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BANK OFFICER'S

HANDBOOK

OF

COMMERCIAL BANKING LAW

Fifth Edition

FREDERICK K. BEUTEL

Professor of Law, Enwritus, Uttiversity of Nebraska Member of the Nebraska Bar

MILTON R. SCHROEDER

Professor of Law, Arizona State Ut~iversity Member of the Arizona Bar

WARREN, GORHAM & LAMOm

Uosron

Professor of Law, Arizona State Ut~iversity Member of the Arizona Bar WARREN, GORHAM & LAMOm Uosron

NCWYork

PREFACE

financial institutions has dictated an enlargement of the chapters dealing ) with the nature and regulation of commercial banking. These chapters, which are now Part I of the Fifth Edition, not only provide an overview of the gcneral regulatory framework but discuss important provisions of b the Depository Institutions Deregulation and Monetary Control Act of 1980, the Financial Institutions Regulatory and Interest Rate Control Act of 1978, and other recent legislation. The materials on commercial paper have been reorganized into a separate Part I1 and the chapters describing the duties of bank and customer have been reorganized as Part 111. These two parts have the greatest continuity with the Fourth Edition, but the material has been revised to focus primarily upon the Uniform Commercial Code and developme'nts under it. Increased cov- erage is given to credit card transactions and electronic fund transfers. ., Part IV contains an expanded discussion of the law relating to secured transactions which is now governed by Article 9 of the U.C.C. This Part provides a comprehensive outline of the methods for creating and en- forcing security interests in different types of collateral. It covers the numcrous changes effccted by the 1972 amcndmenls to Article 9 of the . U.C.C,It also givcs a bricf synopsis of the rcccntly cnactcd B:~nkruptcy Reform Act. The continued growth of special regulatory law dcaling with consumcr transactions has warranted establishing a separate Part V in this edition to treat issucs rclating to such laws as thc Consumer Credit Protection Act and the Federal Trade Commission Holdcr in Due Course Rule-issues bankers must be familiar with. In preparing this Fifth Edition we are deeply indebted to Mark Sanford and Bill Richardson, students at the Arizona State University Collegc of Law, who providcd research and editorial hclp in preparing this manuscript for publication. Thcir contributions wcre invaluable. We are also grateful for the outstanding support providcd by the stall of the Arizona State University College of Law, and particularly for the efforts of Betty Andre, Dorothy Swanton, and Sandra Mitchell. Dean Alan Matheson of the College of Law has been especially supportive of this project.

1

I

SUMMARY OF CONTENTS

Part I-The

Nature and Regulation

of Banking: An Overview

Nature of Banking The Federal Reserve System Federal Deposit Insurance

Federal Regulation of Banks Bank Competition and the Prohibition Against Dealing in Securities Bank HoJding Companies Savings Inslitutions Specialized Organizations With Banking Functions Sources of Con~mcrcialBanking Law

Part Il-Commercial

Paper

3

45

53

/

./,

1

119 /

1439

159 .

CUAPTER10. Commercial Paper and Its Transfer

1731

CIIAPTERI I.

Elcnicntary Rcquircmcnts of Ncgotiablc Money Paper

185f

CHAPTER12.

Other Types of Negotiable Paper

199

CHAPTER13.

Forms of Indorsement and Transfer of

Negotiable Paper

2 13

CIIAPTER14.

Liability of Parties to Commercial Paper

and Securities

223

CHAPTER15.

Holders in Due Course, Bona Fide Purchasers,

and Defenses to Negotiable Paper

241

CHAPTER16.

Negotiability of Commercial Paper With

Special Contracts

263

CHAPTER17.

Interest and Usury

285

CHAPTER18.

Personal Security Devices and Suretyship

Defenses

293

v

SUMMARY OF CONTENTS

Part 111-Duties

of Bank and Customer

Bank Accounts Mulunl Dutics of ihc Ilunk i~ndDcpsitor 'Collection and Payment of Instruments Presentment for Payment or Acceptance Protest, Notice of Dishonor, and Waiver Collection of Documentary Drafts Bank's Liability on Its Own Instruments New Payment Systems: Credit Cards and Electronic Fund Transfers Transactions With Fiduciaries

i Part IV--Secured

i

Transactions and

Bankruptcy

CI,APTER 28.

~APTER29.

The Creation and Perfection of Security Intcrests in Personal Property Types of Secured Transactions

30. Priorities: Rights of Competing Creditors, Purchasers, and Transferees

3 1. Default and Enforcement of Security Interests

32. Debt Adjustment and Bankruptcy

TABLE OF CONTENTS

Section

List of Tables Table of Abbreviations

Part I-The

Nature and Regulation

of Banking: An Overview

Chapter 1

NATURE OF BANKING

1-5

Introduction

1-10

Classification of Banks

1-15

The Emergence of the National

1-20

Government in Banking State Regulation of Banks

1-25

An Outline of the National Banking System

1-30

Correspondent Banking

1-35

Banks Changing From One System to the Other

Part V-Special

Consumer Credit

Reglrlatiotls

 

2-5

:IMPTER

33.

Crcdit Disclosure Regulation

2-1 0

ZHAPTER

34.

Regulation of Other Consumer Credit

2-1 5

 

Practices

2-20

IHAPTER 35.

Preservation of Consumer Defenses

2-25

and Claims: The Holder in Due Course Rule

2-3 0

'ableof Cases

2-3 5

ndex

2-40

2-45

* 2-5 0

2-5 5

2-60

Chnpter 2

TIlE FEDERAL RESERVE SYSTEM

Thc Structure of thc Fcdernl Rcscrvc Systcm The Functions of the System Board of Governors Orders, Regulations, and Interpretations Open Market Operations Federal Reserve Banks Directors of the Reserve Banks Powers and Duties of Reserve Banks Depository Functions of Reserve Banks

Reserves Discounts and Advances Check Collection and Fund Transfers

vii

Page

xxiv

MV

3

5

6

9

14

15

17

19

20

22

23

25

27

29

30

30

31

33

34

 

TABLE OF CONTENTS

 

I

 

Page

Section

 

Federal Reserve Note Issues

36

4-65

Examination of Banks

37

4-7 0

Regulation of Interest and Dividends Paid by Banks

38

4-7 5

Credit Controls

38

4-80

The Relationship of the Federal Reserve System to Savings Institutions

40

The Comptroller of the Currency

41

Bank Holidays

44

Chapter 3

 

FEDERAL DEPOSIT INSURANCE

 

3-5

Thc Federal Deposit Insurance Corporation

45

3-10

Insured Deposits

46

3-1 5

Deposit Insurance Assessments

48

3-20

Permanent Insurance Funds

48

3-25

Tcrmination of Insurance

49

3-30

Liquidation and ~eorganizationof Insured Banks

50

3-35

Bank Regulation and Supervision

5 1

Chapter 4

 

FEDERAL REGULATION OF BANKS

 

4-5

Federal Regulatory Agencies in General

 

53

4-10

Federal Bank Examination-Financial

Institutions

Examination Council

54

f-15

Prevention of Unsafe and Unsound Banking

Practices

56

b20

Suspension or Removal of Directors or

Officers for Cause

57

1-25

Dcrcgulation of Intercst and Dividends

PaidbyBanks

57

4-30

Portfolio Regulation of Commercial Banks

59

35

Regulation of the Incidental Powers of

National Banks

65

-40

Loans to Bank Officers and Directors

66

5

Loans to Bank Affiliates

 

68

-50

Financial Privacy for Bank Customers

69

-55

Financial Record-Keeping and Reporting of Currency

Transactions-The

Bank Secrecy Act

 

74

4-60

Local Credit Needs-The Reinvcstmcnt Act of 1977

Community

77

 

viii

I

TABLE OF CONTENTS

Environmental Regulation Transactions Involving Securities American Banks Doing Foreign Business Foreign-Owned Banking Corporations

