[Senate Hearing 108-864]
[From the U.S. Government Publishing Office]
S. Hrg. 108-864
REVIEW OF THE NATIONAL
BANK PREEMPTION RULES
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
ON
THE OFFICE OF THE COMPTROLLER OF THE CURRENCY RULEMAKINGS PERTAINING TO
THE APPLICABILITY OF STATE LAWS TO NATIONAL BANKS
----------
APRIL 7, 2004
----------
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
S. Hrg. 108-864
REVIEW OF THE NATIONAL
BANK PREEMPTION RULES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
ON
THE OFFICE OF THE COMPTROLLER OF THE CURRENCY RULEMAKINGS PERTAINING TO
THE APPLICABILITY OF STATE LAWS TO NATIONAL BANKS
__________
APRIL 7, 2004
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate/
senate05sh.html
U.S. GOVERNMENT PRINTING OFFICE
24-076 WASHINGTON : 2005
_____________________________________________________________________________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Mark F. Oesterle, Counsel
Martin J. Gruenberg, Democratic Senior Counsel
Patience R. Singleton, Democratic Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
WEDNESDAY, APRIL 7, 2004
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 2
Senator Corzine.............................................. 8
Senator Allard............................................... 9
Senator Carper............................................... 26
Senator Schumer.............................................. 31
WITNESSES
John D. Hawke, Jr. Comptroller of the Currency, U.S. Department
of the Treasury................................................ 4
Prepared statement........................................... 55
Response to written questions of:
Senator Shelby........................................... 307
Senator Sarbanes......................................... 312
Senator Johnson.......................................... 314
Senator Miller........................................... 317
Roy Cooper, Attorney General, Department of Justice, State of
North
Carolina....................................................... 10
Prepared statement........................................... 109
Response to written questions of:
Senator Johnson.......................................... 322
Senator Miller........................................... 323
Gavin M. Gee, Director of Finance, State of Idaho, on Behalf of
the Conference of State Bank Supervisors....................... 13
Prepared statement........................................... 121
Response to written questions of:
Senator Johnson.......................................... 325
Senator Miller........................................... 326
Martin Eakes, Chief Executive Officer, Center for Responsible
Lending........................................................ 39
Prepared statement........................................... 160
Response to written questions of Senator Johnson............. 327
Joe Belew, President, Consumer Bankers Association............... 43
Prepared statement........................................... 193
Walter T. McDonald, President, National Association of
Realtors'........................................... 44
Prepared statement........................................... 210
William M. Isaac, Chairman, The Secura Group..................... 46
Prepared statement........................................... 224
Arthur E. Wilmarth, Jr., Professor of Law, George Washington
University Law School.......................................... 48
Prepared statement........................................... 229
James D. McLaughlin, Director, Regulatory and Trust Affairs,
American Bankers Association................................... 51
Prepared statement........................................... 289
Additional Material Supplied for the Record
Operating Subsidiaries of National Banks Chart by the Comptroller
of the Currency................................................ 330
Wildcard Authority & Parity Statues Chart from the 2002 Profile
of State-Charted Banking by the Conference of State Bank
Supervisors.................................................... 349
REVIEW OF THE NATIONAL BANK PREEMPTION RULES
----------
WEDNESDAY, APRIL 7, 2004
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 2:05 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order. I would
like to thank everyone for being here today.
The purpose of this hearing is to examine the Office of the
Comptroller of the Currency, OCC's, recently issued rules on
preemption and visitorial powers. While these may be very
technical provisions, I believe they merit our close
consideration because of the significant consequences for our
dual banking system.
In order to get a full appreciation of these issues I think
it is important to ask some basic questions about the rules
such as, why are they necessary? Was the OCC acting within its
legal authority when it issued them? What new powers or
responsibility do they provide to the OCC? What powers or
responsibilities do they take away from the States? What
impact, if any, will the new rules have on the development and
enforcement of consumer protection standards? Finally, in the
absence of such rules, what, if any, negative consequences
would there have been for national banks and their customers?
I look forward to hearing from the panelists on these and
other questions that will come from the Committee.
Additionally, I also look forward to examining some of the
larger issues implicated by these rules. For example, what is
the appropriate role of State governments in the regulation of
financial services within a national economy? Do these rules in
any way affect such roles? Do these rules create negative
consequences for the operation of the dual banking system?
In the end, I believe that it is extremely important for
the Committee to examine all these questions so that we can
have a full appreciation of all the implications of these new
rules.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. I am
going to take a moment or two here, with the Chairman's
indulgence.
Chairman Shelby. Proceed as you wish.
Senator Sarbanes. I am very pleased to welcome this panel
of witnesses before the Committee this afternoon to testify on
the recently adopted OCC rules on national bank preemption and
visitorial powers. Mr. Chairman, I want to thank you for
holding this hearing.
Chairman Shelby. Absolutely.
Senator Sarbanes. The actions by the OCC have significant
and far-ranging consequences and deserve close examination by
the Congress.
Let me state at the outset that I am opposed to the actions
of the OCC. Last November, I joined in a letter with my
Democratic colleagues on this Committee in which we urged the
OCC to defer any further rulemaking on the preemption of State
laws at that time and, instead, to examine vigorously claims of
predatory lending and other violations of State consumer
protection laws by national banks and their operating
subsidiaries. In that letter we stated,
Congress has previously voiced its intent that national
banks not be immune from coverage by State laws. The House-
Senate Conference Committee report on the 1994 Riegle-Neal
Interstate Branching and Bank Efficiency Act stated that,
``States have a strong interest in the activities and
operations of depository institutions doing business within
their jurisdictions, regardless of the type of charter an
institution holds. In particular, States have a legitimate
interest in protecting the rights of their consumers,
businesses, and communities.'' In enacting the Gramm-Leach-
Bliley Act in 1999, Congress affirmed the Supreme Court
standard in Barnett Bank that State laws apply to national
banks unless those laws serve to prohibit or significantly
interfere with the national banks' Congressionally authorized
powers.
Regrettably, the OCC chose to finalize its proposed
regulations in January. As a general matter, my inclination is
to defer to bank regulators in the exercise of their authority,
especially if it relates to safety and soundness. They are
charged with making an independent judgment, presumably with
the public interest foremost in mind. And I understand that
those judgments may not always please everyone.
