Significant changes to Pennsylvania banking laws will take effect on December 24, 2012, as a result of three bills, known as the “Banking Law Modernization Package,” signed into law by Governor Tom Corbett. According to a letter dated November 14, 2012, from the Secretary of the Pennsylvania Department of Banking and Securities (Department) to Pennsylvania-chartered financial institutions, the goal was “to update, simplify and modernize” the state’s banking laws and “to reduce regulatory burden at the state level where possible, given the increased regulatory demands of the federal [Dodd-Frank Act].”  Highlights are described below.

Act 170 (H.B. 2368). Amendments to the Pennsylvania Banking Code of 1965 include the following:

  • Various sections dealing with lending authority are deleted, including Section 322 (known as the “Simplification and Availability of Bank Credit Act”), which substantially liberalized rate and fee authority for consumer loans when it was added to the Code in 1994. In place of those sections, Sections 303 and 506 are amended to deregulate interest rates on all direct and indirect, open-end and closed-end, consumer and commercial loans made by a bank or savings bank to an individual, a partnership, a limited liability company, or an unincorporated association. The new provisions improve on Section 322’s broad fee authority by eliminating any limit on late charge amounts (although a 15-day grace period is still required).

Like Section 322, amended Section 303 provides that the section “shall govern” all direct and indirect loans. We expect that, as the Department did with Section 322, it will interpret such language to provide optional authority under which banks can make seller-assisted loans without compliance with Pennsylvania’s Goods and Services Installment Sales Act (GSISA) or Home Improvement Finance Act (HIFA).

Also like Section 322, amended Section 303 contains specific requirements for closed-end motor vehicle loans made by banks through dealers acting as intermediaries. The Department had interpreted Section 322 to authorize banks to make dealer-assisted direct motor vehicle loans without compliance with Pennsylvania’s Motor Vehicle Sales Finance Act (MVFSA). We expect the Department to interpret Section 303 similarly. But we also expect that the Department will continue to require compliance with the MVFSA, GSISA, or HIFA in bank transactions structured as the purchase of an installment sales contract from a seller or dealer.

  • The threshold for when state-chartered banks must seek approval for investments in bank premises and fixed assets is increased to more than 100% (from more than 25%) of capital, surplus, undivided profits, and capital securities.
  • To satisfy Dodd-Frank requirements for engaging in derivative transactions, credit exposure from such transactions is added to the categories of indebtedness covered by the Code's limits on indebtedness to one customer.
  • The restriction limiting the number of beneficiaries on a deposit account to two is removed.
  • New prohibitions on persons who may serve as a bank director are added.
  • Engaging in unlawful banking or trust activity is deemed a felony rather than a misdemeanor, and penalties are significantly increased.

Act 171 of 2012 (H.B. 2369). Amendments to the Department of Banking and Securities Code include the following:

  • Limits on disclosure of formal enforcement actions against institutions are changed to permit the Department to disclose such actions. (According to the Secretary's letter, this will also allow institutions “to disclose the actions as necessary to the public as well as bank vendors, such as auditors, without requesting Department approval.”)
  • Subsidiaries of regulated institutions are added to the entities over which the Department has supervisory and enforcement authority.
  • The Department is authorized to assess civil penalties of up to $25,000 for each violation against an institution or institution-related individuals for a violation of any law or order or any unsafe and unsound practice or breach of fiduciary duty.
  • New provisions are added addressing the authority of the Pennsylvania Attorney General and other state agencies to undertake administrative proceedings and initiate lawsuits against state and federally chartered institutions.

Act 172 (H.B. 2370). Amendments to the Loan Interest and Protection Law (the general usury law also known as Act 6) include the following:

  • Certain of the disclosure requirements for variable rate mortgage loans are removed.
  • Banks and savings banks are expressly allowed to take advantage of the deregulated rates permitted by the Banking Code.