Page

79

79

81

82

Chapter 5

DANK COMPETITION AND TIIE PROIIIBITION AGAINST DEALING IN SECURITIES

Branch Banking Consolidations nnd Mcrgers lntcrlocking Dircctoratcs Prohibition of Tying Arrangements Banking and Antitrust Laws The Prohibition Against Dealing in Securities Bank Scrvicc Corporations Interstate Banking Competition From Non-Bank Financial Institutions

87

90

91

92

93

95

97

98

99

Chnptcr 6

BANK HOLDING COMPANIES

Introduction

Prohibition of Non-Bank Aclivitics-Exemptions 104

Activities Closely Related to Banking Hearings and Judicial Review of Board Decisions Under Section 4(c) (8) Intcrstatc Activities of Bank Holding Companies

105

101

111

113

Bank Holding Companies and the Securities

Business Bank Holding Companies and Competition inBanking

115

116

Chapter 7

SAVINGS INSTITUTIONS

Savings Institutions Generally Savings and Loan Associations Regulation of Savings and Loan Associations

119

120

121

I

TABLE OF CONTENTS

Page

Promise or Order

;

186

Unconditional

187

In Writing and Signed

190

Certainty as to Sum

190

Kinds of Money

19 1

Demandpaper

192

Determinable Future Time

192

Order or Bearer Paper

193

Designation of Payee

195

Fictitious or Nonexisting Payecs

195

Drawee Must Be Certain

196

All Formal Requisites Must Be Met

196

Ambiguous Terms and Rules of Construction

197

 

Chapter 12

OTHER TYPES OF NEGOTIABLE PAPER

 

Other Types of Negotiable Paper Negotiability of Commodity Paper at ComrnonLaw UniformLaws Negotiability of Commodity Paper Under Commercial Code Identification of Documents of Title Carrier's Liability Carrier's or Warehouseman's Lien Method of Transfer of Documents of Title

Nature of Negotiation Stock Certificates Effect of Negotiation Prior Statutes Making Corporate Bonds Negotiable Investment Securities Under the Commercial Code Investment Securities Under the Commercial Code

-1977

Amendments and Uncertificated Securities

 

Chapter 13

FORMS OF INDORSEMENT AND TRANSFER OF NEGOTIABLE PAPER

 
 

*

Typcs of Transfer

 

2 13

Nature of Indorscmcnt

2 14

xii '

TABLE OF CONTENTS

Section

Page

13-15

Kinds of Indorsements

215

13-20

Blank Indorsement

215

13-25

Special Indorsement

215

13-30

A Qualified Indorsement

217

13-3s

Restrictive Indorsements

217

13-40

Conditional Indorsements

218

1345

Rights of Restrictive Indorsees

219

13-50

Bank's Power to Supply Missing Indorsement

220

13-5 5

Efiect of Restrictive Indorsements on Securities

nnd Conlnlodi~yPnpcr

220

Transfcr Without Indorsement

221

Limit of Indorsees' Rights By Separate Contract

221

Chnpter 14 LIAUILITY OF PARTIES TO COMMERCIAL

PAPER AND SECURITIES

14-5

Thc Naturc of Commercial Paper Contracts

223

14-10

Primary and Secondary Liability

224

14-15

Liabili~yof Makers and Acceptors of

Negotiable Money Paper

225

14-20

Acceptance on the Instrument

226

14-25

Acceptance by Separate Instrument

226

14-30

Promises to Accept Nonexistent Paper

227

14-35

Liability Caused by Impropcr Handling

227

14-40

KindsofAcceptances

227

14-45 QualifiedAcceptances

228

14-50

Effect of Acceptance on Liability of Othcr Partics

229

14-55

Liability of Issuers of Securities

230

14-60

Sccondary Liabili[y on the Papcr

231

14-65

Indorser's Liability

231

14-70

Drawer's Liability

232

14-75

Warranty of Transferors of Paper

233

14-80

Warranties on Presentment of Negotiable

Paper for Performance

234

14-85

Limitations of Liability in Warranty

235

14-90

Limitation of Liability by Special Contract

235

14-95

Liability of Agents

236

14-100

Illustrative Agency Cascs

237

14-105 Truske'sLiability

239

14-1 10 Rcprcscntntivc Capacity

240

Xlll

Chapter 15

HOLDERS IN DUE COURSE.

BONA FIDE

PURCIIASERS.

AND DEFENSES TO

NEGOTIABLE PAPER

Page

Holders in Due Course

241

Requirements of Holding in Due Course

242

Without Notice of Defects or Dcfenses

243

Good Faith

245

Organizations and Agcncy

247

Value

248

Bank Credit as Value

250

Before It Was Overdue

252

Purchaser of Overdue or "Stale" Negotiable Paper

254

Kinds of Defenses

254

Defects in Contractual Relations

255

Other Agreements Affecting Defenses to the Instrument

255

Wrongs in Contracting and Transfer

256

Illegality

257

Statutes Making Instruments Void

258

Usury Statutes

258

Capacity

259

Lack of Causation

261

Holder in Due Course-Abolition Consumer Transactions

in

NEGOTIABILITY

Chapter 16

OF COMMERCIAL PAPER

WITH SPECIAL CONTRACTS

The Problem of Negotiable Notes Acceleration Clauses Promises to Do Additional Acts Promises to Preserve Collateral or Other Security Acceleration on a Contingency Provisions in Mortgages Chattel Paper Sealed Instruments Judgment Notes Waiver of Rights

xiv

262

263

264

266

266

267

268

269

27 1

272

273

Seclion

'I'AIJI. E 01:

CONTENTS

16-55

Provision for Sale or Holding of Collateral

16-60

Indexation

16-65

Negotiability by Mere Statement

16-70

Negotiability of Mortgages and Other

16-75

Title-Retaining Contracts Contracts in Mortgages-Effect on Negotiability

16-80

and Enforceability of the Notes Negotiability of Investment Paper

16-85

Registered Bonds

16-90

Spccial Contracts in Bonds

16-95 Negotiability

16-1 00 Negotiability by Contract

16-105

and Effect of Stock Exchange Rules

Waivers of Defenses

Chapter 17

INTEKEST AND USURY

State Usury Laws Federal Preemption of State Usury Law Rcsidcntial Real Property Loans Obligations of Depository Institutions Business and Agricultural Loans of $25. 000 or More Other Loans State Laws Overriding Federal Interest Limits Most Favored Lender Doctrine Interstnte Crcdit Activities of National Banks The "Prime" Rate

Page

274

275

275

276

277

278

278

279

281

282

283

285

286

288

288

289

289

290

290

290

291

Chnpler 18

PERSONAL SECURITY DEVICES AND SURETYSHIP DEFENSES

Types of Security Simple Personal Security Suretyship Defenses Discharge of Parties Primarily and Secondarily Liable on Negotiable Paper Suretyship. Guaranty. and Accommodation Parties on Negotiable Paper Use of Power of Attorney

293

294

295

296

297

300

TABLE OF CONTENTS

Part Ill-Duties

of Bank and Customer

Chapter 19

BANK ACCOUNTS

Page

Basic Commercial Code Definitions

305

Definition of Bank and Branch Bank

307

Nature of Bank Accounts

307

Kinds of Accounts

309

Opening an Account

3 12

Contracts of Adhesion or Unconscionable Agreements

312

Forms of Accounts

314

Signatures

3 19

Termination of Relationship

321

Non-Deposit Liabilities

324

Chapter 20

MUTUAL DUTIES OF TIIE BANK

AND DEPOSITOR

Bank's Right to Charge Customer's Accounl

328

Improper Payment and Bank's Rights of Subrogation

328

Liability of Bank for Refusal to Pay

329

Post-Dated Checks

333

Stale Checks

333

Stopping Payment

334

Payment Stopped by Third Parties

338

Stopping Payment on Cashier's Checks. Bank Drafts. and Certified Checks

340

Identification of Payees and Indorsers

341

Bearer Paper

342

Fictitious or Nonexisting Payees

343

Miscredited Proceeds

347

Checks With Forged or Unauthorized Signatures

348

Alteration

350

Altered Checks Which Were Complete When Signed

351

Instruments Issued With Blanks

353

Obligation of Good Faith

354

Jli~nk'~Riglit to Revokc Crcclits to Cirstorncr's Account and Charge Customer for Items Not Paid

