Testimony of the 108th Congress

Congressional Review of OCC Preemption

Testimony of Independent Community Bankers of America On

"Congressional Review of OCC Preemption"

before the
Subcommittee on Oversight and Investigations
of the
House Financial Services Committee

January 28, 2004

Karen M. Thomas

Independent Community Bankers of America

Washington, DC

Madam Chairman, Ranking member Guiterrez, and members of the Committee, my name is Karen Thomas. I am Director of Regulatory Affairs and Senior Regulatory Counsel for the Independent Community Bankers of America ("ICBA"),1 and I am pleased to appear today on behalf of ICBA to share with you our views on the Office of the Comptroller of the Currency's (OCC) preemption rule.

Earlier this month, OCC finalized two rules designed to clarify its exclusive authority over national banks. The first rule declares that certain state laws that "obstruct, impair, or condition" a national bank's exercise of its lending and deposit-taking activities are preempted. While the final preemption rule sets forth the areas of state law generally preempted as applied to national bank activities, the OCC also reaffirms that there are state laws, such as criminal laws and laws on contract and debt collection, that create the environment in which a national bank operates that will continue to apply to national banks.

A second, companion rule affirms the OCC as the exclusive supervisory authority for national bank activities. While conceding that states have the authority to enforce rules such as fire codes and environmental laws, the agency made clear that any action involving the exercise of a national bank's power granted by the federal government is solely the province of the OCC and not state or local officials.

When proposed, these rules engendered heated controversy and debate-pro and con. We understand that to address criticism that the rules would result in inadequate protection of consumers, the OCC also included two provisions designed to prevent national banks from engaging in predatory lending. Namely, national banks are prohibited from making consumer loans predominantly on the foreclosure or liquidation value of the collateral without regard to the borrower's ability to repay the loan according to its terms. And, national banks may not engage in unfair or deceptive practices within the meaning of Section 5 of the Federal Trade Commission Act.

With issuance of the final rules, the controversy over the rules remains. Strong views and feelings have been expressed on both sides as to the legitimacy and appropriateness of the rule.

Summary of ICBA Position

In October, 2003, ICBA provided its views to OCC on the proposed rule.

In general, as expressed in our comment letter, the ICBA believes it would have been preferable for the OCC to continue to analyze how individual state laws impact national banks and to make preemption determinations on a case-by-case basis, rather than adopt a broad general preemption regulation. In our judgment, the importance of the federal-state relationship mandates that whenever preemption is undertaken, it should be carefully considered in the context of an individual statute or statutory provision. The merits of preemption will vary from case to case and require that each case be evaluated on the basis on those particular merits. The OCC proposal, though, in our view offered a basis for guidelines or a policy statement on the analysis the agency should undertake in reviewing individual state laws when presented with a preemption issue. Overall, we are concerned that the scope of the OCC rule may not maintain the creative balance that characterizes our unique dual banking system.

The issue is: did the OCC go too far? Our concern is that they may have, but for us it is not a clear-cut case.

Impetus for the Rule

The ICBA understands the impetus for the OCC rule and the desire to bring clarity to the preemption issue. In recent years, the OCC has faced numerous court cases challenging its authority to preempt state laws that might apply to national bank activities. (Through the years, the OCC has had an enviable winning record in preemption cases.) In addition, proliferation of state anti-predatory lending legislation has helped move the issue of preemption to the forefront, most recently with the OCC's preemption of a Georgia anti-predatory lending statute. The final preemption rule is designed to clarify the general applicability of state law to national banks, outline the types of state laws that are preempted (as well as those that generally are not), and provide national banks with a level of certainty in conducting their operations.

Regulatory Burden

Our testimony is in the context of the concern that community bankers in various states have expressed about the growing trend among state legislatures to pass aggressive consumer protection measures that, although well-intended, increase banks' regulatory burden and have negative unintended consequences for consumers and bank customers.

Consequently, ICBA has strongly supported on a number of occasions federal preemption of state laws as they apply to national banks. For example, we have supported the OCC when it preempted individual state laws such as the Georgia anti-predatory lending statute, state laws banning ATM fees, and insurance sales laws that restrict how banks can market and sell insurance.

According to the OCC, it adopted the two rules to assist national banks and their customers because "the imposition of an overlay of state and local standards and requirements on top of the federal standards to which national banks already are subject, imposes excessively costly, and unnecessary, regulatory burden." This statement resounds well with community bankers as they face an ever-growing mountain of regulation.

For example, Georgia bankers faced a serious problem as a result of the state's aggressive law to combat predatory lending. The penalties attached to the loan, not just to the original lender. Secondary market investors stopped buying loans originated in Georgia because they were not willing to take the risk that they might purchase a loan considered predatory. Consequently, liquidity in the market dried up, and secondary market lending slowed significantly. Following actions by the National Credit Union Administration and the Office of Thrift Supervision to preempt the Georgia law for federal credit unions and federal thrifts, the OCC preempted it for national banks and, as a result of a parity clause in the Georgia law pushed for by Georgia community bankers, state chartered banks were also exempted. Had the Georgia statute not been preempted, Georgia consumers would have been seriously disadvantaged in their ability to secure mortgage loans.

