Vermont Legislature SmartTranscripts:

[Speaker 0]: Good morning, everyone. This is the LeBron House Committee on Commerce and Economic Development. Again, Thursday, 01/15/2026, at 10:34 in the morning. We're back from a break, and we're going to continue our look at H-six 48. Hopefully, no one knows the firehousekeeping bill. We'll go back with Deputy Commissioner Flynn. Aaron?

[Speaker 1]: All right. Thank you, Mr. Chair. Kind of picking off with my troll remarks. It's gonna get a little spicier. This is more this is more of the fun section. Yeah. Section 34, which is on page 48, Joe. This is the first sec first change here is a definitional change or it's within the definition section. First paragraph, we're just clarifying the the language about these parts and parts one, two, and five. But more importantly, paragraph 65, for whatever reason, we left off the financial and special purpose financial institution. Special purpose financial institution is a bank like entity that's not an insured bank. So if there's an uninsured bank, there's a merchant bank, and there's a non depository trust company that are called special purpose financial institutions, It's adding in the financial because it was left off for whatever reason.

[Speaker 2]: Part three. Of this part and parts one, two, and five, which are money services, or just the grammar?

[Speaker 0]: Well, I've never seen Park before. Is it different than a subsection?

[Speaker 2]: Yeah, so it's the way the whole title eight is organized and you really only see it in the table of contents. So all the money transmitters are required and all the insurance It are almost never comes up except in instances like this.

[Speaker 0]: They're able to refer

[Speaker 2]: to all insurance companies or all banks that are already.

[Speaker 0]: I don't recollect that this I'm sure you have Herb, but Okay, thank you.

[Speaker 1]: So again, the definition of a Vermont financial institution refers to a special purpose institution. It's actually a special purpose financial institution, which is another defined term elsewhere within this particular institution. This is the more fun stuff. So Section 35, this is a change to the requirements for bank governing body meetings. So currently, a bank is required to have its board of directors or what we call the governing body, is required to meet at least six times per year and once every quarter. We've heard that just with the changing of the times and trying to make business more efficient, that that's a little too onerous. So we compromised with this language in saying that, look, the governing body can meet as few times as four times a year, they can meet as often as they would like, But if they don't meet as often as monthly, they need to form an executive committee of their board of directors or their governing body, which does meet monthly, and then any actions that executive committee takes are then ratified at the next meeting of the governing body itself. We're just trying to modernize and make the governance of a bank more efficient without sacrificing any actual oversight of the institution. Section 35 would be applicable to a stock bank, so a bank that has a stockholder. Section 36 is the same language which would be applicable to a mutual bank. A mutual bank is a bank that is not owned by stockholders, they're owned by their depositors. Any questions on the rationale for why we're making those changes? Excellent. Section 37, this is another area where we're trying to modernize and improve bank operations. So this is a section on the loan authority. Within this standard, if you are on page 51, we've a little changes to some areas here. So we've added paragraph e, which says that the written loan policy that the institution has adopted must include the circumstances under which a loan shall be considered for approval by the financial institution's governing body. We're proposing that language in exchange for the language that we stricken down at the bottom of the page, which required that any loan the bank was contemplating making that was greater than 10% of their capital base must be approved by the governing body. In this day and age, that very onerous, and it's impeding lending going on in Vermont. It's making things slower. So we said, okay, we would be okay with that as long as the board determined what level of risk they would accept and put that in their policy, and that's how they would choose to approve loans in that particular case. Do you all understand the rationale and what we're doing with that?

[Speaker 3]: What happens, Erin, if a bank sets their policy and DFR looks at that and says,

[Speaker 2]: I don't know.

[Speaker 1]: We would still have all of the abilities that we have to evaluate what they're doing, what they say they're going to do. Oftentimes you'll have a policy such as this that is established by the board of directors, but senior management team is not following it. So we'll we'll address those concerns with normal course of our examination activities. And most of that examination activities is risk focused. So like, we're not gonna spend too much time worrying about a $100,000 loan, but a $10,000,000 loan we're gonna probably provide more scrutiny over. And so this is more about their internal processes. If we did identify any concerns with what they're doing, how they're doing it, this doesn't impede us from still doing whatever regulatory action we feel is necessary to protect depositors.

