Proposed Amendments to 7 TAC §3.36

Title 7. Banking and Securities
Part 1. Finance Commission of Texas
Chapter 3. State Bank Regulation
Subchapter B. General
7 TAC §3.36

NOTE: This document was submitted to the Texas Register on the date indicated below. This is not the actual publication; the editorial staff of the Texas Register sometimes edits the submission. The Texas Department of Banking therefore does not guarantee the exact accuracy of this document.

Date: October 18, 2013

The Finance Commission of Texas (the commission), on behalf of the Texas Department of Banking (the department), proposes to amend §3.36, concerning specialty examination fees applicable to state banks, bank affiliates and service providers, and bank holding companies, among others.

Pursuant to Finance Code, §16.003, the department is charged with responsibility for all direct and indirect costs of its existence and operation, and may not directly or indirectly cause the general revenue fund to incur any of such costs. Under Finance Code, §31.106, each state bank has a duty to pay fees to fund the cost of examination; the equitable or proportionate cost of maintenance and operation of the department; and the cost of enforcement of Finance Code, Title 3, Subtitle A, known as the Texas Banking Act. In that connection, Finance Code, §31.003(a)(4), authorizes the commission to adopt necessary or reasonable rules regarding recovery of the cost of maintaining and operating the department and the cost of enforcing the Texas Banking Act, by imposing and collecting ratable and equitable fees for notices, applications, and examinations. Finance Code, Title 3, Subtitle G, governing bank holding companies, interstate branching, and foreign banks, was once part of Subtitle A but now separately authorizes the commission to adopt rules under the same standards, see Finance Code, §201.003(a)(4).

Most regulatory programs administered by the department are supported by similar language, requiring each regulated industry to pay its proportionate share of the cost of regulation. The purpose of a fee charged by the department, whether the fee is for an application, an examination, or another purpose, is to enable the department to be self-supporting and each regulatory program to be self-sustaining. The department therefore must periodically evaluate its operations to determine whether the department’s fee structure equitably allocates the cost of regulation as required by statute.

A key regulatory function for which the cost of operations exceeds related revenue is the examination of state trust companies, state bank fiduciary activities, and other special examinations and investigations, including examinations of bank holding companies, interstate branches of out-of-state, state banks in Texas as host state, state bank affiliates, and third-party contractors performing activities on behalf of state banks. The specialty examination fee under the Texas Banking Act is addressed in this proposal. A proposal to increase the fee for examination of state trust companies, by amending §17.22, appears elsewhere in this edition of the Texas Register. Another regulatory function that no longer adequately supports the cost of operations is the applications process for banks, trust companies, and money services businesses. Proposals to amend §15.2, concerning application fees for banks, §21.2, concerning application fees for trust companies, and §33.27, concerning license fees for money services businesses, also appear elsewhere in this edition of the Texas Register.

Existing §3.36(h) specifies a daily rate of $600 per examiner per day for conducting an examination of a state bank trust department and for other special examinations and investigations, including examination of a bank holding company that owns a state bank, an interstate branch of a state bank in Texas as host state, an affiliate of a state bank, and a third-party contractor performing activities on behalf of a state bank. That rate was last revised a decade ago, see the August 29, 2003, edition of the Texas Register (28 TexReg 7347). The proposed rate is expressed as up to $110 per examiner hour (equivalent to $880 per examiner per day), with banking commissioner discretion to charge a lower rate in a specific instance for equitable reasons.

To determine the rate of $110 per examiner hour, the department compiled the salaries of all trust examiners and the chief trust examiner (the supervisor of trust examinations), and divided by available billable hours (excluding vacation leave, sick leave, and holidays). The resulting base rate was grossed up to include indirect payroll costs and a nominal allocation for costs of indirect administration. Additional indirect costs exist that could be and perhaps should be allocated to the specialty examination function, but the department is concerned that the resulting fee increase would be unreasonable to implement in a single step. Although the proposed fee increase will not completely fund the currently anticipated revenue shortfall in future years, the department intends to review the efficiency of its operations and implement examination efficiencies and other expense reduction strategies to achieve a more balanced operation. However, adequacy of the proposed rate of $110 per examiner hour may have to be revisited in two or three years.

