History of the Banking Industry in Texas and the Department
In 1845, the first Constitution of the State of Texas provided that "[n]o corporate body shall hereafter be created, renewed, or extended, with banking or discounting privileges," and this prohibition against the chartering of banks was carried forward into the Constitutions of 1861 and 1866, deleted in the Constitution of 1869, and added back into the present-day Constitution of 1876 as Article XVI, Section 16. Banking certainly existed during these periods but was dominated by private, unincorporated banks, many of which issued their own currency.
In 1865, the first national bank in Texas was organized in Galveston.
During the period 1869-1876, a number of state-chartered banks were created by special acts of the Legislature. Ten additional state banks were established under a general law passed in 1874. Only a few of these banks ever actually opened for business. From 1876 to 1900, banking in Texas was conducted by private banks, existing state banks, and national banks.
As of 1890, 148 private banks were operating in Texas.
As of 1900, 440 national banks existed in Texas.
In 1904, Article XVI, Section 16, of the Constitution was amended to permit state-chartered banks, by permitting the Legislature to authorize the incorporation and regulation of corporate bodies with banking and discounting privileges. The amendment imposed personal liability on stockholders for debts of such corporate bodies at the time of stock purchase, and prohibited foreign corporations from exercising banking or discounting privileges in this state.
In 1905, the 29th Legislature adopted by general law a system of corporate state bank chartering and regulation, as authorized by constitutional amendment. State bank charters were obtained by filing articles with the Secretary of State, and supervision of state banks was assigned to the Commissioner of Agriculture, Insurance, Statistics, and History, under the title of Superintendent of Banking (for which duties the commissioner was paid an additional $500 annually). Bank examinations were directed to be conducted once each year. The Superintendent was given authority to direct the discontinuance of "illegal and unsafe and unauthorized practices," the correction of improper entries, and the repayment of illegal disbursements (essentially the equivalent of the modern "cease and desist order.") The failure of an entity to comply with the directions given would be referred to the Office of Attorney General for appropriate action.
In 1907, the 30th Legislature created the Department of Agriculture and the former agency was renamed the state Department of Insurance and Banking.
By the end of 1907, there were more than 300 state banks operating in Texas.
In 1909, due to public agitation created by the 1907 panic, the 31st Legislature passed the Texas Guaranty Law to implement a bank deposit protection system with mandatory bank participation. The Texas Guaranty Law was administered by the newly created State Banking Board, comprised of the Attorney General, the State Treasurer, and the Commissioner of Insurance and Banking. Charters were still obtained without investigation from the Secretary of State. This act placed the duty on the Commissioner of Insurance and Banking to examine each bank every three months and authorized the Commissioner to hire bank examiners. No employee of the Department of Insurance and Banking could have a direct or indirect financial interest in a supervised entity.
In 1909, the 31st Legislature created the Texas Library and Historical Commission, transferring to it the duties of statistical and historical work from the Insurance and Banking Commissioner.
In 1913, in response to overcrowded banking and unsafe practices, the 33rd Legislature enacted revisions that transferred chartering authority to the State Banking Board. The Board was required to investigate and verify the financial and moral integrity of the incorporators and make findings very similar to those in the law today, i.e., that a public necessity existed for the bank and that the incorporators were acting in good faith.
In 1913, the 33rd Legislature enacted laws relating to the incorporation and regulation of state building and loan associations, assigning responsibility to the Commissioner of Insurance and Banking. State building and loan associations existed prior to 1913, but had all been created by special acts of the Legislature.
In 1913, the 33rd Legislature authorized formation of "rural credit unions," and assigned chartering and supervisory authority to the bank commissioner and the State Bank Commission. At this point, there was no "Bank Commissioner" with that title, so presumably it was the Commissioner of Insurance and Banking which was intended.
In 1915, the banking division staff of the Department of Insurance and Banking consisted of five clerical employees and 17 field examiners.
In 1917, the 35th Legislature created loan and investment companies and placed supervisory authority with the Commissioner of Insurance and Banking.
In 1923, the 38th Legislature created the office of banking commissioner and the state Department of Banking, formerly part of the state Department of Banking and Insurance. This is the origin of the present Texas Department of Banking. The banking commissioner was appointed by the governor to a two-year term with the advice and consent of the Senate. Examination frequency was reduced to at least once every four months. Perhaps due to an oversight, state building and loan associations were not mentioned in the act. Accordingly, regulation of these entities was not transferred to the Texas Banking Department.
In 1923, Department staff numbered 38, with 950 state banks and $377 million in total assets.
In 1923, the Legislature prohibited the operation of private banks, but enacted a grandfather clause allowing the continued operation of certain existing private banks, notwithstanding the general prohibition on that type of institution.
In 1925, the Legislature amended the requirements for a grandfathered private bank, as originally enacted in 1923, but retained the general prohibition on private banks. The Department liquidated the last known private banks in the early 1990s, and is unaware of any remaining private banks. At least theoretically, a private bank could still exist if it was (a) in operation on June 16, 1923, or (b) operated for any period of 20 years prior to June 16, 1923, and resumed operations not later than June 23, 1924. See Texas Finance Code §31.004(b).
In 1927, the 40th Legislature repealed the Texas Guaranty Law. The opportunity for repeal had existed in 1925 but the bill failed, ultimately damaging the state banking system. The crucial problem was a provision for annual special assessments against member banks, which created concern because the guaranty fund had been technically insolvent since the business depression of 1921. Many state banks converted to national banks during the period 1925-1927.
In 1929, the 41st Legislature revised the law relating to regulation of state building and loan associations, and transferred regulatory jurisdiction to the Texas Department of Banking.
In 1929, the 41st Legislature modified bank examination frequency to require two examinations annually.
In 1933, Congress amended the Federal Reserve Act to institute the system of federal deposit insurance on a temporary basis, and created the FDIC, owned by the Federal Reserve System. Historically, all banks which were members of the Federal Reserve System on or before July 1, 1934, were required to become stockholders of the FDIC by such date. No state bank was eligible for membership in the Federal Reserve System until it became a stockholder of the FDIC, and thereby became an insured institution, with required membership by national banks and voluntary membership by state banks.
In 1935, Congress amended the Federal Reserve Act to provide for a permanent deposit insurance fund; the stock of the FDIC to be purchased by the Secretary of the Treasury on behalf of the U.S., and the deposit insurance system to be maintained through assessments directly on the insured institutions.
In 1937, Article XVI, Section 16, of the Constitution was amended to eliminate personal liability of stockholders, an attribute deemed no longer necessary because of federal deposit insurance.
In 1943, the 48th Legislature enacted The Texas Banking Code of 1943 and created the Finance Commission. The Finance Commission appointed the banking commissioner with the advice and consent of the Senate. The banking commissioner served at the pleasure of the Finance Commission, and was statutorily labeled as both an employee of the Finance Commission, subject to its orders and directions, and the chief executive officer of the Banking Department, a pre-existing agency. The nine members of the Finance Commission were appointed by the governor to six year terms, one-third of which expired every two years. The Finance Commission consisted of two sections, a six-member Banking Section, and a three-member Building and Loan Section. These sections were at least "quasi-state agencies" in that each section had rulemaking authority over its related industry. Examination frequency of state banks was at least twice a year. The banking commissioner was given authority to: conduct charter investigations and report findings to the State Banking Board (who acted on the application); investigate and act on merger applications; and declare financial moratoriums or impose statewide withdrawal limitations on all financial institutions (with the consent of the Governor). The banking commissioner was also given authority to remove officers, directors, and employees of state banks as an enforcement tool (Art. 342-101 et seq., Vernon’s Texas Civil Statutes).
In 1945, the 49th Legislature granted authority to the banking commissioner to demand statements under oath regarding trust fund investments of PCC associations, to review those statements, and to report violations to the Office of Attorney General (Art. 912a, Vernon's Texas Civil Statutes).
In 1950, Congress passed the Federal Deposit Insurance Act and removed deposit insurance law from the Federal Reserve Act.
In 1955, the 54th Legislature expanded the authority of the banking commissioner over trust funds of PCC associations, including the power to examine trust fund records.
In 1955, the 54th Legislature granted authority to the Banking Department to license, examine, and regulate the sale of prepaid funeral services and merchandise. (Art. 548b, Vernon's Texas Civil Statutes).
In 1956, Texas Attorney General Will Wilson issued his Opinion No. WW-324, holding that Senate confirmation of the Insurance Commissioner's appointment by the Insurance Board violated the separation of powers principles of Tex. Const. Art. II, §1. However, this confirmation practice apparently continued with respect to statutory confirmation requirements applicable to other state officers, including the banking commissioner's appointment by the Finance Commission.
In 1956, Congress enacted the Bank Holding Company Act of 1956, to bring bank holding companies under the jurisdiction of the Federal Reserve System for the purpose of limiting the activities of a bank holding company to those of a financial nature, i.e., "closely related to banking," to prevent unsafe or unsound practices, and to prevent the undue concentration of banking resources in the hands of a few companies.
In 1957, the 55th Legislature enacted Article 1513a regarding trust companies and repealed former trust company provisions in Chapter 7 of the Insurance Code. The banking commissioner was granted limited authority to approve securities deposited with the State Treasurer.
In 1962, the Department supervised 4,013 entities, of which 553 were banks with assets of $3.4 billion.