[Speaker 3]: And you're reviewing every three years? Every bank, every three

[Speaker 1]: Every yeah. We actually partner with the FDIC. So we either do an exam together or we alternate, and one of us is in the bank either every twelve to eighteen months, depending on how big of a bank they are. So it's it's more frequent than three years.

[Speaker 2]: Thank you. Sure.

[Speaker 1]: And again, this was requested by some some bankers. They just, again, wanted to improve governance.

[Speaker 0]: Right. So so it is improving governance because the written policy has to include, you know, what they're thinking of it as a circumstance. Exactly. Not actually I was just confused. It's not making things any easier for them. It's just saying you need to set out a new written policy. Make your loan policy, I guess, more clear. Exactly. Additional requirement in a sense.

[Speaker 1]: Exactly. We we don't wanna be prescriptive in the statute. We want the board to say this is what our risk appetite is. If we're okay with making up to $5,000,000 with our loan officers making loans up to $5,000,000 that's okay. And they are the ones that are going to set what their loan approval requirements are for the board.

[Speaker 0]: We're not removing any requirement that is perceived as too restrictive now. We're just adding an indentional requirement.

[Speaker 1]: The approval of loans over that 10% of capital for our smaller institution is restrictive because it does, you know, add complexity and time, and that was the comment we received. So the compromise was just saying, alright, the board's required to have this policy. We want the board to determine at what level they will be the ones who are reviewing the loan before it's actually made within their institution.

[Speaker 0]: Where's the 10%?

[Speaker 1]: It's in paragraph D, it's at the bottom of the page. Page 51. It's stricken through right there at the bottom. Sure. Another proposal that we are making to this statute is related to, there's another lending related provision. You'll see on page, where is it? Sorry, back in paragraph D, same page, there's a limitation. So there's a hard cap in terms of the size of a loan a bank can make, and it's at 20% of their capital level. Further on in that section, there are rules about how we attribute a loan to one person to another person for the purposes of determining that cap. The existing statutes can be read in an ambiguous way, so it's not clear that some loans can be made to entities that may be related to some ultimate parent, but the parent has nothing to do with the underlying loans of its two, say, sister LLCs below them. So we've heard that that is an impediment to some institutions being able to make the loans that they would like to make. Obviously, housing is a big deal. I don't know how much real estate development folks have been in, but even a three storey apartment building, you are talking $5.06, $78,000,000. It is very expensive. So this is an attempt to address those concerns and provide a little more clarity. What we've done is we've incorporated the standards that are currently found are the same for national banks. So the national bank regulators, the OCC, I talked about them earlier. And so we're taking those provisions and putting them within hours to try and address some of those concerns. The OCC's language is not specific to if it's a loan to a corporation or an LLC. The OCC's language looks at, is there a common relationship between the two entities? And if there's not, then they're separate. So if you see on page 52, we've added the language about common enterprise shall be or are deemed to be to exist. Marie and I were just talking about what the language may be in. There might be amendments to talk about there. But, essentially, if there is this common enterprise between the two entities and they they really are interdependent and could not exist separately, then we look at them as borrowers. Both of the loans would be subject to the total 20% cap. I'll just stop there and see if anyone has questions on concepts of what we're trying to share. And again, the rationale is we want banks to be making loans out in the marketplace, getting those deposits to use so that economic activity can occur. Keep flipping back on pages, but back on page 51 in paragraph D, we've included the provision that the OCC has in their language about lending to a corporate group. So we still think that there should be some sort of a hard cap, and we're using this corporate group up to 50% of its capital level as that sort of maximum limit. Most of these questions are really only related to the smaller institutions that are operating in Vermont. Most of the larger banks would have enough capital where it's probably not even going to be an issue. They can do their activities as they would like. Any questions on this language? Would you like me to go through each each item line by line, or or what would you like me to do, mister chair?

[Speaker 0]: Think line by line looks good.

[Speaker 1]: Okay. I've I've on page 51, I've I've explained everything in in the changes in paragraph d. Page 52, paragraph one, we're changing will to shall and each person to both persons, and we'll be deemed a single borrower. That's that's mostly stylistic. In paragraph a, striking some language and adding the proceeds of a loan derivative transaction or extension of credit to one person shall be deemed to be used, and that's existing language. So just clarifying that you will add these together in these circumstances. Paragraph b is the language about common enterprise, which I just discussed. Paragraph I is a further I

[Speaker 0]: think I missed. So how does that term or common enterprise, how does that relate back to some of the other privilege I think I missed? Yeah.