Robert L. Bacon, Deputy Commissioner, Texas Department of Banking, has determined that for the first five-year period the proposed rule as amended is in effect, there will be fiscal implications for state government (but not for local government) as a result of enforcing or administering the rule. The increased fee revenue from specialty examinations is required to partially offset the department’s projected budget deficit for fiscal year 2014 and subsequent years. Mr. Bacon estimates that the proposed fee increase in §3.36(h) will generate an additional $197,000 in revenue for each year of the first five-year period the proposed rule is in effect.

Mr. Bacon also has determined that for each year of the first five-year period the amended section as proposed will be in effect, the public benefit anticipated as a result of the amendments will be better matching of the actual cost of regulation with the service provided, for the purpose of achieving economic self-sufficiency for trust and specialty examination functions within the department.

For each year of the first five years that the amended rule will be in effect, there will be economic costs to persons required to comply with the amended rule as proposed. There will be adverse economic effect on small businesses or micro-businesses, and no differences in the cost of compliance on a per hour basis for small businesses as compared to large businesses.

Because the proposed fee is hourly, the annual cost of compliance for each state bank will depend on a number of considerations. Generally, the larger the institution or trust department, the more hours required for an examination, but other factors make this generalization unhelpful. A bank trust department administering complex trusts may require more hours in an examination than would be required for a similarly sized bank with a trust department administering only individual retirement accounts with conventional financial assets, for example. Further, the frequency of examination will vary according to the composite rating assigned to the bank, see Commissioner Policy Memorandum Number 1004. In general, more frequent examinations are performed on higher risk institutions. A highly rated bank trust department may only be examined once every 18 months, a moderately rated bank once every 12 months, and a poorly rated or higher risk bank once every six months.

Currently there are 39 state banks with trust departments or other activities subject to examination based on the hourly fee. In conducting its analysis, the department determined an average annualized cost of compliance separately based on historical costs of trust and other specialty examinations for these banks. Two of these banks are micro-businesses, and 17 (including the two micro-businesses) are considered small businesses, as those terms are defined in Government Code, §2006.001. The remaining 22 banks are large businesses. The department determined that the average annual cost of compliance for each year of the first five years that the amended rule will be in effect is $500 for a state bank that is a micro-business, $700 for a state bank that is a small business, and $8,450 for a bank that is a large business. To possibly reduce the adverse economic effect on smaller institutions, the proposed amendments to §3.36(h) will grant discretion to the banking commissioner to charge a lesser amount than the proposed $110 per hour fee in connection with a specific examination or investigation, for equitable reasons.

To be considered, comments on the proposed amendments must be submitted no later than 5:00 p.m. on December 2, 2013. Comments should be addressed to General Counsel, Legal Division, Texas Department of Banking, 2601 North Lamar Boulevard, Suite 300, Austin, Texas 78705-4294. Comments may also be submitted by email to legal@dob.texas.gov.

The amended section is proposed under Finance Code, §31.003(a)(4) and §201.003(a)(4), which authorizes the commission to adopt necessary or reasonable rules regarding recovery of the cost of maintaining and operating the department and the cost of law enforcement by imposing and collecting ratable and equitable fees for notices, applications, and examinations. As required by Finance Code, §31.003(b) and §201.003(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive position of state banks with regard to national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development in this state.

Finance Code, §§31.105 - 31.107, 201.105, 202.005, 203.007, and 204.003, are affected by the proposed amended section.

§3.36. Annual Assessments and Specialty Examination Fees.

(a) - (g)  (No change.)

(h)  Specialty examination fees.

(1)  Examinations of fiduciary activities and other special examinations and investigations, including but not limited to examinations of bank holding companies, interstate branches of state banks in Texas as host state, affiliates, and third-party contractors, are subject to a separate charge to cover the cost of time and expenses incurred in these examinations.

(2)  The fee for an examination under this subsection will be calculated at a [uniform] rate not to exceed $110 [of $600] per examiner hour, to recoup [per day to cover the cost of the examinations including] the salary expense of examiners plus a proportionate share of department overhead allocable to the examination function. The banking commissioner in the exercise of discretion may lower the [uniform] rate in connection with a specific examination or investigation for equitable reasons, without the prior approval of the finance commission.

(3)  In connection with an examination under this subsection, the regulated entity or other legally responsible party shall pay to the department the examination fee set forth in paragraph (2) of this subsection, and shall also pay to the department an amount for actual travel expenses incurred by the examiners, including mileage, public transportation, food, and lodging.

(i)  (No change.)