355

I

TABLE OF CONTENTS

Seclion

20-95

Dcpositcd 20-100 Duty of Depositor to Examine Monthly Statcnicnts 20-105 Customer's Duty to Rcport Forgcrics and Altcrat'Ions

Customer's Right to Withdraw Against Itenis

When Checks Arc Rctaincd by the Bank

20-1 10 Depositor's Duty of Due Care

20-1 15

Ambiguous Instruments

20-1 20

Banker's Lien Garnishment

Chapter 21

COLLECTION AND PAYMENT OF

INSTRUMENTS

Introduction Relation of Depositor and Bank Choosing the Collecting Bank Intcrmcdiary and Collccting Banks Conscqucnccs of Dclny or Othcr Failure to Act Propcrly in Collecting the ltcni Sending Paper Direct to Payor Medium of Payn~entUnder Commercial Code Duties of Drawee or Payor Bank Pnymcnt Pnymcnt by Ncgotinblc Papcr and Its ElTcct on the Underlying Transaction Payor Bank's Right to Canccl Payment and Recover Proceeds Direct Returns Instruments Payable At or Through Banks Errors in Handling Computer Encoded Chccks Federal Reserve Rulings. Clearinghouse Rules. and Agreements

Page

356

357

360

360

361

362

364

365

366

368

368

370

372

373

373

374

375

377

378

379

381

383

Chapter 22

PRESENTMENT FOR PAYMENT OR

ACCEPTANCE

Formnli~icsto Dc Mct nt Maturity Dctcrn~inationof Maturity

xvii

385

38G

Section

TABLE OF CONTENTS

22-1 5

Saturdays. Sundays. and Holidays

22-20

Presentment for Payment

22-25

Formalities of

Presentment

22-30

Placc of Prcsentmcnt

22-35

Unusual Cases

22-40

When Presentment Is Not Required

22-45

Time Allowed for Payment

22-50

Tenderof Payment

22-55

Dishonor

22-60

Presentment for Acceptance

22-65

Presentment as It Affects the Drawer's Liability

PROTEST.

Chapter 23

NOTICE OF DISHONOR. AND WAIVER

23-5

Nature of Requirement of Formalities at Maturity

23-10

Protcst

23-15

Form of Protest

23-20

Time and Place of Protest

23-25

When Protest Is Unnecessary

23-30

Notice of Dishonor

23-35

Person Giving Notice

23-40

Persons Receiving Notice

23-45

Time Within Which Notice Must Be Given

23-50

Place for Addressing Notice of Dishonor

23-55

Cascs Where Notice Nccd Not Bc Givcn

23-60

Prcscntmcnt of Previously Dishonorcd Cllccks

23-65

Waiver

23-70

Construction of Waivers

23-75

Agrccmcnt for Chargcback as Waivcr

23-80

Notice of Dishonor to Drawer

399

400

400

401

401

402

403

404

404

406

407

408

408

410

410

411

Chapter 24

COLLECTION OF DOCUMENTARY DRAITS

24-5

I 124-10

Documentary Drafts Bank's Duty to Present Draft and Notify Customer of Nonpayment

xviii

413

414

3

TABLE OF CONTENTS

Section

Page

24-1 5

Bank's Responsibilities for the Documents and theGoods

415

 

Chnptcr 25

 

BANK'S

LTADILITY ON ITS OWN INSTRUMENTS

25-5

Bank's Liability on Negotiable Instruments

 

Gencrally

417

25-10

Certificates of Deposit

418

25-15

Cashiers' Checks

418

25-20

Money Orders and Travelers Checks

419

25-25

Acceptance of Drafts

420

25-30

Certifying or Accepting Forged or Altered Paper

422

25-35

Mistake in Certifying

423

25-40

Letters of Credit

423

25-45

Scope of Commercial Code Letter of

Credit Provisions

427

25-50

Form of Lcttcrs of Crcdit

427

25-55

Issucr's Obligation to Its Customer

429

25-60

Issuer's Obligation to Pay

430

25-65

International Letters of Credit and

Uniform Customs

431

25-70

Rights of Remitters

432

 

Chnptcr 26

 

NEW PAYMENT SYSTEMS: CREDIT CARDS AND ELECTRONIC FUND TRANSFERS

 

26-5

Bnnk Credit Cards

434

26-10

Truth-in-Lcnding Act Provisions Governing

Crcdit Cards

436

26-15

Issuing Credit Cards

437

26-20

Cardholder Liability for Unauthorized Use

437

26-25

Preservation of Cardholder Claims and Defenses

438

26-30

Prohibition Against Set Off of Credit Card

Obligations

440

26-35

Terms of Credit Card Plans Affecting Merchants

and Other Persons Who Honor the Card

441

26-40

Duty of Sellers to Notify Issuers of Returned

Goods and Other Credits

441

1

TABLE OF CONTENTS

TABLE OF CONTENTS

eclion

6-45

I

50

-55

-60

-65

.6.70

:675

Electronic Fund Transfer Systems Regulation of Electronic Fund Transfers Scope of the Electronic Fund Transfer Act Unauthorized Transfers Error Resolution Financial Institution's Liability to Customers for Electronic Fund Transfers Extcnt of Civil Liability of Institutions for

Electronic Fund Transfers

16-80

Prcauthorizcd Trnnsfcrs nnd Stop Pnymcnt Rigllh

!6-85

Suspcnsion of Obligations to Third Partics

!6-90

Disclosure and Notice Obligations

!6-95 Administrative Enforcement 16-100 Miscellaneous Restrictions on Electronic Fund Transfers 26-1 05 Issuing Access Cards

26-1 10 Relation to State Law 26-1 15 Enforcement

Page

441

443

444

445

446

448

448

449

450

450

45 1

45 1

452

453

454

Chapter 27

TRANSACTIONS WITH FIDUCIARIES

Nature of Fiduciary Rclalionsllip Duties of Fiduciary Special Duties of Fiduciaries Handling Funds or Securities Duties of Third Parties Dealing With Fiduciaries Requirements of Value to Cut Off Rights of Beneficiaries The Nature of Notice of Breach of Fiduciary Relationship Transfers of Negotiable Instrument by Fiduciaries Deposits of Fiduciaries and Fiduciary Funds Fiduciary Deposits Under Uniform Fiduciaries Act Deposits in Name of Two or More Trustees Fiduciary Deposits Under Commercial Code Banks in Fiduciary Relation to Security Owners Uniform Act for Simplification of Fiduciary Security Transfers Uniform Common Trust Fund Act Regulation of Trust Authority of National Banks

455

456

457

458

459

460

461

463

465

465

466

466

467

468

469

Part I V-Secured

Transactions and

Bankruptcy

Chapter 28

THE CREATION AND PERFECTION OF SECURITY INTERESTS IN PERSONAL

PROPERTY

Poxr

Introductinn

473

Scopc of Comnlcrcinl Codc

474

Lcascs and Consignments as Security Transactions

476

The Security Agreement

477

Purchase Money Security Interest

479

Pcrfcction of Sccurity Intcrcsts

479

Filing

480

Financing Statements

482

Termination Statements and Partial Releases of Collateral

484

Assignment of Security Interests

485

Chapter 29

TYPES OF SECURED TRANSACTIONS

The Pledge

487

Field Warehouse Systems

490

Duties of a Pledgee

491

Perfection of Security Interests by Filing

492

Security Interests in Goods and Chattels

493

Consumer Goods

494

Equipment

495

Farm Products

496

Inventory

497

Accounts

498

General Intangibles

499

Instruments

499

Chattel Paper

500

Documents of Title

501

Securities

501

Fixtures

505

Motor Vehicles

507

xxi

Section

TABLE OF CONTENTS

Poge

 

29-90

Bank Accounts

507

29-95

Insurance Policies

509

 

Chapter 30

 

PRIORITIES: RIGHTS OF COMPETING CREDITORS. PURCIIASERS. AND TRANSFEREES

 

130-5

Unperfected Security

Interests

;

51 1

D3elo

Conflicts With Other Perfected Sccurity Interests

513

Po-15

Buyerof Goods

515

.30-20

Purchasers of Instruments. Chattel Paper.