[Speaker 1]: So basically, if if based on the provisions that follow paragraph b, common enterprise will be deemed to exist, and so therefore it is essentially a loan to one borrower and is subject to that 20% cap.

[Speaker 0]: Right. But what where else in the in the statute is that relevant? So if it's common enterprise, you're gonna treat them as one unit. Exactly. Where else in in the statute does toggle a comment in? I

[Speaker 1]: believe that might be the only reference to price in the statute. Okay. Well, there's I'll get to it. I just I see it in a couple of pages here. Alright. So paragraph I is further defining what a common enterprise is in the section I there. So if the source of repayment of each obligation is gonna be the same, so maybe it's the same sale of a good or something that's gonna repay both loans, we would wanna look at those holistically and together. And just some clarifying language at the end of that paragraph, which talks about an employer is not treated as that, as a source of repayment under that because we're talking about wages. Let's see. Paragraph II. One. Loans, derivative transactions, or extensions of credit are made to borrowers who are related directly through common control, including where one borrower is directly or indirectly controlled by another borrower. And substantial financial interdependence exists between or among the borrowers. So if there is that level of control and we have the two separate entities and maybe they're both related, like, let's say I own a gas station and and I operate a gas station, but I also own through a separate LLC, the the real estate separate from the gas station. The LLC that owns the real estate is essentially dependent on the operation of the gas station, so we would wanna look at those together. Does that does that concept make sense?

[Speaker 4]: Yeah.

[Speaker 0]: Paragraph two.

[Speaker 1]: And this gets into more definitions of how control is deemed to exist between the parties, and it gets into the power to vote 25% or more of any class of voting securities of that entity. Most of the time you will probably wholly own the LLC or the related entity, so it will be clear, but this just sets the threshold, the 25% ownership. Paragraph three. This gets into the financial interdependence when more than 50% or more of the borrower's grocery sheets or gross expenditures on an annual basis are derived from the transaction with the other borrower. Again, the Gas Station LLC example that I provided. And then paragraph four again further clarifies how we're looking at those gross expenditures and gross receipts, and what they include, gross revenues, gross expenses, and then any intercompany loan, dividend, contribution, or similar receipts or payments.

[Speaker 4]: And

[Speaker 1]: new section here is III. Loans, derivative transactions, extensive credit are made to borrowers to acquire a business enterprise in which those borrowers will own more than 50% of the voting securities or voting interests. So if you were buying a business, both parties are part of that acquisition, if they're going to control 50%, then it is included as one borrower. And then finally, paragraph four, Herb, to your point, this is where the common enterprise language comes back. The commissioner determines based on an evaluation of the facts and circumstances of particular transactions that this common enterprise does exist. So Thank you. Our examination staff will look at each situation, and if they're deemed to be that, then we could make that determination. Any questions on that? Not a terrible change to how we currently look at loans to one borrower today, but it is adding these other new tests to get away from the very ambiguous language that we find ourselves with. Still on page 54, Joe. Paragraph d just made some stylistic changes there. The obligation to general partner or member of an association shall reattribute it to the partner or association. So if you're the general partner and the association also has a loan from the same entity, those are one loan for purposes of this test. Paragraph e on page 55. The obligations of a general partner or association are not attributed to other general partners or members unless the situation in Subdivision A or B of this Subdivision D1 exists. This is where you would have to go all the way back to D1 to find out what that condition is related to. Similar language in paragraph F, but it's for persons in a corporate group, and it's really saying that the obligations of persons in a corporate group are not attributed to other persons in the corporate group unless there are these conditions found, as we defined elsewhere, that do exist. And that allows us to use that 50% corporate group cap.

[Speaker 4]: Okay?

[Speaker 1]: Stylistic

[Speaker 0]: Yeah. So that that that's generally consistent with corporate law too, right? In terms of liability of the same member of the company. This is consistent with that, isn't it?

[Speaker 1]: I don't know. There might be different legal liabilities that are present in corporate law, but this is really referring just to that sort of that bank capital risk test that we've got in this or that limit that we've established as a policy decision years ago.

[Speaker 0]: Okay, thanks. Sure.