However, the OCC's actions in this instance led me to
depart from this general approach. First, the OCC's actions do
not relate directly to the safety and soundness of the
financial system. They instead go to the relationship between
Federal and State-chartered banks and thrifts, and the historic
balance of responsibilities they share. Second, the OCC's
actions have led to such a unanimous and strong outcry from
State officials as to suggest that fundamental damage has been
done to the Federal-State relationship. The National
Association of Attorneys General, the Conference of State Bank
Supervisors, the National Governors Association, the National
Conference of State Legislatures have all strongly opposed the
OCC's action. Third, the OCC's actions have been opposed by
consumer, civil rights, and community groups from across the
country as an assault on consumer protection as applied to
nationally chartered banks and their State-chartered operating
subsidiaries. The intensity of opposition from the State
officials and consumers, civil rights, and community groups has
been exceptionally strong.
The attorneys general of all 50 States submitted a comment
letter to the OCC on October 6 expressing their opposition to
the preemption and visitorial powers rules and urging the OCC
to defer further action on them. I want to quote from that
letter because it summarizes the concerns raised about the
actions of the OCC.
The OCC's current proposal, coupled with the other recent
OCC pronouncements on preemption, represent a radical
restructuring of Federal-State relationships in the area of
banking. In recent years, the OCC has embarked on an aggressive
campaign to declare that State laws and enforcement efforts are
preempted if they have any impact on a national bank's
activities. The OCC has jealously pushed its preemption agenda
into areas where the States have exercised enforcement and
regulatory authority without controversy for years.
The OCC's preemption analysis is one-sided and self-
serving. The OCC has paid little deference to well-established
history and precedent that has allowed the States and the OCC
to co-exist in a dual regulatory role for over 130 years. That
precedent has upheld this Nation's policy that national banks
are subject to State laws unless the State laws significantly
impair the national banks' powers created under Federal law.
The OCC is destroying that careful balance by finding
``significant interference'' or ``undue burden'' whenever State
law has any effect on a national bank.
In the area of predatory mortgage lending, the OCC's
actions are particularly disappointing. Instead of commending
the States' efforts, the OCC has gone to great lengths to
attack them and to declare that they are inapplicable to
national banks and their operating subsidiaries. In their
place, the OCC has recommended minimal protections that fail to
address many of the worst predatory lending abuses.
Also on October 6, a coalition of 19 consumer, civil
rights, and community groups, including the Consumer Federation
of America and the Leadership Conference on Civil Rights, sent
a comment letter to the OCC in which they stated, in part, and
I quote:
In 1994, Congress passed the Homeownership and Equity
Protection Action to protect borrowers of high-cost loans from
predatory lending practices. Unfortunately, the scourge of
predatory lending did not go away and, in fact, increased in
tandem with the explosion of subprime lending. Recognizing this
continuing problem, various States have developed increasingly
effective approaches to eradicating predatory lending, without
drying up access to reasonably priced subprime mortgage credit.
This is federalism as its best.
Your proposal to preempt the State antipredatory lending
laws is, at best, misguided, and at worst, a blatant attempt to
increase the power of the OCC at the expense of homeowners, the
sovereignty of the States, and the intent of Congress. We
believe this proposal to be fundamentally flawed both in its
assessment of the impact of State antipredatory lending laws
and as to the powers Congress entrusted to the OCC. We urge the
OCC to scrap its proposed preemption of State predatory lending
laws, while continuing to develop its own advisory guidance to
ensure that national banks are not engaged in predatory
lending.
And, finally, Dudley Gilbert, the Legal Counsel for the
Oklahoma State Banking Department, wrote an article in the
American Banker on February 20 entitled ``OCC's Preemption Rule
is About Keeping Market Share,'' which provides a perspective
on the OCC's actions from the viewpoint of a State banking
regulator. And in that article, he says,
The OCC's preemption rule seems to be more about protecting
its remaining multi-State megabanks or attracting new ones to
the fold than about ``clarifying'' a 140-year-old law. The OCC
standard for preemption has been built on a political platform
for the promotion of its charter.
The point was echoed in a Wall Street Journal article on
January 28, 2002 entitled ``Friendly Watchdog: Federal
Regulator Often Helps Banks Fighting Consumers.'' In that
article, they stated,
The OCC solicitousness toward the businesses it oversees
stems in part from its need to compete for their loyalty. In an
uncommon arrangement, banks can choose either a State or
Federal regulator, and the selection has financial
consequences. The OCC and State banking departments subsist
entirely on fees paid by the institutions they regulate.
The Comptroller has asserted that State officials and
consumer groups are all wrong, that the OCC is simply codifying
existing judicial interpretation in its regulations, and that
the OCC is actually enhancing consumer protection through its
regulatory and enforcement actions. I must say I find that
position very difficult to understand and accept. I think the
criticisms that have been leveled by the State officials and
the consumer groups seem to me to be right on point. And, of
course, we will explore that matter in the course of this
hearing.
Thank you very much, Mr. Chairman.
Chairman Shelby. Thank you, Senator Sarbanes.
Our first panel is composed of three people: John Hawke,
Comptroller of the Currency; Roy Cooper, Attorney General,
State of North Carolina; and Gavin Gee, Director of Finance,
Idaho Department of Finance. I welcome all of you to the
Committee. Your written testimony will be made part of the
record in its entirety. We will start with Mr. Hawke.
STATEMENT OF JOHN D. HAWKE, JR.
COMPTROLLER OF THE CURRENCY
U.S. DEPARTMENT OF THE TREASURY
Comptroller Hawke. Thank you, Mr. Chairman and Ranking
Member Sarbanes. I appreciate the invitation to discuss the
OCC's recently issued rules on preemption and visitorial
powers. I want to start by emphasizing a few overarching
considerations as background for the discussion of the rules
themselves.
First, national banks and their subsidiaries are highly
regulated and closely supervised. While we occasionally
confront instances of abusive conduct at our banks, the
overwhelming number of our banks operate in conformity with the
law and with recognized standards of sound banking and fair
practices. Because of this, it is not at all surprising that
the State attorneys general virtually unanimously have
repeatedly stated that predatory lending is not a problem in
the regulated banking system.
