Business Checking Freedom Act of 2003

Madam Speaker, I move to suspend the rules and pass the bill (H.R. 758) to allow all businesses to make up to 24 transfers each month from interest-bearing transaction accounts to other transaction accounts, to require the payment of interest on reserves held for depository institutions at federal reserve banks, and for other purposes, as amended.

Madam Speaker, I ask unanimous consent that all Members may have 5 legislative days within which to revise and extend their remarks and include extraneous material on H.R. 758.

Madam Speaker, I yield myself 3 minutes.

The legislation before us today, H.R. 758, the Business Checking Freedom Act, is a result of two things. In 1996, in a joint report called Streamlining Regulatory Requirements, the board of governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency and the OTS determined that the 1933 statutory prohibition against paying of interest on business checking accounts no longer serves a public purpose.

Last year, President Bush joined many others in saying that small banks should be allowed to pay interest on their small business checking accounts. The reasons for this are basically two- or threefold.

One is, it is a free-market approach. More than that, though, there is an advantage now in the present prohibition against small banks. Large banks can offer complex sweep accounts or other sophisticated ways of offering implicit interest on checking accounts. Small banks simply do not have the resources to do this.

Secondly, large corporations today have several alternatives with what they can do with their funds to get interest. Small businesses, more often than not, have to rely on checking accounts and are denied equal treatment. So this will level the playing field between small banks and larger financial institutions. It will also level the playing field between small and large businesses.

I want to commend the gentleman from Pennsylvania (Mr. Toomey), the gentlewoman from New York (Mrs. Kelly), the cosponsors of this legislation. I want to particularly commend the gentleman from Ohio (Mr. Oxley) for making this a priority.

In closing, I want to say that this legislation has passed the House twice in the 107th Congress. It has wide bipartisan support. It came out of the Committee on Financial Services on a large, one-sided vote. It has the endorsement of certain groups, of the Chamber of Commerce, NFIB, Independent Insurance Agents, American Community Banks, and I could go on and on.

Finally, I simply want to say there is another provision in this, and this offers the Federal Reserve the right to pay interest on sterile reserves. Recently, they testified before our committee that by being allowed to pay interest, it would both increase the amount of interest that small depositors could make or a depositor could make on their deposits in financial institutions, and it would also lower the cost of consumer credit.

Madam Speaker, I reserve the balance of my time.

Madam Speaker, I yield 3 minutes to the gentleman from Iowa (Mr. Leach).

Mr. Speaker, I yield 3 minutes to the gentlewoman from New York (Mrs. Kelley), the sponsor of the bill.

Mr. Speaker, I yield 3 minutes to the gentleman from Pennsylvania (Mr. Toomey), who, along with the gentlewoman from New York (Mrs. Kelly), is one of the two primary cosponsors of the legislation and both drafted legislation.

(Mr. TOOMEY asked and was given permission to revise and extend his remarks.)

Mr. Speaker, I yield 3 minutes to the gentleman from California (Mr. Royce) to speak in favor of the legislation.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, in closing, I want to address the issue of what this bill does and what it does not do. The bill authorizes the Federal Reserve to pay interest on sterile reserves, and as has been testified before our committee, that should result in depositors in banks, thrifts, credit unions, receiving higher interest on their deposits. It should also result in lower interest rates for consumers.

The second thing that this legislation does, it allows banks to pay interest on accounts established by businesses in those banks. It does not authorize any new types of accounts. It does not in any way change who can own a bank and who cannot own a bank. It does not in any way allow these industrial loan companies to offer accounts which they are prohibited from offering now. And they are prohibited at the present time from offering demand deposit checking accounts; there is nothing in this legislation that allows them to offer those accounts.

The Bank Holding Company Act establishes the rules for who can own a bank and who cannot. We do not amend that legislation in any regard. The bill does not, with respect to the gentleman from Iowa, authorize Wal-Mart, WorldCom, Enron or any other company to own a bank or expand the authority that they might have under existing law. They already have authority under existing laws and under the Bank Holding Company Act, which specifically permits them to own certain limited-purpose banks, including credit card banks, industrial loan banks, grandfathered unitary thrifts, grandfathered nonbank banks, and trust banks. That is the present law.

