Needs-based bankruptcy legislation has been introduced in the House that is virtually identical to a bill bottled up in the closing days of the last Congress by the Clinton Administration and liberal Democrats. But, unless major concessions are made by the financial services industry coalition that is pumping huge bucks into lobbying for the bill, congressional staffers believe it will mostly likely suffer the same fate as last year.

The bill’s supporters are primarily credit card lenders, although the mortgage industry is supporting provisions that bar "cramdowns," what the industry terms "inappropriate" reductions in the value of secured residential liens. That could be crucial if a downturn in the economy places in doubt the ability of unemployed consumers to repay home equity loans.

The core of the bill is a provision that requires courts to take a debtor’s income, expenses, obligations and any special circumstances into account when determining whether the debtor has the capacity to repay a portion of his or her debts. If it is determined they have the capacity to repay some of the debts, they would be barred from discharging of all debts under Chapter 7 of the bankruptcy code.

However, the bill preserves the right of any filer earning less than the median national income–currently about $51,000 for a family of four–to automatically choose Chapter 7 or Chapter 13, which provides court protection while the debtor reorganizes his debts. The primary sponsor of the new bill, Rep. George W. Gekas, R-Pa., said this provision "preserves, protects and enhances the ability (of lower income families) to obtain a legitimate ‘fresh start’ from bankruptcy."

For lenders, the bill requires more disclosure about the effect of paying only the minimum payment on credit cards and other non-secured debt, limits the ability of a creditor to terminate an account just because a consumer pays his or her bill in full each month, and establishes new creditor penalties designed to encourage good-faith pre-bankruptcy settlements with debtors.

The administration is being supported in its opposition to the bill by such consumer groups as the Consumer Federation of America. "This flawed approach is being pushed by those who want to please powerful members of the credit card lobby," said a CFA official. "It fails consumers because it leaves families in crisis stranded while giving credit card companies free reign to continue to engage in misleading and coercive practices."

Among provisions being sought by the consumer group is "a balanced approach" that includes meaningful disclosures about the true price of credit and proper protection from credit company abuses. They also want tight restrictions on marketing credit cards to minors who may have no ability to repay, outlawing live checks and shutting down the practice of credit card companies that cancel credit cards to consumers who pay off on time.

The consumer groups say credit card disclosures and marketing practices, including what they term the "detrimental" treatment of small businesses, also need to be addressed.

The consumer groups cite a recent study from the American Bankruptcy Institute which shows that only 3% of those who file for bankruptcy have the ability to repay their debts–a far lower proportion than claimed by the credit card industry

The FDIC recently clarified how bankers can invest in trust preferred securities by saying that state nonmember banks are not limited in the same way national banks are, a ruling bolstering the state charter.

National banks, which are overseen by the Office of the Comptroller of the Currency, have a limit of 10% per issuer. The FDIC said that limit does not apply to state non-member banks. The only limit is the one imposed by each state.

"I think what the FDIC’s letter does is clarify the state banks’ flexibility in their capitalization, and that can only be a good thing," said Ellen Lamb, spokeswoman for the Conference of State Bank Supervisors.

The OCC, for its part, said the issue is one of many it is monitoring in its ongoing efforts to be sure the national banking charter is competitive. The 10% limit is mandated by law, a spokesman said, and would have to be changed by Congress. Although the agency would be willing to ask Congress for an increase if it seemed important to its banks, the spokesman said, the agency would also have to consider safety and soundness issues.

The Joint Forum on Financial Conglomerates, an international group of senior bank, insurance and securities supervisors, released final documents Feb. 18 on the supervision of large financial groups. The documents were criticized last week by a group of large international institutions.

The guidance addresses some of the issues faced by supervisors of large groups with mixed activities, including banking, insurance and securities.

The release was called unfortunate by an official of the Institute of International Finance, a group that represents most of the largest financial institutions worldwide.

"It is highly disappointing that the Joint Forum chose to not make significant changes to the techniques used for assessing capital adequacy," said Barbara C. Matthews, the IIF’s banking advisor and regulatory counsel. Specifically, the forum does not discuss risk-based approaches, she said. Furthermore, on controlling intra-group risk, the issues would be best addressed by controlling it through standards on affiliate transactions and limits on intra-groups concentration credit, she said.

While documents released by affiliates of the Switzerland-based Bank for International Settlement are usually used as reference by financial regulators, this one may become obsolete shortly, observers noted.

If a proposal announced two weeks ago and supported by the Group of 7 is adopted, a Financial Stability Forum could be created soon that would supersede the BIS joint forum. Furthermore, since the International Monetary Fund would be part of the new forum, it is likely that existing BIS guidance would be revisited, sources said.

