1998 Legislative Update

The following is a summary of banking related legislation enacted by the Illinois General Assembly and subsequently approved by Governor Edgar. This summary is provided for your general reference. For specific guidance concerning the applicability or effect of legislation on your institution, you should seek the advice of your legal counsel.

Public Act 90-575 (House Bill 597): Creates the Financial Institutions Digital Signature Act; amends the Property Tax Code regarding mortgage lender's fault for unpaid taxes; amends the Check Printer and Check Number Act; effective March 20, 1998.

Financial Institutions Digital Signature Act

Public Act 90-575 created the Financial Institutions Digital Signature Act. This legislation provides that a financial institution may generate documents by electronic or computer means, and such documents shall have the same effect and validity as if they had been generated manually by writing, typing, etc. It also provides that the use of a digital signature by a financial institution or its customer has the same force and effect as a manual signature if the digital signature is (i) unique to the person using it; (ii) capable of verification; (iii) under the sole control of the person using it; and (iv) linked to data in such a way that if the data changes, the digital signature is invalidated. A related amendment to the Illinois Criminal Code specifies that unlawful use of another person's digital signature constitutes forgery.

In related legislation, Public Act 90-759 (House Bill 3180), effective July 1, 1999, created the Electronic Commerce Security Act. That Act further establishes the validity of electronic documents and electronic signatures in commercial transactions and establishes certain recognized security measures that are deemed to be commercially reasonable under the law.

Property Tax Code

P.A. 90-575 amended Section 21-15 of the Property Tax Code to provide that the delinquency for unpaid taxes shall be deemed the fault of the mortgage lender if (i) the mortgage payments have all been received by the mortgage lender pursuant to the mortgage contract; (ii) the mortgage lender holds funds in escrow for the payment of the taxes; and (iii) the escrow funds are sufficient to pay the taxes after deducting funds needed for hazard insurance and mortgage insurance premiums and any other assessments to be paid from the escrow account pursuant to the mortgage contract.

Check Printer and Check Number Act

The Check Printer and Check Number Act was also amended by P.A. 90-575. In Section 15 of that Act, the requirement to verify the customer's telephone number and social security number was eliminated. Information that is now subject to verification includes the customer's name, street address (including city and state) and account number. Section 15 now specifies that acceptable forms of verification include a copy of the account agreement, a recent account statement issued by the financial institution, a written or verbal response from the financial institution verifying the account information, or a copy of the Magnetic Ink Character Recognition specification sheet from the financial institution. Alternative forms of verification may also be authorized by a rule promulgated by the Office of Banks and Real Estate. Subsection (b) of Section 15 was added by this legislation to exempt certain check orders from the verification requirements. Those exemptions include (i) checks to be drawn on an account for which the check printer has previously supplied checks to that accountholder and where there have been no changes to the accountholder's name, address or account number; (ii) orders placed by a financial institution and made on behalf of a new or existing accountholder of that financial institution; and (iii) orders on an existing account where the only changes involve a zip code (with no change to the street address) or changes to or from an abbreviated word in the address (such as changing "Apartment" to "Apt." or "IL." to "Illinois"). Section 17 was added to the Check Printer and Check Number Act to provide that this law does not apply to personal computer users who generate checks for personal use or for their immediate family members at no charge. Section 25 was amended to revise the bonding requirement applicable to check printers, clarifying that the bond in the principal amount of at least $10,000 would be for liability for violations that have resulted in a judgment against the check printer and removing the specification that the bond must run to the Commissioner of Banks and Real Estate. Section 30 of the Act was amended to authorize the Commissioner to impose fines of up to $10,000 for certain violations of the Act or rules promulgated under this Act.