[Speaker 1]: Some other small changes just in terms of reducing capitalization on the term indebtedness, and all of that language already exists. I think that covers those changes. Unless there are more questions on that, I can move on. Alright, now we're getting into laws which affect credit unions, from unchartered credit unions. Section 38 is a language about the definition, so except as otherwise specifically provided elsewhere in this title, following terms of the following meanings for the purposes of this part and parts one, two, and four of this title. Again, if you actually go and look at the law online, it doesn't tell you that this is in this particular part. You have to go back to the table of contents. So it is a little confusing, but we don't want to address that.

[Speaker 0]: Appreciate your honesty.

[Speaker 1]: Section 39. This is similar to the bank governing board language. This is just applicable to Vermont credit unions. So it says the same thing. The governing body of a credit union shall meet as often as is necessary to ensure the proper oversight of the credit union, but not less than four times per year, at least once each quarter. If a governing body meets less than monthly, there might need to be a comma right there, Maria, the governing body shall appoint an executive committee that that meets monthly, and we should add this following language, Maria, during the months in which the the governing body does not meet, and the minutes of the executive committee meetings shall be ratified by the governing body at the governing body's next meeting. Same standard that would be applicable to Vermont banks should be applicable to Vermont Credit Units. Questions? K. Section 40 is essentially codifying something we've, the in the banking division, always assumed was possible. But if you have a if I have a deposit at a credit union, I'm a member of that credit union. If my spouse is a joint deposit holder or would like to be a joint deposit holder, she doesn't have to be a member of the credit union, but we would still treat that deposit as a joint deposit owned by both of us equally. Questions on that language? Do you want me to read through it? Or is it

[Speaker 3]: Is that a change in law,

[Speaker 2]: or is it a clarification?

[Speaker 1]: It's a clarification. Again, it's something that we've always assumed. As long as there's a member that is owning the deposit, we weren't too concerned with who any other joint account owner was. Section 41 is another loan authority specific to credit unions in this case, and we're just clarifying that as long as the borrower is a member on a loan at the credit union, that the co borrower does not have to be a member. Again, that's a provision that we've always interpreted, or it's a practice that we've always interpreted was okay, but this just codifies that as long as the borrower is a member of the co borrower, it's okay as well. At the end of paragraph A, we've stricken that last sentence. The governing body shall establish a written loan policy in accordance with the requirements of this section, because it's extraneous. In the next section or the next paragraph, we talk about the written loan policy they need to have. On page 60, number c, the written loan policy. Any questions on that?

[Speaker 5]: On

[Speaker 1]: page 61, we've just in paragraph H, we've just clarified where you find the referenced federal laws as they're applicable to these credit unions. Second to last of my topics, section 42 is about credit union mergers. The existing standard in law is that the emerging credit union and the continuing credit union both need to vote to approve the credit union merger. We're confused as to why the continuing credit union would need to vote on the approval. This requirement is not found in the Federal Credit Union Act, so we thought it made sense to streamline that requirement so that only the credit union that will be merged away is the one that needs to approve that merger. Any questions on these requirements? We've removed references to each participating credit union instead of in its place putting the merging credit union and all of the changes that would be necessary for that. In paragraph e one, we've added requirements that the merger should be certified by the officers, the executive officer, and the secretary, and submit those records of the vote to us.

[Speaker 3]: When I think of merger, I think of two entities coming together, and forming either a new entity.

[Speaker 1]: It's more of an absorption, yeah, because these are nonprofit entities. Essentially, just one entity is transferring all of its assets and liabilities over to that existing entity. There's really not a change to create a new entity whatsoever.

[Speaker 3]: The amount of work that it would take to create a new entity is probably unnecessary.

[Speaker 1]: It's probably unnecessary, exactly.

[Speaker 3]: They've figured out along the way which one is going go forward.

[Speaker 1]: Yeah. East Rise Credit Union is now down the street. Vermont State Employees Credit Union voted their membership voted to merge into East Rise. Time it was New England Federal Credit Union. But yes, there was no effect on the members of New England Federal Credit Union. They still had all of their services. They had all of their accounts. It's just the members were added to that role.