Second, the OCC is committed to protecting and helping
customers of national banks, and we have ample resources and
formidable enforcement powers to carry out that commitment. We
have a world-class consumer assistance group that resolves
literally tens of thousands of inquiries and complaints every
year. And where consistent or persistent problems have arisen,
our track record shows that we will use our supervisory and
enforcement powers promptly and effectively to fix them. With
the formal enforcement powers that we have, plus the authority
and influence that our examiners exercise over the banks they
supervise, I believe we have an unmatched ability to afford
consumers the protections that we all want for them.
Third, we recognize that our counterparts at other agencies
and in State law enforcement share this commitment to protect
consumers, and we welcome opportunities to share information
and to cooperate and coordinate with them to address customer
complaints and consumer protection issues. Through a
coordinated and cooperative approach to the remedying of
abuses, I believe we can achieve a high level of protection for
consumers.
With that preamble, let me summarize what the OCC's new
regulations do and what they do not do. While I recognize that
there are some significant differences of opinion on many of
the issues involved, I am concerned that there has been
widespread misunderstanding and mischaracterization of what we
have done.
The first regulation, which I will call the preemption
rule, codifies principles that have been established in almost
200 years of decisions by the Supreme Court and lower Federal
courts, that have been applied in innumerable interpretations
and rulings of the OCC over many years, and that have been
embodied in regulations of our sister agency, the Office of
Thrift Supervision, for many years. The regulation provides
clear and predictable guidance to national banks regarding the
standards that apply to core banking activities: lending and
deposit-taking.
The rule is based on the well-established principles that
the States do not have the constitutional authority to limit or
condition the exercise of powers that Congress has conferred on
the instrumentalities that it creates, and that a State law
cannot apply to a national bank if it obstructs, impairs, or
conditions the bank's ability to exercise those powers unless
Congress has provided that it should apply. The regulation then
lists specific types of State laws that are preempted,
substantially mirroring those already preempted by OTS.
It is important to emphasize what the regulation does not
change, since some confusion may exist on this score. It does
not establish brand-new standards or principles of preemption.
It does not preempt State laws other than those listed. It does
not immunize national banks from complying with a host of State
laws that form the infrastructure of doing the business of
banking, such as contract law, tort law, public safety laws,
and generally applicable criminal laws. It does not preempt
antidiscrimination laws. It does not extend to activities
authorized for financial subsidiaries of national banks, which
can exercise powers that are not permissible for the bank
itself. It does not impinge on the functional regulation
framework that Congress set in place in the Gramm-Leach-Bliley
Act. It does not allow national banks to charge higher rates of
interest than they previously could. It does not authorize any
new national bank powers, such as real estate brokerage. And it
makes no changes to existing OCC rules governing the activities
of operating subsidiaries.
Our second rule, the visitorial powers rule, amends an
existing regulation implementing a Federal statute that is as
old as the national banking system itself and that grants the
OCC exclusive authority to supervise, examine, and regulate the
national banking system. Congress reemphasized this principle
of exclusive visitorial powers only recently in the Riegle-Neal
Interstate Branching law by explicitly providing that, to the
extent State consumer protection laws apply to the interstate
branches of national banks--that is, where those laws are not
preempted under the longstanding principles I have referred
to--the OCC is the exclusive enforcement authority for such
laws with respect to national banks.
The visitorial powers statutes provide no exception for the
States to regulate the banking activities of national banks
through enforcement actions, and I believe it is well-
recognized by State law enforcement officials that Federal law
precludes them from taking administrative enforcement actions
against a national bank with respect to its banking activities.
What is at issue here is solely whether State officials can do
through the courts what they cannot do directly, and our
visitorial powers rule simply sets forth our understanding of
the basic statute as precluding the exercise of similar
visitation powers by resort to the courts.
The second, and equally important, issue that I want to
address is the effects of these rule changes. In addition to
clarifying which State laws apply and which do not apply to
national banks, the rule also puts in place additional focused
standards to protect customers of national banks from unfair,
deceptive, abusive, or predatory lending practices. These new
standards apply nationwide, to all national banks, and provide
additional protections to national bank customers in every
State, including those States that do not have their own
predatory lending standards. The rule does not leave customers
of national banks or their subsidiaries vulnerable to predatory
lending practices. And I stress that the State Attorneys
General have repeatedly said that the problems of predatory
lending are not problems in the regulated banking system; they
are problems that occur in the unregulated segment of the
financial services industry.
The regulation first provides that national banks may not
make consumer loans based predominantly on the foreclosure or
liquidation value of a borrower's collateral. This will target
the most egregious aspect of predatory lending, where a lender
extends credit based not on a reasonable determination of a
borrower's ability to repay, but on a lender's calculation of
its ability to seize the borrower's accumulated equity in his
or her home. And I should add that is a standard that is easy
for bank examiners, and traditional for bank examiners, to
examine for and to enforce.
The regulation also specifically provides that national
banks shall not engage in unfair or deceptive practices within
the meaning of Section 5 of the Federal Trade Commission Act in
their lending activities. The OCC was the first Federal banking
agency to
assert the power to take enforcement actions for violations of
Section 5, a position that our sister agencies have recently
adopted.
These rules supplement the very extensive guidance that we
published last year admonishing our banks to stay well clear of
predatory practices and telling them in no uncertain terms what
we would do if we found such practices in any of our banks. I
believe our rules and advisories on predatory lending go well
beyond anything that any other bank regulatory authority has
done in this regard. And I commend those advisories to the
attention of anybody interested in this subject because they
provide a very comprehensive definition of predatory lending
and a very comprehensive mandate to our banks about how to
steer clear of predatory lending.
Some may ask, why not allow State and local predatory
lending laws to apply as well? Isn't more regulation better?
To that I would answer, not unless there has been a
demonstration that more regulation is needed because the
existing regulatory scheme does not work. That is not the case
with respect to the national banking system. Again, whatever
our differences with the State Attorneys General are, they have
repeatedly stated that the problem of predatory lending is
largely confined to unregulated, nondepository institutions and
has not been in evidence in regulated banks or their
subsidiaries. And, as I said, this is not at all surprising.
