treated as “in-process” transactions and allowed to post and settle business asusual, mirroring treatment for other in-process transactions initiated prior to close-of-business and awaiting settlement when a bank is placed in resolution. Deposit insurance calculations cannot beperformed for balances that have not yet been assigned to customers. CI bankers advise thatcascading complications could occur if clearing balances were treated as any other deposit accountso that holds were placed following collapse of the bank; this would forestall reconciliation ofaccounts and delay distribution of funds to insured depositors.

5. Recordkeeping Requirements for Deposits from Loan Credit Balances

As proposed, a new paragraph §370.4(d) would address deposits that consist of credit balances onloans. New §370.4(d)(1) would require that a CI’s IT system be capable of restricting, as of theclose-of-business on any day, access to either loan credit balances or else an equal amount in thedeposit balance for every deposit customer that also has a loan credit balance. New §370.4(d)(2)(i)would require that a CI’s IT system be able to generate a file for loan credit balances in the formatof Appendix C. For credit balances on open-end loans (revolving credit lines), the file would haveto be producible within 24 hours of the CI being taken into resolution.

Treating credit balances on loan accounts as deposits to integrate into Part 370 processing hastroubled CIs from the outset. They do not see the proposed §370.4(d), taken as a whole, as apositive solution. However, the Associations recognize the desirability of incorporating the fileproduction aspect of the Proposal into the rule, as described below.

The key point remains that loan credit balances are almost always far smaller than the SMDIA and,depending on the institution, loan customers do not overlap significantly with deposit customers.Where either or both of these conditions are present, which is the case at almost all CIs, loan creditbalances are likely to have a minimal impact on deposit insurance calculations. By contrast,developing capabilities to be able to include these amounts in the deposit insurance calculationswould be an involved and expensive undertaking.

“Option A,” where CIs would develop systems capable of restricting access to loan credit balances,seems like overkill for so minor an impact on deposit insurance determinations. Asking CIs toconfigure multiple deposit systems for insignificant balances would mean significant cost andcomplexity. Moreover, restricting access to loan overpayments for all credit customers wouldfrustrate many whose deposits, if any, plus credit balances are below the SMDIA. Particularlytroubling with respect to credit card accounts, the intricate systems banking firms have developedto protect customers do not distinguish between debit and credit balances. It is not clear how theseprocesses could be adjusted to make such distinctions and place holds on credit balances. It is notas if the bank could simply take a snapshot of credit card accounts to identify credit balances as ofclose-of-business when the issuing bank fails; a cardholder may have incurred transactions earlierin the day that will enter the system for processing later. Therefore, to employ “Option A,” a CImay have to freeze all credit card accounts for which there are credit balances. This would causemajor problems for a significant number of consumers who rely on credit card transactions fordaily purchases, frustrating the FDIC’s goal of smooth transition for depositors.

Moreover, CIs face major challenges to link loan credit balances to customers’ deposit accountsbecause certain information, such as ownership rights and capacities, is not gathered systemicallyfor loan products and in most cases does not align with information for deposit products. Further,integrating deposit systems with loan systems across multiple lines of business would be verydifficult. For these reasons, CIs would not be interested in “Option B” to develop systems capableof computing, then restricting, deposit balances associated with loan credit balances.

As to the proposed requirement under §370.4(d)(2)(i) for capacity to produce an Appendix-C-compatible file on open-end loan credit balances within 24 hours of the CI being placed intoresolution, representatives from the CIs report that such files could be produced, but with muchdifficulty due to differences in data inconsistencies and capture between loan and deposit systems.The Associations recommend that any requirement to match customer information between depositand loan systems apply only for large credit balances, for which the pairing could be performedmanually.

In sum, to support accurate deposit insurance determinations and also limit the operational cost ofintegrating loan credit balances into Part 370 processing, consistent with the Proposal’s overallpurpose, the Associations suggest adjustments to §370.4(d) as proposed:

• For credit balances on open- or closed-end loans, IT systems should not be required to becapable of imposing restrictions on loan credit balances or on equivalent deposit balancesfor the loan customers as under proposed §370.4(d)(1).
• For loan accounts with credit balances for which there are associated deposit accounts, a CIcan provide a list of combined balances for each ORC. For those that exceed the SMDIA,the FDIC would be able to adjust insured-versus-uninsured balances to make sure that onlytruly insured amounts are paid out.
• A cutoff size should be established under proposed §370.4(d)(2)(i) below which creditbalances on open-end loans would not be required in the credit balance files.