In 1963, the 58th Legislature replaced the Attorney General as a member of the State Banking Board with a citizen appointed by the Governor to a two-year term with the advice and consent of the Senate. The other members of the State Banking Board continued to be the State Treasurer and the banking commissioner as chairman.
In 1963, the 58th Legislature granted authority to the banking commissioner to license, examine, and regulate sellers of money orders, travelers checks, and similar instruments, under the Sale of Checks Act (Art. 489d, Vernon's Texas Civil Statutes).
In 1963, the 58th Legislature created the Texas Savings and Loan Department, formerly part of the Banking Department (Art. 852a, Vernon's Texas Civil Statutes). The Savings and Loan Department became a sister agency to the Banking Department, both under the jurisdiction of the Finance Commission.
In 1963, the 58th Legislature passed the Texas Regulatory Loan Act, creating the Office of Regulatory Loan Commissioner to license, examine, and regulate the business of consumer lending. A regulated loan was essentially a secured or unsecured loan involving a cash advance of $1,500 or less. Former law subjected these lenders to fee-based examination by the banking commissioner but did not require a license. The Office of Regulatory Loan Commissioner became a sister agency to the Banking Department, both under the jurisdiction of the Finance Commission.
In 1967, the 60th Legislature amended Article 1513a regarding trust companies and provided for examination authority of the banking commissioner, but subject to an exemption from examination if the company did not sell its securities to the public, requiring the banking commissioner to accept a filed financial statement instead.
In 1969, the 61st Legislature revised the examination frequency applicable to state banks to three times in 24 months and no more, except as otherwise deemed necessary.
In 1969, the 61st Legislature created the Texas Credit Union Commission and transferred responsibilities over credit unions from the Banking Department. This was a complete split, with no continuing role for the Finance Commission (Art. 2461-1.01 et seq., Vernon's Texas Civil Statutes).
In 1974, the Department purchased the building at 2601 North Lamar Boulevard. Title was vested in the name of the Banking Section of the Finance Commission. Prior to that, the Department’s headquarters office was in the John H. Reagan Building on 15th Street in Austin.
In 1980, Congress enacted the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). The problems in the thrift industry were already becoming apparent, and DIDMCA was an attempt to alleviate them, by lifting interest rate ceilings, authorizing thrifts to offer checking and negotiable order of withdrawal, or NOW accounts, and granting powers to thrifts formerly reserved for commercial banks, including allowing savings and loans to enter into consumer loan and credit card businesses, and mutual savings banks to make business loans and accept demand deposits. The DIDMCA also preempted state usury laws concerning several kinds of loans, including new 12 U.S.C. §1821d, the "most favored lender" doctrine for state banks. Overlooked at the time but crucial to later developments was the increase in deposit insurance from $40,000 to $100,000.
In 1980, the OCC significantly changed its chartering policy for national banks to focus more on the organizing group and its business plan and less on the ability of the community to support a new bank, which led over the next few years to an immediate and substantial increase in new national bank charters, many of which were in Texas. While state bank chartering fluctuated within a narrow range, the OCC granted over 25 Texas-based charters in 1980, over 50 in 1981, almost 70 in 1982, almost 120 in 1983 and 1984, and 75 in 1985. The FDIC was required to approve deposit insurance for state charters, a factor which had a limiting effect on state regulator ability to match OCC chartering enthusiasm.
In 1980, Article XVI, Section 16, of the Constitution was amended to add bank authority to have unmanned teller machines within the city or county of its domicile.
In 1981, Congress enacted the Economic Recovery Tax Act of 1981, which included several provisions that improved the rate of return on commercial real estate and increased demand for these investments by lowering marginal income tax rates (the highest rate was reduced from 70 to 50 percent), lowering capital gains rates (from 28 to 20 percent), and by permitting the use of accelerated depreciation for commercial properties.
In 1981, oil prices peaked at $36.95 per barrel, up from $2.75 per barrel in 1973.
In 1982, Congress enacted the Garn-St. Germain Depository Institutions Act of 1982 (Act). The thrift industry was now perceived as in crisis. The Act broadened sources of funds for thrifts, mandated creation of money market accounts, allowed federal, state, and local governments to hold NOW accounts, allowed federally chartered savings and loans (S&Ls) to offer demand deposits, eliminated remaining interest rate differentials between what banks and thrifts could offer for deposits, and granted additional powers to federal thrifts, including the power to invest up to five percent of assets in commercial loans. S&Ls were also allowed to invest up to 30 percent of assets in consumer loans. With respect to national banks, the Act liberalized lending limits and removed real estate lending restrictions. The Act also allowed the FDIC to authorize emergency interstate acquisitions of failed commercial banks, although it imposed some priorities tending to favor in-state bids. The significance of thrifts entering areas formerly the province of commercial banks was the increase in competition that encouraged more aggressive practices to preserve market share. Bank market share losses in commercial loans began to be replaced by commercial real estate loans and energy loans.
In 1983, the 68th Legislature revised the examination frequency applicable to state banks to one examination annually and no more, except as otherwise deemed necessary.
In 1983, Article 1513a was amended to include two sections that provided the banking commissioner the power to invoke sanctions against a trust company as if it were a state bank. Chartering of trust companies remained through the Secretary of State's office. The Banking Department did not have a comprehensive list of those institutions, and many companies filed financial statements with the Banking Department annually in lieu of examinations.
In 1983, the 68th Legislature changed the number of members and composition of the Finance Commission to 12 by adding the three-member Consumer Credit section. The section had two individuals who held either a lending or pawnshop license and one member of the general public.
In 1983, Texas Attorney General Jim Mattox issued his opinion JM-38, confirming Opinion No. WW-324 through a broader holding that any attempt by the legislature to broaden its constitutional authority to confirm governor appointments of state officers, by extending it to state officers not appointed by the governor, violated the separation of powers principles of Tex. Const. Art. II, §1. Senate confirmation of the banking commissioner's appointment by the Finance Commission, as required by the Banking Code, is no longer required.
From 1979 to 1984, both the FDIC and the OCC reduced field examination staff by almost 20 percent. This substantial reduction in staff came about primarily through a series of freezes on new hires because of the agencies’ policies of increased reliance on off-site surveillance and the desire of both the Carter and Reagan administrations to reduce the size of the federal government.
In 1984, Congress enacted the Secondary Mortgage Market Enhancement Act of 1984 (PL 98-440, 98 Stat. 1689), codified to 15 U.S.C. §§77d (5), 77r-1, 78c(a)(41). By this Act, Congress removed perceived regulatory barriers inhibiting the development of a private market for residential mortgage-backed securities. The Act (Title I, §106) preempted blue sky laws requiring registration of mortgage-backed securities and other regulatory statutes restricting or otherwise affecting investment in mortgage-backed securities under state law, for trustees, governmental entities, corporations, etc., including state-chartered financial institutions. Congress included a provision reserving a seven-year period during which the states could enact legislation overriding either or both federal preemptions. Texas did not act.
In 1984, Article XVI, Section 16, of the Constitution was amended to add new Subsection (c), granting state banks “the same rights and privileges that are or may be granted to national banks of the U.S. domiciled in this State.”
In 1984, the Department created its Corporate Activities Division, to process applications affecting bank corporate structure and ownership and to serve as the repository of permanent bank files.
In 1985, the 69th Legislature revised the examination frequency applicable to state banks to permit the banking commissioner to defer an annual examination for up to six months if considered necessary to efficient administration.
In 1985, the 69th Legislature amended Article 489d to increase the net worth and bonding requirements for a sale of checks licensee from $10,000 to $500,000, add permissible investment restrictions, audit requirements, and impose a trust on monies held from sale of money orders pending disbursement. This action arose out of the failure and bankruptcy of a large money order company that resulted in extensive losses to money order purchasers.
In 1986, Congress enacted the Tax Reform Act of 1986, eliminating accelerated depreciation on commercial real estate and prohibiting deduction of "passive losses." One effect was to dampen demand for commercial real estate investments, which acted to soften real estate prices. Real estate limited partnerships had emerged in 1980 as a major investment vehicle as a result of the Economic Recovery Tax Act of 1981, growing five-fold from 1980 to a high of $16 billion in new capital in 1985, only to fall precipitously over the next few years, gathering only $1.5 billion in new capital in 1989 (nationwide).
In 1986, Article XVI, Section 16, of the Constitution was amended to substitute “state banks” for “corporate bodies” throughout and to ease branching restrictions slightly.
In 1986, oil prices that had averaged approximately $30 a barrel in November 1985 plunged to less than $13 a barrel by March 1986 and to $10 a barrel by August 1986, the lowest price for oil since 1974.
In 1986, to facilitate bank resolutions and ensure continued banking capital during a period of massive bank failures, the 69th Legislature authorized acquisition of Texas banks by out-of-state bank holding companies. From 1982 through 1986, 54 banks failed in Texas, 26 of which were state banks.
In 1986, a case was decided that allowed one prepaid funeral benefits licensee to withdraw all earnings from trust on a monthly basis, based on a holding that the Department did not have authority to reopen a prior final order based on changed circumstances. Sexton v. Mount Olivet Cemetery Ass'n, (MOCA)720 S.W.2d 129 (Tex. App. – Austin 1986, writ ref'd n.r.e.). This unique treatment of this one licensee continues. Quarterly, MOCA withdraws all earnings on its PFC trust fund and uses those funds for its current operating purposes. It is the only company doing so.
