Banking law is complex and expansive. Not only does banking law regulate traditional banks and financial institutions, but it also affects even any company issuing a line of store credit. If your company falls under the jurisdiction of any banking regulatory body or other bank law, it's imperative to work with an attorney who is familiar with banking regulation and compliance. Priori Legal can connect you to an experienced banking attorney from our marketplace on-demand.
Regulating Banks and Financial Institutions
Banks are some of the most carefully regulated institutions in the United States, but sometimes it’s difficult to understand exactly what qualifies as a bank.
What qualifies as a bank?
Each regulatory institution defines a “bank” under its purview slightly differently, but the general definition is always the same. Any trust or company incorporated under U.S. state or federal law that has a charter and whose main business is receiving deposits, making loans and discounts, or exercising fiduciary powers similar to of national banks under authority of the Comptroller of the Currency is considered a bank. This of course includes traditional commercial banks, but it can also include building and loan associations, investment banks, online lending companies, and other similar institutions.
The line isn’t always clear-cut, however. Some money services businesses and money transmitters, such as PayPal are subject to certain banking laws, but not strictly considered banks.
How are investment banks regulated differently?
Investment banks are a specific category of banks that are not subject to the same level of regulatory scrutiny as commercial banks. Investment banks only work in securities-related transactions, such as expediting the purchase and sale of investments or assisting in IPOs. They don’t have deposits or make traditional consumer loans, so they are allowed to take on more risk than most banks and they do not fall under the purview of the Federal Reserve or the FDIC. Instead, investment banks fall under SEC regulation, and they generally have more operational freedom.
Banking Compliance and Regulation
Banks and other financial institutions are subject to a host of banking laws and other regulations determining what is and is not legal. Each transaction is overseen by a number of regulatory bodies to ensure the highest level of compliance. Because of all this scrutiny, any financial institution or other organization subject to U.S. banking law must carefully consider all banking regulations before acting, to ensure that it is fully in compliance with current regulation from these regulatory bodies, legal instruments, and many others. A banking lawyer can help your company do this properly.
Consumer Financial Protection Bureau Regulations
The Consumer Financial Protection Bureau (CFPB) regulates the way lenders interact with the public. The CFPB does this by overseeing all consumer financial markets, rulemaking on the way financial contracts can be drafted and financial products can be pulled together, supervising lending and credit practices, and generally monitoring for abusive or fraudulent behavior in consumer financial markets.
Federal Reserve Regulations
While the Federal Reserve Banks are primarily associated with regulating the economy at large, individual companies must also comply with Federal Reserve Regulations, especially those related to extensions of credit. All companies must ensure that any credit agreement—even those that do not require outside financing— strictly complies with the Federal Reserve’s regulations concerning credit, as well as all other rules for financial institutions and lenders.
Almost all banks and formal financial institutions today are insured by the FDIC (the Federal Deposit Insurance Corporation). If your company is FDIC insured, you agree to comply with their regulations for organizations, especially regarding capitalization, insolvency, and deposits. In general, FDCI regulations only apply to formal financial transactions, levels of risk, and deposits, but all organizations should review such guidelines, especially if they someday hope to be insured by the FDIC.
Now that banking is carried out primarily online and over mobile networks, regulating financial transactions has become a priority for government enforcers. Complying with FinCEN (Financial Crimes Enforcement Network), the bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to root out financial crime, must be a priority for every company like is has never been before. As FinCEN’s primary focus is pinpointing domestic and international money laundering, terrorist financing, and other financial crimes by following the money, every company must carefully audit their own books and maintain total financial transparency or risk FinCEN scrutiny.
Right to Financial Privacy
Any company with financial records must also comply with the Right to Financial Privacy Act. This law gives customers of financial institutions the right to certain levels of privacy from government searches. While this right in and of itself does not require a high level of compliance, the Right to Financial Privacy Act and other data privacy laws require all financial institutions and similar organizations to thoroughly secure the financial information of customers.
Banking law is aggressively enforced, and as there are many enforcement agencies involved in banking law enforcement, almost all banks and financial companies will find themselves the subject of a banking enforcement action at some point. While routine, all enforcement actions should be taken seriously, as the consequences of a determination of non-compliance can be severe, including termination of deposit insurance, “cease and desist” orders, civil fines, and even criminal prosecutions of individuals involved. If your company faces enforcement, it’s important to fully comply with orders given during the investigation—and to let an experienced banking attorney set out the best defense for your company.
Legal Issues Surrounding Banking Transactions
All banking transactions are subject to a host of legal issues. Not only do all financial market regulations need to be followed, but also all transactions must be accompanied by the proper contracts and paperwork. Banking lawyers can draft everything from customer agreements and transaction authorizations to more complex contracts governing a line of credit or a loan. All banking transactions require a large amount of paperwork to protect your company and the consumer relationship. Creating standard contracts and custom agreements as prudent can help.
Contracting with Banks
Business contracts always require careful attention to terms, but when these contracts involve a bank, the scrutiny and compliance expected increases exponentially. If your company starts negotiations with a bank for any kind of contract, there will be certain clauses that have wider implications than in normal contracts. A banking attorney can help you better understand what pitfalls to look out for and get you the best possible agreement.
What is receivership?
When a bank is at a point of default or bankruptcy, the government can seize the failing bank and run the institution until it is more financially secure to ensure the bank does not default on loans.
If my company is not primarily involved in banking do I really need to worry about banking law?
It depends on your company’s activities. If you are working in the financial sector, investments, or other areas that may intersect with banking, you may need to comply with relevant banking laws regardless. The best way to find out if you are responsible for complying with any banking regulations is to discuss your exposure with a qualified banking attorney.
How are securities regulated by banking law?
While securities law is generally considered to be separate from banking law, there is some overlap. If you are involved in issuing, trading, or selling securities, there may be additional banking laws relevant to your work. Speaking with a banking lawyer may help clarify your compliance responsibilities better for you.