Documents

516

30-25

Proceeds

517

?30-30

Fixtures

518

30-35

Rights of Unpaid Sellers of Goods

 

520

30-40

Conflicts With Liens Arising Under Other

.aws

521

30-45

Commingled or Processed Goods

522

30-50

Subordination Agreements

522

 

Chapter 31

 

DEFAULT AND ENFORCEMENT OF SECURITY INTERESTS

 

3

1-5

Default Generally

 

523

31-10

Repossession of the Collateral

524

31-15

Constitutional Limitations on Secured Party

 

Rcmcdics

 

526

3

1-20

Disposition of Collateral After Dcfault

529

3

1-25

Retention of the Collateral in Discharge of the Obligation

53 1

3

1-30

Liability for Failure to Comply With Code

532

 

Chapter 32

 

DEBT ADJUSTMENT AND BANKRUPTCY

 

32-5

Nature of Insolvency

 

535

32-10

Rcmedics for Insolvency

536

32-1 5

Waiver or Cancellation of Debts

536

32-20

Assignment for Benefit of Creditors

538

32-25

Receiverships

538

xxii

Section

TABLE OF CONTENTS

32-30

Bnnkruptcy

32-35

Voluntary and Involuntary Pctitions in Bankruptcy

32-40

Rights and Powers of Trustccs in Bankruptcy

32-45

Sccurcd and Unsecured Creditors

Part V-Special

Cons~oucrCredit

 

Regulatiorls

Chapter 33

 

CREDIT DISCLOSURE REGULATION

33-5

Introduction

33-10

Truth-in-Lending

33-15

Scope

33-20

Closcd-End and Open-End Credit Arrangements

33-25

Closcd-End

Crcdit Disclosure Rcquiremcnts

33-30

Opcn-End

Crcdit

33-35

Consumcr

Lcascs

33-40

Disclosures in Real Estate Transactions

33-45

Rcscission Rights in Real Estate Transactions

33-50

Civil Liability

33-55

Adriiinistrativc Enforccmcnt

33-60

Rcliancc on Modcl Forms

33-65

Duty to Rcvisc Prior Disclosurcs

33-70

Regulation of Crcdit Advertising

33-75

EfTcct of Truth-in-Lcnding on State Law

33-80

Credit Billing

Page

539

541

542

544

549

551

552

553

553

555

556

558

558

560

562

563

564

564

565

565

Chnptcr 34

REGULATION OF OTHER CONSUMER CREDIT PRACTICES

34-5

34-1 0.

34-15

34-20

34-25

34-30

.4

34-35

Thc Consumcr Credit Protection Act Rcstrictions on Garnishnlcnt

Dcbt Collection Practices

Crcdit Rcporting Crcdit Discrimination Unfair or Deceptive Practices-The Commission 1mprovcn)cnt Act Plain English Laws

Federal Trade

xxiii

569

569

570

571

573

576

576

TABLE OF CONTENTS

Chapter 35

PRESERVATION

OF CONSUMER

DEFENSES AND CLAIMS:

THE HOLDER

IN

DUE COURSE RULE

TABLE OF ABBREVIATIONS

Section

 

Page

35-5 Introduction

579

35-10 Abolition of Holdcr in Duc Coursc Stntus by FTC

580

1

35-15 Transactions Covered by FIT Rule

581

35-20

Preservation of Claims and Defenses Undcr the

Uniform Consumcr Credit

Code

583

35-25

Othcr Statc Law Limiling Holdcr in Duc

 

Ala. L.

Course Rights

590

Am.

 

Am.

Table of Cases

 

T-1

Ann.

 

Ariz. L.

Ariz. St.

Ark. L.

Banking

 

List

of

Tables

Number

Page

1.

State Bank Commissioners

11

2.

Regulations of the Board of Governors of the Federal Reserve System

24

B.U.L. Bus.

3.

I Regulations of Comptroller of Currency

43

Calif. L.

1 4.

Regulations of the Federal Deposit Insurance Corporation

47

Rut. Cam. L. Case W. Res. L.

5.

Maximum Limits on Insured Deposits

48

C.B.C.T.

6.

State Enactments of UCC and Amendments

163

7.

Hierarchy of Rules Binding on Banks

168

 

Clcv. St. L. Rev, Colum. L. Com. Conn. L. Corncll CRA DIDC

DIDMCA

ECOA

OFT

Automatcd Clcaring Housc Automatic Investment Service American Law Institute Amcricnn Law Rcports Alabnmn Law Revicw American Decisions American Reports Annotated Cases Arizona Law Review Arizona Statc Law Journal Arkansas Law Kcview Automatcd Teller Machine Banking Law Journal Fcderal Board of Contract Appeals Bank Collection Codc (American Bankers Association) Bills of Exchange Act (English) Bank Holding Company Boston University Law Review Business Lawyer California Law Review Rutgcrs Camden Law Review Case Western Reserve Law Review Customer Bank-Communications Terminal Commodity Credit Corporation Code of Federal Regulations Cleveland State Law Review Columbia Law Revicw Commercial Law Journal Conneclicut Law Review Corncll Law Quarterly Community Rcinvestnlcnt Act Dcposilory Institutions Deregulation Commiltcc Dcpository Institutions Deregulation and Monctary Control Act of 1980 Equal Crcdit Opportunity Act Electronic Fund Transfer Fcdcrnl Banking Lnw Rcports (CCH)

xxiv

xxv

TABLE OF ABBREVIATIONS

FCA FCIA FDCP FDI

FICB

Federal Credit Administration Foreign Credit Insurance Association Fair Debt Collection Practices Federal Deposit Insurance Act

FDIC

Federal

Deposit Insurance Corporation

Fed. Res. Bull. FHLB FHLBB FHLBS FHLMC

Federal Reserve Bulletin Federal Home Loan Bank Federal Home Loan Bank Board Federal Home Loan Bank System Federal Home Loan Mortgage Corporation Federal Intermediate Credit Bank

FNMA

Financial Institutions Regulatory and Interest Rate Control Act of 1978 Federal National Mortgage Association

FOMC

Federal Open Market Committce of the

FRB

Federal Reserve System Board of Governors of the Federal

FSLIC

Reserve System Federal Savings and Loan Insurance Corporation

F.

Federal Supplement

FTC

Fcdcrnl

Tratlc Conin~issior~

17.2cI

Pcdcrd I(cporlcr, Sccond Scrics

Ga. L. Gco. Geo. Wash. L. Haw. L. Iowa L. Ill. L. Kan. L. Rev.

Georgia Law Kcvicw Georgetown Law Journal George Washington Law Review Harvard Law Review Iowa Law Review Illinois Law Review University of Kansas Law Review

Ky.

Kentucky Law Journal

L.R.A. (N.S.)

Lawyers Reports Annotated Lawyers Rcports Annotatcd (New Series)

Mich. L.

Michigan Law Review

Minn. L.

Minnesota Law Review

Miss.

Mississippi Law Journal

N.C.C.B.

National Consumer Cooperative Bank

N.C.L.

North Carolina Law Review

Ncb. L.

National Credit Union Administration Nebraska Law Review

Notre Dame

(Uniform) Negotiable Instruments Law Notre Dame Lawyer

NOW

Negotiable Order of Withdrawal

Nw. U.L.

Northwestern University Law Review

N.Y.U.L.

New York University Law Review

Ohio St.

Ohio State Law Journal

Or. L.