In 1987, Congress enacted the Competitive Equality Banking Act of 1987. The primary motive was to aid the deteriorating Federal Savings and Loan Insurance Corporation (FSLIC), but provisions affecting commercial banks were included. The "nonbank bank" provision in the Bank Holding Company Act was closed. (By limiting the authority of certain subsidiaries to exclude them from the definition of "bank" in the Bank Holding Company Act, banking institutions were evading interstate banking limitations.)
In 1987, Texas Attorney General Jim Mattox issued an opinion (JM-630) holding that legislation authorizing acquisition of Texas banks by out-of-state bank holding companies was constitutional under Tex. Const. Art. XVI, §16(a). The opinion distinguished between foreign corporate "ownership" of a Texas bank (permitted) from foreign corporate "operation" of a Texas bank (prohibited).
In 1987, Article 1513a was repealed by the enactment of Chapter XI of the Texas Banking Code. Under Chapter XI, all trust companies were required to submit their charters to the Banking Department for substitution before September 1, 1990. During 1987 and 1988 the Secretary of State's Office delivered approximately 220 trust company charter files to the Banking Department. Prior to 1987 the majority of the Texas trust companies operated with minimum regulatory supervision. Only in the most critical situations would the Banking Department have become involved and that being under questionable authority.
In 1987, the 70th Legislature modernized the statutes governing the prepaid funeral industry, and created the Guaranty Fund to guarantee performance by sellers of trust-funded prepaid funeral benefits contracts under their obligations to the purchasers (Acts 1987, 70th Leg, ch. 747, effective August 31, 1987).
In 1988, restricted bank branching was federally preempted. Texas v. Clarke, 690 F. Supp. 573 (W.D. Tex. 1988). Underlying doctrine and policy of competitive equality permits branching authority for a national bank equal to that authorized by state law for a "state bank" under 12 U.S.C. §36, but the definition of "state bank" is a matter of federal law. Following Department of Banking and Consumer Fin. v. Clarke, 809 F.2d 266 (5th Cir.), cert. denied, 90 S.Ct. 3240 (1987), the court held that "state bank" must be defined "by a targeted functional analysis" and in accordance with federal law. Because essential banking business consists of receiving deposits, making commercial loans, and negotiating checks and drafts, and because Texas savings associations operate as functional banks, they are "state banks" under 12 U.S.C. §36(c) and national banks could adopt the statewide branching pattern of the state savings associations. In response to arguments that competitive equality no longer existed for commercial state banks, the court noted that Tex. Const. Art. 16, §16, "governs the branching ability of Texas commercial state banks. Section 16(c) reads, "[A] state bank created by virtue of the power granted in this section, notwithstanding any other provision of this section, has the same rights and privileges that are or may be granted to national banks of the United States domiciled in this State." . . . A reasonable construction of section 16(c) results in the conclusion that commercial state banks may branch statewide because national banks also may branch Texas-wide."
In 1988, pursuant to Article XVI, Section 16(c), of the Constitution, the Finance Commission adopted a rule authorizing statewide branching for state banks, notwithstanding constitutional and statutory provisions to the contrary. By implication, the case also affected permitted unmanned teller machine locations. Prior to this time, a bank could not have a second location; thus, each bank office was its own charter, with its own president, board of directors, and capital base.
In 1988, 175 Texas banks with assets of $47.3 billion (state and national) failed— 25 percent of the state's 1987 year-end banking assets.
In 1989, 134 Texas banks with assets of $23.2 billion (state and national) failed— 13.6 percent of the state's banking assets.
In 1989, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, significantly restructuring the regulation of thrifts, abolishing the FSLIC, and transferring its insurance authority to the FDIC. The Act also significantly strengthened the enforcement authority of the FDIC, created cross-guarantee provisions making affiliated institutions in a bank holding company group liable for losses incurred by a failed institution in the group. The Act also mandated an increase in the newly created Bank Insurance Fund, resulting in a doubling of assessments imposed on commercial banks.
In 1989, the 71st Legislature enacted the Texas Health and Safety Code, a nonsubstantive codification of health and safety statutes. Regulatory provisions relating to cemeteries were codified as Chapters 711-714. Chapter 712 related to PCCs and incorporated the duties and responsibilities of the banking commissioner.
In 1989, the 71st Legislature eliminated the Banking Section and Building and Loan Section, which dated back to 1943, as well as the relatively new Consumer Credit Section (created in 1983), which were subdivisions of the Finance Commission, and reduced membership from 12 to nine.
Between 1985 and 1990, 440 banks failed in Texas, 38% of which were state banks. During that period, 22 trust companies were also closed. In addition, a number of trust companies failed to exchange their charters as required by 1987 legislation and therefore ceased to exist.
In 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). What began in 1980 as deregulation resulted in "reregulation" under FDICIA. The ability of the states to grant new banking powers to state banks was limited for the first time by preventing state bank activities as principal beyond those permitted to national banks unless the FDIC found the activity to be safe and sound. FDICIA added "prompt corrective action" provisions eliminating some regulatory discretion and requiring enforcement actions in certain circumstances, required annual on-site examinations by federal regulators and audited financial statements of institutions of more than $150 million in assets, mandated the adoption of uniform standards for real estate lending by depository institutions, and put new restrictions on the use of brokered deposits.
In 1991, the 72nd Legislature amended the Texas Banking Code of 1943 to permit statewide branching, as already permitted by rule and constitutional parity.
In 1991, the 72nd Legislature granted authority to the banking commissioner to license, examine, and regulate currency exchange and transmission businesses under the Currency Exchange Act (Art. 350, Vernon's Texas Civil Statutes).
In 1993, the 73rd Legislature expanded the enforcement authority of the Banking Department with respect to the sale of prepaid funeral services and merchandise, and imposed investment restrictions on prepaid funeral benefit trust funds. It also expanded enforcement authority in the prepaid area and primarily included broader discretion to issue cease and desist orders for unlicensed activity.
In 1993, the Department was officially accredited by CSBS.
In 1993, the method of revenue generation for the bank examination program changed from examination fees (per examiner day), to annual assessments billed quarterly based upon an institution's size and condition.
In 1993, the 73rd Legislature created the "limited banking association" as a charter option, modeled after limited liability company statutes, to allow bank owners to eliminate corporate double taxation and take advantage of pass-through features of federal income taxation of partnerships. Acts 1993, 73rd Leg., ch. 765, eff. Aug. 30, 1993.
In 1994, Congress enacted the Reigle Community Development and Regulatory Improvement Act of 1994 (PL 103-325). Sections 202-207 and 347, codified in part to 15 U.S.C. §§77r-1 and 78c(a)(41) and (53), added "small business related security" (securitized small business loans) and "commercial mortgage related security" to preempt blue sky and investment limit statutes (see discussion of 1984 Secondary Mortgage Market Enhancement Act above). States have a seven-year period to override the additions and prohibit or set limits on these investments, expiring Sept. 23, 2001. The Department added "opt out" language to the Texas Banking Act of 1995, see Texas Finance Code §34.101(d)(4) and (g). The Community Development and Regulatory Improvement Act also reduced federal examination frequency to 18 months for certain "small" institutions. The Department was required to similarly reduce examination frequency for reasons of competitive parity. Supervisory Memorandum 1003 and Texas Finance Code §31.105 provide further details.
In 1994, Congress enacted the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (PL 103-328). The Act broadly grants interstate branching rights by merger and preempts restrictive state branching law unless a state "opts out" in the manner permitted by the Act. The prohibition on foreign corporate banking set forth in Tex. Const. Art. XVI, §16(a) is preempted.
In 1995, the IRS issued a private letter denying pass-through tax treatment to Texas limited banking associations. The IRS rejected the state's interpretation of its own constitution and imposed its own view that Texas was restricted by Art. XVI, §16(a), to creating only "corporate" banks. Priv. Ltr. Rul. 95-51- 032 (Sept. 27, 1995).
In 1995, the 74th Legislature enacted the modernized Texas Banking Act and repealed the Texas Banking Code of 1943 (except for Chapter XI, relating to trust companies). The State Banking Board was eliminated and its responsibilities transferred to the banking commissioner. The Banking Department of Texas was renamed the Texas Department of Banking. The banking commissioner's authority to issue interpretive statements and legal opinions was reinforced by explicit statutory language, and the authority to investigate unauthorized activities was expanded (Art. 342-1.001 et seq., Vernon's Texas Civil Statutes).
In 1995, the 74th Legislature prohibited interstate mergers and branching in Texas until September 1, 1999, in a bill designed to comply with the federal Riegle-Neal Interstate Banking and Branching Act of 1994 (Art. 489f, Vernon's Texas Civil Statutes).
In 1995, the 74th Legislature expanded the scope of the Currency Exchange Act to include currency transportation as an activity to be licensed and regulated by the banking commissioner.
In 1995, the Department began conducting annual customer surveys of banks and trust companies.
In 1996, although Texas was one of two states to "opt out" of interstate branching, in anticipation of future needs and to endorse the unified view of state regulators regarding multi-state supervision of interstate state banks, the banking commissioner signed a Nationwide Cooperative Agreement and Nationwide State/Federal Supervisory Agreement for the coordinated supervision of multi-state, state-chartered banks. The FDIC and the Federal Reserve were also signatories.