6. Deposit Accounts with Pass-Through Insurance Converge and Transactional Features

For a deposit account for which records of the relationship and interests of the beneficial ownersare not maintained by the CI, and the account has “transactional features,” the Proposal wouldamend §370.5(a) to require the CI to “take steps reasonably calculated to ensure that the accountholder will provide to the FDIC the information needed for the CI’s information technology systemto calculate deposit insurance coverage … within 24 hours after the appointment of the FDIC as receiver.” At a minimum, “steps reasonably calculated” would have to include -

• contractual arrangements that obligate the account holder to deliver all the informationneeded for deposit insurance determination to the FDIC in a format compatible with theCI’s IT system immediately upon the CI being taken into resolution; and
• disclosure to the account holder that delay in delivery of information to the FDIC, orsubmission in a format incompatible with the CI’s IT system, could result in delayed accessto deposits.

The current §370.5(c) provides that a “CI’s failure to provide the certification required … shall bedeemed not to constitute a violation … if the FDIC has granted the CI relief …” This would bedeleted as no longer necessary.

CIs appreciate the proposed changes that apply to pass-through accounts for which a CI does notmaintain the information needed for deposit insurance calculations. The proposed changes, whichwould eliminate the current requirement for CIs to certify to what their accountholders will do,would streamline the process for CIs to build compliant solutions without sacrificing Part 370’soverall objectives.

Rather than directing CIs to attest to what pass-through accountholders will do, the proposedamendment takes a pragmatic approach to require instead that a CI take reasonable steps to ensurethat holders of pass-through accounts with transactional features will provide the information tocomplete the deposit insurance calculation when needed. It specifies that contract language withsuch accountholders must require them to deliver that information in timely fashion and disclosurethat any interruption in doing so could delay access to account funds.

These enumerated requirements are sufficient to achieve the FDIC's overall objectives. Depositagreements will be amended to expressly inform pass-through accountholders of the informationthey need to maintain, and the format in which they need to maintain it, for timely resolution oftheir accounts. Most pass-through accountholders will likely update their systems to comply withthese requirements, to avoid any delay in accessing the account balances due to non-compliance.

As a practical matter, the proposed changes to §370.5 recognize the reality of pass-throughaccounts. Simply put, up-to-the-minute balance information for beneficial owners of these accountsis not available to CIs, so accountholders must bear some responsibility for their resolution. Asstated in the proposed amendment, a CI can take steps that are reasonably calculated to ensureparticipation by pass-through accountholders, but beyond that the accountholders themselves mustbe part of the solution.

There has been discussion of distinguishing pass-through accounts with transactional features fromother types of pass-through accounts. One of the benefits of the proposed amendment is that a CI can streamline compliance, if it chooses to do so, by treating all pass-through account holders thesame. That is, a CI can leverage the required contract language with all of its pass-through accountholders and make the required disclosure to all pass-through account holders. Some CIs may electthis course to simplify implementation of Part 370 and because holders of accounts withouttransactional features may appreciate the opportunity to opt into a regimen that may expediteresolution of their accounts should the bank fail.

For the foregoing reasons, the CIs and Associations support the proposed amendments to §370.5.Moreover, we wish to express our appreciation for the FDIC managers who have been workingcollaboratively with bankers to support drafting of model language to satisfy the contract anddisclosure requirements.

7. Expanded Exemption for Deposit Accounts from External Mortgage Servicers

For deposit accounts comprised of payments by mortgagors of principal, interest, taxes, andinsurance for which information on the mortgagors is maintained by mortgage servicers (in acustodial or other fiduciary capacity) that are external to the CI, and the accounts have transactionalfeatures, a CI is currently exempted under 370.5(b)(1) from the 370.5(a) requirement to assure thatthe mortgage servicers would provide information to the FDIC on the mortgagors within 24 hoursof the bank being placed in receivership. The Proposal would expand the exemption to all of themortgagors’ payments, not only those for principal, interest, taxes, and insurance.

The Associations support the expanded exemption for deposit accounts from external mortgageservicers. The mortgage servicing systems employed by most CIs do not have the capability toidentify depositor account-level information on the principal, interest, taxes, insurance, or relatedbalances in those accounts, except at predetermined reporting dates. Therefore, for those accounts,relief is needed from the steps required in §370.5(a).

