Banking Law

Banking law is a discipline of law that concerns itself with regulations that cover banks and bank accounts. Until the early 1980s, the federal government regulated and controlled interest rates on bank accounts, set a limit on interest rates for savings accounts, and prohibited interest payments on checking and other deposit accounts. Banks were also not allowed to offer money market accounts to clients. Two acts, the Depository Institutions Deregulation Act of 1980 and the Garn-St. Germain Depository Institutions Act of 1982, eliminated regulations on interest rates for savings accounts and overturned restrictions on checking and money market accounts.

Checking accounts are regulated by state law as well as some federal laws. One such federal statute is the Uniform Commercial Code which in Article 4 defines the rights between individuals with regards to bank deposits and collections. The Federal Reserve plays a role in banking regulation particularly when it involves rules regulating checks. Many checks pass through the federal reserve system and are thus controlled by Regulations J and CC of the Federal Reserve. Regulation CC is concerned with the availability of funds in a depositor’s account and the process that is required to handle checks that are not honored due to non-payment. The Expedited Funds Availability Act which is expanded upon in Subpart B of Regulation CC places time restrictions on how long a depository bank can wait to make a deposited check available for withdrawal.

Banking laws are established by the US Congress, federal agencies, state legislatures, and state agencies. The three major federal agencies that concern themselves with monitoring the banking industry include the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency. Some portions of the banking industry are further controlled by other agencies such as the US Department of Housing and Urban Development and the Federal Trade Commission. Lending, fraud, and mortgage lending are some of the areas that banking law is concerned with.

Lending is one of the main roles of a financial institution (such as a bank) and the US government controls many aspects of the lending process. For example, limits are placed on how much a bank can lend to a consumer. The law governing lending limits states that the cap for limits is set at 15% of the bank’s capital plus surplus for unsecured loans and 10% for secured loans. This specific law is meant to ensure that banks do not engage in what is referred to as loan account risk.

Laws also regulate the disclosures made to consumers upon applying for loans. The Consumer Credit Protection Act has set provisions that require banks to disclose the loan interest rate, finance charges, total payments, and other necessary information. Banks and lending institutions that fail to disclose such information can be held liable for twice the amount of finance charges at a minimum of $100 to a maximum of $2,000 in addition to attorney fees for each violation.

Mortgage lending is an aspect of lending that concerns itself with home ownership and mortgages for consumers. Congress has enacted a number of laws that ensure consumers have a fair mortgage lending process. The Fair Housing Act prohibits discrimination against loan applicants based upon their race, color, sex, and nationality while the Real Estate Settlement Procedures Act (RESPA) prohibits those who receive settlement services from receiving fees or portions of the proceeds. Lenders must also provide disclosures as with any loan and provide an estimate of the closing costs expected to finalize each loan.

Fraud can be a major issue with banking institutions and several statutes have been enacted to address banking fraud. One statute forbids bank employees from taking bribes, fees, or gifts in exchange for the approval of a bank loan or extension of credit. Section 214 of this act prohibits offering these bribes. Bank employees, officers, and agents who falsify bank reports or engage in unauthorized transactions can be penalized financially up to $1,000,000 and face a prison term of up to 30 years. Laws have also been adopted to protect banks themselves from fraud and individuals who attempt to defraud or obtain property owned by a bank can be fined up to $1,000,000 and face up to 30 years in prison.





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