National banks and their subsidiaries are highly regulated and
closely supervised. The largest national banks have large teams
of examiners on premises at all times.
Our approach to predatory lending is a comprehensive,
ongoing, integrated supervisory approach focused on preventing
predatory practices, not on banning or restricting specified
loan products based on their terms. We have substantial
resources available nationwide to make sure that our
supervision, in this and other areas, is effective.
Additional regulation brings with it added costs which may
lead to higher prices for consumers. It may also have
undesirable collateral consequences. For example, there is a
vigorous debate going on in the economic literature as to
whether State predatory lending laws reduce the availability of
nonpredatory subprime credit. I think there is widespread
agreement, however, that these laws have reduced the volume of
subprime lending, and it is far from the case that all subprime
lending is predatory. Indeed, the expansion of the subprime
market has played an extremely important role in our record
level of homeownership and in making credit available to
segments of the population, particularly minorities, who in the
past have not had ready access to credit.
State and local laws that increase a bank's costs and its
potential liabilities in connection with higher-risk subprime
loans and that result in constrictions in the secondary
markets, which we have seen, inevitably will cause some
legitimate lenders to conclude that the costs and risks are not
worth it. The result is diminished credit availability, and
credit options available to a segment of potentially
creditworthy subprime borrowers will be reduced.
Paradoxically, when such well-intentioned laws cause
regulated banks to reduce their participation in the subprime
market, they are deterring the most highly regulated segment of
the industry, those subject to CRA requirements and those most
likely to conform to accepted practices and standards. We
believe our approach does not constrict credit availability
from legitimate, highly regulated lenders and effectively
protects customers of national banks and their subsidiaries
against predatory lending practices.
Chairman Shelby. Mr. Hawke, do you have much more?
Comptroller Hawke. Just one paragraph, Mr. Chairman.
Chairman Shelby. You are about finished?
Comptroller Hawke. Yes.
In conclusion, we believe that our new rules are legally
sound, that they enable national banks to operate in a manner
fully consistent with the character of their Federal charter.
Most importantly, coupled with the strong oversight and
enforcement powers that the OCC can and will bring to bear,
they do not leave national bank customers exposed to abusive
practices. We share with our colleagues in the States a
commitment to assuring that national banks' treatment of their
customers meets the highest standards, and I am confident that
if we work in cooperation and coordination, we can all fulfill
that commitment.
Senator Sarbanes. I am curious. Was the ``in conclusion''
in the statement, or was that a quick add-on?
[Laughter.]
Comptroller Hawke. No, it is right here in the text.
Senator Sarbanes. Okay.
Chairman Shelby. Mr. Hawke, we did not want to rush you,
but we have 2 or 3 minutes to vote, and Senator Corzine already
has.
Comptroller Hawke. The clock is not working here.
Chairman Shelby. I was going to recognize him to make any
opening statement, as long as he wanted to take, because we
would like to hear everybody, Mr. Cooper and Mr. Gee, as soon
as we get back. Can you do that?
Senator Corzine. Sure, Mr. Chairman.
Chairman Shelby. Okay. You are recognized.
STATEMENT OF SENATOR JON S. CORZINE
Senator Corzine. [presiding.] Thank you, Mr. Chairman.
This is the only time the guy on the far right-hand
corner----
Senator Sarbanes. It is all yours, Jon.
[Laughter.]
Senator Corzine. Now you are seeing what poker is like,
right?
Senator Sarbanes. Don't get carried away.
[Laughter.]
Senator Corzine. I think there might be about 25 years
between me and thee. We will work on it.
Mr. Chairman, and to the witnesses, I want to thank all of
you for being here, and I want to thank the Chairman for
holding this hearing. This really is an important issue, this
preemption of State consumer protection laws. A number of us
feel quite strongly about it, and I want to thank Comptroller
Hawke for both your testimony and, I think, a willingness to
listen, if not necessarily agree on some of the directions we
are taking here.
Let me start by saying I am deeply concerned about the
OCC's action. The broad nature of this rule has profound
implications for our dual banking system as well as the ongoing
relationship between the Federal Government and the States. I
certainly hear this on a regular basis with my people back in
Trenton. Moreover, this rule has critical implications for
consumer protections, which I think a number of people will
speak to, and may well prove detrimental to that important
effort.
Some have suggested that the OCC's actions stem from
nothing more than a power grab. I am not sure I associated
myself totally with that, but it certainly is something that is
widely discussed in the press, the media, in general, and I
would cite The Wall Street Journal friendly watchdog chart that
I have included here, which I think is reflective of some of
both the editorial comment and discussion that we see
surrounding this topic.
While I do not accept that this is the sole purpose for the
action, it does strike me curious that the only groups that
have come out in support of the OCC action, as far as I can
tell, are the very banks that are regulated.
Given these broad concerns, a decision of this magnitude in
my view should only have been made after an exhaustive review
and deliberations by Congress, this Committee, and both of the
issues that I talked about have been raised with the OCC by
Members of Congress from both sides of the aisle. In November,
every Democratic Member of this Committee signed a letter to
Comptroller Hawke that expressed concerns regarding the
rationale, the pace, and implications of the OCC proposal.
Included in that letter was the request that the agency defer
final rulemaking until the implications of the rule on State
enforcement of predatory lending laws could be better
ascertained.
In the House, Sue Kelly, the Republican Chairwoman of the
House's Financial Services Subcommittee on Oversight
Investigations, and a bipartisan group of Members wrote the
Agency in December also asking them to delay implementation of
the rules until Congress could hold hearings to review the
proposal and provide an appropriate signal of intent.
Unfortunately, those letters have not been attended to, and
as I think all of you know, similar concerns have been
expressed by the Nation's Governors, Attorneys General, State
legislators, et cetera.
I think this needs to be reviewed, and the role of Congress
in establishing the laws that govern our dual banking system
and this Committee and its oversight need to be taken into
account. And, you know, I think this is important in making
sure that we maintain the confidence between the OCC and those
of us who are responsible for oversight.
I hope that we can figure out a way to restore Congress'
voice in this, and consideration, and I think there is a
legitimate concern about the implications for the ability of
our State legislatures and State governments to be involved in
this dual banking system in a credible, strong way. I certainly
think it is important for consumers. I am certainly going to be
asking that we have a larger role in this, and I think it is
important that this get an additional oversight look here among
the Committee.