Smaller banks may soon be able to offer customers a financial service provided only by large banks until now thanks to a plan by an upstate New York bank.

Canandaigua National Corp. plans to offer its legal and regulatory expertise in the mutal fund market to other banks at a reduced cost either by outsourcing its investment services to small banks or by helping them start up their own mutual fund family.

"It can cost a bank up to $70,000 to begin offering mutual funds," Robert Swartout, vice president and investment officer at the $500-million-asset bank, told Financial Modernization Report last week. "But through working with us, other banks could save a bundle of money and not have to reinvent the wheel by spending $200 an hour in lawyers’ fees."

Sharing resources will help banks profit from the mutual fund business, said Swartout, adding Canandaigua plans to begin offering its legal and regulatory expertise in three-to-six months.

He said keeping up with the regulatory burden of a fund family can be "a grind" for small banks. "But we think we might be able to deliver our system of dealing with the Blue Sky Laws (regarding full and proper disclosure by securities sellers) and other regulatory matters relatively inexpensively."

Swartout said a pool of community banks have already expressed interest in Canandaigua’s program. He said once the program is up and running Canandaigua will add staff to handle the legal and regulatory work for its small bank clients.

The Electronic Check Clearing House Organization (ECCHO), the industry group that sets rules for and promotes the use of electronic check presentment (ECP), is now providing smaller banks the benefit of ECCHO’s rules coverage to limit the losses incurred through snafus in check processing.

The not-for-profit group estimates ECP will save banks using the system $2-3 billion a year. David Walker, ECCHO’s executive director, said the value of ECP to the paying bank comes from posting items a day earlier than if it had waited on a paper check.

"The risk to the depository bank is reduced because it can get return notices faster so it can reduce check write offs. The faster they can be notified about return items, the faster they can protect themselves, reducing losses," Walker said.

ECCHO is now made up of about 20 of the largest banks in the country. Those members pay big fees, $100,000 up front and as much as $80,000 in annual fees. The fees go to pay for lawyers and staff to support the complicated set of ECCHO rules that are becoming an industry standard, and to promote the use of the rules throughout the industry. Now, smaller banks can become members after the board of directors, comprising executives from full-member banks, decided at its thrice-yearly meeting in February to allow them entry through trade groups such as the Independent Bankers Association of America. The smaller banks can join for as little as $100 a year, based upon size.

By following the ECCHO’s rules, which are enforced by its unique status under the Uniform Commercial Code, banks have extra protection because their check counterparties as well as other parties in volved in the transaction are required to follow the rules. Other check processing rules, sources said, do not have this requirement.

Industry organizations such as the Bankers Roundtable agree that implementing ECP should be one of the industry’s highest objectives. It has the goal of implementing 50% of the largest banks’ check volume by 2001. Walker said he does not believe this goal can be met through the biggest banks alone, despite their massive check volume, and that the participation of smaller banks is neccessary.

Borrowings from the Federal Home Loan Bank system will be a "very important" source of funding for more community lenders over the next three years, according to a forthcoming survey from Grant Thornton.

According to Grant Thornton’s annual survey of community banks, 43% of all community banks anticipate increasing their use of FHLB borrowings in 2009.

"Stable and affordable funding is becoming something of a survival issue for community banks," said Diane Casey, managing partner of financial services for Grant Thornton.

The survey also found that 75% of all community banks said funding with core deposits will be more difficult in three years, up from 62% in 1998. At the same time, 44% of all community banks predict that FHLB borrowings, also known as advances, will be very important as a funding source for their bank, compared with 27% that describe these borrowings as very important today.

Of the 82% of respondents that are FHLB members, 51% expect FHLB advances to be very important in three years, up from 33% today.

In the debate over who should pay more to bail out the decade-old thrift debacle, recently revived by the American Bankers Association, America’s Community Bankers is fighting back.

ACB, which represents thrifts, is lobbying Congress heavily to stick to the original payment schedule for the Bank Insurance Fund and the Savings Association Insurance Fund. The issue was decided in 1996 when a deal was cut to have each industry pay a certain amount into the funds to cover the cost of the bailout. Those amounts o 6.25 basis points for thrifts and 1.25 basis points for banks–are weighted more heavily on the thrift side now, but amount to more money being paid by the bankers because that industry is larger.

Starting in 2010, each industry would pay 2.3 basis points, an increase for the bankers and a decrease for thrifts. Part of the deal was that the thrift and bank charters would be melded into one when the payments were equalized. The ABA cried foul recently when it learned that there is a possibility that may not happen, because new financial modernization legislation would not eliminate the unitary thrift charter.

