Changes made through a recent comprehensive overhaul of Iowa’s banking laws aim to make it easier for banks in the state to participate as investors in community development projects, as well as to enable them to compete more effectively in an increasingly technology-embedded industry. 

The Iowa Bank Modernization Act, a more than two-year endeavor that included a review of each banking statute within the Iowa Code, was signed into law earlier this year by Gov. Kim Reynolds after unanimous passage by both the Iowa House and Senate. 

The far-reaching bill also addressed issues such as regulatory relief for state-chartered banks, revamped the corporate application process for financial institutions, outlined changes in allowable investments for banks, and included new provisions for banks’ fiduciary powers. It also updated corporate governance provisions and the administration and authority of the Iowa Division of Banking. 

It’s a process that began shortly before the current banking superintendent, Jeff Plagge, joined the division in September 2019, Plagge noted during a recent interview with the Business Record. 

“The entire code had not been reviewed in its entirety for about 25 years,” Plagge said. “There have been tweaks along the way during those 25 years, but it had not been revisited in its entirety for that time. So that was a big project. If you think of technology and fintech, and process and systems and everything else — a lot has changed in that time frame. So it was a good time to go back and engage the industry in discussions to ask, ‘What’s not working, what needs to be tweaked?’ At the end of the day, we’re just trying to help banks be able to modernize and to keep up with what’s happening in the industry.” 

Here are some of the major areas that were addressed and an overview of the changes. 

Community development and public welfare investment

In a move to make it easier for banks to get federal approval for participation in community development projects, the updated state code now refers to “public welfare investments” rather than “community development projects” to increase the likelihood that rural areas and smaller cities in Iowa will qualify under federal law. 

Having been a banker for 42 years, Plagge noted that a community bank’s financial involvement is often critical to making a project happen. “This is a big one, from the standpoint of expanding opportunities for banks to help their communities, thus helping the citizens of the community as well,” he said. 

Zak Hingst, legal counsel with the Iowa Division of Banking, said it’s been challenging that some parts of rural Iowa that might benefit from public welfare investment projects aren’t designated as low- or moderate-income census tracts, even though from the state’s perspective it would be a beneficial project. “The hope is that [the updated language] telegraphs to the federal regulators that the state is prioritizing public welfare investments in most of the state, [including] rural areas and small towns, even if they’re maybe not low income,” he said. 

The updated statute continues to give banks the option to invest in an entity that will carry out the project, but now also includes a provision that allows banks to invest directly in the project, said Shauna Shields, bank bureau chief with the division.

“In rural Iowa, a lot of times you have some dilapidated buildings or houses that are expensive to tear down properly,” she said. “But because it’s a small investment, the bank might want to buy a property, tear the building down and then sell it to a local builder to build something on it. That scenario didn’t necessarily qualify under the prior laws — that’s an example of something we’re trying to facilitate.” 

Electronic banking activities 

The past decade, particularly the past few years during the global pandemic, has brought significant changes in technology, particularly in how banks offer services such as mobile banking, digital signatures and other changes to make remote banking easier. 

As a result, banks are working more closely with financial technology, or fintech, companies that are producing application programming interfaces that enable banks’ core systems to provide capabilities that the banks wouldn’t be able to do on their own, Plagge said. A new section in the banking law now authorizes him to approve banks’ collaborations with fintech partners. 

“So this [new section] acknowledges that, and encourages banks [to go] into that space,” he said. “We’re open to seeing that kind of activity, but it has to make sense. … We’re going to always tell banks, ‘Know your partners; do your due diligence,’ because everybody likes to claim that they’ve got it all down to a science.” 

Additionally, another new provision allows Iowa banks, with prior approval by the superintendent, to invest up to 5% of their aggregate capital in equity shares of fintech companies. Until this change, banks were only able to invest in fintechs through their holding companies, Plagge noted. 

Both the American Bankers Association and the Independent Community Bankers of America have started fintech funds that conduct due diligence on fintechs that enable banks to invest on a fund-of-funds type of basis, but with this new law, Iowa banks can now also invest directly in fintechs, Plagge said. 