In 1996, the Department established its internet website (formerly www.banking.state.tx.us), which contains the statutes, rules, published interpretive opinions, and examination procedures used in the oversight of the supervised entities. The website also contains the text of testimony and speeches presented by agency employees, information on how to file a consumer complaint, answers to the most commonly asked consumer questions, and information on supervised entities.
In 1996, the banking commissioner sued Commercial National Bank, Texarkana, Arkansas, and the OCC for allowing a national bank to relocate its main office to Texas and retain branches in Arkansas, in violation of Texas law opting out of interstate branching (Article 489f, Vernon's Texas Civil Statutes). The U.S. District Court ruled in favor of the commissioner. Ghiglieri v. Ludwig, 1996 WL 315947, 1996 U.S. Dist. LEXIS 8321 (N.D. Tex. 1996), rev'd 125 F.3d 941 (5th Cir. 1997), cert. denied 118 S.Ct. 1361 (1988).
In 1996, the banking commissioner sued Sun World National Bank (a subsidiary/affiliate of NationsBank) and the OCC for allowing a national bank to relocate its main office to New Mexico and retain branches in Texas. The U.S. District Court ruled in favor of the commissioner. Ghiglieri v. Sun World, N.A., 942 F. Supp. 1111 (W.D. Tex. 1996), rev'd 117 F.3d 309 (5th Cir.1997), cert. denied 118 S.Ct. 1361 (1988).
In 1997, the 75th Legislature enacted the Texas Finance Code, a nonsubstantive codification of financial regulatory statutes. The regulatory provisions of the Texas Banking Act were codified as Subtitle A, Title 3, Texas Finance Code (Chapters 31-39, 59). Regulation of sale of checks, currency exchange, and sale of prepaid funeral benefits was codified as Subtitle E, Title 3, Texas Finance Code (Chapters 152-154). The agency's enabling statutes were codified to Chapter 12 in Title 2, Texas Finance Code. Trust company statutes, formerly located in Chapter XI of the Texas Banking Code of 1943, were codified as Chapter 151, but the source law was simultaneously repealed and replaced by another bill.
In 1997, the 75th Legislature enacted the Texas Trust Company Act, a complete system of laws governing state trust companies. The banking commissioner continued to have chartering, examination, and regulatory authority over state trust companies (Art. 342a-1.001 et seq., Vernon's Texas Civil Statutes).
In 1997, the Finance Commission Salary Administration Plan was discontinued by action of the 75th Legislature.
In 1997, the Fifth Circuit overturned the District Court decisions (Ghiglieri v. Ludwig and Ghiglieri v. Sun World) and found in favor of the OCC. The Supreme Court denied writ of certiorari in 1998. One ground for the decision was that federal law required all banks to be treated equally for an effective "opt out" statute, and the applicable definition in the Federal Deposit Insurance Act includes state savings banks. Article 489f did not mention state savings banks. This result is legally correct but not anticipated by Congress, as evidenced by statements to the contrary in the Congressional Record. However, a state (but not federal) savings bank had been added to the definition of "state bank" by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, originally for the narrow purpose of granting the FDIC regulatory jurisdiction over state savings banks and the Savings Association Insurance Fund in connection with the merger of the FSLIC into FDIC.
In 1997, the banking commissioner filed a lawsuit against NationsBank of Texas, N.A. and NationsBank, N.A., Charlotte, North Carolina, to prevent the merger of the two banks in violation of Texas opt out law. In the 1996 Sun World litigation, Sun World National Bank was owned by NationsBank, and after the relocation, Sun World was merged into NationsBank, N.A., Charlotte, North Carolina. The result was that NationsBank, North Carolina, had branches in El Paso, Texas. It was argued that the merger was proper as an "intrastate" merger because both banks were "located" in Texas.
In 1997, Article XVI, Section 50, of the Constitution was amended to allow home equity loans, effective January 1, 1998. Because of extensive and complex consumer protection provisions directly in the Constitution, Department examiners began to closely monitor state bank home equity lending practices.
In 1998, in cooperation with the federal banking regulators, the Department began conducting Year 2000 Readiness assessments of state-chartered banks, trust companies, and foreign bank agencies (FBA) in addition to the normal examinations. These efforts were to ensure that there was no disruption in banking services on January 1, 2000.
In 1998, the U.S. District Court for the Northern District of Texas issued an order denying a preliminary injunction, ruling that the state had not shown a likelihood of prevailing on the merits on its claim that the merger of NationsBank, North Carolina, and NationsBank of Texas was not an "intrastate" merger, because NationsBank, North Carolina, was clearly located in Texas through its El Paso branches (formerly SunWorld branches, acquired through merger). NationsBank, Texas became a branch of NationsBank, North Carolina.
In 1998, citing constitutional parity and the federal preemption of Article 489f for its failure to address state savings banks, the banking commissioner announced that the Department would accept applications for interstate merger and branching transactions for state-chartered banks.
In 1999, CSBS re-accredited the Department. As of January 1, 1999, the Department had 135 employees, and exercised oversight responsibility of 397 commercial banks with total assets of $51.2 billion. The Department also had oversight of 33 trust companies doing business with the public, 14 FBAs, 447 PFCs, 226 PCCs, 39 sale of checks licensees, and 80 currency exchange licensees.
In 1999, the 76th Legislature enabled interstate mergers, branching, and fiduciary activities for financial institutions, including trust companies, effective September 1, 1999. The bill added new Subtitle G to Title 3, Texas Finance Code (Chapters 201-204), to govern interstate acquisitions of banks, interstate mergers between banks, interstate branching of banks, and foreign bank branching in Texas, effective September 1, 1999. Regulation was committed to the banking commissioner with rulemaking authority and appellate jurisdiction vested in the Finance Commission. The bill also amended trust company statutes to authorize interstate fiduciary activities, and revised other laws regarding public deposits, probate, and the civil process to conform to an interstate bank operating environment. Governor George Bush signed the Interstate Banking and Branching Bill for Texas on July 16, 1999.
In 1999, the 76th Legislature expanded currency exchange, transmission, and transportation licensing requirements to transportation of financial instruments and non-bank owned automated teller machines.
In 1999, voters approved to modify the definition of an urban homestead from one to ten acres. Reverse mortgages were required to comply with U.S. Department of Housing and Urban Development and secondary market standards. The Finance Commission was required to conduct studies of the availability and quality of home equity loans.
In 1999, the Gramm-Leach-Bliley Act of 1999 (GLBA), also known as Gramm-Leach-Bliley Financial Services Modernization Act (Pub.L. 106-102, 113 Stat. 1338), was passed by Congress. The regulation attempted to update and modernize the financial industry. The main function of the GLBA was to repeal the Glass-Steagall Act that said banks and other financial institutions were not allowed to offer financial services, like investments and insurance-related services, as part of normal operations. The Department worked with the Texas Department of Insurance, State Securities Board, Department of Savings and Mortgage Lending, Office of Consumer Credit Commissioner, and the Texas Credit Union Department to coordinate cooperative supervisory efforts between the agencies to implement a functional regulatory environment to comply with GLBA.
In early 2000, the Finance Commission established its own website.
In 2001, the 77th Legislature passed S.B. 314, the sunset bill for the Texas Department of Banking. S.B. 314 enacted standard sunset provisions regarding conflicts of interest, standards of conduct, equal employment opportunity, information on the State Employee Incentive Program, and consumer complaints. The bill enhanced regulatory authority over PFCs and PCCs, and rulemaking authority with respect to these two industries was transferred to the Finance Commission. Several statutory changes regarding PFCs were designed to enhance consumer protection, including mandatory model plain language contracts, additional consumer disclosures, and provisions regarding the extent to which contract modifications could be permitted after death of the beneficiary. The statutory changes also included expanded enforcement actions to impose administrative penalties for willful or repeat offenders. Two significant changes made with respect to PCCs were to expand the Department’s examination authority and to expand enforcement authority to permit imposition of administrative penalties for willful or repeat offenders. A floor amendment to the bill added a new section to the Texas Business and Commerce Code that requires a bank to pay checks drawn on that bank at "par value", meaning the bank could not charge a fee to a non-accountholder that cashes a check drawn on that bank at its facilities. This provision was later preempted by federal law.
In 2001, the 77th Legislature allowed the continuation of the Finance Commission. The bill removed the Commission as a state agency and made it a policy-making body for the Finance Agencies. The composition of the Commission was also changed as recommended by the Sunset Advisory Commission. The requirement of two bankers and two thrift members was changed to one banker and one thrift executive member, one representative of the consumer credit industry and a mortgage broker. Other provisions of significance included the addition of Section 11.305 to the Texas Finance Code which requires the Texas Department of Banking and the Texas Savings and Loan Department (the name at the time) to jointly conduct a continuing review of the condition of the state banking system on a periodic basis and the addition of 11.307 requiring regulated entities to provide consumers information on filing complaints with the respective state regulatory agency in the annual privacy notice.
In 2001, the 77th Legislature enacted H.B. 2155, conforming Texas law to the GLBA. This included authority for state banks to conduct financial activities or activities incidental or complementary to financial activities. State-chartered bank and trust companies are granted the minimum authority permitted by GLBA, with authorization for activities beyond those allowed for national banks and their subsidiaries, but within the bounds of safety and soundness. The bill further made administrative subpoenas confidential.