Oregon Law Review

xxvi

rc

TABLE OF ABBREVIATIONS

PCA

PIN

Ruling Case Law REA Rural Electrification Administration

Production Credit Association Personal Identification Number

Reg. A to Z RESPA

Federal Reserve Regulations Real Estate Settlement Procedures Act

San Diego L. Rev. Santa Clara SMSA So. Calif. L. Stan. L. Rev.

Tenn. L. Rev. Tex. L. TILA Tul. L. U.B.L.A.

Right to Financial Privacy Act San Diego Law Review Santa Clara Lawyer Standard Metropolitan Statistical Area Southern California Law Review Stanford Law Review Unitcd States Statutes at Large Tennessee Law Review Texas Law Rcview Truth-in-Lending Act Tulane Law Review Uniform Bills of Lading Act

U.C.C.

Uniform

Commercial Code (Official

U.C.C. (U.L.A.)

Text 1972) Uniform Commercial Code (Uniform

U.C.C.C.

Laws Annotated) Uniform Consumer Crcdit Codc

U.C.M.A.

Unilorln Chnllcl Morlgngc Act

U.C.S.A.

Uniform Conditional Salcs Act

U.C.T.F.A.

Uniform Common Trust Fund Act

U.

Chi. L. Rev.

University of Chicago Law Review

U.

Cinn. L. Rev.

University of Cincinnati Law Review

Uniform Sales Act

U.

Colo. L. Rev.

University of Colorado Law Review

U.F.C.A

Uniform Fiduciaries Act Uniform Fraudulent Conveyances Act

U.

Fla. L. Rev.

University of Florida Law Review

U.

111. L.F.

University of lllinois Law Forum Uniform Laws Annotated

U.

Pa. L. Rev.

Univcrsity of Pcnnsylvanin Law Rcvicw

U. Pitt. L. Rev, U.S.A.

U.T.R.A.

University of Pittsburgh Law Review

U.S.C.

United States Code

U.S.C.A.

United

Slates Code Annotated

U.S. Comp. Stat. U.S.L.W. U.S.T.A.

Unitcd States Conipiled Statutes

United States Law Weck Uniform Stock Transfer Act Uniform Trust Receipts Act

U.W.R.A.

Uniform

Warehouse Receipts Act

Vand. L. Rev. Vill. L. Rev. Wash. & Lee L. Wash. L. Rev.

Vanderbilt Law Review Villanova Law Review Washington & Lee Law Review Washington Law Review

xxvii

TABLE OF ABBREVIATIONS

Wash.

Washington University Law Quarterly

W.

Va. L.Q.

West Virginia Law Quarterly

W.

Va. L. Rev.

West Virginia Law Review

Wm. & Mary L. Wis. L.

William & Mary Law Review Wisconsin Law Review

Yale

Yale

Law Journal

xxviii

PART I

The Nature and Regulation of Banking: An Overview

Chapter 1

NATURE OF BANKING

Section

Page

1-5 Introduction

3

1-10

Classification of Banks

5

1-15

The Emergence of the National

Government in Banking

6

1-20

State Regulation of Banks

9

1-25

An Outline of the National Banking System

14

1-30

Correspondent Banking

15

1-35

Banks Changing From One System to the Other

17

5

INTRODUCTION

Thc comnicrcial bank is the most common typc of banking insti- tution. Its principal business is to accept deposits, make loans, collect commercial paper, and arrange the transfer of funds. Most of the ma- terial in this book will be devoted to these commercial banking functions. Commercial banking functions arc not thc only activities thnt banks perform. Thcrc arc many othcr typcs and [unctions of banks, such as the reserve banks that are really bankers' banks; investment banks, whose chief business is underwriting securities for large corporations; and savings banks, which accept money, usually on time deposit, for the purposc of encouraging savings. Thcrc arc also many specialized banks, such .as land banks, foreign trade banks, and the like, that are chartercd to enter certain kinds of business. The federal government has created many such special banking organizations to carry out special federal policies, and brief descriptions of some of these organizations are pro- vided in a subsequent chapter.' Recent changes in federal banking law have blurred some of these distinctions as dcscribed below.2 The abovc-mentioned types of banks should be carefully distin- guished from the so-called trust company. A trust company is not really

.L

See Chapter 8.

g 1-5

OVERVIEW

a bank at all; instead of borrowing and lending money, it accepts funds

for the purpose of investment. The beneficial interest in such funds, however, remains in the original owner and not in the bank itself. In many statcs trust companics arc combincd with banks or arc allowed to pcrform banking functions in addition to their duties as trustees.' There are also a number of personal finance loan organizations, authorizcd by the laws of the scvcral statcs, that loan small amounts of

Since thesc

organizations normally do not accept deposits but dcpcnd upon thcir owrl cr~pilelIIII~ol11cr SOU~CCSof credit to furnish tl~cfutlds lor lending,

they are not banks in the proper sense. Many banks have small loan departments that make the same type of loans.' It is not uncommon for a single large bank to exercise all of the functions mentioned above, and in addition they often operate safe- deposit and trust departments, but these are special branches of activity that are not usually classified as commercial banking.

Until recently, the regulatory regimes under which banking in the United States was conducted confined commercial banking functions to those financial institutions that were organized as state or national banks. The enactment of the Depository Institutions Deregulation and Monctary Control Act of 1980, however, authorized some commercial banking

As

a result, there is a growing similarity of functions between commercial

banks and savings institutions. Under the Act, for example, savings and loan associations, credit unions, and savings banks can now give their customers checking privilege^.^ The laws and regulations that govern commcrcial banking arc numerous and complex. The various types of financial institutions en- gaging in commercial banking activities are matched by an equal di- versity of statutes and regulations controlling the activities of these institutions. At the federal level alone, responsibility for regulating banking activities has bccn givcn to a numbcr of scparatc agcncics; whcn regulatory autllority is shnrcd by st:~tcnntl tcclcrnl ngcncics, thc conl- plcxity or tllc law is compounclcd. In addition, thc Inw governing thc transactions of commcrcial banks is complcx. Tl~cUniform Conlnlcrcial

money to consumers at higher than the usual legal rates.

activities to be undertaken by thrift institutions as wcll as banks.n

The Depository Institutions Deregulation and Monetary Control Act of 1980 olsn pcrrnila a:cvitiga nnd lonn nssocintiona to crlgngc in trust r~ctivilics

under certain conditions. See

* See

12

12 U.S.C.A.

!j 146(n) (Wcst 1980).

U.S.C. !j 85 (1976), Rockland-Atlas Nat'l Bank of Boston v.

Murphy, 329 Mass. 755, 110 N.E.2d 638 (1953). See !j 7-95.

8 Id.

NATURE OF BANKING

3 1-10

Code (U.C.C.)' has brought a desirable uniformity to the legal treatment of such activities as the collection of commerciaL paper and checking accounts, but there is also an increasing numbcr of special purpose statutes, frcqucntly intcndcd to provide spccial consumcr protection, that affect the activities of commercial banker^.^ Moreover, there are many new lcgal issues raised by technological developments in banking (c.g., transfcrring funds electronically) that are not addrcsscd by the U.C.C. Modern banking has become an enterprise where careful legal

cor~nsclis csscntinl.

olficcr cngngcd in commcrcial banking transactions and the nttorncys

called upon to advise in banking matters.

This book is intcntlctl to scrvc ns n guide for tllc

8 1-10 CLASSIFICATION OF BANKS

Although originally there was a common-law right to enter the banking business," the power and influence of banks'today are such that banking is now universally recognized as an activity charged with the public intcrest, subjcct to careful control by both state and federal laws and administrative rules. In addition to laws prescribing various forms of organization, all banks are responsible to and regulated by either the state or thc federal government, often by both at once, and frequently by more than one federal agency. Such regulation includes the issuance of a charter creating the legal organization (usually a corporation), the inspection of the books of the bank, and numerous regulations about the nature of the business conducted by the bank. When the charter is issucd by thc state, such banks are known as state banks and their busincss is supervised by officials usually called state banking comrnis- sioncrs. When the federal government issues the charter, such banks are known as national banks and are governed by the federal banking laws and by numcrous fcdcrnl administrative agcncics, which arc discussed

Iwlow."'

tcrn nnd must bc insurcd by thc Fcdcrnl Dcposit Insurance Corporntion (FDIC). Stntc bnnks may choosc, but arc not rcquircd, to bccomc nlcnl-

All nntionnl brinks :lrc mcn~hcrsor lllc Fctlcrnl Rcscrvc Sys-

7 SCCChnnlcr 9 nnd Pnrt 3.

SCCPnri5.

