Financial Institutions Modernization Act: Helpful information - WI Bankers Association

LRB-4192/1 and LRB-4193/1: Financial Institutions Modernization Act
The Wisconsin Bankers Association (WBA) has received several good questions about this bill and what it will accomplish. The information below helps explain key terms and concepts found within the bill.

P.O.D. accounts and loan obligations to financial institutions – Allow financial institutions to satisfy the account owner’s loan obligation before distributing funds to the beneficiary.

  • A Payable on Death (P.O.D.) account is a special type of bank account which allows for the money remaining in the account when the account owner dies to pass directly to the beneficiaries named by the account owner, avoiding probate proceedings and overriding any last will and testament or revocable living trust documents. P.O.D. accounts may have multiple beneficiaries.
  • A lien is the legal right to keep possession of property belonging to another person until a debt owed (the loan obligation) by that person is discharged or satisfied.
  • A beneficiary is a person designated to receive funds after the account holder's death. An account holder must record beneficiaries using the financial institution's official beneficiary designation form, then sign and return the form to the bank for the designations to take effect.
  • Real-life example: A bank customer passes away with $25,000 in a P.O.D. account and still owing $5,000 on a mortgage loan with the bank. This bill would allow the bank to satisfy the loan before distributing the remaining $20,000 to the P.O.D. account’s beneficiary, rather than distributing the full $25,000 and then entering court proceedings to collect on the loan.

    The duty of a bank to make payment on lost, destroyed, or stolen cashier’s check, teller’s check, or certified check – reduce the period after these checks are issued/guaranteed before the bank is obligated to pay the amount of the check to someone claiming the check was lost, destroyed, or stolen (from 90 days to 14 days).
    Each of the three types of checks listed in this bill are considered “safer” than a traditional personal check. A cashier’s check (sometimes called a teller’s check) is drawn against the bank’s own funds (not the individual’s) and is commonly required to make a down payment on a house or condo. A certified check is similar to a cashier’s check in that it is issued by the bank but draws on the individual’s funds.
  • Real-life example: Under this bill an individual would have 14 days to notify the issuing bank that the check was lost, stolen, or destroyed and receive the funds back. Current law allows for 90 days, which increases the potential for check fraud.

    Providing temporary authority to act as a mortgage loan originator while a license application is pending.
  • A mortgage loan originator is a licensed individual who originates (creates), sells, or assists with collecting payments for residential mortgage loans.
  • Real-life example: Under this bill, a newly hired mortgage loan originator is free to perform his/her duties while his/her application for a license is being reviewed by the Department of Financial Institutions.

    Property subject to garnishment or tax levy in possession of a financial institution
  • A garnishment is a court order directing that property be seized to satisfy a debt owed. A tax levy is a garnishment used by the WI Department of Revenue (DOR) to collect taxes owed by seizing property. The most common property subject to garnishment or tax levy is wages.
    This bill protects financial institutions from being held liable for property subject to garnishment until the bank has had a reasonable time to comply with the garnishment or DOR directive.
  • Real-life example: An individual whose wages are to be garnished to pay child support instead immediately withdraws the funds and leaves town immediately after finding out the news from the court – leaving everyone else on the hook. This bill would allow banks and credit unions to a have a remedy against such bad actors.

    Entities that provide to financial institutions electronic data processing services.
  • Most banks and other financial institutions rely on the services of third-party entities to process their electronic data (electronic data processing servicers). This electronic data includes customer account information, transaction histories, and other data related to the core banking services of depositing and lending money, which is why these entities are sometimes known as core providers. As more and more aspects of banking are done digitally (online or mobile banking, for example), these core providers process greater and greater volumes of valuable data banks collect from their customers.
  • Real-life example: A bank decides it wants to switch from one core provider to another, but first charges a fee for transferring the data back to the bank that is very difficult to determine – even for the bank. This fee could be large enough to negate any monetary benefit to the bank of switching to the second core provider, essentially holding both the bank and its customers’ data hostage. This bill would prevent that scenario by requiring the fee to be disclosed when the contract is signed.
  • Real-life example 2: Bank A has agreed that it wants to sell the bank to Bank B. Bank A uses software that will charge a “de-conversion” fee to move its core data different format. The core processor informs Bank A that the fee that for “de-conversion” is $1 million, high enough that Bank B can no longer purchase bank A, making both parties unhappy.

    Loans to state banks by a Federal Home Loan Bank – elimination of 20-year term limitation and limitation on the value of bank assets that may be pledged as collateral to secure the loan.
  • The Federal Home Loan Bank System is an organization created by the Federal Home Loan Bank Act of 1932 in response to the Great Depression. The system is comprised of 11 Federal Home Loan Banks which serve as an additional source of real estate lending support for the U.S. banking system and are exempt from federal and state taxes. These banks receive no taxpayer funding. Banks purchase private stock in the system to become members and gain access to funding/loans.
  • Under current law, to obtain a loan from the Federal Home Loan Bank, a state-chartered bank may pledge bank assets having a value less than two times the amount of the loan and not more than four times the amount of the bank’s capital. In addition, the loan term cannot exceed 20 years.
  • Real-life example: A state-chartered financial institution wishes to take out a loan from the Federal Home Loan Bank system in order to offer more loans or better rates to its customers. This bill would allow the bank to do so at lower cost by either pledging more assets or lengthening the term beyond 20 years (the same way a 30-year mortgage has lower payments than a 15-year mortgage)
  • Pro-Tip: Credit Unions and Savings Institutions are already allowed to do this activity.

    Consolidating the Banking Review Board and Savings Institutions Review Board in the Department of Financial Institutions – rename the Banking Review Board as the Banking Institutions Review Board and consolidate it with the Savings Institutions Review Board.
  • Currently, the Wisconsin Department of Financial Institutions, which regulates state-chartered financial institutions, has both two five-member boards which advise the Division of Banking: the Banking Review Board and the Savings Institutions Review Board. Both boards advise the Division of Banking on matters related to their institutions. Savings Institutions (sometimes called Savings and Loan Associations, S&Ls, or thrift banks) are similar to commercial banks but place a stronger emphasis on residential mortgage loans.
  • Real-life example: Since commercial banks and savings institutions differ only in market focus and a few lending regulations, a single, combined advisory board can serve the same function as two separate boards, reducing cost to the state and, ultimately, taxpayers.

    Founded in 1892, the Wisconsin Bankers Association is the state’s largest financial industry trade association, representing 235 commercial banks and savings institutions and almost 21,000 employees.

    Of the nearly 235 Wisconsin banks, 97 percent are members of the Wisconsin Bankers Association. The Association represents banks of all sizes from banks in rural Wisconsin to the state's largest financial institution in Green Bay.

    The WBA office is located at:
    4721 S. Biltmore Lane
    Madison, WI. 53718