In 2001, the 77th Legislature passed H.B. 626 which added protections to lenders when their collateral becomes subject to state asset seizure laws.
In 2001, the 77th Legislature expanded the Department’s responsibilities to include the supervision of PCSEAs. These entities are subject to registration and renewal by the Department. The Department will also investigate complaints against PCSEAs and may revoke their registration after following a formal hearing process. The Department is also tasked with implementing plain language contracts for this industry.
In 2001, the federal district court for the western district of Texas granted a permanent injunction restraining the effectiveness of a new Texas statute purporting to prohibit banks from charging a teller’s fee for cashing a check drawn on an account with that bank (i.e., an “on us” check cashing fee). Several banks brought the case against the Texas banking commissioner. The OCC filed a brief amicus curie in favor of the plaintiff’s position. Wells Fargo Bank Texas v. Randall James, No. 01-CA-538-JRN (U.S.D.C., W.D. Tex.) (December 3, 2001).
In 2001, Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 or USA PATRIOT Act and on October 26, 2001, President Bush signed the Act into law. The Act contains strong measures to prevent, detect, and prosecute terrorism and international money laundering. Provisions affecting banking organization and MSBs are generally set forth as amendments to the Bank Secrecy Act.
In 2001, the Texas Attorney General’s Opinion JC-0417 determined that the provisions of Chapter 154 of the Texas Finance Code were applicable to religious organizations that sold prepaid funeral benefits and did not violate the Establishment Clause or Free Exercise Clause of the First Amendment to the U.S. Constitution. Based on this Opinion, the Department was able to negotiate and subsequently enter into an Agreed Order with a religious organization in late 2002 to fund $2,156,000 collected from customers related to previously sold contracts that contained preneed funeral merchandise and services that had not been properly deposited into restricted accounts.
In 2002, the Department through administrative action facilitated the recovery of approximately $182,000 for 300 consumers related to misappropriated funds from two MSBs.
In 2002, the Department signed a cooperative agreement with the MTRA to promote a nationwide framework for cooperation and coordination among state money transmitter regulators that have concurrent jurisdiction over a regulated entity.
In 2002, Congress passed the Sarbanes–Oxley Act of 2002 (Pub.L. 107–204, 116 Stat. 745), federal law that set new or expanded requirements for all U.S. public company boards, management, and public accounting firms. There were several provisions of the Act that also apply to privately held companies. The bill, which contains eleven sections, was enacted as a reaction to a number of major corporate and accounting scandals, including Enron and WorldCom. Sections of the bill cover responsibilities of a public corporation’s board of directors, which includes publicly traded financial institutions, adds criminal penalties for certain misconduct, and required the Securities and Exchange Commission to create regulations to define how public corporations are to comply with the law. The Department began reviewing corporate governances and evaluating external audit work papers.
In 2002, the Finance Commission Chair announced the commencement of a study of agricultural business lending in Texas. The study provided any overview of historical trends along with current perceptions and experience of industry professionals and participants. The conditions, opinions and experiences of agricultural producers operating in the state were included in the results. The study concluded that credit facilities are sufficiently available to all financially responsible agricultural producers.
In 2002, the Department issued 14 certificates of registration for 14 PCSEAs with 15 offices. To help administer Chapter 396 of the Texas Finance Code, the Finance Commission adopted Title 7 of the Texas Administrative Code Chapter 31 which covers topics as (1) how to register a PCSEA; (2) responsibilities of a registered PCSEA; (3) adding, closing or relocating a PCSEA office; (4) transferring control of a PCSEA; (5) cessation of a PCSEAs business; (6) exercise of the Department’s enforcement authority; (7) foreign PCSEA agencies; and (8) civil remedies for a violation of Chapter 396.
In 2002, the Department participated in its first joint state examination of a MSB with the California Division of Financial Institutions.
In 2002, FinCEN promulgated an interim final rule, Title 31 Code of Federal Regulations (CFR) Part 103, which mandates that MSBs must develop and implement an anti-money laundering program no later than July 24, 2002. A license holder and agent under either Chapter 152 or 153 of the Texas Finance Code are considered an MSB under the Federal definition. MSB license holders were notified in July 2002 that examination procedures had been added to verify compliance with these requirements at each Department examination.
In 2003, the 78th Legislature passed S.B. 300 which amended 712 of the Texas Health and Safety Code and increased the rates for required perpetual care deposits. It further required the timely placement of markers or monuments in a PCC.
In 2003, S.B. 1583 added a new chapter (Chapter 278) to the Texas Finance Code requiring additional disclosure information be given to consumers who elect to transmit money.
In 2003, a major court case, Wells Fargo v. James, involved a claim by plaintiff banks that Texas Business and Commerce Code §4.112 is preempted by the National Bank Act, 12 U.S.C. §21 et seq., and 12 C.F.R.§7.4002 (a). Section 4.112 prohibits a bank from charging fees to non-account holders for cashing checks drawn on that bank. The U.S. Court of Appeals for the Fifth Circuit, affirming a decision noted below, held that the National Bank Act, specifically, 12 U.S.C. 24 (Seventh), preempts state law prohibiting the charging of fees for cashing on-us checks. Wells Fargo v. James, 321 F.3d 488 (5th Cir. 2003). The OCC participated as amicus in the litigation. It was reaffirmed that national banks may charge a non-accountholder a convenience fee for using a bank teller to cash an “on us” check. An “on us” check is a check drawn on the bank by one of the bank’s customers. The fee is essentially compensating the bank for making cash immediately available to the payee; otherwise the payee would have to wait for the check to clear through the payment system.
In 2003, Article XVI, Section 50, of the Constitution was amended to allow a home equity line of credit and the refinancing of a home equity loan with a reverse mortgage. The Constitution was also amended to allow the Finance Commission and Credit Union Commission interpretative authority of home equity laws and permitted lender cure provisions. The amendments were part of S.B. 1067, S.J.R. 42 and H.J.R. 23 in the 78th Regular Session. On September 13, 2003, voters approved the provisions.
In 2003, the Check Clearing Act for the 21st Century was passed. The law facilitates check truncation by removing the legal obstacles that require financial institutions to physically present and return original checks. The Check Clearing Act for the 21st Century also authorizes substitute checks and provides that a properly prepared substitute check is the legal equivalent of the original check.
In 2003, the Finance Commission approved a rule authorizing state banks to offer and sell debt cancellation contracts and debt suspension agreements. This was a result of S.B. 1445 which amended Texas Finance Code 342 to authorized licensed lenders to offer debt cancellation and debt suspension agreements to borrowers of consumer loans not secured by real property.
In 2003, State of Texas v. the Marmon Mok Partnership et al. filed in 1995 against the contractor, architectural firm and structural engineering firm involved in the renovation of and third floor addition to the Finance Commission Building, to remedy recently-discovered design flaws and contraction defects was settled. The defendants’ offer to settle in 2003 was accepted by the State of Texas.
In 2003, the method of revenue generation for the PFC program changed from examination fees (per examiner day), to annual assessments that may be billed quarterly or fewer times based upon outstanding contracts.
In 2003, CSBS re-accredited the Department for the third time. The Department had 152 employees, and exercised oversight responsibility of 338 commercial banks with total assets of $61.5 billion. The Department also had oversight of 28 trust companies doing business with the public, 8 FBAs, 423 PFCs, 233 PCCs, 64 sale of checks licensees, and 79 currency exchange licensees.
In 2003, the method of revenue generation for the PCC program changed from examination fees (per examiner day), to annual assessments that may be billed quarterly or fewer times based upon the outstanding statutory trust fund balance reflected on the PCC’s statement of funds in their annual renewal report.
In 2003, Equitable Trust Co. v. Finance Commission and Department of Banking was affirmed. The suit sought to reduce the trust company’s 1999 examination fees and challenged the Department’s fee structure on the basis that the method of calculating fees did not meet statutory requirements. In 2003, the Austin Court of Appeals affirmed a district court decision upholding the validity of the Department’s methodology for calculating examination fees and finding that the specific examination fees charged to the trust company were reasonable.
In 2004, representatives of the Department travelled to Mexico City, at the request of the Mexican Senate Committee on North American Affairs, to give an overview of how money remittance statutes operate in Texas.
In 2004, the Department investigated an individual company selling preneed mausoleums and misappropriating funds. The agency solicits assistance from the Consumer Protection Division of the Office of Attorney General. One cemetery involved was placed in receivership in 2005. The individual who misappropriated the funds filed for bankruptcy, and the defalcation directly resulted in additional legislation being enacted in 2005.
In 2004, the OCC issued two regulations regarding the applicability of state law to national banks. The first rule specifies which state laws generally apply to national bank operations and which laws do not. The second rule provides that the visitorial powers of the OCC are exclusive for national banks and national bank operating subsidiaries. The rules prohibit states from regulating national banks with regard to receiving deposits, lending, and licensing. Under these rules, state laws regarding contracts, torts, criminal law and right to collect debts, acquisition and transfer of property, taxation, and zoning only apply to national banks to the extent they incidentally affect the exercise of national bank powers. The rules also bar states from licensing, examining or regulating state-chartered corporations that are subsidiaries of national banks.