[Speaker 3]: Thank

[Speaker 4]: you. So it's sort

[Speaker 2]: of like an acquisition. It's a merger. But I guess my question is, what is the rationale for the institution that it's merging into? What is the rationale for their members not voting? Meaning The

[Speaker 1]: the institution that will continue Yeah. That will continue to exist, we don't think, and it's not a requirement under federal law, that their members vote on allowing that other credit union to become part of this existing credit union because that existing credit union will continue to exist. There will be no change. There's no effect on the members of that credit union. So there really is no

[Speaker 2]: So there isn't any concern that they could be taking on risk? The emerging credit union, maybe if it has more liabilities.

[Speaker 1]: Yeah, those are risks that are probably better addressed by the governing body and the senior management team of that acquiring credit union.

[Speaker 2]: Expectations they're doing the proper due diligence.

[Speaker 1]: There's a lot of due diligence and there's a lot of requirements in state law and in federal law about how all of that process has to go. The system Just about Do the members of that credit union need to, you know, assent to the merger?

[Speaker 4]: I get it. Okay.

[Speaker 0]: Thank you. But if there are members of that credit union that wants to take over another credit union, if there are members there that object to that, how do they would that be at a meeting or

[Speaker 1]: So you're talking about the surviving credit union. If their members want to object to that, they would not have the ability to do that. So at the time that Vermont State merged into New England Federal, New England Federal Credit Union members did not have the ability to say, No, we don't want you to do this. Only the members of Vermont State Employees Credit Union or VSECU at the time had the ability to say yes or no to that transaction because they were the only ones affected.

[Speaker 5]: So we're taking away the rights of of members of a credit union.

[Speaker 2]: And You voted for the board. Right?

[Speaker 6]: To the members vote for the board? True. True. But sometimes when you vote

[Speaker 7]: for I

[Speaker 5]: mean, I get the streamlining process. Mhmm. But we currently have it set up in a different way to provide a benefit to credit union members that are receiving that risk or

[Speaker 0]: whatever.

[Speaker 1]: I And mean, it's not

[Speaker 5]: a deal breaker or anything, but I kinda like the idea of maintaining the extra benefit of being in Vermont of having the right to vote on a merger, even though probably like five people come.

[Speaker 1]: Yeah, I mean The flip

[Speaker 8]: side of that is I happened that maybe my life works for that merging, credit union that's getting merged in, they're going to lose their job. Well, now I can send an email, I can do a big campaign and say, Vote no on this, vote no on this. And most people who are depositors in a bank, they don't have no clue. And oh my goodness, this is bad. And now you have allowed those members to destroy a merger because they maybe didn't know what was going on.

[Speaker 1]: I think from my perspective, we have a situation where there's gonna be disparate treatment among two separate mergers. So for example, the VSCCU merger into a federal credit union, federal law did not allow or provide for the provision of those members of the federal credit union to approve that merger. I would argue that the state charter is at a bit of a disadvantage because we don't have the same provision in our law. Right now, we require both credit unions to merge, and quite frankly, I don't think it's totally necessary. The people of the credit union that will cease to exist definitely should have the right to say what happens to their member owned organization. That's a non starter for sure.

[Speaker 0]: So it's kind of competitive issue between the federal and the state charter?

[Speaker 1]: It's a little bit of that, yes. Three Vermont credit unions have merged out this year already. The story is generally that it's a smaller institution with a long time manager that is a retirement age and just can't do it anymore. So they're deciding that, look, I can't do it. No one else would like to become the manager of this credit union. So they decide to merge up.

[Speaker 0]: But you don't want to disadvantage Monarch Charter Credit Union, vis a vis. Correct. Do you have a question?

[Speaker 7]: Well, I was just gonna relate that Credit Union, which is federal Mhmm. Did in fact just merge into and disappear into a larger entity as of January 1. And we did have plenty of opportunity to vote on it, and there was, you know, informational meetings and mailings, emails.

[Speaker 4]: Mhmm.

[Speaker 7]: Yeah. It was very well orchestrated, interestingly enough. Were smaller one by numbers of members and all that, and the larger one in terms of assets held. So there was actually a fairly nice special dividend that was a very interesting process to participate in. And basically, I thought it went pretty seamlessly given, again, federal regulation. Mhmm. It's very interesting, the first time I've participated.

[Speaker 0]: Excellent.