O State v. Scougal, 3 S.D. 55, 51 N.W. 858 (1892); Chase Nat'l Bank

Factor & Discount Co. v. Jack-

v. Sanford, 284 U.S. 660

(193 1 ); Northeast

son, 223 Ga. 709, 157 S.E.2d 731 ( 1967). See also 1 A. Michie, Banks and Banking 5 I (pcrrn. ed. 1973).

CC lo See Chapters 2-4.

8 1-15

OVERVIEW

bers of the Federal Reserve System.ll (Even nonmember state banks are subject to the regulatory authority of the Federal Rcserve Board to some extent, however.)I2 Membership in the Federal Reserve System also involves insurance of deposits by the FDIC, State banks may obtain FDIC insurance without becoming members of the Federal Rcscrve System.la A few state banks are neither insured by the FDIC nor are they members of the Federal Reserve System.

national

banks, state member banks, nonmember insured state banks, and non- insured state banks. Subsequent chapters will show how this classifica- tion scheme determines, in large measure, the laws and agencies that will exercise regulatory authority.

There are, therefore, four classes of commercial banks:

5 1-15

THE EMERGENCE OF THE NATIONAL GOVERNMENT IN BANKING

The complex structure of our modern banking system is the product of controversies accompanying the development of banking, and partic- ularly federal involvement in banking, that date from the first days of our nation. Controversy first emergcd over the creation of a ccntral na- tional bank. The first Secretary of the Treasury, Alexander Hamilton, supported creation of a national bank. The first Secretary of State, Thomas Jefferson, opposed it. Hamilton prevailed and Congress cre- ated the First Bank of the United States, giving it a charter of twenty years. The bank was not only the largest bank of the time, it was also the largest corporation in the United States. The bank was located in Philadelphia but had branches in other major cities."

At that time,

the currency in circulation (except for coins and some greenbacks) con- sisted mainly of notes issued by state banks. The notcs of thc First Bank of the United States came to account for about 20 percent of the notes in circulation, giving the national economy the benefit of a uniform and reliable currency.l5 Some hostility to a central bank persisted, however, and to it were added complaints of foreign domination and charges of unconstitution- ality. The growing number of state banks joined the cause against the First Bank of the United States, arguing that the national bank was not

The First Bank of the United States was a success.

11 The Federal Reserve System is discussed in Chapter 2. See Chapter 2. 18 Federal deposit insurance is discussed in Chapter 3.

14 Johnson, Historical Beginning-The

l5 White, Banking Law 8 (1976).

6

Federal Reserve 8( 1980).

NATURE OF BANKING

9 1-15

necessary in view of the increased number of state banks. The state banks rescntcd the practice followcd by thc First Bank of rctiring from circulation all state bank notes it received by returning them to the issuing bank for payment. This practice required the state banks to maintain larger reserves of funds than othcrwisc would have bcen necdcd. Opposition to the First Bank became so strong that when Jefferson's Republican party came into power in 1801, a bill to recharter the bank failed, and the bank died when its charter expired in 1811.18 After the First Bank's charter expired, the nation experienced serious cconomic problems from the lack of an effective banking system. Although a number of state banks cxistcd, the bank notes they issued were often of dubious quality. The disruptions of the War of 1812 heightened the problem. Bank failures became common after 1809 l7 and, with the expiration of the First Bank in 1811, there was no central bank to comc to the assistance of the weaker banks.I8 These and other difficulties in managing the federal government's financial affairs without a national banking mechanism persuaded a narrow majority of Congress of the desirability of a national bank, and in 1816 Congress chartered the Second Bank of the United States.lD The Second Bank of the United States was larger than the first, and many cam to view it as too powerful, Prcsidcnt Andrcw Jackson nlnong them. 'During Jackson's first tern1 as President, his political rival Henry Clay convinced Congress to pass a bill extending the charter of the bank. Clay, as a prcsidcntial aspirant, then hoped to exploit Jackson's expected veto of the bill as a political issue in thc 1832 prcsidcntial clection. Thc plan backfircd when Jackson's veto, accompanied by a ringing message attacking thc constitutionality of thc bank, brought him widesprcad popular support, and hc was reelected by a substantial margin. Four years later, in 1836, the charter of the Second Bank of the United States

expired.20

Although the constitutionality of thc Bank was attacked during this period, as early as 1819 thc U.S. Supreme Court had upheld thc powcr of Congress to establish a national bank. Chief Justice Marshall, in the historic case of McCullocl~v. Marylat~d,ruled that the chartering of the First Bank of the United States was a mcasurc "necessary and proper" to the exercise of Congress' fiscal powers under the Constitution to raise revenue, borrow money, and regulate commerc~.~~Undcr the suprenlacy

la Id.

1' Id.

IR Id. at 9.

Johnson, note 14 supra, at 8. z0 Id. at 10; Whitc, notc 15 supra, at 16. 21 17 U.S. 316 (1819).

5 1-15

OVERVIEW

clausc of thc U.S. Constitution, which nlakcs thc laws of fhc United States superior to state law, Chief Justice Marshall held that the estab- lishment of the bank could not be restricted by inconsistent state Icgisla- tion. This dccision was reaffirmed fivc years latcr in Osborn v. Bank oj the United States.22 After the demise of the Sccond Bank of the United States, banking was carried on through state-chartered banks. This period saw thc enact- ment of state legislation authorizing "free banking." Much of this legis- lation, which madc it easier to incorporate state banks, was patterned aftcr the New York Frec Banking Act,of 1838. As a result, the numbcr of state banks grew. It was no longer necessary to obtain a special statc charter; anyone who met the minimum incorporation requirements could establish a bank. Thc systcm of local statc banks that subsequently cmcrgcd led to problcms. Banks varicd grcatly in thc adcquacy of thcir capital nnd rcscrves retaincd against bank notes and dcmand deposits. Some banks engaged in risky lending policies. The bank notes issued by the indi- vidual banks were of disparate quality. The amount of credit extended

by

cconomy.28

banks

fluctuated

erratically

without

regard

to

the

needs

of

the

1863, the Civil War increased prcssurc for a sound

financial and monetary system, and Congress adopted the National Bank Act of 1863. This Act, together with amendments in 1864 and 1865, reestablished a national banking system. It did not create a central national bank, but it did provide for the charter of national banks. To insure the strength of thc new national banks the Act imposed require- ments relating to reserves, the amount of notes that could be issued, and restrictions on lending. In 1865, Congress imposed a tax on the notes issued by state banks in order to make the notes issued by the national banks thc currcncy of the Unitcd Statcs. Thc constitutionalily of this tax was affirmed by the Supreme Court in a dccision upholding in broad terms congressional power to adopt appropriatc legislation to "sccure a sound and uniform currency for the country." 24 It was cxpcctcd that thc tax on statc bank notcs would causc statc banks either to convert to national charters or to disappear, but ncithcr of these expectations occurred. The increase in the use of checks as a means of payment provided an alternative source of funds for the state banks in the form of dcmand deposits, and statc banks continucd to cxist alongside thc ncw national banks.'"

Finally, in

2z 22 U.S. 738 ( 1824).

2a Johnson, notc 1 supra, at 10. 24 Veazie Bank v. Fenno, 75 U.S. 533 (1859).