There is nothing in this legislation that expands their right to own an institution. So WorldCom presently, Wal-Mart presently, they could own an industrial loan company or a unitary thrift, or some of these grandfathered institutions. We do not expand that authority at all.

The gentleman from Iowa (Mr. Leach) has a fear, first of all, that we are mixing banking and commerce. Well, we are already mixing them. Present law already allows them to mix. We do not expand that in any way under this legislation.

Mr. Speaker, we addressed the amendments of the gentleman from Iowa (Mr. Leach); he offered two amendments in committee. And I have great respect for the former chairman of the committee. He offered two amendments to strip the ILC language from the bill. They were overwhelmingly rejected, 55 nays, 8 yeses; the other amendment, 55 nays, 8 yeses. The gentleman from Iowa (Mr. Leach) has legitimate concern with certain types of commerce and financial institutions and the mixing of them. However, this legislation does not do that. That will have to be addressed in the Bank Holding Act.

I yield to the gentleman from Iowa.

Mr. Speaker, does the gentleman agree that an industrial loan company can already offer a NOW account?

Mr. Speaker, what Chairman Greenspan has said is, these institutions are not regulated by the Federal Reserve. There is nothing in this that takes any regulation or adds any regulation.

Mr. Speaker, reclaiming my time, this does not authorize them to offer any accounts which they presently cannot offer nor expand the rights of corporations to own these industrial companies.

Mr. Speaker, I yield back the balance of my time.

Mr. Speaker, I thank the gentleman from Alabama (Mr. Bachus) and appreciate all his help on this legislation as well as the time he has yielded to me. I would also like to thank (Mr. Kanjorski), an original cosponsor of my bill, which is part of this one, as well as the gentlewoman from New York (Mrs. Kelly) for her work.

Mr. Speaker, I yield to the gentleman from Iowa, with whom I actually have a disagreement on this particular issue, but I have enormous respect for his opinion and would like to give him an opportunity to rebut a point made earlier.

Mr. Speaker, reclaiming the balance of my time, I would just say that I appreciate the thoughtful remarks of the gentleman from Iowa but respectfully disagree, and I think that the merits of this bill are really quite strong.

In fact, the combination of the bill that I introduced, H.R. 859, and the bill that the gentlewoman from New York (Mrs. Kelly) introduced, H.R. 758, really are a modernizing effort here. It is going to help small businesses and their employees. It is going to help small banks and their employees and their customers. It is pro-free market legislation. It is bipartisan. It is really a commonsense repeal.

Frankly, it was hard for me to believe when I first discovered that we have a law in the United States of America that says it is illegal for a bank to pay interest on a business checking account. I thought that was the business banks were in, as a matter of fact. But in fact it is hard to repeal a bad law in this country, and we have had this one on the books for about 70 years. Its repeal is long overdue. Today is our chance to do what we can do in the House to abolish this bill.

Now, if it goes into effect and is signed into law, the actual repeal happens 2 years from now. I would prefer it happen sooner than that, but this is the compromise that was arrived at. So that is certainly better than continuing with the legislation. But I would like to be precise about the net effect of this. Because it is not precisely that businesses will now start earning interest which heretofore they have not. In fact, what happens now is that banks have found these cumbersome and very inefficient ways to circumvent this prohibition. So they pay the economic equivalent of most of the interest that a business would earn, but because of the expense of administering these bureaucratic programs, the businesses do not get the full value of the deposits they have.

At the end of the day, we should not force banks and their customers to go through a lot of expensive and inefficient and economically unproductive hurdles to avoid a regulation that has no merit in the first place. So that is why we are here, to repeal this.

Mr. Speaker, I thank everybody who has been involved in supporting this legislation, and I urge my colleagues to vote ``yes.''