I guess I am about to transfer my sole moment in the
sunlight here to Senator Allard, since he is a little closer to
the middle and on the majority side. The Chairman asked me to
chair until they return, but recognizing protocol, I will be a
very generous fellow and hand that all back.
[Laughter.]
Then I will be able to ask Senator Allard whether I also
could submit a letter from the New Jersey State Department of
Banking and Insurance that challenges the conclusions reached
by the National Home Equity and Mortgage Association concerning
the impact of the New Jersey Homeownership Security Act is
having on New Jersey's subprime market. I think there is a lot
of reason for serious, objective study of the impact on these
markets, and I think there is a good report along those lines.
Senator Allard. I have no objection and I hear no
objection.
Senator Corzine. Thank you, Mr. Chairman.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. [presiding.] I will go ahead and give my
statement for the record, and I see that we still have a vote
going. We are waiting to complete testimony until the Chairman
and the Ranking Member get back.
I would like to thank the Chairman for holding this hearing
today to discuss two rules recently promulgated by the Office
of the Comptroller of the Currency regarding preemption and
visitorial powers of national banks. One of the rules clarifies
the extent to which the operations of national banks are
subject to State law; the other rule concerns the authority of
the OCC to examine, supervise, and regulate national banks. I
look forward to discussing the OCC's reasons for promulgating
these rules as well as the potential implications of the two
rules with respect to the country's economic system and
particularly the Nation's housing markets.
The OCC has not only a difficult but also a very important
duty to regulate lending and investment activity of national
banks. With regulatory and supervisory authority over 2,200
national banks and 56 branches of foreign banks in the United
States, the OCC plays an integral role in ensuring the safety
and soundness of the national banking system, while ensuring
fair and equal access to financial services for all Americans.
With the broad-ranging authority granted to the OCC to approve
or deny applications for new charters, approve or deny
structural changes, issue cease-and-desist orders, and issue
rules and regulations governing bank investment and lending,
today's oversight hearing that will examine two recently
published rules is certainly appropriate.
As Chairman of the Housing Subcommittee, I am concerned
about how these new rules will impact the housing markets and
predatory lending practices. I am hopeful that they will
fulfill the OCC's mission of protecting consumers while
contributing to an effective system of banking that has served
our Nation so well.
Again, I would like to thank Comptroller Hawke and each of
our witnesses for taking the time to testify before the
Committee today, and I do look forward to your testimony.
What I am going to do, Senator Corzine, is go ahead and put
us in recess until the Chairman and Ranking Member both get
back. Then you and I can head down and vote. The second vote is
apt to be a short vote. Instead of being a 15-minute vote, it
will be a 10-minute vote. You and I can head on down. I expect
the Chairman and the Ranking Member to be here shortly. So, I
would suggest that if you want to stand and stretch as though
you are in the seventh inning, go ahead and do your standing
and stretching. But I would not go very far because as soon as
they get here, they will want to take right off with the
hearing.
The hearing is in recess.
[Recess.]
Chairman Shelby. The hearing will come back to order.
Mr. Cooper, if you will proceed, just like we never went to
vote.
Thank you.
STATEMENT OF ROY COOPER
ATTORNEY GENERAL
DEPARTMENT OF JUSTICE, STATE OF NORTH CAROLINA
Mr. Cooper. Thank you, Mr. Chairman, and Members of this
esteemed Committee. Thank you for allowing me to be and
addressing this critical issue.
One spectacular result of these sweeping new rules proposed
by the OCC is the rare harmony being sung by State attorneys
general across the country.
Chairman Shelby. Is that all 50?
Mr. Cooper. All 50 of us are on the same page.
Chairman Shelby. Democrats and Republicans----
Mr. Cooper. Yes, sir, bipartisan.
Chairman Shelby. --on the same page?
Mr. Cooper. Yes, sir.
These rules are wrong both as a matter of law and as a
matter of public policy. I have submitted my written comments
that discuss my objections, and let me quickly outline the
major ones.
First, these rules significantly diminish important
protections for American consumers. Second, they undermine
creative and State efforts to combat predatory lending. And,
third, they ignore Congressional intent and misinterpret
Supreme Court precedent.
Simply put, these new OCC rules put consumers at risk by
taking 50 cops off the beat. That is absolutely the heart of
the matter. Thousands of State attorneys general's staffers
across the country are helping consumers with their problems,
mediating disputes, and securing refunds for people who have
been wronged. Over the years, most State consumer protection
laws were applied to national banks and their affiliates
without controversy. There have been problems with some
national banks, and State action has been taken.
National banks knew they were expected to abide by State
law, and attorneys general provided the enforcement--until now.
Now the OCC is saying we can do the job by ourselves. We alone
can protect the tens of millions of national bank customers
across the country.
That is simply not realistic. For the last 2 years, in
North Carolina, my consumer office alone received over 1,000
formal written complaints regarding national banks, along with
thousands more phone calls. And this is happening in attorneys
general's offices across the country. We welcome the OCC to
work with us in addressing these complaints, but the OCC cannot
do this alone and do it effectively.
Now, although I do not believe the OCC wants its members to
break the law, I have no confidence that they will provide
adequate consumer protection by themselves. The OCC is actively
recruiting banks into its fold, saying that they will not be
bothered by State predatory lending laws. In addition, The Wall
Street Journal recently documented how the OCC consistently
sided with national banks and against consumers in recent legal
disputes. Consumers must have the confidence that
decisionmakers and regulators will be fair and that they will
go to bat for them if they have been ripped off.
My next concern is that not only do these new rules
undermine State predatory lending laws, but they also fail to
address the most abusive practices forbidden by State laws.
These include unjustified origination fees, deceptive discount
points, excessive prepayment penalties, loan flipping, and
financing of single-premium credit insurance. These practices
are sometimes technical and difficult for the average borrower
to understand, but there is a reason that the phrase
``predatory lending'' is used to describe them. In order to be
effective, there must be specific restrictions under the law to
fight each of these practices, and the OCC rules just do not do
this.