In 2005, the 79th Legislature passed S.B. 1173 creating a new subchapter in 712 of the Texas Health and Safety Code to limit how a cemetery corporation could directly or indirectly sale or offer for sale an undeveloped mausoleum space to the public. S.B. 1173 also amended 712 of the Texas Health and Safety Code to grant the Department examination authority to verify compliance with the new subchapter.
In 2005, a district court issued a Temporary Restraining Order and appointed a Temporary Receiver to run the day-to-day activities for a PCC previously discussed in the 2004 summary noted above. The court appointed a permanent receiver on April 20, 2006 and the court executed a final order to terminate the receivership on January 19, 2011. This court action allowed a new owner to take possession of the cemetery.
In 2005, the Department facilitated the recovery of misappropriated funds for PFCs of approximately $249,500.
In 2005, the Department executed a MOU with FinCEN and the IRS to allow for the exchange of certain BSA information between the agencies. The purpose of the MOUs was to help facilitate a more efficient oversight of the MSB industry.
In 2005, the Department celebrated its one-hundred-year centennial anniversary. The Department chartered or licensed 329 state-chartered banks, 8 FBAs, 24 trust companies, 424 PFCs, 239 PCCs, 69 currency exchangers, 68 money transmitters. The Department had 150 employees. The Department also developed and produced a written history of the first 100 years of Texas banking and agency operations entitled “Without Compromise, Fear or Favor.”
In 2005, Hurricane Rita made landfall on the eastern Texas Gulf Coast. Financial institutions as far inland as 100 miles suffered disruptions. Some banking facilities in and around the area had a difficult time opening for normal business. In the wake of this disaster, oil and gas prices rose dramatically.
In 2005, the Texas Money Services Act (Act of May 26, 2005, 79th Leg., R.S., H.B. 2218, §1) was enacted. The Act consolidated chapters 152 and 153 relating to MSBs into Chapter 151 of the Texas Finance Code and repealed the Sale of Checks and Currency Transmission Act. The Act also reduced the amount of net worth and security required of currency exchangers; changes the method of computing the new worth requirements for money transmitters; and changes the method of computing the security and permissible investment requirements of money transmitters. The Act also provided the Finance Commission the authority to adopt rules regarding authorized delegates as well as examination authority over authorized delegates.
Between the 78th and 79th Legislature, the House Financial Institutions Committee sought to identify those areas in Texas’ laws that discouraged major lending institutions from locating in Texas and discouraged commercial lending by Texas-based institutions. The Finance Commission and the Credit Union Commission conducted a study to compare Texas laws related to financial institutions with federal laws and determine which state laws may be preempted or invalidated by federal law. As a result, H.B. 955 made changes to 27 chapters of the Texas Finance Code, including consumer and commercial lending, usury reform, enforcement and penalties, and the powers of each state regulatory agency.
In 2005, the Federal Financial Institutions Examination Council (FFIEC) released a comprehensive examination manual for BSA/AML. The Department adopted these procedures in order to perform BSA/AML examinations. The Department focused on educating and training financial institutions, MSBs, and its examination staff.
In 2006, the banking commissioner adopted Supervisory Memorandum 1023. This memorandum expands the examination frequency to an 18-month cycle for certain qualifying MSB license holders. In 2006, the Department seized the records and funds of an entity operating a MSB without a license. The district court appointed a Temporary Receiver to run the day-to-day activities of this company. The internet company that offered electronic money orders had 17,000 customers with deposits of approximately $7,000,000, of which 600 were Texas customers with approximate account balances totaling $500,000. The settlement repaid customer funds.
In 2006, the banking commissioner issued Supervisory Memorandum 1021 concerning consumer awareness about fraud-induced wire transfers. The memorandum provides guidance and establishes best practices for MSB license holders with regards to developing customer awareness programs to combat fraud-induced wire transfers.
In 2006, the Department facilitated a meeting between representatives from FinCEN, the Office of the Attorney General, and the currency transmission industry to focus on the current inconsistencies between federal and state recordkeeping requirements applicable to MSBs. Several suggestions made during the meeting were adopted into the final MSB recordkeeping rules.
In 2006, the Department opted to take a proactive approach to financial education in Texas by creating a financial education coordinator position to serve as the point of contact for information exchange to address financial education issues in Texas. This was done to support the 79th Legislature’s actions to enact law requiring the incorporation of financial literacy into Texas high schools.
Between 2006 and 2007, the subprime lending crisis developed. Federal regulators issued two guidances regarding nontraditional mortgage products and sub-prime mortgage lending.
In 2007, the Department facilitated the recovery of approximately $340,522 related to the misallocation of PFCs.
In 2007, the 80th Legislature amended the Texas Finance Code to encourage financial literacy programs initiated by banks, allow for examination scheduling priorities and flexibility, revised the legal lending limit calculation, addressed the classification of mineral or royalty interest, aligned deposits eligible for asset pledging to maintain parity with other financial institutions, and allowed for regulatory authority to facilitate disaster recovery.
In 2007, H.J.R. 72 proposed a constitutional amendment to clarify certain provisions relating to the making of a home equity loan and use of home equity loan proceeds in Texas. The resolution clarified the designation of an agricultural exemption, the permissibility of electronic loan applications, the right of an owner to voluntarily use proceeds to pay off other debt, and the provisions regarding blanks in the agreement. H.J.R. 72 also amends the provisions regarding open-end home equity loans related to the methods for disbursing funds. It modifies the provision prohibiting the use of a preprinted solicitation check to a prohibition on the use of a solicitation check with any amount preprinted.
In 2007, the Legislature created a new system for banks to use to report on customers who are victims of identity theft. The bill required the Department to establish a notification system for the sole purpose of facilitating compromised accounts information to a check verification company by a financial institution. Check verification companies are required to register with the Department in order to obtain the information (Chapter 35 of Texas Business and Commerce Code, Chapter 11 of Texas Finance Code).
In 2007, new regulations were established to report mortgage fraud in Texas. H.B. 716 requires a lender to provide each applicant a written notice of penalties for making false or misleading written statements, as well as establishing a penalty in the Texas Penal Code for such statements. The legislation further established the Texas Residential Mortgage Fraud Task Force, which includes the Texas Department of Banking as a member. The Task Force was disbanded by the 85th Legislature in 2017.
In 2007, the national financial crisis began and a series of major financial institutions failed.
In 2007, Comerica Bank became a part of the Texas state banking system. Comerica Bank became the largest Texas-based bank, with assets of $60.1 billion, and over 400 branches in Michigan, California, Texas, Florida, and Arizona.
In 2008, the Department facilitated the recovery of approximately $548,215 in misappropriated funds related to PFCs.
In 2008, the Department entered an Agreed Order with a license insurance-funded permit holder to stop selling PFCs in Texas and at the same time the TDI issued a Hazardous Financial Condition Order against two insurance companies that funded PFCs in several states, including Texas. In November 2013, six individuals associated with these companies were sentenced to prison terms from 18 months to 10 years for defrauding purchasers of preneed funeral contracts of more than $450 million in several states, including Texas. This defalcation ultimately resulted in significant revisions to the PFC statutes enacted in 2009.
In 2008, the House Committee on Financial Institutions was charged to study insurance-funded PFCs. The agency participated in the hearings, hosted stakeholder meetings, and gathered information for the committee. Revisions to this area of regulation were incorporated in a bill filed during the 81st Regular Session.
In 2008, FinCEN released the first MSB BSA/AML Examination Manual with the goal of achieving consistency in the application of BSA requirements among states and the IRS when performing MSB examinations. The Department worked closely with FinCEN along with the IRS and various other state representatives during the development stages and was one of a few selected states to field test the manual.
In 2008, the Department seized the records from an entity for selling prepaid funeral benefit trust-funded contracts without a permit and for failing to deposit $329,599 in money collected from these sales. At the criminal trial where the Department was the prosecutor’s main witness, this person was found guilty and was sentenced to 10 years in prison.
In 2008, the banking commissioner and FDIC executed an information-sharing agreement to enhance the ongoing working relationship between the two agencies.
In 2008, the Department launched the Closed Account Notification System or CANS. As of March 1, 2008, account holders at depository institutions in Texas can request that their closed account information be submitted via the system.
In 2008, CSBS re-accredited the Department for the fourth time. As of June 30, 2008, the Department had 169 employees, and exercised oversight responsibility of 328 commercial banks with total assets of $153.9 billion. The Department also had oversight of 22 trust companies doing business with the public, 8 FBAs, 413 PFCs, 242 PCCs, and 130 MSBs. Other registered entities not subject to examination included 12 PCSEAs and 6 check verification companies.
In 2008, the Housing and Economic Recovery Act was signed into law by President Bush. The Act was aimed at addressing the nation’s real estate and economic crisis. Housing finance reform, foreclosure prevention, and tax provision are included in the Act. Of interest is the Secure and Fair Enforcement (S.A.F.E.) Mortgage Licensing Act which established minimum licensing requirements for all residential mortgage loan originators, including bank and bank holding company employees.
In 2008, the Emergency Economy Stabilization Act was enacted by Congress and signed by President Bush. The Act granted broad powers to the U.S. Treasury, FRB, and FDIC. Several programs were created as a result to help stabilize the financial services system. The Department monitored the programs and routinely reported the information to the Finance Commission. One programs temporarily increased the FDIC deposit insurance coverage from $100,000 to $250,000.