H.R. 758 contains a provision, section 7, entitled Rule of Construction, regarding escrow accounts maintained for purposes of settling real estate transactions. This provision is similar to section 7 of H.R. 1009, the Business Checking Freedom Act of 2002, a bill I sponsored that the House passed last year. Section 7 of H.R. 758 makes clear that the current legal treatment of certain services and benefits provided by banks in lieu of interest in connection with such escrow accounts remains the same. There are some minor changes to this section from section 7 of H.R. 1009, which clarify that the provision does not prohibit or require the payment of interest on such accounts and that it does not affect State laws regrading the payment of interest on escrow accounts. I understand the latter is intended to ensure that State laws governing mortgage servicing escrow accounts for the monthly collection and payment of taxes and insurance are maintained. In brief, section 7 does not alter the current legal definition of interest or the legal treatment of real estate settlement escrow transactions.

Under section 7, current Federal legal standards, including regulatory interpretations, regarding the definition of interest on deposits will continue to stand. For example, the Federal Reserve's Regulation Q currently provides that services and benefits can be given by banks in lieu of interest to depositors and that the provision or the receipt of such services and benefits does not constitute interest. This has been the Federal Reserve's consistent

regulatory and interpretive view for decades. For example, a Federal Reserve staff opinion in 1978 stated that the ``absorption or reduction'' of banking service changes did not constitute the payment of interest (Fed. Res. Bd. Staff Op., October 27, 1978), a view also reflected in a 1964 Fed. interpretative letter (1964 Fed. Res. Interp., July 17, 1964). Under these regulatory principles, title companies and agents receive bank services, such as free printed checks, overnight float and safe deposit and night depository facilities, armored car services, as well as low-interest loans, that help defray their cost of maintaining real estate settlement escrows, ultimately lowering the cost of these services to the public. Such accounts often times last only a few days, the time necessary for settlement payments and other disbursements to be made after the closing of a real estate transaction.

In our Nation's highly developed financial system, Federal banking law and regulations have operated to facilitate the smooth and efficient flow of real estate transactions and promoted American homeownership. I am optimistic that these services will continue to be provided in the current efficient manner when H.R. 758 becomes law.

Madam Speaker, I yield myself as much time as I may consume.

I rise today in support of H.R. 758, the Business Checking Freedom Act of 2003. By repealing the prohibition on the payment of interest on demand deposits, this bill will repeal the last vestige of interest rate controls enacted in the 1930s during the Depression. This prohibition long ago ceased to serve any useful purpose and has imposed unnecessary costs on banks and their business customers, particularly small banks and businesses that cannot afford sophisticated cash management products. The repeal of this prohibition is long overdue.

For institutions that cannot offer demand deposits, however, the bill includes a provision added as a result of an amendment that I cosponsored with the gentleman from California (Mr. Royce), the gentleman from Massachusetts (Mr. Frank), the ranking member, and others that permits depository institutions to offer interest-bearing negotiable order of withdrawal, or NOW, accounts to their commercial customers. This provision will allow institutions such as industrial loan companies to offer the same type of interest-bearing account to business customers that they have long been able to offer to individuals, nonprofit organizations and public entities.

I think it is important to note this provision does not permit industrial companies to offer demand deposits. As has been the case since the enactment of the Competitive Banking Equality Act of 1987, ILCs would continue to be prohibited from offering demand deposits. Moreover, ILCs will continue to be subject to the same safety and soundness regulations by the FDIC and by their State regulators as under current law.

There is no indication that State regulators will allow their chartering authority to be used in an inappropriate manner. I note, for example, that State authorities in the past have rejected applications by some commercial companies to establish ILCs where there were concerns about how the charter would be used.

H.R. 758 also will permit the Federal Reserve Board to lower the reserves it currently requires on transaction accounts, such as demand deposits and NOW accounts, and to pay interest on the reserve balances that depository institutions are required to maintain. While providing these cost savings for banks, the bill will require the board to conduct an annual survey on a broad range of bank fees and services and to report to Congress on trends in the cost and availability of retail banking services. This survey will provide Congress the information we need to determine the extent to which retail customers receive the benefit from the cost savings we are creating with this bill.