However, the Associations recommend that the exemption be broadened to also apply to mortgageservicing accounts maintained by CIs. Under the revised 370.5(b)(1), a CI would be permitted totreat a deposit account maintained by a mortgage servicer outside the bank using the “alternativerecordkeeping” methodology per §370.4 without taking further steps for these accounts per theproposed §370.5(b). In contrast, in situations in which the CI is the mortgage servicer, it would berequired to have processes in place to calculate deposit insurance associated with the accountwithin 24 hours of being placed in resolution. We see no reason to treat mortgage servicingaccounts differently depending on the servicer. Moreover, the costs that CIs must bear to maintainmortgage servicing accounts to comply with §370.4(a) could drive business away from CIs asservicers. We believe that this is not the FDIC’s intent. Accordingly, we recommend that allmortgage servicing deposit accounts receive the same treatment under §370.5(b)(1), regardless ofwhether the account is maintained by a CI or an external mortgage servicer.

8. Exceptions for Certain Custodial Deposit Accounts

The Proposal would add additional types of fiduciary accounts to be exempt under §370.5(b)(4)from 370.5(a) (which requires CIs to assure that the account custodians would provide informationto the FDIC on the beneficiaries within 24 hours of the bank being placed in receivership). Theadded deposits account types would include trust accounts maintained for ‒

• formal revocable trusts per 12 CFR §330.10,
• irrevocable trusts per 12 CFR §330.12, and
• irrevocable trusts per 12 CFR §330.13.

Exemption of the three types of trust accounts from processing during the first 24 hours ofresolution of a CI is a positive move. Although such an account may have transactions features, aCI may not be able to identify the beneficiary in advance because of various state laws governingtrusts. Should the CI be taken into resolution, trying to process these accounts in the succeeding 24hours would be difficult-to-impossible, given the number of agents and custodians that would beinvolved in the submission of information.

Delayed access of funds for these accounts with transactional features may impact thebeneficiaries. However, the information needed by the FDIC to free up the funds would bestraightforward and could be communicated quickly through the agent or custodian. For example,the information could be provided in an Excel spreadsheet that could easily be converted to aformat needed to process the beneficiaries through deposit insurance calculation.

9. Elective Extension of the Compliance Date

Proposed new section §370.6(b)(2) would permit a CI that is currently subject to the rule to extendimplementation to April 1, 2021, by notifying the FDIC. The notification would need to disclosethe number of, and amount of deposits in, accounts for which the bank’s IT system will be unableto calculate FDIC insurance coverage as of April 1, 2020.

The CIs have expressed broad support for this modification. The Associations recommend that theoption to extend implementation by a year should be available to all CIs. Ever since Part 370 wentinto effect two years ago, the CIs have worked diligently to fill gaps in deposit account data andupgrade IT systems to comply. Nonetheless, a number of interpretive issues and systems challengeshave arisen despite the best efforts of the CIs.

When Part 370 was originally proposed, the Associations observed that the IT systemenhancements required for compliance would involve major development projects at a time whenkey resources in the CIs were (and continue to be) under pressure to enhance data security systems and make other changes to comply with a range of other new rules. We therefore requested at leastfour years to implement the rule and were disappointed when it provided only three years.

Moreover, in developing processes to apply Part 370 and related expectations in subsequentlyissued guidance, the CIs have encountered many issues for which they requested clarifications andinterpretations from the FDIC. We appreciate the diligence of FDIC staff in working with thebankers. However, this process has taken time, as that staff have been learning about thecompliance challenges along with the CIs, and have been careful to present suitable answers.Nonetheless, CIs’ progress in implementing the rule has been affected by these delays.

Further, the CIs gratefully appreciate the amendments proposed for Part 370, as well as those for12 CFR §330. These refinements address some of the insurmountable challenges that have been thesource of spirited discussion among the CIs and the FDIC ever since the rule became final. Thesignificant amount of time it has taken to resolve these challenges, which the two proposals nowaim to do, has significantly hindered progress in implementing the rule.

Even where challenges have been resolved, it may not be reasonably feasible for CIs to modifysystems and operations to the point that their senior executives are comfortable certifying tocompliance by April 1, 2020. Elective extension of the compliance date would give them time tobring systems and operations into compliance, eliminating the need for multiple requests forexceptions. Consequently, all CIs would value an option to extend the compliance deadline to April1, 2021.