The ACB’s message last week was that the 1996 solution was the correct one and it would be a futile "reopening of wounds" to rejigger the deal now. In a document entitled "FICO Obligation: The Real Story," obtained by Financial Modernization Report, the group outlined why it believes the deal did not "squeeze" banks and why it should stay in force. The document said ending the requirement that SAIF members pay higher premiums than BIF members would "risk heightening the premium disparity it averted in 1996" and "pull the rug from under the typical SAIF-insured institution that has paid at least 33 times more in premiums to the FDIC since 1996 than an equivalently sized BIF-insured institution."

Sky Financial, formed after the merger last summer of two Ohio banks and the winter acquisition of a third, is in the process of closing two more deals. Its aggressive strategy is blending core banking and aggressive feebased businesses, and is turning the bank into a multi-service financial contender.

CEO David Francisco likens the firm to a mini Norwest, touting a strong sales culture and a belief in growing the banking business through acquisitions, but pointing to an emphasis on fee-based income.

The merger of $1.7-billion-asset Mid Am Bank of Toledo with Citizens Bancshares of Salinaville’s $1.9 billion, and the December acquisition of The Ohio Bank of Findley plus the pending acquisitions of Wood Bancorp of Bowling Green and First Western Bancorp of New Castle, Pa., bring the company’s heft to $7.3 billion. The latter two deals are scheduled to close in the second and third quarters, respectively. The company has melded nine charters into three, and will become the seventh-largest bank in Ohio, a state with several big players, including National City, Fifth Third, KeyBank and the old Bank One.

"We made a decision three or four years ago that traditional banking business is becoming more and more commoditized, and with pressure on margins going forward, we know we’re not going to grow our net income on banking 15% a year. We have to augment that and the other piece is fee-based businesses," he said.

One of the bank’s goals is to grow earnings per share (EPS) at 12-15% a year. Management’s thinking is 10-11% will come from the core banking franchise, a couple more out of acquisition efforts and the last few from the fee-based businesses. Other goals are to continue to operate in the top quartile of U.S. banks in earnings, revenue growth, efficiency and asset quality.

The company’s performance has impressed industry analysts, garnering a favorable rating from banking specialist Keefe Bryuette & Woods’s analyst Brock Vandervliet. Vandervliet upgraded his Feb. 9 rating of "attractive" to "buy," the firm’s highest rating, last week upon analysis of the company’s first quarter performance. He said he expects the company’s stock to trade at $33 a share one year from now, a roughly 27% increase from the current price of $25.75. The company competes in the rural markets of Ohio and Pennsylvania and has a limited presence in Michigan and West Virginia.

In the last three years the company has built up mass, either acquiring or building from scratch nine subsidiaries in such diverse businesses as specialty health finance and plain old credit insurance. The companies are in the process of getting name changes to include the word Sky.

The company’s next move is the acquisition of a full-service insurance agency to augment the credit insurance business, expected to be announced in the next several weeks. Francisco said the company is actively shopping for a company with $8 to $10 million in commission revenue and, most importantly, canny management.

"There is lots of potential for us to expand in the broad-based insurance. We can do a lot of business referrals once we get this in place," Francisco said, describing it as "another industry in the early stages of consolidation." The new company would be added into Sky Insurance which operates in Ohio and Michigan.

In addition to the credit insurance, the company has Mid Am Title Insurance Agency, which operates only in Michigan. That company will remain separate from the other insurance business.

Francisco said one of the nice things about now being reasonably large is having extra money to spend on "experiments" such as acquiring local Internet service provider ValueNet. The bank bought the concern to see if it could lure the service’s 1,800 customers who were not already with the bank into the fold. The cost of the experiment (roughly $200,000) and the amount it brings in–enough to break even–is not so important, Francisco said.

"It’s the concept we’re trying to prove. If it works, we’ll do 10 more," he said, adding that the landscape is littered with small local Internet service providers.

Another interesting chance Sky took was starting its own specialty finance company, Mid Am Credit Corp., which provides financing mainly for dentists. The Columbus-based venture is now the number two provider of loans to dentists nationwide, with $135 million in volume, earning $4.5 million last year. "Neat thing about a company investment of $300,000," Francisco said. "I’d take six more, please."

Other businesses the bank has are not the big money makers Mid Am Credit Corp. is, but are critical pieces of the overall mix the bank offers customers, Francisco said. The bank’s brokerage business, Sky Investments, based in Bryan, Ohio, is a full-service broker dealer in 19 states and in the bank’s branches.