Public Act 90-665 (Senate Bill 1528): Omnibus legislation that amends numerous acts affecting Illinois banks, savings banks and credit unions; effective July 30, 1998, except for amendments affecting redemption of repossessed vehicles that are effective January 1, 1999.,

Illinois Banking Act

Section 5 of the Illinois Banking Act was amended to expand the grant of parity or "wild card" powers available to state banks. Section 5(11) was amended to make its provisions (granting state banks all powers available to national banks) applicable even if a contrary or prohibitive statute exists elsewhere in Illinois law. The provisions of the Financial Institutions Insurance Sales Law, which apply equally to state banks, national banks, savings banks, savings and loan associations, trust companies and credit unions, were not affected by this amendment to Section 5(11).

Subsection (25) of Section 5 was added to grant state banks parity regarding products and services offered by state-chartered or federally-chartered thrifts. The powers conferred on state banks by Section 5(25) include pledging assets to secure uninsured deposits of accountholders; providing data processing services to the public on a for-profit basis; acting as a surety; and purchasing and developing real estate relating to residential housing (for sale or for rent), including reconstruction, rehabilitation and rebuilding of residential properties and construction of retail shops and other service facilities incidental to the housing development.

In addition, Section 5(25) authorizes a state bank to offer a number of products and services through the establishment of a service corporation. Service corporations of federally-chartered savings associations may provide services for financial clients or that are finance-related, including accounting and internal audit functions; advertising and market research; courier services; data processing and data storage; administering personnel benefit programs; and developing and integrating software and related systems. Such service corporations may also offer credit-related services, including abstracting; acquiring and leasing personal property; appraising; acting as a collection agency; analyzing credit; and engaging in check or credit card guaranty or verification. Service corporations may offer consumer services including financial consulting; home ownership counseling; postal services; stored value instrument sales; welfare benefit distribution; and check printing. In addition, service corporations may engage in real estate development, maintenance and management as well as insurance agency activities, including the sale of title insurance. These new powers available to state banks are subject to the same restrictions that are imposed on thrifts by statute or by regulation and are also subject to the Financial Institutions Insurance Sales Law. A bank that chooses to exercise a power through the establishment of a service corporation would have to comply with the federal Bank Service Corporation Act [12 U.S.C. 1861 et seq.]. Section 5(25) does not grant state banks additional powers concerning real estate brokerage or the establishment of bank branches.

To the extent that a state bank proposes to offer, directly or through a subsidiary or service corporation, a product or service that may not be offered by a national bank, the state bank should consult with the FDIC to determine whether FDIC approval is required [12 CFR 362].

Section 9 was amended to eliminate the "reserve for operating expenses" from the information required in the application for a permit to organize a state bank.

Section 10 was amended to permit the Commissioner to consider the experience and qualifications of proposed management and the proposed plan of operation when reviewing the application for a permit to organize a new bank and making the necessary findings.

Section 13 was amended to require a finding that any stockholder who would own a controlling interest in the new bank has conducted his or her prior business with other financial institutions in a safe and sound manner before the Commissioner will issue the charter. This finding is comparable to one that must be made for a person who attempts to acquire a controlling interest in an existing state bank.

Section 21.1 was amended to provide that a copy of the merger application filed with and approved by an out-of-state bank's home state regulator shall be accepted by the Commissioner in lieu of the Commissioner's own application requirement when an out-of-state bank will be the resulting bank following a merger with an Illinois state bank. Similarly, receipt by the Commissioner of a copy of any notice of intent to establish Illinois branches that the out-of-state bank files with its home state regulator constitutes satisfactory notice to the Commissioner.

Section 24 was amended to eliminate the requirement that certificates of merger be recorded.

Section 48 was amended in subsection (7) to expand the grounds for which the Commissioner may seek removal or future prohibition of a bank director, officer, employee or agent. The amendment allows the Commissioner to consider misconduct by the person at other financial institutions or business entities. Prior to this amendment, the Commissioner could only take action if the person's misconduct occurred at the specific state bank at which the person was employed or for which the person served.

Section 48.1 was amended by adding paragraph (15) to subsection (b), including the exchange of information between commonly-owned affiliates among the exceptions to the confidentiality of a bank customer's financial records.