“We’ve seen some good [bank-fintech partnerships], and we’ve seen some rocky ones,” he said. “And the rocky ones usually occur because someone didn’t do their due diligence. Maybe someone said, ‘We can do this, this and this for you,’ but it turns out they could do some things but didn’t have their system set up to do the others. … Eventually, they’ll have to get there, and we and the federal regulators are going to hold them to that to make sure they’re meeting consumer compliance rules and all the other disclosure rules and so forth, because consumers need to know what they’re getting and who they’re getting it from.” 

Investments in tax equity financing projects 

Another new section in the Iowa banking code authorizes banks to make equity investments in projects that will generate tax credits that may be transferred to the bank. “This actually came as a request from the industry to say, ‘This is pretty restrictive in the current code,’ ” Plagge said. “The more we looked at it, we agreed that we should expand them.” 

Iowa banks are now authorized, once certain criteria are met, to invest up to 5% of aggregate capital in any one project and up to 15% of aggregate capital in all investments under the new section. 

“This is a growing interest area, especially now with what the government is doing in the solar [energy] space and other tax credit areas,” Plagge said. Also, the provision allows for more flexibility for projects that are located outside of the state. 

Cryptocurrencies are an emerging technology-related area that was not specifically addressed in the state banking bill. While public interest in cryptocurrencies seems to heat up or cool down with the tempo of prices they’re trading at, Plagge is taking a wait-and-see approach. 

“My personal bias as superintendent is that until the Feds and Congress figure out how they’re going to regulate it, I’m not too interested in spending a lot of time on it, simply because you just spent a lot of time on and then you have the Feds come in and change it all up.” 

A big issue that has yet to be decided is whether banks that hold cryptocurrencies would be able to obtain Federal Deposit Insurance on those types of accounts, and how it might consider applications for FDIC coverage for fintech companies that provide banking as a service technologies. 

“It needs to be seriously looked at with banks and credit unions,” Plagge said. “In the payment space, there’s a lot of compliance, a lot of capital requirements around us. There are backstops around all that, that if something goes bad, it’s determined how it’s going to be made right [for] the consumer. … The Fed is taking their time, but probably rightly so, to make sure they get it right.” 

Other major provisions in the act 

Regulatory relief: 
Removes requirements that a bank’s principal recordkeeping functions be performed at the bank’s principal place of business. Data processing and record-keeping functions may now be performed at any secure location, not necessarily a bank office. Also, a state bank can now locate its principal place of business at any location in the state, not only within the boundaries of a municipal corporation. 

Corporate applications: 
Changes the definition of “control” in regard to provisions for change of control of an Iowa bank to owning, controlling or having the power to vote 25% or more of the voting shares of the bank, a change from the previous 50% threshold. This aligns Iowa law with the requirements of the Federal Reserve Act to reduce confusion about when a change of control application is required. 

Corporate governance and operations: 
Among the changes, annual meetings of bank shareholders are now permitted to be held outside the state, but the bank must enable remote participation by shareholders by telephone or video technology that enables all participants to hear each other simultaneously. 

What the changes mean to one banking leader

Don Coffin
President and CEO, Bankers Trust  

Overall: 
The Bank Modernization Act is good for community banks and makes it easier for community banks to affect change in the communities we serve, especially in rural markets. 

On investments in tax equity: 
Bankers Trust was a driving force behind the modernizations that expanded state banks’ ability to invest in tax credits. This was a needed update to put us on par with what is permitted for national banks, as well as banks chartered in other states that had already updated their rules to allow for tax equity investments. We greatly appreciate the Iowa Department of Banking and IBA’s partnership in engaging stakeholders and drafting the tax equity language in the bill. And, with the recent passage of the Inflation Reduction Act, investment in projects generating energy tax credits is expected to expand even further, and Iowa banks are better suited to participate in this rapidly growing field. 

On electronic banking activities: 
We have had concerns in the past about regulatory scrutiny over partnerships with fintechs. The modernized act makes several updates that provide clearer guidance on when board or superintendent approval is truly needed so we now have greater flexibility. It is important to have good vendor management processes in place before partnering or investing, but the modernization gives options for community banks to stay competitive when the large core providers aren’t as agile in rolling out solutions. It also allows community banks to differentiate themselves in the market and provide better service to our customers through these third parties.