The company also has a collection company headquartered in Florida, Sky Asset Management, which is on the cusp of being profitable, Francisco said, pending some infrastructure work. Mid Am Financial Services Inc., based in Indianapolis, is a B, C and D mortgage lender which helps the bank keep customers whose credit exposure it might not want on the balance sheet. The bank does not do portfolio loans, instead selling them to a wide variety of buyers on a flow basis. Although at the break-even point now, budgeted to make $600,000 this year, the division probably has as great a potential to be a big money maker as any of the other start-ups, Francisco said, because it is volume driven.

"We’re three times as big as we were at the start of 2008," said Francisco. We have a much larger core bank base to cross sell these other services through. We got all the pieces in place, we’re comfortable with it, now we have to go and sell the living daylights out of it and make it happen."

In a new kind of municipal-revenue bond underwriting deal, Commerce Capital Markets is working on helping large cities fund mass transit improvements without having to wait until the federal grant money has trickled in.

The Cherry Hill, N.J.-based investment bank subsidiary of Commerce Bancorp would underwrite a bond that would be paid off entirely through future federal government grants. The idea is similar to grant anticipation revenue vehicle (Garvee) bonds which have been used in the last year to pay for highways, but not mass transit. Commerce Capital’s methodology on the new bonds would be different, according to Vince Stafford, CEO of the firm. Commerce Capital is proposing that the deals would not need the general obligation bonds that many Garvees require. That would be the case with deals that Commerce Capital is proposing to two major cities–which the firm declined to name until the deals are clinched.

This innovation was made possible last summer in Congress through legislation appropriating $217 billion for highway and mass transit spending over six years, called the Transportation Equity Act for the 21st Century, or Tea-21. This legislation made it a virtual guarantee that the funds will be there for municipalities to use, a change from before. Although three states used Garvee bonds which did not require additional backing from general obligation bonds–known as "naked Garvees"–last year to fund highways, the proceedure had not yet been used for mass transit.

Stafford explained the cities can get their projects started sooner by getting funding this way than getting a grant of a certain number of years and having to wait until nearly the end of that time to start. He said he is expecting a decision from one of the cities sometime this week.

Banks of all sizes would be able to conduct any securities and insurance agency activities in an operating subsidiary under compromise financial modernization legislation that is scheduled to be marked up Thursday in the House Banking Committee.

At the same time, the Senate Banking Committee appears to have fallen into partisan bickering. Legislation is being drafted by the Republicans on the committee that would reverse earlier agreements and give the insurance industry virtually everything it wants. The revised bill would allow banks with assets of $500 million or less to conduct insurance underwriting and other nonbanking activities in an operating subsidiary, and makes few concessions to the insurance agents industry. However, rollbacks of CRA provisions proposed in the bill are likely to divide the committee along party lines. A markup is projected for Wednesday, but Democrats say they will have an alternate bill and need a delay to study the new Republican version.

Under a copy of the details of the House pact obtained by Financial Modernization Report, there would be no commercial basket allowed for financial institutions covered under the law. However, language is being drafted that would allow activities that are "complementary" to financial activities and other lines of business, provided these activities remain "small," according to a synopsis of the compromise prepared by committee staffers.

The legislation would still bar bank underwriting of insurance and real estate development in operating subsidiaries, and the definition of insurance and a mandate for "functional regulation" would remain. While the agreement could still blow up, Reps. James Leach, R-Iowa, and John LaFalce, D- N.Y., chairman and ranking minority member of the House Banking Committee, appear resolved to reach an agreement on bipartisan legislation that can be passed by the committee. Under the plan, the markup will begin March 4 but is unlikely to be completed until the middle of the next week, committee staffers said.

The compromise House bill will provide the agents with safe harbors contained in last year’s final financial modernization package. However, LaFalce and Treasury Department Secretary Robert Rubin are said to be "adamant" about maintaining deference to the Comptroller of the Currency in disputes over whether a product is banking or insurance. LaFalce is also pushing for language that will allow banks to conduct insurance activities in all branches, eliminating the "place of 5,000" provision that has effectively been obliterated anyway through Comptroller interpretations. The American Council of Life Insurance is said to be insisting on no deference to the Comptroller.

A key provision in the Leach/LaFalce compromise is language that the Federal Reserve Board gets to determine for holding company affiliates what is "financial in nature," and therefore able to be conducted in an affiliate, subject to a veto by the Treasury. It is the other way around for opsubs, with the Comptroller able to determine what is "financial in nature" and therefore capable of being conducted in an opsub, subject to a Fed veto