In 2008, two Texas financial institutions failed – one state-chartered bank and one state-chartered thrift. These are the first Texas state-chartered institutions to fail since 2002.
In 2009, the number of problem banks nationwide rose from 171 at year-end 2008 to 702 at year-end 2009. A total of 140 banks failed nationwide; the highest annual total since 1992. Of these, five were Texas banks – three state-chartered banks, one national bank and one federal thrift. MSBs also suffered during the economic downturn, forcing some to surrender their license or raise additional capital.
In 2009, four state financial regulatory agencies, including the Finance Commission agencies, were granted SDSI status in the 81st Regular Session. H.B. 2774 allows the agencies’ oversight boards to set the spending authority or limits for the agencies. The Department established contracts with the Office of Attorney General and Texas Comptroller of Public Accounts for services.
In 2009, the 81st Legislature passed S.A.F.E., a compliant legislation as required by the federal S.A.F.E. Act. To ensure Texas was complying, H.B. 10, H.B. 2774, and H.B. 2779 were enacted.
In 2009, H.B. 3762 amended Chapter 154 of the Texas Finance Code, establishing requirements for sellers of PFCs. The bill also amended sections relating to PFC premiums and insurance-funded contracts, and added a new section establishing requirements for insurance policies. The examination period was extended to 18-months with provision for the commissioner to extend or reduce the period six months. The bill further required examination ratings to be adopted by rule, expanded the PFC guaranty fund to include insurance-funded contracts, required qualitative standards for issuance of new permits and renewal of existing permits, increased oversight in the transfer of an existing permit holder’s business, created an informational brochure and a new website for consumers, created an eight member Advisory Committee to review and make recommendations regarding the regulation of insurance-funded contracts, and required the Department to develop and publish an examination manual with input from the Advisory Committee.
In 2009, H.B. 1031 amended Section 712.007(c) of the Texas Health and Safety Code to specifically reference that cemetery property roads are included in the definition. As a result, all cemetery sales contracts, certificate of ownership forms, and any other cemetery contract issued after September 1, 2009 had to include the revised definition.
In 2009, the U.S. Treasury released a proposal for reforming the financial regulatory system. This includes the creation of the CFPB.
In 2010, the banking commissioner acted against an entity operating an alternative payment system that was designed to mobilize the value of gold without the required Texas MSB license. The entity was also investigated by the U.S. Secret Service, IRS Criminal Investigation, and the Federal Bureau of Investigation (FBI). Three principal directors and owners of the company plead guilty to criminal charges relating to money laundering and the operation of an illegal money transmitting business.
In 2010, the Department assisted the Department of Aging and Disability Services in the recovery of approximately $252,000 in misappropriated prepaid funeral funds.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law. The Act changed the regulatory structure of the U.S. financial regulatory system and is categorized into sixteen titles, requiring regulators to create approximately 243 rules, conduct 67 studies, and issue 22 periodic reports. The Act formally created the CFPB. Certain provisions were not immediately effective, however, some provisions that impact state law became effective on the “Transfer Date” (July 21, 2011), including the ability to allow states to bring consumer protection lawsuits against national banks and federal thrifts.
In 2010, the Department launched the prepaid funeral contract website, as required by H.B. 3762, to provide information to enable consumers to make informed decisions relating to the purchase of preneed funeral contracts including descriptions of the trust and insurance funding options.
In 2010, the Department published an informational prepaid funeral brochure as required by 81st Legislature. In developing a brochure titled Information About Prepaid Funeral Planning, the Department solicited input from the prepaid funeral industry and consumer groups. Beginning in early summer, the brochure must be presented to each potential purchaser of a prepaid funeral benefits contract.
In 2010, the Department aligned the domain names of each website it maintains as required by the DIR policy. Sites are to follow the [state].gov. naming convention.
In 2010, the banking commissioner formed the Electronic Crimes Task Force in cooperation with the U.S. Secret Service to address the growing risk of cyber-attacks through Corporate Account Takeovers. The Task Force’s initial objective was to address Corporate Account Takeover problems and issuing best practices.
In 2010, the total number of Texas state-chartered problem banks peaked at 58. Nationally, 154 banks failed, of which one was a Texas national bank.
In 2010, the Department completed its first fiscal year as a SDSI agency in August.
In 2011, the banking commissioner with the assistance of the TDI and local district attorney facilitated the recovery of misappropriated prepaid funeral funds of approximately $172,000.
In 2011, 92 banks across the nation failed. One of those banks was a Texas state-chartered bank.
In 2011, S.A.F.E. Act and Mortgage Loan Originators (MLOs) Training was conducted by the Department. The new mortgage loan originator registration system for bank MLOs began operation, at which time banks had six months to complete their MLO registration. MLOs are prohibited from originating residential mortgage loans until they successfully complete the federal registration process.
In 2011, S.B. 249 of the 82nd Legislature increased the size of the Finance Commission from nine members to eleven members. One of the new members must be a banking executive. S.B. 1008 also amended the makeup to allow the seat dedicated to a mortgage broker could be held by a residential mortgage loan originator.
In 2011, H.B. 3004 amended Chapter 154 of the Texas Finance Code to extend guaranty fund coverage to third-party funeral providers who enter a PFC after the effective date of the bill.
In 2011, H.B. 2495 amended Chapters 711 and 712 of the Texas Health and Safety Code, resulting in amendments to Title 7 of the Texas Administrative Code Chapter 26. A significant change was the implementation of ongoing minimum capital and financial fitness requirements for all PCCs. For PCC certificate holders who incorporated after September 1, 1993, they must maintain a minimum equity or net worth of $75,000.
In 2011, H.B. 1146 was enacted establishing standards related to appraisal reports on residential properties in Texas. Registration of appraisal management companies was required after March 1, 2012.
In 2011, S.B. 1165 was approved to enhance the banking commissioner’s ability to ensure the safety and soundness of the Texas banking industry by allowing the commissioner to increase penalties against banks and individuals. The limit for banks increases from $500 to $10,000 for each violation for each day the violation continues, and a person other than a bank is subject to $5,000 following the same criteria. In addition to the per day limit, S.B. 1165 also imposed a maximum total administrative penalty of (1) for a bank, the lesser of $500,000, or one percent of the bank's assets and (2) for a person other than a bank, $250,000.
In 2011, S.B. 762 mandated that the Finance Commission study the fees, costs, interest, and other expenses charged to property owners by property tax lenders in conjunction with the transfer of property tax liens and the payoff of loans secured by property tax liens.
In 2011, the Department signed a MOU between the CSBS and CFPB to establish and enhance the cooperative relationship between the CFPB and state regulators of consumer financial products and services.
In 2011, the first concurrent MSB examination was conducted with the IRS.
In 2011, the Department initiated free financial education webinars as an outreach program for financial institutions and Texas consumers. The inaugural webinar was co-hosted with the FDIC.
In 2012, the banking commissioner and the U.S. Secret Service Dallas Field Office jointly announced efforts to assist financial institutions in adopting practices designed to reduce the risks of corporate account takeover. Working with the Electronic Crimes Task Force and Texas banks, the U.S. Secret Service launched “Operation Texas Money Mule,” a global undercover operation.
In 2012, the Department announced a new online service allowing all entities licensed by the Special Audits Division the option to renew their license online, bringing the benefits of e-government to these entities.
In 2012, Frost Bank, a banking subsidiary of Cullen/Frost Bankers, Inc. with assets of $20.4 billion, completed its conversion from a national bank to a Texas state-chartered bank.
In 2012, FinCEN established a working group to review and provide suggestions for revisions to the BSA/AML examination. The Department was appointed as a member of the working group.
In 2012, the Department signed the Nationwide Cooperative Agreement for MSB Supervision. The agreement created the MMET.
In 2013, the Department uncovered the misallocation of MSB funds related to accelerated mortgage payments. In July 2013, a district court issued a Receivership Order and on October 27, 2016, the district court granted the Receivers’ Motion for Discharge and to Close Case. Consumers received only pennies on the dollar as a recovery.
In 2013, the banking commissioner issued Supervisory Memorandum 1035 concerning licensing of foreign-located money transmitters under Texas Finance Code Chapter 151.
In 2013, the Texas Electronic Crimes Task Force was reconvened by the banking commissioner to elevate the priority and broaden the scope of the banking industry’s engagement in addressing cyber threats.
In 2013, the Department and CFPB entered the State-Supervisory Coordination Framework Agreement which detailed the responsibilities and coordinating rules between the parties, examination process, corrective actions, and other supervisory procedures.
In 2013, CSBS partnered with the FRB of St. Louis to research Community Banking in America in the 21st Century. The Department supported the initiative and hosted town hall meetings around the state to gather input from the industry.
In 2013, the 83rd Legislature enacted S.B. 661 which amended Chapters 711 and 712 of the Texas Health and Safety Code relating to cemeteries. The bill amended definitions and removed platting requirements when the only change is the addition of a small multiple cremains receptacle. Additional amendments clarified that the minimum capital requirements apply to each cemetery owned by a cemetery corporation; made unauthorized multiple burials in a cemetery plot or unauthorized removal of remains from a plot a second-degree felony criminal violation; and clarified that a change in ownership of 51% or more of the business requires an application for a new certificate of authority (COA).