[Speaker 1]: The final section I was planning to talk about is Section 43. We've left Title VIII and we're now into Title IX. And this is a section about how loans get dispersed, of the funds when a loan is funded, what you need to comply with to disperse those funds. And in paragraph F, we've just again, this is a financial institution definition situation, and we wanted to clarify the financial institution and what it means to be that financial institution. So we've added the definition from elsewhere in Title VIII, which is essentially a bank, and we've added in the definition of what a credit union is, which is found at the bottom of paragraph f. Questions on that section? Excellent. Well, thank you for your time this morning.

[Speaker 9]: We're almost there. Once again, Joe Valenti, director of policy at DFR. I will run through the insurance sections very quickly. Before I do that, there was a securities question in section 54 earlier this morning, and I did get an answer from deputy commissioner Smith. That is is this was regarding restitution awards and the ability of the commissioner to require that an award be forfeited if the person was involved in dishonesty, full jury, fraud, or deceit. The question, I believe it came from representative Olson, was whether the individual would have the right to appeal that decision. And, yes, they would appeal to the Superior Court of Washington County. That would be their right. Going back to insurance in section 44, we only have four items for insurance. The first one is around the formation of a mutual insurance holding company. So there are the protects of insurance companies. There are mutuals. There are stock insurers. This provision would allow a mutual insurance holding company to use the word mutual in its name. Currently, if you think of some of the insurance companies that are household names, Mass Mutual, Liberty Mutual are two examples. Those are mutual insurance holding companies. They're not strictly pure mutuals, but their states have allowed them to continue to use mutual in their name. Mutuals, whether they are a mutual insurer or a mutual insurance holding company, are distinct from other types of insurers, and it is important for them to be able to market themselves using the word mutual. We currently have four mutual insurance holding companies in Vermont. In terms of the distinction between the two, a mutual insurance holding company provides a more flexible corporate structure with the ability to raise capital, but whether it is a mutual insurer or a mutual insurance holding company, it is the distinction with other types of insurers is that it is governed by culturally and in terms of their business, governed by policy holders and funded by policy holders rather than through stock. That's a high level overview there. Section 45 is regarding annual, and we did add explicit language here on quarterly statements. This is we already require quarterly statements. I think we went over this on Tuesday with regard to the captive bill. But during our recent accreditation exam, the NAIC did recommend that DFR codify filing requirements, including the explicit requirement for quarterly statements. I just noticed here on line nine on page 66, we do mention oath. We'll want to change that to oath or affirmation, but this is very similar to the captives language that we had discussed. And so there are quarterly statement requirements. There are deadlines for each of those. And like I said, these are existing requirements. They're already in our checklist. This is not imposing anything new. It's just codifying based on a recommendation that came up during our accreditation process. And I will say this was a suggestion. This was not a remedial item by any means in our accreditation. Passed with flying colors. Section 46, this is correcting. We had something in our language around group life policies that was, in practice, impossible to implement. So the question here is when a group life policy can add dependent coverage if any part of the funding for that coverage is coming from employees. There's a question of how many employees must be a part of that group plan. The previous language had said that dependents could be covered if at least 75% of the eligible employees or members who have eligible dependents elected to participate. It is not possible to know how many employees or members have dependents, whether their dependents are eligible or not, just simply not feasible. I will say this is something that was last changed in 1993. We don't know the origin of the original language, and so we can't really speculate about how it got here. It's not in any of the model laws. I think the general principle is that you don't want people to be a small group of people to be paying for coverage that they may not themselves benefit from. But so the change that we're making here is instead of this possibility of identifying whether they have eligible dependents or not, it's simply if at least 75% of the eligible employees or members elect to make the required contribution. So it's just whether the members or employees are participating, it's not making any assumptions or needing to obtain any information about dependents. And then the last item we have, and this is this is in a national model. It's something that we have already we already do internally. It's just something that was not codified in the statute, was that we are adding in terms of our unfair methods of competition or unfair or deceptive acts or practices statute for insurance in Section 4,724. We did not explicitly include race, religion or national origin. Again, our internal practices were consistent with including those elements. It just wasn't something that we had covered in statute. We wanted to correct that. So any questions on insurance? All right. In that case, if Commissioner Samson is here, if he does want to make any remarks or Only if there are questions.

[Speaker 0]: We have people to come in and talk with us this afternoon. One is here from the banks and credit unions, as well as property and casualty insurance as well. If we'll take an early lunch today, and we'll be back at one.