Finally, I would like to counter very briefly some points
the OCC makes when justifying these new rules. First, the OCC
claims that it is merely exercising longstanding powers and
codifying existing law. Do not be fooled. These rules are a
dramatic change. They far exceed the preemption standard set by
the Supreme Court in the Barnett Bank case, and they ignore
specific Congressional acknowledgment of the role of States in
regulating national banks.
The OCC also argues that these rules are necessary so that
banks can operate under consistent, uniform national standards.
The national banks do not need the OCC to insulate them from
their obligation to be good corporate citizens in their
respective States. When North Carolina passed our
groundbreaking Predatory Lending Act, our national banks were
right there at the table supporting the effort because they
knew that predatory lending was a scourge that had to be
removed. They saw the case of Freddie Rogers, a 56-year-old
Durham school bus driver. For 10 years, he made his mortgage
payments, but when he wanted to refinance because he had bad
well water, he discovered that he had paid down only $165 on
the principal. He was a victim of junk fees, unneeded
insurance, and front-loaded payments--a predatory loan. And
making $8.24 an hour, he could never get ahead.
Our predatory lending law in North Carolina works. Recent
studies have shown the law has saved consumers over $100
million in the first year and that subprime credit is still
readily available. The only lenders we have run out of North
Carolina are those that are making predatory loans, and I say
good riddance to them.
Our law has created a road map for lending practices across
the country. For example, we were the first State to outlaw
single-premium credit insurance, which was a useless product
that overcharged consumers. It was considered controversial at
the time, yet within 2 years, all major subprime lenders
stopped offering this overpriced product to consumers.
We are now seeing lenders across the country voluntarily
adopting a number of provisions of North Carolina's predatory
lending law. Please do not let the OCC take away the
effectiveness and the creativity of the States in fighting
these problems.
In conclusion, as a State Attorney General, I know that my
colleagues and I would vastly prefer a cooperative relationship
with the OCC, just as we have with other Federal agencies.
Unfortunately, with these preemption rules, the OCC has sought
to eliminate that cooperation.
As attorneys general, we will not stand by and let these
rules take effect without a judicial fight. But the best place
to deal with this issue is right here in Congress. In fact,
Senator Edwards from my home State has introduced a resolution
to repeal these rules. I would assume that there are other
Members of Congress who are looking at this effort as well. And
I would encourage these efforts to let us step back and look at
what we are doing.
Thank you very much, Mr. Chairman.
Chairman Shelby. Mr. Gee.
STATEMENT OF GAVIN M. GEE
DIRECTOR OF FINANCE, STATE OF IDAHO
ON BEHALF OF
THE CONFERNECE OF STATE BANK SUPERVISORS
Mr. Gee. Thank you, Chairman Shelby, Senator Sarbanes,
Members of the Committee. My name is Gavin Gee. I am the
Director of the Department of Finance for the State of Idaho,
and I am here today testifying on behalf of the Conference of
State Bank Supervisors. We commend you on this important and
timely hearing.
As you know, the OCC has recently issued sweeping
regulations that seek to preempt almost all State laws that
apply to national banks and their subsidiaries. This regulation
also tries to shield all national banks and their operating
subsidiaries from oversight, inspection, and enforcement
actions by any State authority.
These regulations are not minor or incremental changes.
Their scope is nearly unlimited, and their implications are
potentially enormous. The OCC's new regulations usurp the
powers of Congress, stifle State efforts to protect their
citizens, and threaten not only the dual banking system but
also public confidence in our financial services industry. If
you allow these OCC rules to stand, our banking system and bank
customers will be hurt.
Idaho is a small State with only about 1.3 million
residents and bank deposits of about $12.5 billion. Although
only one national bank is headquartered in Idaho, interstate
branches of national banks account for about 70 percent of the
State's banking assets. Therefore, most of the bank-related
complaints and inquiries my office receives come from customers
of national banks. We receive even more complaints about
mortgage brokers, nonbank mortgage lenders, and finance
companies, entities that are all likely to become operating
subsidiaries of national banks in response to these new OCC
regulations.
Idaho, like the vast majority of States, has not passed
specific legislation against predatory lending. We have been
very successful in enforcing existing laws that protect
borrowers and punish fraud. Contrary to the OCC's argument,
these laws have done nothing to interfere with credit
availability in Idaho. But the OCC's regulations effectively
preempt all of Idaho's consumer protection laws and law
enforcement remedies, and those of every other State,
regardless of whether that State enacted a predatory lending
law.
Maintaining a local role in consumer protection and a
strong State banking system has never been more important.
State supervision and regulation are essential to our diverse,
decentralized financial system. State bank examiners are the
first responders to almost any problem in the financial system.
We can and do respond to these problems more quickly than the
Federal Government.
My office has a long history of protecting Idaho consumers
from predatory or abusive lending and other financial fraud. We
also have a long history of working cooperatively with national
banks and their subsidiaries to resolve consumer complaints and
inquiries. It cannot be in the public interest to replace this
locally based service with one small office in Houston, Texas,
as the Comptroller's regulations would do.
The OCC preemption would create an uneven playing field for
national banks and State-chartered banks, and that concerns us.
What concerns us even more, however, is that this preemption
would also create an uneven playing field for consumers.
Borrowers who walk into a mortgage lender, a money transmitter
office, or a payday lender do not know whether that business is
owned by a national bank. Those borrowers have the reasonable
expectation that State laws will protect them. If borrowers
need to seek remedies, their first instinct will not be to
complain to the OCC. More often than not, they will come to us,
to the State banking departments, consumer credit agencies, and
State attorneys general.
States already have networks in place for referring
complaints to the appropriate agencies and to law enforcement
authorities when necessary. The States dedicate hundreds of
employees to handling these consumer complaints, and these
resources strain to keep up with the demand. With limited
resources at both the State and Federal levels, we should be
talking about sharing responsibilities, not preempting valuable
resources.
This debate should not be about the protecting of or the
advancing of one charter over another. It should not be about
turf. It should be about creating the best structure for a
financial services system that allows a wide range of financial
institutions to compete effectively and make their products and
services available to all segments of our Nation and that
offers consumers protection and remedies against fraudulent and
misleading practices, no matter the charter of the consumer's
financial institution.
If Congress finds that Federal preemption is necessary to
achieve this goal, we will accept that. With his actions,
however, the Comptroller of the Currency is trying to cut off
this discussion altogether.