10. Amendments to the Definition of “Transactional Features”

The Proposal would amend §370.7 to provide that a deposit account has “transactional features”if ‒

• it “can be used to make transfers to parties other than the account holder, the beneficialowner of the deposits, or the CI itself, by use of a method that results in the transfer notbeing reflected in the close-of-business ledger balance for the account on the day thetransfer is initiated,” or
• “preauthorized or automatic transfer instructions provide for transfers to an account withtransactional features at the same institution.”

The Associations appreciate the difficulty in defining “transactional features” precisely. CIs are inthe best position to determine the scope and nature of various arrangements for which depositaccounts are treated under “alternative recordkeeping,” and the resulting impact on their beneficialowners. We therefore believe that the revised definition better supports the FDIC’s ability todetermine deposit insurance coverage promptly. This definition, along with the proposed changesin §370.5, would enable CIs and the FDIC to make timely and accurate insurance determinations.

The Proposal notes that the current definition of “transactional features” has fewer benefits andgreater compliance burdens than expected, given the structure of various deposit broker andprepaid card programs. The Associations request that the FDIC confirm in writing that broker-dealer sweep arrangements are intended to be excluded, because they only involve transfersbetween accounts held in the name of the broker. Specifically, we request that the FDIC confirmthat the term “transactional features” does not apply to deposit accounts maintained with a CI by abroker-dealer for the benefit of its customers as part of a program it offers whereby these customersmay have transfer capabilities (such as check writing, debit card, etc.) in connection with theirsecurities accounts, as long as ‒

• such transfers are not permitted directly from the deposit accounts with the CI; and
• debits in the customers’ securities accounts created by their use of these transfers may besatisfied by transfers from their deposit accounts at the CI, as instructed by the brokerdealer, to separate deposit accounts maintained by the broker-dealer at the CI or elsewherefor purposes of satisfying such debits.

11. Simplification of Applications for Exceptions from Part 370 Deposit Account Processing

The Proposal would amend §370.8(b) to clarify the required elements of a request for an exceptionfrom treatment under Part 370 for a certain type of account, and expressly allow submission of asingle request on behalf of multiple CIs. Under a new §370.8(b)(2), the FDIC would publish inthe Federal Register responses to exception requests, keeping private the identity of requestors andother information confidential to their institutions. A new §370.8(b)(3) would permit a CI to use apublished exception immediately after notifying the FDIC that “substantially similar facts and thesame circumstances” apply; the FDIC would have up to 120 days to deny that usage.

The Associations enthusiastically support these changes, which would clearly help CIs submitapplications for exceptions and reduce the number of submissions needed. Perhaps more important,these provisions would help FDIC staff process applications expeditiously. All in all, these willhelp the FDIC and CIs address the inevitable special cases that arise in implementing such aninvolved and detailed program.

Representatives from the CIs report that they believe they will be able to interpret cases for whichaccount types in their banks involve “substantially similar facts and the same circumstances” asthose for which the FDIC provides public notice of granting exceptions. However, they feel that120 days is too long a span for the FDIC to invalidate such an interpretation. They would beconcerned with the cost and delay of progressing with Part 370 implementation for four monthsonly then to have to backtrack to treat accounts understood to be excused. The Associationsrecommend that the FDIC should limit any delay in providing notice of denials to 60 days.

12. Senior Executive Certification to the Institution’s Compliance with 12 CFR §370

The Proposal would amend §370.10(a)(1) to require a CI’s chief executive officer or chiefoperating officer to certify that “testing indicates that the institution is in compliance” with Part 370(not just “has successfully tested,” as in the standing rule). That testing must be completed“during the preceding twelve months” of the initial compliance date (rather than “during thepreceding calendar year” in the standing rule). In a refinement, the certifying executive would berequired to certify that he or she has taken reasonable steps to ensure and verify that thecertification is accurate and complete “to the best of his or her knowledge and belief after dueinquiry.”

As a general matter, the Associations continue to disagree with a requirement for a senior executiveto certify to an institution’s compliance with Part 370. Such certification is unnecessary to ensurethat the institution will make compliance a priority. Compliance with laws and regulations – Part370 and all others – is a priority for every banking organization, and senior executives are heldresponsible to ensure that compliance. Moreover, the standard bank supervision and examinationprocess serves as an effective, efficient, and simpler way to ensure CI compliance with this rule.Layering an additional chief executive or operating officer certification requirement on top of theexisting, already-sufficient regulatory and supervisory framework has no incremental value, thoughit does involve cost and complexity. Thus, our first recommendation is that the certificationrequirement be eliminated in its entirety in favor of the FDIC’s existing supervisory review regime.