In 2013, S.B. 297 amended Chapter 154 of the Texas Finance Code to clarify procedures for administrative hearings and court hearings, allow the banking commissioner to issue subpoenas for particular investigations and to prohibit wrongdoers from participating in the sale of prepaid funeral benefits.
In 2013, Chapters 151 and 278 of the Texas Finance Code are amended by the 83rd Legislature to clarify and correct language, eliminate conflicts with federal regulations, allow the use of a national registry for MSB licensing, and generally improve the efficiency of administering the statutes.
In 2013, H.B. 52 amended Chapter 711 of the Texas Health and Safety Code, adding the definition of a cemetery broker; registration requirements of a cemetery broker with the Department; requirements for handling consumer complaints; and termination of registration. The bill also added a section on the powers and duties of the Department relating to cemetery brokers which includes administration, fees, and examination of records.
In 2013, H.B. 3068 was passed, prohibiting a surcharge on purchases made using a debit card or stored value card instead of cash, credit card or a similar means of payment. The Department investigated and responded to 23 complaints in which merchants appeared to be acting contrary to the law.
In 2013, the Department launched the Corporate Application Filing Entry System (CAFE) to allow supervised entities to submit applications or notices electronically. The system eliminates the time and expense of printing, copying, and mailing documents and allows for a higher level of efficiency.
In 2013, CSBS announced the Department’s fifth re-accreditation. As of June 30, 2013, the Department had 191 employees and exercised oversight responsibility of 288 commercial banks with total assets of $203.3 billion. The Department also had oversight of 21 trust companies doing business with the public, 10 FBAs, 390 PFCs, 243 PCCs, and 137 MSBs. Other registered entities not subject to examination included 11 PCSEAs, 3 cemetery brokers, and 3 check verification companies.
In 2013, the Department conducted its first joint MSB examination with FinCEN.
In 2013, of the 24 bank failures in the U.S., Texas accounted for two; both were national charters.
In 2014, oil prices fell by nearly 50% in the second half of 2014, as a flood of crude from U.S. shale activity disrupted the global oil market. While this downturn affected a relatively small number of state-chartered banks, it created uncertainty regarding the indirect impact it would have on the broader state economy going forward.
In 2014, Deputy Commissioner Newberg was elected President of MTRA.
In 2014, the banking commissioner facilitated the recovery of approximately $380,270 in funds related to the misappropriation of PFC fund benefits.
In 2014, the banking commissioner issued Supervisory Memorandum 1038 setting out the Department’s interpretation of what it means for a money transmission license holder to conduct business through an authorized delegate under the Texas Finance Code. The memorandum also establishes key criteria the Department will use when determining if a license holder is conducting its business through an authorized delegate.
In 2014, five cemetery brokers registered with the Department.
In 2014, the Department issued Supervisory Memorandum 1037, becoming the first state to issue guidance and establish the regulatory treatment of cryptocurrency currencies under the existing money transmitter laws.
In 2014, the Department held an Executive Leadership of Cybersecurity seminar to discuss the current cyber threat landscape, the collection and sharing of cyber threat intelligence and best practices in cybersecurity management. Community bank chief executive officers and senior executive leadership attended the event. U.S. Treasury Deputy Secretary Sarah Bloom Raskin was the keynote speaker. This program was replicated in several states nationwide.
In 2014, the Department’s website was redesigned and featured more information, easier navigation, and improved accessibility. In addition, the new format gave the Department the ability to develop an official portal called DEX to communicate and share documents securely with entities regulated by the Department.
In 2014, the Department began accepting MSB applications through the Nationwide Multistate Licensing System & Registry (NMLS) system.
In 2014, the fee assessment schedule applicable to all licensed MSBs, was modified to reflect two revised schedules, one applicable to money transmission licensees and one applicable to currency exchange licensees, to make it more equitable for each type of MSB license. The annual license fee was also included in the assessment fee rather than separately charged and collected.
In 2015, Commissioner Charles G. Cooper testified before the House Financial Institutions’ Subcommittee on Financial Institutions and Consumer Credit in Washington, D.C. The subject matter of the hearing dealt with examining the regulatory burdens from a regulator’s perspective.
In 2015, the commissioner issued Supervisory Memorandum 1040 to provide MSB license holders with industry best practices regarding the documentation of authorized delegate (AD) compliance monitoring efforts. In addition, it is the intent of this memorandum to offer general guidance for AD file content and structure to facilitate more efficient and effective regulatory review, to improve MSB compliance, and to reduce the demands on limited license holder resources.
In 2015, the commissioner issued an Emergency Order to Cease and Desist Activity, to Seize Records and Funds, and to Cancel a Permit, relating to the misappropriation of approximately $290,250 in PFC funds. The local police department also investigated the situation.
In 2015, the Department notified financial institutions of the expectations regarding cybersecurity assessments. Examination staff began reviewing completed cyber assessments performed by state-chartered banks and continued these reviews at regularly scheduled examinations and special off-site reviews.
In 2015, Texas Finance Code §§12.101 and 13.002 were amended by the 84th Legislature to clarify that the Finance Commission appoints the Banking and Savings and Mortgage Lending Commissioners by a majority vote.
In 2015, the Texas Bullion Depository was established by the 84th Legislature. The administration of the depository was assigned to the Texas Comptroller of Public Accounts. The law further expanded the definition of a MSB to include activities of a depository agent and creates a licensing requirement for depository agents under the regulation of the Department.
In 2015, H.B. 3555 amended Chapters 31, 35, 181, 185 and 202 of the Texas Finance Code. Primarily, the bill clarifies prohibition authority against individuals with felony convictions and authorizes injunctive relief in cease and desist orders.
In 2015, the 84th Legislature approved changes for trust companies. These included the requirements for restricted capital; aligning examination authority with that for banks; establishing confidentiality of statement of condition and income for exempt trust companies and streamline reporting requirements; expanding the scope of family members and interests that may be served by private trust companies; and establishing other guidelines for exempt trust companies.
In 2015, Chapter 712 of the Texas Health and Safety Code was amended, authorizing the commissioner to petition a court for modification of trust and transfer of funds to an entity taking over a cemetery. The amendments further clarify the authority to bring injunctive actions and requirements for emergency orders.
In 2015, S.B. 899 amended Chapter 151 of the Texas Finance Code. The bill clarified the licensing exclusions for persons engaged in currency transportation and clarified the definition of money transmission. The bill further increased the amount of security required for an internet currency exchange applicant and license holder; and authorized county prosecutors to pursue criminal violations.
In 2015, Title 7 of the Texas Administrative Code Section 3.37(a) was amended to adjust the way assessments applicable to state banks are calculated (40 TexReg 7620). The first annual inflationary adjustment is set for September 1, 2017.
In 2015, the first concurrent MSB examination was conducted with the CFPB.
In 2016, Commissioner Charles G. Cooper was elected Chairman of the CSBS Board.
In 2016, total assets for Texas state-chartered banks were $254.6 billion as of December 31st, up $7.7 billion over the previous year. This growth occurred despite a reduction of eight state banks in 2016 to 244 state banks.
In 2016, depressed oil prices impacted the energy sector industry. With over two years of an oversaturated oil market, oil and gas companies were led to bankruptcy, as they were unable to make a profit due to depressed barrel prices. Seventy oil and gas producers filed for bankruptcy. Problem banks increased from a low of seven in 2015 to a high of 14 in 2016.
In 2016, the banking commissioner executed seven separate Consent Orders to seven different entities for providing online money transmission services to Texas customers without the required Texas MSB license.
In 2016, the banking commissioner issued Supervisory Memorandum 1013 that authorizes MSB license holders to release examination reports to banks under certain conditions. This memorandum was issued to assist MSB license holders with opening or maintaining bank accounts.
In 2016, the banking commissioner issued Supervisory Memorandum 1015 which clarifies that under the Texas Money Services Act, an MSB license holder must have an in-house Chief Compliance Officer, but may outsource other BSA compliance functions.
In 2016, the Department was named as a Temporary Receiver to run the day-to-day activities of a troubled PCC; the District Court approved the Receiver’s request to transfer the cemetery to Dawson County and the proposed plan of distribution of funds to claimants.
In 2016, the State Auditor’s Office completed its audit report on the Texas Department of Banking: A Self-Directed, Semi-Independent Agency (Summary of Report 17-012).
In 2017, the banking commissioner executed two separate Consent Orders to two different entities for providing online money transmission services to Texas customers without the required Texas MSB license.
In 2017, the Department approved the first de novo bank application since 2009.
In 2017, the banking commissioner testified before the Senate Committee on Banking, Housing and Urban Affairs in Washington, D.C. The subject matter of the hearing dealt with a call to end the one-size-fits-all bank regulation and instead tailor regulations to different kinds of banks.
In 2019, pursuant to Senate Bill 614, which became effective September 1, 2019, private child support enforcement agencies, Texas Bullion Depository & Cemetary Brokers were no longer required to register with the Texas Department of Banking.
In 2019, the Department renamed its Special Audits Division to Non-Depository Supervision. The name change better aligned the division’s name with its diverse supervisory duties. The change also reflected the Department’s goal of aligning its non-depository supervision processes with other state regulators and the Conference of State Bank Supervisors’ Vision 2020.