ICBA - Publications - OCC Finalizes Controversial Preemption Rules

OCC Finalizes Controversial Preemption Rules

JANUARY 9, 2004


OCC Finalizes Controversial Preemption Rules

Despite heated opposition from members of Congress, the states and consumer activists, the OCC finalized two rules designed to clarify its exclusive authority over national banks by preempting state laws on national bank lending and deposit-taking activities. However, to address concerns raised by its critics, the OCC also included two provisions designed to prevent national banks from engaging in predatory lending.

When the OCC initially proposed a sweeping preemption regulation, the ICBA urged the agency to continue acting on a case-by-case basis to protect the creative balance of the dual banking system and to carefully evaluate the specific elements of each state law that would be preempted.

The rule will likely be subjected to legal challenges, and congressional hearings are expected, although it might be difficult for Congress to act in this election year to overturn the rule.

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."

"Both regulations are important to the future of the national banking system," Comptroller of the Currency Jerry Hawke stated, "and will enhance the ability of national banks to plan their activities with predictability and operate efficiently in the modern financial services marketplace, subject to effective and efficient supervision." The agency said the rules were issued on a solid basis of U. S. Supreme Court precedents that go back almost to the founding of the United States. The OCC also stressed that it was not adding any new powers or authorities for national banks, but merely codifying the judicial precedents for preemption.

The Rules. The first rule establishes areas of state laws that do not apply to national bank lending and deposit-taking activities. The rule preempts state laws on lending that affect licensing, terms of credit, permissible interest rates, escrow accounts and disclosure and advertising. The rule also preempts state laws on bank deposits that require specific disclosures, licensing, abandoned and dormant accounts, and checking accounts and funds availability.

The OCC declined to state that it "occupies the field" as the exclusive authority for national bank real estate lending activities, although it asserted that it has the authority to do so. This would mean that only the OCC could determine what is appropriate for real estate lending by national banks.

A second rule affirms the OCC as the exclusive supervisory authority for national bank activities. While the agency conceded that states have authority to enforce rules such as fire codes and environmental laws, 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 any state or local official.

Operating Subsidiaries. According to the OCC, since national bank operating subsidiaries function with the same powers and under the same regulations as national banks, both rules apply to operating subsidiaries in the same way as they apply to national banks. The OCC's position prevailed in a California case over the state's authority to regulate a mortgage subsidiary of a national bank, but a separate case is pending in Connecticut, where all 50 state attorneys general have filed a brief opposing the OCC.

Predatory Lending. Since the OCC's action was prompted in part by recent efforts by the states to combat predatory lending, such as statutes in Georgia and New Mexico, the OCC included two provisions in the preemption rule designed to prevent national banks from engaging in predatory practices. The first provision requires that any consumer loan made by a national bank must be based on the borrower's ability to repay and not primarily on the liquidation value of the collateral.

The second provision reaffirms the OCC's authority against unfair or deceptive practices under section 5 of the Federal Trade Commission Act. The OCC stressed that its corps of 1,800 examiners and its consumer complaint system served as an effective mechanism to quickly address consumer problems, but reaffirmed that there was little evidence that national banks had engaged in predatory lending.

Dual Banking. When the rule was initially proposed, critics contended that the agency's proposal would severely damage the dual banking system by abrogating state authority. Disputing these criticisms, the OCC stressed that the rules will enhance the dual banking system. "Distinctions between state and federal bank charters, powers, supervision and regulation are not contrary to the dual banking system; they are the essence of it. ... Clarification of how the federal powers preempt inconsistent state laws is entirely consistent with the distinctions that make the dual banking system dual," said Hawke.

Critics Respond. Reaction to the two rules was swift. New York Attorney General Eliot Spitzer called the OCC's action "shamefully wrong" and "bad public policy," vowing to not hesitate to use New York's consumer protection statutes to go after any national bank suspected of deceptive or illegal conduct.

The Conference of State Bank Supervisors stated that "the arrogance and audacity of the Comptroller's actions are astounding" and called on Congress to conduct oversight hearings on the OCC's action. House Financial Services Committee vice-chair Sue Kelly (R-NY) called the two rules " a significant change to banking regulation that requires the oversight and investigation of Congress," suggesting that hearings are likely when Congress reconvenes.

The rules will take effect 30 days after publication in the Federal Register. Additional information is at www.occ.treas.gov.