Likewise, state and local laws banning ATM fees have not benefited the consumer. When presented with a state law prohibiting them from charging non-customers a fee for using their ATMs, banks have elected not to permit non-customer use. While consumers had previously had a choice to use their own bank's ATM and not incur a fee, or use another bank's ATM for a small fee, the ATM fee ban resulted in less service and less convenience for consumers. These state and local laws have been declared by the courts to be preempted as to national banks.

Consumer Protection

Consumers deserve to have accurate information about the financial products and services they are buying and to be protected from unscrupulous financial services providers and unfair or misleading practices.

In the context of analyzing whether consumers will be adequately protected under OCC's rule it is important to keep several considerations in mind.

First, OCC's rule expressly affirms that national banks must treat all customers fairly and honestly by stating that a national bank shall not engage in unfair or deceptive practices within the meaning of section 5 of the Federal Trade Commission Act (FTCA). A practice is considered unfair or deceptive if there is a representation, omission, act or practice that is likely to mislead; if it would be deceptive from the perspective of a reasonable consumer; and if it is material in the context of the transaction.

The OCC has previously taken actions under the FTCA against national banks, and affirms it will continue to review unfair and deceptive acts or practices on a case-by-case basis. The parameters in the FTCA ban against unfair and deceptive practices are the very essence of many of the state laws against predatory lending. Therefore, national banks do not operate in a vacuum, and the ICBA agrees that it is appropriate to reaffirm that national banks are subject to the FTCA prohibitions against unfair and deceptive practices.

Second, the new rule has added an anti-predatory lending standard. It is intended to prevent national banks from making a consumer loan where repayment is unlikely and would result in the lender seizing the collateral. The ICBA agrees with the OCC that it is generally inappropriate to base a transaction solely on the value of the collateral that supports it. The final rule has made appropriate accommodation for exceptions to the general rule, such as reverse mortgages.

Finally, it is also important to recognize that national banks are subject to a broad panoply of consumer protection statutes enacted by Congress. Beginning with the adoption of the Truth-in-Lending Act in 1968, national banks must adhere to many consumer protection statutes, including the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Truth in Savings Act and other statutes designed to protect the interests of consumers. Federal banking regulators ensure compliance with these requirements through regular, rigorous examination and supervision.

To stop abusive lending practices, efforts and energy must be focused on the non-depository institutions not subject to regular examination and supervision that are the source of many predatory activities. Saddling the entire lending industry with additional burdens only drives up the costs of credit. Well-intended statutes actually may make the environment more fertile for predators by driving legitimate-and supervised-lenders out of the market and driving marginal borrowers towards predators who already ignore existing laws. Or, as was the case in Georgia, possibly drying up funding sources.

Impact on Dual Banking System

The dual banking system, with bank chartering, supervision and regulation divided between the federal government and the states, has served our nation well for more than 100 years. The ICBA believes that the dual banking system should be protected while also ensuring consumers have access to a full range of competitive banking products regardless of their bank's charter. Over the years, the lines of distinction between state and federally chartered banks have blurred and the differences have diminished. Nevertheless, support for a dual banking system remains vigorous among community bankers who value the productive tension between state and federal regulators. One set of rules issued by one federal banking regulator is viewed as an undue concentration of power by many community bankers.

What we do not know is whether the OCC's preemption rule will disturb the balance of the dual banking system. While only 25 percent or so of bank charters are national charters, national banks hold more than 55 percent of bank industry assets. We must be careful lest one charter, state or national, gains sufficient advantages over the other, and tips the balance in favor of that charter. If sufficient numbers of banks switch charters as a result, the viability of the dual banking system could be in question.

OCC preemption of state laws is one side of the coin. The other side is state actions that impinge on the charter powers of national banks and state actions that undermine appropriate federal supervision and regulation. For example, industrial loan companies, which are chartered in a few states, have the potential to undermine supervision and regulation at the holding company level while breaching further the separation of banking and commerce, as Federal Reserve Chairman Greenspan has warned.


The principle of federal preemption of state law is a long and well-established one. However, where the lines should be drawn is subject to continuing debate. Preemption is a complex subject that requires a balancing of interests. While many community banks support some preemption, many are also uncomfortable with a policy of blanket preemption. Creating a broad regulation on preemption will not eliminate challenges to the OCC's authority to preempt state law. Indeed, court challenges to the final rule have already begun. We are concerned that a broad preemption may have unintended and unforeseen consequences and would prefer an analysis of the unique elements of particular state laws in particular circumstances before a decision to preempt is made.

1 ICBA is the primary voice for the nation's community banks, representing more than 4,600 institutions with 17,000 locations nationwide. For more information, visit www.icba.org.

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