In the event the FDIC retains the certification requirement, the Associations support the“knowledge and belief” qualifier that would be amended by the Proposal. However, werecommend that the certification should take account of situations in which all capabilities may notbe implemented fully or in which there may be areas of noncompliance or requiring improvement.The CIs have been assured repeatedly by FDIC managers that, when a CI is making a good faitheffort to implement Part 370, they will be patient with elements of that implementation that havebeen identified and accepted by them as under construction. There is recognized risk that certifyingexecutives could expose themselves to liability if they attest that “testing indicates that theinstitution is in compliance” when there are acknowledged deficiencies. The Associations thereforerecommend that §370.10(a)(1) be further amended to provide for a qualified certification thatidentifies areas of noncompliance that require improvement.

13. Time Allowance Following a Change in Law, Acquisition or Merger to Return toCompliance with 12 CFR §370

As amended, new §370.10(d) would provide a grace period for CIs to come into compliance withPart 370 after any change in law that makes them non-compliant. New §370.10(e) would provideup to a year for a CI to return to compliance with Part 370 following an acquisition or merger.

Representatives from the CIs indicate that they would need at least 18 months to update datarecords and make system changes to return to compliance, should any legislation leave them non-compliant. The predecessor rule 12 CFR 360.9 provides for at least 18 months to re-achievecompliance following legislative change, so the more involved Part 370 rule warrants at least aslong an adjustment period.

Based on their experience with mergers and acquisitions, including deposit assumptiontransactions, CIs recommend that one year is not enough time to return to compliances with Part370. The first year after a consolidation, the surviving institution is focused on assuring its success.Simply merging systems of record takes a year or more. Only after that would there be time todevote to updating processes to incorporate the additional systems and data to comply with Part370. This is especially true when the acquired bank or merger partner was not previously a CI.Accordingly, the Associations ask that CIs be allowed two years following completion of the dealto regain compliance with the rule.

We note that an inadequate regulatory adjustment period, threatening supervisory retaliation fornoncompliance, would become an artificial barrier to beneficial consolidation transactions. Further,this would discourage CIs from acquiring troubled banks, raising the cost and time needed for theFDIC to resolve troubled institutions.

14. Potentially Problematic Fields in the Data File Templates

The Associations agree with the technical amendments and corrections listed in the Proposal.

In response to the request in the Proposal to identify “fields for which a null value is notpermissible, but for which a CI does not maintain the relevant data,” some CIs have reported thatthe following required fields per file as potentially problematic.

• CS Gov ID in the Customer File: The text of 12 CFR §330 and current Part 370 do notrequire CIs to maintain government ID numbers in their deposit record-keeping systems.Part 370 requires a “unique identifier” that “may be, but is not required to be, a government-issued identification number.” A backdoor requirement to maintaingovernment ID numbers through the Part 370 output files defeats the point of adopting the“unique identifier” concept. As a practical matter, CIs likely do not have government IDnumbers in their deposit systems for every single deposit account. Some customer recordsmay date back decades or have been acquired by acquisition, in which case records may bemissing government ID numbers. Further, while under “Know Your Customer” and BankSecrecy Act Anti-Money Laundering requirements, CIs are expected to have a governmentID number for almost all customers somewhere within the institution, this data may be heldin paper or scanned documents or otherwise away from the deposit systems and cannot belinked to deposit systems without extensive manual review.
• DP Hold Amount in the Account File: The utility of this item is unclear; any accountbalance in the Account file is by definition complete so any hold amount should be nil. Onthe other hand, reporting this item involves unnecessary complexity for non-deposit systemsthat do not normally place holds.
• AP Gov ID in the Participant File: CIs may not have government ID numbers for allaccount participants. For example, when a customer opens a trust account, some do notrequest TIN’s for beneficiaries that are not customers, and state law may not allow a bankto request such information
• CS Unique ID in the Pending File: How is CS Unique ID different from the PT ParentCompany ID for a record in the pending file? The PT Parent Company ID is, “This fieldcontains the unique identifier of the parent customer ID who has the fiduciary responsibilityat the CI”. How do we use both these fields in the same record? For records in the pendingfile, only the parent company (fiduciary) would be known, and they are the account holder.Therefore, would not the CS Unique ID field be blank for pass-through accounts in thepending file?
• DP Hold Amount in the Pending File: The utility of this item is unclear; any accountbalance in the pending file should by definition have a hold amount for the balance shownin the DP Current Balance Field. However, reporting this item involves unnecessarycomplexity for non-deposit systems that do not normally place holds.
• Output Files Structure in Appendix B: A reference states that “[t]he unique identifier andgovernment identification are required in all four tables so those tables can be linked wherenecessary.” However, current file requirements require Gov ID in only three files;Account file does not have a Gov ID field. Moreover, other references suggest that it is theUnique Identifier that is required in all four files for linking. As stated above, current Part370 does not require CIs to maintain government ID numbers, and the preamble to the final rule confirms that CIs need not use government ID numbers as unique identifiers. TheAssociations request that this reference be corrected to remove any implication of anindependent requirement to maintain government ID numbers.