Corporate Fiduciary Act

Section 1-7 of the Corporate Fiduciary Act was amended to give the Commissioner discretion to specify circumstances when a trust company could establish a subsidiary without applying to the Commissioner for approval.

Section 4-4 was amended to remove the requirement that an out-of-state bank must obtain a certificate of authority from the Commissioner before conducting trust business at its Illinois branches.

Section 5-6 was amended to expand the grounds for which the Commissioner may seek removal or future prohibition of a corporate fiduciary director, officer, employee or agent. The amendment allows the Commissioner to consider misconduct by the person at other financial institutions or business entities. Prior to this amendment, the Commissioner could only take action if the person's misconduct occurred at the specific corporate fiduciary at which the person was employed or for which the person served.

Electronic Fund Transfer Act

The Electronic Fund Transfer Act was amended by adding Section 85, providing immunity from liability if actions or omissions of a person subject to this Act were based in good faith on a rule, interpretation or opinion issued by the Commissioner.

Illinois Bank Examiners' Education Foundation Act

Section 6 of the Illinois Bank Examiners' Education Foundation ("IBEEF") Act was amended to reduce the mandated frequency of meetings of IBEEF's Board of Trustees from quarterly to annual meetings. Special meetings may be called by the Commissioner or a majority of the Board.

Savings Bank Act

Section 1006(e) of the Savings Bank Act was amended to provide that a savings bank possesses powers incidental, convenient or useful to the accomplishment of any power (formerly limited to express powers) conferred by the Savings Bank Act.

Section 1008(a) was amended by adding paragraph (26) to grant savings banks parity regarding products and services that may be offered by state banks. The exercise of any power under this grant of parity is subject to the same restrictions that would apply to a state bank.

Section 6001(c) was amended to clarify that either a licensed or certified appraiser may be used by a savings bank to make an appraisal of property when required by the Savings Bank Act.

Section 6003 was amended to add subsection (19), authorizing savings banks to purchase investment grade marketable obligations of any other state or territory (or political subdivision thereof) to the same extent that the savings bank may invest in marketable investment securities (generally, up to 15% of the savings bank's capital).

Section 6013(j) was amended to provide that the lending restrictions and collateral requirements prescribed in Section 6013 do not apply to loans or investments made pursuant to Section 6003.

Consumer Installment Loan Act; Illinois Vehicle Code; Illinois Fairness in Lending Act; and Motor Vehicle Retail Installment Sales Act

The Consumer Installment Loan Act, the Illinois Vehicle Code, the Illinois Fairness in Lending Act, and the Motor Vehicle Retail Installment Sales Act were amended to consolidate the provisions governing redemption and transfer of title of a repossessed automobile under Section 3-114 of the Illinois Vehicle Code. These changes do not take effect until January 1, 1999.

Uniform Commercial Code

Sections 9-105, 9-106 and 9-302 of Illinois' Uniform Commercial Code were amended to provide for "uncertificated certificates of deposit" and for the perfection of a security interest in such an instrument.

Public Act 90-696 (House Bill 2474): Amends the Uniform Commercial Code regarding public agency's unperfected security interest in pledged bank assets; effective August 7, 1998.,

Uniform Commercial Code

Public Act 90-696 amended Section 9-301 of the Uniform Commercial Code to protect the interests of public agencies having more that $100,000 on deposit in a failed financial institution. This legislation grants the public agency a superior security interest (even though such interest may be technically unperfected) over the failed financial institution's receiver (i.e., the Federal Deposit Insurance Corporation) when the financial institution had pledged assets to secure the public funds on deposit at that financial institution.

Reminder: Automated Teller Machine Security Act's provisions are in full effect as of July 1, 1998.

Public Act 89-542, enacted July 19, 1996, created the Automated Teller Machine Security Act. That Act established the legal requirements and standard of care that must be observed by the establisher of an automated teller machine ("ATM") for the safety of ATM users at and in the vicinity of the ATM. The Act mandated immediate compliance for all new ATM's established on or after July 1, 1997. All ATM's in existence prior to that date were to be brought into compliance no later than July 1, 1998.