26 Johnson, note 14 supra, at 1 1.

NATURE OF BANKING

5 1-20

Thc lack of a ccntrnl banking systcm continucd to be n wcakncss in the national economy. It was diflicult to shift bank reserves to meet the crcdit nceds of the country, and the currency provided by the banks was not flexible cnough to mcet denlands for it. Thc financial panic of 1907 led to extensive examination of the nation's banking structure and finally, after prolonged political debate and compromise, Congrcss enacted the Federal Reserve Act. Under the Act, Congress authorized the establishment of the Federal Reserve System. The Act did not create a central national bank. Instead, thcrc were to be rcgional Federal Rescrvc Banks, with a central Federal Reserve Board to supervise the System. National banks would have to become members of the System, and state banks would have the opportunity to become members. The national banking system continued to come under pressure despitc thc irnprovcments stcrnming from the Fedcral Rescrve Act. A la& numbcr of bnnk failurcs occurrcd, and thc strcsscs of the Grcnt Depression prompted Prcsidcnt Rooscvelt to declarc an emergency bank holiday in March of 1933. When the banks reopened, a series of efforts to increase national regulation and control of the banking industry occurred. In the Banking Act of 1933, Congress established the Federal Deposit Insurance Corporation (FDIC), through which qualified banks would be insurcd. This Act, in addition to providing for insurance, also imposed regulatory requirements designed to strengthen the banking system. Although the insurance was originally limited to member banks of the Federal Reserve System, Congress later cxtended it to state banks. Although substantial changes have since occurred in the regulation of banking, the basic framework of the U.S. banking systeni was put in place with the adoption of the Banking Act of 1933. The Act provided for a dual system of state banks and national banks. It gave the federal government regulatory control over banking through the chartering of national banks, administration of thc Fcdcral Rcscrvc Systcm, and supcr- vision of banks insured by the Fcdcral Deposit Insurance Corporation.

§ 1-20

STATE REGULATION OF BANKS

Comprehensive federal banking legislation was not adopted until passage of thc National Bank Act of 1863 and subsequent amendments to that Act. Originally, all banks were controlled by statc law, either common or statutory, and many states had constitutional provisions governing thc banking busincss. As cxpcricncc with banking grcw, stntc laws on thc subject proliferated to the point that thcre arc now myriad statutes enfranchising banking corporations and creating departments of

state

govcrnnicnt to rcgulatc, supcrvisc, and inspcct thcni.

6. Today thcrc is a dual, state and fcderal, system of banking rcgula- tion. Statc law governs the regulation of state banks unless preempted

5 1-20

OVERVIEW

by federal law as a result of the supremacy clause of the U.S. Consti- tution. Under the supremacy clause, federal law overrides conflicting state law. Thus, in the case of state banks that are members of the Federal Reserve System and state banks that are insured by the Federal Deposit Insurance Corporation (FDIC), there will be both state and federal regulation of the banks' actions. State law covers all aspects of the banking business conducted by state banks: issuance of charters, which set out in detail the powers necessary to carry on daily banking activities such as receiving deposits; prescribing the size of reserves to protect depositors; making loans; investing in specified securities; owning and managing real estate; trading in commercial paper; issuing circu- lating bank notes; and financing businesses. Each state has created a department of banking, under various titles, that supervises and regulates statc banks within its jurisdiction. Thcsc dcparlmcnts cmploy bank cxamincrs and othcr oficials to inspcct the operation of the state banks. Thc books of thcsc banks arc subjcct to periodic audits, and the banks themselves are requircd to issuc annual ' or semiannual financial statements, which are reported to thc banking dcpartmcnt, and which may later be madc public. Statc banking commissioners, in addition to chartering banks, su- pervise and rcgulatc banks to insure thcir solvcncy and liquidity. If audits disclose that the banks are not sound, the commissioner may demand that more capital be raised either by assessment of the stock- holders or from outside sources. If the commissioner deems the bank to bc bcyond solvcncy, hc may closc and liquidate it, distributing the assets according to law to creditors, depositors, and, if anytiling remains, to the stockhoIders.lB The state banking commissioners also have the power to make rules and regulations to carry out their duties and to implement the slatutes. Thus the binding state rules governing the operation of banks may be found in three sources:

(1)

(2)

The constitution of the state; The statutes passed by the legislature; and

(3) The rules promulgated by the banking commissioners.

The constitutions and the statutes are regularly published and should be available at most law libraries; the regulations are a diflercnt matter. A few states have official publications similar to the Federal Register, which is discussed in 3 9-45, or keep central files, as required by statute, that contain the text of all the administrative regulations having the force of law. However, the majority have no such requirements. In

NATURE OF BANKING

3 1-20

these states the regulations are kept on file in the bank commissioner's office, which will usually send, on request, copies of the rules desired. The official addresses of the bank commissioners' ofices are contained in the Table of State Bank Commissioners.

*

TABLE 1.

Alabama

Supcrintendcnt Department of Banking Montgomery, Alabama 36130

Alaska

Director, Division of Banking Sccuritics and Corporations Dcpartment of Commercc Juncau, Alnskn 99801

Arizorla

Superintendcnt of Banks Banking Dcpartmcnt Phocnix, Arizonn 85007

Arka~~sas

State Bank Commissioner Bank Department, Department of Commerce Littlc Rock, Arkansas 72201

Calilornia

Superintendent of Banks Banking Departrncnt San Francisco, California 94104

Colorado

Commissioner Division of Banking, Dcpartment of Regulatory Agencies Denver, Colorado 80203

Conneclicut

Commissioner Banking Department Hartford, Connecticut 061 15

Delaware

Slate Bank Commissioner

Department of Administrative

Services

Dover, Delaware 19901

Stale Bank Commissioners

Florida

Comptroller Department of Banking and Finance Tallahassee, Florida 32304

Georgia

Commissioner Dcpartmcnt of Banking and Finnncc Atlnnto, Gcorgin 30303

Hawaii

Director Dcpartment of Regulatory Agencies Wonolulu, Hawaii 96809

lrlal~o

Director Department of Finance Boise, Idaho 83720

Illinois

Commissioner Banks and Trust Companies Springfield,Illinois 62701

Indiat~a Supervisor Banks and Trust Companies Division, Dcpartment of Financial Institutions Indianapolis, Indiana 46204

Iowa

Superintendent Department of Banking Des Moines. Iowa 50309

Kansas

Commissioner State Banking Department Topcka, Kansas 66612

OVERVIEW

TABLE 1.

State Bank Commissioners

(continued)

Kentucky

Commissioner

Department of Banking and

Securities-

Frankfort, Kentucky 40601

Louisiana Commissioner Office of Financial Institutions, Department of Commcrce

1

Baton Rouge, Louisiana 70804 Maine

Superintendent Bureau of Banking, Department of Business Regulation Augusta, Maine 04333

I

Maryland Bank Commissioner Department of Licensing and Regulating Baltimore, Maryland 21201

I

Massachusetts

Commissioner

Department of Banking and

Insurance Boston, Massachusetls 02202

Michigan Commissioner Financial Institutions Bureau, Dcpartment of Commcrce Lansi&, Michigan 48909

Minnesota

Commissioner of Banks

Department of Commerce

St. Paul, Minnesota 55101

Mississippl Commissioner Department of Banking and Consumer Finance Supervision Jackson, Mississippi 39205

Missouri

Commissioner Division of Finance, Department of

Consumer Affairs, Regulation and Licensing Jeffcrson City, Missouri 65101

Montana Administrator Financial Division, Department of Business Regulation Helena, Montana 59601

Nebraska Director Department of Banking and Finance Lincoln, Nebraska 68509

Nevada Superintendent Banking Division, Department of Commerce Carson City, Nevada 89710

New Hampshire Bank Commissioner Banking Commission Concord, New Hampshire 03301

New Jersey

Commissioner Department of Banking Trenton, New Jersey 08625

New Mexico

Direclor Financial Institutions Division, Commerce and Industry

Santa Department Fe, New Mexico 87503

New York

Superintendent Banking Department Albany, New York 10047

NATURE OF BANKING

North Carolina Commissioner Banking Commission Raleigh, North Carolina 27602

North Dakota Commissioner Department of Banking and Financial Institutions Bismarck. North Dakota 58505

