Legislative Briefing

1. House Financial Institutions Committee Legislative Briefing Texas Department of Banking Testimony of: Randall S. James – Commissioner February 7, 2005

2. Statutory Mandates • The Department of Banking is entrusted with insuring the safety of the public’s money held by institutions that provide financial services. We charter and/or license the following businesses: • Banks • Chapter 31 of the Texas Finance Code requires the Banking Commissioner to examine each state bank annually or more often as the Banking Commissioner considers necessary to safeguard the interests of depositors, creditors, shareholders, participants and participant-transferees. • Trust Companies • Chapter 181 of the Texas Finance Code requires the Banking Commissioner to examine each state trust company annually or more often as the Banking Commissioner considers necessary to safeguard the interests of clients, creditors, shareholders, participants and participant-transferees. • Offices of Foreign Bank Agencies • Chapter 204 of the Texas Finance Code requires the Banking Commissioner to examine each Texas state branch, agency or representative office of a foreign bank annually or more often as the Banking Commissioner considers necessary to determine if the office is operated in a safe and sound manner. Legislative Briefing

3. Statutory Mandates • Prepaid Funeral Contract Sellers, Perpetual Care Cemeteries, Currency Exchange Businesses, Sale of Check Licensees, and Private Child Support Enforcement Agencies • Chapter 154 of the Texas Finance Code requires that the Banking Commissioner examine each prepaid funeral contract seller annually or more often as deemed necessary to protect the prepaid funds and to assure that the contracted services and merchandise are provided at the time of death. • Chapter 712 of the Texas Health and Safety Code requires that the Banking Commissioner examine each perpetual care cemetery annually or more often as deemed necessary to protect and safeguard the perpetual care trust funds and to assure that the fund income is used to maintain and support cemetery maintenance. • Chapter 153 of the Texas Finance Code requires that the Banking Commissioner examine each currency exchange, transportation and transmission licensee annually to protect and safeguard customer funds and prevent money laundering and funding of terrorist activities. • Chapter 152 of the Texas Finance Code requires that the Banking Commissioner examine each sale of check licensee annually or more often as deemed necessary to protect and safeguard customer funds and prevent money laundering and funding of terrorist activities. • Chapter 396 of the Texas Finance Code requires the Banking Commissioner to monitor private child support enforcement agencies through registration and investigation of consumer complaints. Legislative Briefing

4. Profile of Regulated Entities Information as of September 30, 2004. * Includes (13) out-of-state state chartered banks operating in Texas with $13.5 billion in total assets. Legislative Briefing

5. Supervisory Information The total number of state-chartered banking organizations has declined. Most of this reduction is the result of merger activity. As a result, the surviving banks are substantially larger in size and operate many more branch locations. As the size of the organization increases, so does the complexity of its operations. Larger banks engage in more sophisticated investment ventures and provide a greater variety of products and services to their customers. Even though the number of banking organizations has decreased, the assets and branches have increased, and agency resources needed to appropriately supervise these businesses have not diminished. Larger and more complex banks also necessitate a better trained and experienced staff of examiners, including more subject matter specialists, to review their operations. • [1] Does not include out-of-state chartered banks operating in Texas. • [2] Includes Bank and Trust field examiners and related directors. Legislative Briefing

6. Consumer Assistance Information At the suggestion of the Sunset Advisory Commission, legislation was approved that requires our supervised entities to provide their customers with information about how to contact the Department in the event of a problem. Consumers are contacting the agency looking for help in resolving problems with institutions or seeking answers to financial questions. The need has outstripped the available resources, and additional staffing is needed. Staff assisted approximately 2,500 callers on problems with financial service providers not supervised by the Department. Legislative Briefing

7. Issues Affecting the Agency • Entity supervision continues to increase in scope and complexity. • Bank and Trust Supervision – Increased supervision is occurring in: (i) anti-terrorist and money laundering detection; (ii) strengthening corporate governance practices; (iii) protecting consumer information; (iv) credit underwriting, (v) overdraft protection plans, and (vii) interest rate risk analysis. Other factors that influence the level of required supervisory resources include: • Competition for branch expansion, mergers and acquisitions, de novo charters, and nonbank activities. • Evolution of the industry into a greater diversity of financial products. • Protection of consumer interests and privacy and preventing identity theft and abusive credit practices. • Advancements in technology. • Special Audits – (Prepaid Funeral Contract Providers, Perpetual Care Cemeteries, Sale of Checks, and Currency Exchange and Transmission) • Evolving methods of transferring funds. • Industry investments into riskier instruments that yield higher returns. • Money service business bonding is becoming increasingly more difficult to acquire. • Compliance with anti-money laundering laws. Legislative Briefing

8. Proposed Legislation • Statutory requirements for operation of this industry are established in the Finance Code, Chapters 152 and 153. • Chapter 152 is primarily a consumer protection statute that focuses on the safety and soundness of the check seller and includes provisions to ensure that the seller will be able to meet its payment obligations upon presentation of the payment instrument. • Although Chapter 153 includes some consumer protection provisions, it is primarily designed to prevent money laundering by regulating the receipt of currency for purposes of exchange, transmission or transportation. • The new MSBA consolidates the regulation of money service businesses into one act and creates a statutory framework that treats functionally similar money service businesses in a uniform manner. • Texas Money Services Business Act (MSBA): Proposed bill to consolidate the regulation of money service businesses into one modern act. • Sales of Undeveloped Mausoleum Spaces: Proposed bill to regulate interment sales in a “to-be-built” mausoleum. • Requires certain funds to be placed in a preconstruction trust account or requires the seller to be bonded to ensure funds will be available to construct the mausoleum. • Proposed bill also: (1) provides for examination authority of records relating to undeveloped mausoleums; (2) requires that construction begin within 48 months from the sale of the first contract; (3) provides for periodic draws while construction is in progress; and, (4) addresses refund requirements if death occurs prior to completion. Legislative Briefing

9. Proposed Legislation • The Department stands ready to act as a resource outlet to state leadership on these other issues expected to be considered this legislative session. • Texas Finance Code rewrite, • Usury, • Identity theft, and • Preemption of state law by federal authorities. Legislative Briefing