We urge Congress to look carefully at this regulation and
its implications and consider whatever actions may be necessary
to clarify the interaction of State and Federal laws, restore
the balance of the dual banking system, and reassert
Congressional authority over Federal banking policy.
Ultimately, you must decide whether you are comfortable
putting your constituents in the hands of an unelected official
who, with the stroke of a pen, seeks to sweep aside all State
consumer protection laws and has effectively declared all
national banks and their operating subsidiaries in your State
exempt from the authority of your Governor, your State's
attorney general, your State legislature, and your State's
financial regulators.
Already on this panel you have heard conflicting
certainties and conflicting fears. Having read the second
panel's testimony, I expect you will hear more of the same. I
assume that can only lead to confusion on this Committee and
certainly among your constituents as to the implications of
these rules.
Given this confusion, we have a request. We would ask that
this Committee call on an independent source, such as the
Congressional Research Service or a select task force, to
review all of the claims and report to your Committee with
their findings. In the interim, we would ask that the Committee
and the Congress have the OCC rescind or suspend their rules.
If the States are wrong, with the rules rescinded we merely
have the status quo--a consolidating industry making record
profits with a healthy and, for the most part, State-chartered
community banking sector. If the States' concerns are found
valid, then Congress will have prevented a serious change in
Federalism with constitutional consequences that harm
consumers, the banking system, and the economy.
Thank you very much, Mr. Chairman. I would be happy to
answer any of the Committee's questions.
Chairman Shelby. Thank you.
Generally speaking, shouldn't it be the Congress of the
United States that would preempt something by statute, clearly
do so, rather than a regulatory body that would attempt to do
it by regulation, such as the OCC?
Mr. Cooper.
Mr. Cooper. Yes, sir, absolutely. We do not think that
Congress has, in fact, preempted State consumer protection laws
and predatory lending laws. That is a decision that you should
make, not an unelected regulator.
Chairman Shelby. Mr. Hawke, obviously you believe that you
have that power to make a rule and that Congress gave you that
power. Is that right?
Comptroller Hawke. I believe that power comes from the
Constitution, Mr. Chairman.
Chairman Shelby. The Constitution.
Comptroller Hawke. The Supremacy Clause of the Constitution
says that the laws of the United States are the supreme law of
the land, and the judicial history of preemption is based on
exactly that.
Chairman Shelby. How many national banks do we have in the
United States?
Comptroller Hawke. We have about 2,100 national banks.
Chairman Shelby. How many State banks do we have?
Comptroller Hawke. I think there are probably close to
7,000 State banks.
Chairman Shelby. So, 2,100 and 7,000. Are some of our
larger banks State banks?
Comptroller Hawke. There are some. The Fed regulates a
number of large State banks, and in Alabama, for example, there
are a number of large State banks that are doing a broad multi-
State business.
Chairman Shelby. But, Mr. Hawke, if your regulations are
upheld, would there be one standard for the national banks and
one standard for the State-chartered banks?
Comptroller Hawke. I think that depends on what the States
do with respect to their laws. But that, Mr. Chairman, is
really what lies at the heart of the dual banking system. There
are Federal rules that apply to national banks and State rules
that apply to State banks.
Chairman Shelby. Mr. Cooper, do you want to comment on
that? Doesn't that go to heart of it?
Mr. Cooper. It does go to the heart of it, and we are not
saying that we have the right to come in and examine the safety
and soundness of these banks. We do believe that is the
exclusive prerogative of the OCC. But State consumer protection
laws, these national banks which do business in our State
historically have abided by State consumer protection laws. And
we are not just talking about predatory lending, but do not
call in other laws.
Chairman Shelby. How do you answer the question that Mr.
Hawke has proposed that his ability as Comptroller of the
Currency to bring forth these rules or regulations to preempt
the State laws comes from the Constitution, not from the
Congress? And if it did come from the Constitution, just
suppose, and if the courts upheld it, Congress would have no
play in there, would it?
Mr. Cooper. Well, if you extrapolate, that means that any
law that you would pass could apply and preempt----
Chairman Shelby. But he is saying, he is rationalizing his
ability to do these regulations, as I understood.
Comptroller Hawke. In the absence of any action by
Congress.
Chairman Shelby. That is right, in the absence of anything.
Mr. Cooper. We think it is clear what Congress has done.
Specifically, in 1994, in Riegle-Neal, you said specifically
Congress should not prohibit the States from enforcing their
consumer protection laws. We had the exact language in our
written documentation. But we believe that you have spoken on
this and that the U.S. Supreme Court has spoken on this issue.
Chairman Shelby. Well, let us go back to the national
versus State banks. You come from a State that is probably the
second largest banking State in the Nation after New York--
North Carolina. You have State banks and national banks. If
this rule OCC has brought forth is upheld, what does that say
to the North Carolina laws? They cannot be enforced against the
national banks but you can enforce them against the State
banks? Is that correct?
Mr. Cooper. That is correct, Mr. Chairman. We are very
proud of our banking State in North Carolina, and we think
clearly that other lending institutions will cry foul and will
say here the national banks have this exemption from State
predatory lending laws, we need the exemption as well. And what
we fear even more is that these national banks will attract
more banks because of this exemption from predatory lending
laws.
Chairman Shelby. Which would give them immunity in a sense,
would it not?
Mr. Cooper. Correct.
Chairman Shelby. What practical differences will consumers
and national banks experience regarding the rules? In other
words, could you provide us some before and after the rule? You
are the Attorney General of North Carolina. How would you
envision it?
Mr. Cooper. Right now you are seeing State attorneys
general across the country take action against national banks
and other lenders, and you would not see that enforcement
action anymore.
Chairman Shelby. Because they would not have a right to do
it, right?
Mr. Cooper. That is correct.
Chairman Shelby. But they would still have the right to go
after the State banks for doing the same thing.
Mr. Cooper. That is correct. And that is fundamentally
unfair.
Chairman Shelby. Okay.
Comptroller Hawke. Mr. Chairman, could I respond to one
point?
Chairman Shelby. Sure, go ahead.
Comptroller Hawke. I think Riegle-Neal has really been
misstated. I think Riegle-Neal demonstrates exactly the
opposite.