H.R. 758 is a good, balanced bill that resulted in benefits for both banks and

their customers. I recommend passage of this bill.

I want to thank the gentleman from Alabama (Mr. Bachus), the subcommittee chairman, and the gentleman from Vermont (Mr. Sanders), the ranking member, for this bill. I want to recognize that the gentleman from Ohio (Mr. Oxley), the chairman of the full committee, and the gentleman from Massachusetts (Mr. Frank) for their support of this, as well; and I want to acknowledge the lead sponsors of this bill, which are the gentlewoman from New York (Mrs. Kelly), the gentlewoman from New York (Mrs. Maloney), the gentlewoman from West Virginia (Mrs. Capito), the gentleman from California (Mr. Sherman), and the gentleman from Kansas (Mr. Moore).

Madam Speaker, I reserve the balance of my time.

Mr. Speaker, I yield myself 1 minute to address a couple of the concerns that have been raised.

First of all, there is nothing in this bill that creates new authority to offer accounts to businesses. So while the Federal Reserve did suggest that we are altering the structure of banking in the United States, the institutions raised already can offer ILCs. Tyco already has one. So this bill talks about parity. It talks about banks and industrial corporations both offering interest on business checking accounts. That is all this bill does.

There is a broader discussion about the validity of the ILCs. That is not what this bill is about. It is about offering two entities to have parity in terms of offering the same service.

And let me mention one other point in this regard, and that is in terms of the concern about mixing of banking and commerce. FDIC Chairman Powell has stated that he does not have any safety or soundness concerns relating to this provision of the bill.

Mr. Speaker, I yield 4 minutes to the gentlewoman from New York (Mrs. Maloney).

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, this is a piece of legislation that is overdue. The notion of eliminating interest on business checking accounts is something that seems like common sense. I was a small businessman before I came to Congress, and it never seemed to make sense to me is that this prohibition existed. We are talking about removing some inefficiencies that exist in our financial marketplace. That is why this legislation has such strong bipartisan support. I encourage Members to pass this legislation.

Mr. Speaker, I yield back the balance of my time.

Madam Speaker, it is with a great deal of reluctance that I rise in opposition to this bill. It contains many reasonable provisions, most importantly, the payment of interest on business checking, with my only concern on that point being that it does not immediately go into effect, but rather is put off for several years.

It also contains a very reasonable provision that interest be paid by the Fed on sterile reserves held by institutions.

But deeply embedded in this bill is a philosophical umbrage of very profound proportions. There is a small charter, as referred to by the gentleman from Utah, called the industrial loan corporation (ILC) charter. For the first time, the Congress is moving in the direction of giving this kind of charter the powers that make it the functional equivalent of banks. While the gentleman from Utah is correct that there is no effort to offer demand deposits, there is the authorization of business checking accounts which are their functional equivalent.

This particular charter countenances, and indeed there are a number today, the merger of commerce and banking; that is, nonfinancial institutions may own ILC charters. There is also no prohibition about new charters being granted, so new charters presumably can be offered on passage of this act.

What this does is move the American financial system in the direction of the Japanese financial system where they have financial firms intertwined with commercial enterprises and with obvious conflicts of interest.

I would alert this body to the fact that Chairman Greenspan and the Federal Reserve of the United States strongly have come out against this provision, and despite my request, there has not been allowance on the House floor for an amendment relating to this amendment to be proffered. I personally consider it a philosophically difficult circumstance that no amendment was allowed to be offered and that this bill, instead, is being brought up under the Suspension Calendar with exceedingly brief notice.

Having stated that, the big issue is whether or not we want to change the nature of American finance, and I would again alert this body, Chairman Greenspan has written that this will change the structure of American banking in ways that would have allowed, for example, Enron or Tyco to own an ILC with expanded powers. In fact, Tyco does own an ILC. It would have allowed the prospect, with ILCs now becoming the functional equivalent of banks, for such companies to take over enormous sectors of the American banking community.

