In the United States, banking activities are regulated on multiple levels and by various institutions. The laws to which a bank must adhere depend on where the bank is located, the nature of its services, and the scope of its transactions. Some of the main goals of banking regulations are to promote privacy, fraud prevention, fair lending practices, and the dissuasion of criminal activity. For example, the Right to Financial Privacy Act of 1999 requires banks and financial institutions to notify consumers about their policies and procedures involving customers’ financial and personal data. Many banks maintain highly detailed records about customers’ employment, address, finances, and investments.
Other laws are geared toward protecting consumers from being taken advantage of by large lending institutions, which often have superior bargaining power. The Truth in Lending Act addresses credit card policies and seeks to protect consumers. For example, the act makes it unlawful for a bank to raise interest rates on existing credit card balances
The most well known regulatory banking and financial authority is the Federal Deposit Insurance Corporation, or FDIC. The FDIC is an independent agency that was created after Congress enacted the Banking Act of 1933. The FDIC’s main function is to provide deposit insurance, which guarantees a depositor’s monetary deposits up to a specified amount, depending on the type of account involved. In order to obtain the insurance guarantee, however, a bank must be a member of the FDIC and adhere to its rules. Many of these rules involve the supervision of financial services, seeking to ensure safety, security, and transparency in transactions between the institutions and the public. In exchange for the insurance coverage that the banks receive, the FDIC charges a premium, which it uses to fund its activities.
Another prominent regulatory authority is the Federal Reserve. The central operating entity of the Federal Reserve, or the Fed, is the Federal Reserve Board. The board is comprised of 12 districts. Each district incorporates one of the 12 regional Federal Reserve banks. These banks are responsible for enforcing and administering the Federal Reserve’s regulations at the local level within their respective districts.
At the state level, banks must comply with local regulatory agencies for the state in which they are chartered. In addition to state laws, the bank must also comply with any federal regulations. In some cases, federal regulations preempt state laws, which means that the bank or financial institution must comply with the federal law instead of the state law.
At the state and federal levels, banking and finance regulations are strictly enforced. Regulatory authorities typically have broad authority to investigate banks and financial institutions and to assess a multitude of fines and penalties in the event that the bank or financial institution is deemed non-compliant. These penalties can include sanctions, cease and desist orders, and the loss of FDIC insurance. One of the most proactive consumer protection agencies in the field of banking and finance is the Consumer Financial Protection Bureau (CFPB). Recently, the CFPB has focused its efforts on reforming mortgage financing and other consumer lending practices throughout the industry. Each lending activity must be documented thoroughly to show that consistent and regulatory-compliant practices have been followed for each loan applicant. Well-maintained records help banks respond to investigations and defend themselves against any accusations of non-compliance.