15. A Proposal to Allow an Option to Employ Focused Part 370 Processing

As currently written, Part 370 does not promote a focused approach for situations in which CIsshould devote the most effort and investment to those deposit accounts for which the rule createsthe biggest challenges. Instead, it mandates treatment of all accounts. Consequently, CIs have beenobliged to create priorities and allocate expenses across the entire enterprise, even to small accountswith balances that never approach the SMDIA. This does not comport with the stated intent of theproposed amendments, to limit the compliance burden of Part 370.

The Associations propose instead an amendment to Part 370 to permit an optional focusedapproach to compliance, which a CI could elect to employ by notifying the FDIC. In this approach,the FDIC would name a dollar threshold that is below the SMDIA, then all customers whose totalrelationship of deposit balances (TRDB) falls below that level would be excluded from Part 370treatment. The customer’s TRDB would include all deposits, as defined in 12 CFR §1813(l), thatare owned by that customer. The CIs would be required to track customer TRDBs quarterly, andany whose TRDB exceeds the threshold as of the initial compliance date would be subject to fullPart 370 treatment. Subsequently, the CI would be allowed three months to bring into complianceany customer account for which the TRDB rises above the threshold, and simultaneously wouldneed the ability to hold any and all balances if the CI failed.

This approach would recognize that the deposit accounts of customers with TRDBs below thethreshold are completely insured, no matter the ORC categories. Accordingly, the proposedapproach would allow electing CIs to forego all of the processing for these accounts. They couldthen focus on customers whose TRBDs may or do exceed the SMDIA. Moreover, this alternativecould incentivize banks that are not CIs to comply voluntarily with Part 370. FDIC examinationswould also benefit, in directing attention to the deposit accounts that actually matter to depositinsurance calculations.

The Associations understand that FDIC managers have accepted an approach adopted by some CIsto implementing Part 370 whereby total customer relationships above the SMDIA are addressedprior to the implementation date, then low-balance relationships are addressed through servicecontacts, and other accounts below the SMDIA may be remediated past the compliance date. Werespectfully submit that the FDIC should codify such an approach in Part 370.

Thank you for considering our suggestions. If there are any questions, please do not hesitate tocontact the undersigned.

Very truly yours,

Robert W. Strand
Senior Economist
American Bankers Association
[email protected]

John Court
Senior Vice President and Deputy General Counsel
Bank Policy Institute
[email protected]

Phoebe Papageorgiou
Vice President, Trust Policy
American Bankers Association
[email protected]

Jenna Stewart
Senior Regulatory Counsel
Consumer Bankers Association
[email protected]

Appendix

The American Bankers Association: The American Bankers Association is the voice of thenation’s $18 trillion banking industry, which is composed of small, regional, and large banks thattogether employ more than 2 million people, safeguard nearly $14 trillion in deposits, and extendmore than $10 trillion in loans.

The Bank Policy Institute: The Bank Policy Institute is a nonpartisan public policy, research andadvocacy group, representing the nation’s leading banks and their customers. Our members includeuniversal banks, regional banks and the major foreign banks doing business in the United States.Collectively, they employ almost 2 million Americans, make nearly half of the nation’s smallbusiness loans, and are an engine for financial innovation and economic growth.

The Consumer Bankers Association: Established in 1919, the Consumer Bankers Association is thevoice of the retail banking industry whose products and services provide access to credit to millionsof consumers and small businesses. Our members operate in all 50 states, serve more than 150million Americans and collectively hold two-thirds of the country’s total depository assets.