I think this would be a mistake. I think this Congress ought to be deeply skeptical of this kind of circumstance, particularly given the history of the last few years in this country and the last several decades in other countries.

So despite the fact that this bill is reasonable in many respects, this particular provision outweighs the entirety of the bill and, in my view, should cause the bill to be defeated.

Mr. Speaker, will the gentleman yield?

Mr. Speaker, I appreciate this. And let me say that the brunt of this bill is a wonderfully thoughtful approach, and I congratulate the gentleman and the gentlewoman from New York (Mrs. Kelly) on this.

I would only come back to the one provision which I would like to have changed, and that is the industrial loan corporation provision, and to point out to this body that only a handful of States are authorized, such as the State of Utah, to have industrial loan corporations. They are not trivial institutions. In the State of Utah, for example, their assets are double that of banks, S&Ls and credit unions combined.

If this bill passes with this provision and becomes law, the vast majority of States will see deposits swept from their States to this handful of States. That alone is a philosophical circumstance that in my mind should lead people to raise serious doubts about this particular provision of this particular bill.

Mr. Speaker, I have great respect for the gentleman, and he is right about what companies can now do. However, what is not fully described is that they will now be able to buy a charter with an enhanced set of powers, which has not been offered before. It is the enhanced power of this obscure charter that makes this legislation difficult, and that is my concern.

If the gentleman will continue to yield, for the first time, they will be allowed to offer business checking accounts, which has never

been done before. Chairman Greenspan has noted this will cause an ILC to become the functional equivalent of a bank, and such charters will only be authorized in a handful of States, and thus will cause the movement of assets to those States.

That is true. My amendment did not suggest that it be regulated by the Federal Reserve, although other amendments I offered did suggest that.

Mr. Speaker, I want to thank the gentleman from Alabama for both yielding me this time and for his work to move this legislation forward. In addition, I want to thank the gentleman from Ohio (Mr. Oxley) for his

support, as well as the gentleman from Pennsylvania (Mr. Toomey) for the contribution that he has made to this legislation with his bill H.R. 859, which was merged into this bill during committee consideration.

My bill addresses an issue which has been pending before Congress for some time now. This body actually passed a similar measure by voice vote not once but twice during the 107th Congress, but the job is still not done. So we come to the floor once again with a strong hope that the enactment of this bill will finally be realized this Congress. The legislation will go a long way in helping our Main Street banks and small businesses which are so essential to our communities.

The Business Checking Freedom Act contains a number of important provisions. First, it repeals the 70-year-old law prohibiting banks from paying interest on business checking accounts after a transition period. While I believe it should be repealed, I believe a proper transition period is critical. The 2-year transition period contained in the bill is certainly better than the 1-year transition period which was in the original bill, although my preference is for an even longer period to allow the banks and businesses to disengage from each other.

Nevertheless, I believe it is time to move forward with this legislation. The legislation also allows banks to increase money market deposits and savings account sweeps from the current 6 to 24 times a month. This gives the banks an increase in their sweep activities, enabling them to sweep every night, increasing the interest which businesses can make on their accounts.

The bill also gives the Federal Reserve the opportunity to pay interest on reserves that the banks keep with the Federal Reserve System, and gives the Federal Reserve the additional flexibility to lower reserve requirements. This will give the Federal Reserve greater control at maintaining reserves at a specific and consistent level. That will help foster healthy reserve balances, thereby reducing the potential for volatility within the Federal funds rate and protecting the Federal Reserve's ability to conduct monetary policy.

Quite simply, this legislation is about creating new and broader market options. We allow banks to pay interest on business checking accounts, we allow banks to increase sweep activities, and we allow the Fed to pay interest on the sterile reserves that all banks are required to keep with them. We also allow the Fed to lower reserve requirements. We do not require or mandate anything. This way we can allow the market to create change and not the government.

I again thank the gentleman from Ohio for his strong leadership on this issue and for the swift consideration of this legislation, and I ask my colleagues on both sides of the aisle to join me in strong support for this commonsense bipartisan legislation.