Grant Financial Regulatory Agencies the Ability to Assess Appropriate Penalties and Fines
Financial regulatory agencies should have the ability to assess appropriate penalties and fines for violations of the state laws over which they have regulatory responsibility.


Background
The Savings and Loan Act currently authorizes the following supervisory and/or enforcement actions against associations and individuals involved in the activities of S&Ls: cease and desist orders; removal or prohibition orders; divestiture of control order s; and conservatorship orders against an association. The Banking Act authorizes similar types of supervisory and/or enforcement actions: cease and desist orders; conservatorship or supervisory orders; removal of officers, directors, or principal shareholders; memoranda of understanding; board resolutions; and letters of agreement. The State Securities Commissioner is authorized to deny, revoke or suspend a registration; place a dealer, agent or salesman on probation whose registration has been suspended; or reprimand a person registered under the Securities Act. The Consumer Credit Commissioner is authorized to suspend or revoke a regulated loan license, however, the commissioner may assess admin istrative penalties, as well as suspend or revoke licenses to pawnshops under the Texas Pawnshop Act.

There are variances in the number and range of sanctions used by financial regulatory agencies within the state. There are also differences between the sanctions used by state agencies and federal regulators. Federal regulators and the Texas Savings and Lo an Commissioner have the authority to issue prohibition orders, which prohibit a person or entity from doing certain types of business for a given period of time, however, the Texas Banking Commissioner lacks such authority. Further, the Savings and Loan Act and Chapter 8 of the Texas Credit Code have implied wording which speaks to ordering restitution. This language has been legally challenged and is not found in laws affecting other financial institutions.

While current enforcement authority provides adequate supervision and control over the vast majority of supervisory problems, it leaves the agencies and their commissioners with very little middle gro und in seeking resolution to certain kinds of problems or violations of law. The cease and desist authority allows the Department of Banking (DOB) and the Savings and Loan Department (S&LD) to stop problems from continuing. Removal, suspension and prohibit ions are normally used for the very serious supervisory situations. Mid-level problems, however, are often more difficult to control or resolve.

The authority to issue fines or civil monetary penalties against associations and officers, directors, employe es, dealers and agents would provide a very effective mechanism to ensure regulatory compliance in situations that are serious but which do not justify absolute removal from office or prohibition from participation in the affairs of the association or the industry. This authority is available to federal regulatory authorities and has served as an effective deterrent as well as an appropriate remedy for some supervisory problems.

Texas is one of only a handful of states that does not have the authority to i mpose fines or civil monetary penalties for banking, savings and loans, consumer credit and security law violations. According to information received from the State Securities Board (SSB), 37 states gave the state security commissioner or the department t he authority to impose fines. Caps on security law violations among the states with fining authority range from $250 to $100,000 per single violation. A $1,000 cap on banking violations at the federal level was in effect, but was recently changed to offer a range of caps, depending on the nature of the violation. The Texas Credit Union Department, which already has authority for imposing civil penalties, had this authority strengthened in the last regular session.

The majority of states that impose fines or civil monetary penalties are not authorized to use the funds collected in the general operation of the regulatory agency that assessed the fine or penalty. Rather, the money is remitted to the state treasury for deposit to the General Revenue Fund. This removes any motivation for assessing fines or penalties inappropriately to supplement the funding of the agency.


Recommendations
A. State law should authorize the Department of Banking, the Savings and Loan Department, the Office of Consumer Credit Commissioner and the State Securities Board to assess fines or civil monetary penalties against persons or organizations found to have v iolated any provision of the act applicable to their agency, board rule or written agreement entered into with the respective agency.

Funds received as a result of these fines should be deposited to the General Revenue Fund for appropriation as the Legislature deems appropriate.

Under the Department of Banking, this recommendation would include provisions for penalties to be assessed against sellers of pre-paid funeral contracts and perpetual-care cemetery licensees, who are found to be in violation of Title 8 of the Health and S afety Code or the Banking Code as it applies to them.

Appropriate caps should be placed on sin gle violations in order to prevent abusive use of the fining authority. SSB has suggested a $10,000 cap per single violation which is the average cap in states with fining authority. DOB and S&LD have suggested a $1,000 cap per single violation in line wit h the cap previously used by FDIC.

The governing board or commission of the regulatory agency would be required to adopt by rule the conditions under which penalties could be imposed, the range of penalties appropriate for each violation and would contin ue to serve as the appeal body, when appropriate.

B. To provide consistency and to further enhance the regulatory agencies supervisory and enforcement activities, the authority to order restitution and the ability to order prohibitions, should be clearly stated and made available to all four agencies under review.

The governing board or commission of the regulatory agency would be required to adopt by rule the conditions under which penalties could be imposed and the range of penalties appropriate for e ach violation and would continue to serve as the appeal body, when appropriate.


Implications
The authority to issue fines or civil monetary penalties against both associations and officers, directors, employees, dealers and agents would provide a very effective mechanism to ensure regulatory compliance in situations that are serious but which do n ot justify absolute removal from office or prohibition from participation in the affairs of the association or the industry.


Fiscal Implications
Given the fact that significant progress has been made in resolving the banking and savings and loan industries problems and in getting violators out of the industries, it is not expected that orders requiring the payment of civil monetary penalties would be common. T he amount of the penalty or fine would depend on the severity of the violation. S&LD estimates that only one or two orders would be issued in any given year, ranging aggregately from $5,000 to $25,000. The DOB has reason to believe that they would order be tween one and five such penalties, ranging from $10,000 to $50,000 per year, in aggregate.

The Securities Board feels that with a $10,000 cap on each violation, and no cap on the total number of violations, there will be between 50 and 70 orders annually of $1,000 to $10,000, depending on the severity of the violations. It is estimated that aggr egate fines in 1994 would be $137,000 and would increase to an aggregate $300,000 in 1998. All of these estimates are based on records of past violations identified by the agencies.

The authority to issue fines or civil monetary penalties is a new regulatory tool, rather than an expansion of the level of regulation, therefore, there should be no additional administrative costs. Collection of these fines or penalties should be done by existing staff. The Texas Performance Review did not review the adequacy of the current enforcement or level of examination.

Because of recent improvements in the overall condition of banks and savings and loans, it is also possible tha t no fines or civil monetary penalties would be ordered at all during a given year, or that much higher levels of funds would be raised if circumstances warrant.


Fiscal Gain to the General Change
Year Revenue Fund 001 in FTEs

1994 $137,000 0
1995 170,000 0
1996 267,000 0
1997 284,000 0
1998 300,000 0

* The State Securities Board is funded by the General Revenue Fund.