Ohio Superintendent Division of Banks, Department of Commerce Columbus, Ohio 43215

Oklal~oma Commissioner Banking Department Oklahoma City, Oklahoma 73105

Oregon Superintendent of Banks Department of Commerce Salem, Oregon 973 10

Pennsylvania Secretary of Banking Department of Banking Harrisburg, Pennsylvania 17 120

Rhode Island Deputy Bunking Cornmissioncr Department of Business Regulation Providence, Rhodc Island 02903

South Carolina

State Treasurer

State Board of Financial Institutions Columbia, South Carolina 29201

South Dakota Director

+ Division of Banking and Finance Pierre, South Dakota 57501

Tennessee Commissioner Department of Banking Nashville, Tcnncsscc 37219

Texas Commissioner Banking Department Austin, Texas 78705

Utah Commissioner Department of Financial Institutions Salt Lake City, Utah 84101

Vermont Commissioner of Banking Department of Banking and Insurance Montpelier, Vermont 05602

Virginia Commissioner of Financial Institutions Bureau of Financial Institutions Richmond, Virginia 23261

Washington Supervisor of Banking Division of Banking, Department of General Administration Olympia, Washington 98504

West Virginia Commissioncr Department of Banking Charleston, West Virginia 25305

Wisconsin Commissioner Ofice of Commissioner of Banking Madison. Wisconsin 53703

Wyoming Examiner Banking Division Cheyenne, Wyoming 82002

1

5 1-25

OVERVIEW

AN OUTLINE OF THE NATIONAL BANKING SYSTEM

As a result of the historical development of banking in the United States, there are three principal federal regulatory agencies that regulate commercial banks: the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC). There is some ovcrlap in functions between these agencies, which at times has led to differing views on the policies to be followed in bank regulation. For the most part, however, the agencies have cooperated in exercising their re~ponsibilities.~' Each of the agencies will be discussed in detail in subsequent chapters.2E Briefly, The Office of the Cornptroller of the Currency is responsible for chartering national banks. Its primary responsibility is supervising the activities of the national banks. The Board of Governors of the Federal Reservc System, of course, has regulatory authority by statute over all the banks that arc members of the Federal Reserve System and some authority over depository institutions that are not mcmbers of the Federal Reserve System. In this respect, the authority of the Board of Govcmors overlaps to some extent the authority of the Office of the Comptroller of the Currency, since all national banks must be members of the Federal Reserve System. Inso- far as supervision of the banking activities of the member banks is con- cerned, however, the Board of Governors has generally pursued a policy of allowing the Comptroller of thc Currency to be responsible for the examination of national banks that arc rncrnbcrs of ~hcFcdcral Rcscwc System. The Board of Governors, through the individual Fcdcral Rc- serve Banks, is responsible for examining state member banks. The FDIC has regulatory authority over the banks and other de- pository institutions whose deposits are insured b it. Since the FDIC insures the deposits of all member banks of the Federal Reserve System, there is an overlap of authority between the Board of Governors of the

Federal Reserve System and the Office of the Comptmller of the Cur- rency. To avoid duplication of effort, the FDIC limits its supervision to those state banks that are not members of the Federal Reserve System but whose deposits are insured by the FDIC.

21 Hackley, "Our Baming Banking System," 52 Va. L. Rev. 565, 771

(1966).

InThc Board or Govcrnora of thc Fcdcrnl Rcscrvc Systcm and the Comptroller of the Currency are discussed in Chapter 2, and the Federnl Deposit Insurance Corporation is discusscd in Chapter 3.

NATURE OF BANKING

s 1-30

There are also state banks that are neither members of the Federal Reserve System nor have their deposits insured with the FDIC. These statc banks arc rcgulatcd by the appropriate state banking agency. As discusscd in Chaptcr 2 on the Fcdcral Rescrvc System, the Board of Governors has some regulatory authority over even these institutions. Additional agencies have regulatory responsibility for savings and loan associations. Federal savings and loan associations are chartered and rcgulatcd by thc Fcdcral Home Loan Bank Systcrn, to which they are required to belong. Additionally, all federal savings and loan asso- ciations must have their deposits insured by the Federal Savings and Loan Insurance Corporation. This corporation has the responsibility of determining that the associations it insures are following safe and sound practices. Sincc the members of the Fcdcral Home Loan Bank Board serve as the Trustees of the Federal Savings and Loan Insurance Cor- poration, the two agencies pursue complimentary policies. The Federal Savings and Loan Insurancc Corporation, howevcr, has the powcr to insure the dcposits of savings and loan associations that are not members of the Federal Home Loan Bank Board. Whcn such statc associations obtain insurance from the FSLIC, they submit to the authority of the corporation to examine and supervise their activities. The - manncr in which crcdit unions arc rcgulatcd is described in Chapter 7.

t § 1-30 CORRESPONDENT BANKING

Corrcspondcnt banking is n systcn~of rclationships bctwccn banks which cnablcs funds to bc transfcrrcd and chccks to bc paid from onc

The largc distances between cities and

towns in the United States contributed to the development of the cor-

respondent banking system. In earlier days, to facilitate' the collection and payrncnt of checks it was often convenient for a town (or com-

bank to maintain an account with a larger metropolitan bank.

The community bank could use this account to make payrncnt to per- sons within thc service area of the correspondent bank who had checks that were drawn on the community bank. Having such an account could also assist the community bank in collecting chccks that were drawn on institutions locatcd within the service area of the correspondent bank. Through a nationwide network of such correspondents, the banking system developed a workable collection-payment mechanism. The rclationship bctwcen the community bank and the corre- spondcnt bank dcvclopcd to include thc provision of additional scrviccs by thc corrcspondcnt banks. Anlong thc most important of thcsc wcrc thc giving of i~ivcst~ncntndvicc and tllc lending of funds. Additionnlly,

part of the country to another.

munity)

8 1-30

OVERVIEW

the correspondent bank often made loans to officers of the small-town community bank. Since the correspondent arrangement involved the community bank maintaining a substantial interest-free demand deposit with thc corrcspondcnt bank, thc corrcspondcnt bank gcncrally offered the services below cost. Since enactment of the Financial Institutions Regulatory and In- terest Rate Control Act of 1978, correspondent banks must be careful to avoid making loans to the officers, dircctors, and major stockholders of their community bank customers on terms not generally available to other customers.2o Similarly, the community bank may not make loans to the officers, directors, or principal stockholders of the banks where it has a correspondent account on terms other than those generally avail- able to its other customer^.^^ The Act does not prohibit such loans:

what jt proscribes is favorable treatment. No loans may be made "unless such extension of credit is made on substantially the same terms, in- cluding interest rates and collateral as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features." Violations of the Act carry a civil penalty of not more than $I ,000 per day for each day during which the violation exists. These penalties

are assessed initially by the

banks, the Board

state member bank, and the Federal Deposit Insurance Corporation (FDIC) for insured nonmember state banks.82 The Act further establishes reporting requirements whenever an extension of credit is made to the executive officer or major stockholder

of a bank that has a correspondent relationship with thc bank extending

the

bank that the person receiving the credit is affiliated with must file reports." These reporting requircmcnts apply only in thc case of banks insurcd by the FDIC, but thc prohibition of thc Act against favorable loans to ollicers, dircctors, and major stockholdcrs npplics to dl banks, state and federal.36 The manipulation of correspondent balances to serve the private

Both the person to whom the credit is extended and the

Cornptrollcr of the Currcncy for national

df dovernors of the Federal Reserve System for a

2O 12 U.S.C. 5 1972(2)(A) (Supp. 111 1979). See 8 4-40.

30

8'

12 U.S.C.

Id.

I972(2) (A)(Supp. 111 1979).

82 12 U.S.C.

8%Id.

12 U.S.C. 8 1972(2)(G) (Supp. 111 1979).

85 12 U.S.C. 8 1841(c), 1971 (S