First of all, since the beginnings of the national banking
system, there has been an explicit Federal statute that says
that the OCC has exclusive visitorial powers over national
banks. Unlike the argument that the State AG's are making,
there is no exception in that statute for nonsafety and
soundness matters, like consumer protection. That is made very
clear by Riegle-Neal.
Riegle-Neal, in the interstate branching context, says that
State consumer protection laws will apply to national banks
unless they are preempted, and that if they are not preempted,
the OCC is the exclusive enforcement authority.
Within the last 10 years, Congress has explicitly addressed
that issue, and it is simply not true, as the Commissioner
said, that we preempt all State consumer protection laws. That
is exemplary of the kind of gross exaggeration of what we have
done that we are having to deal with. We do not preempt State
fair lending laws. We do not preempt State unfair and deceptive
practices laws. We address only those laws that deal with
deposit-taking and lending, which are the essence----
Chairman Shelby. Do you think you could preempt them under
your constitutional power?
Comptroller Hawke. Probably not. We have not considered
that. But we have not preempted them. We are actually taking
the position that----
Chairman Shelby. In other words, where should the line be
drawn?
Comptroller Hawke. We are taking the position that they are
not preempted.
Chairman Shelby. Where should the line be drawn, Mr.
Cooper, between State and Federal?
Mr. Cooper. State consumer protection laws that protect
consumers should not be preempted by the OCC. We are not
arguing with their powers to examine banks and make sure there
is safety and soundness. But laws that protect consumers in the
particular State should be obeyed by national banks, as well as
State banks.
Chairman Shelby. Mr. Hawke, just briefly, succinctly,
restate the thrust of your legal analysis that your counsel
came upon to determine where to draw the line.
Comptroller Hawke. Our legal analysis traces back to the
1819 decision of the Supreme Court in McCulloch v. Maryland,
which said that the States do not have the constitutional
authority to restrict or limit or condition the powers that
Congress has conferred on a Federally created entity. That is
the ultimate basis for our preemption rule, plus many Supreme
Court and other Federal court decisions since that time.
Chairman Shelby. Your regulations, as I understand it, Mr.
Hawke, contain a new predatory lending standard for national
banks. Is that correct?
Comptroller Hawke. That is correct.
Chairman Shelby. Which prohibits them, that is, the
national banks, from making ``any type of consumer loan based
predominantly on the bank's realization of the foreclosure
value of the borrower's collateral without any consumer of the
borrower's ability to repay the loan according to its terms.''
How does this standard differ, Mr. Cooper or Mr. Gee, from some
of the State predatory lending standards that have been passed?
Is it adequate or inadequate? I do not know.
Mr. Cooper. I think it is inadequate, Mr. Chairman. That is
certainly something that should be done. Asset-based lending
should be prohibited. All they have after that is general
unfair and deceptive trade practices.
In my opening comments, I outlined all the specific
problems that are faced with predatory lending, and you need to
go through and specifically point out those problems.
In North Carolina, we found that our general unfair and
deceptive trade practices act did not work. That is why we came
forward and adopted our specific predatory lending law.
Chairman Shelby. Mr. Gee.
Mr. Gee. Mr. Chairman, I certainly agree with General
Cooper. The other thing I would add is that States right now,
you have to remember that operating subsidiaries of national
banks are generally State chartered. Many of them are State
licensed. They are examined by the States. They are regulated
by the States. They are overseen by the States. That has been
the practice.
And so in those examinations you find, you know,
violations, you find deceptive practices. The States have taken
action in those cases, and that has benefited, obviously,
national banks and their operating subsidiaries because, up
until this regulation, they have been subject to State
oversight and State supervision.
Chairman Shelby. Can the OCC singlehandedly and
sufficiently conduct oversight of national banks and their
operating subsidiaries you referenced? Or will consumer
protection suffer because of the lack of State resources and
manpower?
Mr. Gee.
Mr. Gee. Mr. Chairman, from our perspective, we think the
OCC does not have the ability and does not have the wherewithal
to address consumer protection adequately. As I mentioned in my
remarks and more in my written remarks, I come from a small
State where there is no OCC office, no presence, to our
knowledge. Consumers do not know about the OCC. They are not
listed in the phone book. When they have a problem, they call
our office. They call the State AG. They are not aware of the
OCC, and we do not think that after these regulations the OCC
is going to have a presence in a State like ours. And there are
hundreds and hundreds of State examiners and the investigators
and examiners with State Attorneys General's offices that are
dealing with these problems on a day-to-day basis. We do not
think the OCC has the resources to replace them.
Chairman Shelby. Mr. Cooper.
Mr. Cooper. Mr. Chairman, the OCC is late to the consumer
protection arena. Only in the year 2000 did they wake up and
say, hey, we may need to start enforcing consumer protection
rules here. The Senate might think this was laying the
groundwork for preemption. What you are doing is taking away
years and years of experience of State banking regulators and
attorneys general's staffs who have experience in dealing with
these consumer complaints.
You have seen a home loan, how thick it is. Going through
each one of those papers trying to investigate wrongdoing by
lenders is a lot of work, Mr. Chairman.
Chairman Shelby. Mr. Hawke, do you want to respond to that?
Can you do the job?
Comptroller Hawke. We can do the job. And we do the job. We
have enormous resources. We have hundreds and hundreds of bank
examiners who have enormous clout over the banks that we
supervise. We can get remedies. When matters are called to our
attention, we can get remedies overnight in our banks, and we
do not have to go to court and suffer the expense and delay of
court actions to get remedies.
In Idaho, for example, where there are branches of five
multi-State national banks, if we find problems in those banks,
we can go right to the heart of the matter. We can go to the
top of the organization and get corrections. And as far as
people in Idaho not knowing what our telephone number is, there
are literally tens of thousands of people around the country
who are able to find our telephone number, and if they cannot,
they are referred to us by the State authorities. We have an
enormously effective consumer assistance group that processes
70,000 inquiries annually--complaints that come from all over
the country, from all types of people. And it is a very
effective operation.
Chairman Shelby. Senator Sarbanes, thank you for your
indulgence.
Senator Sarbanes. Mr. Hawke, in your statement you say,
right at the outset, that it is important not to lose sight of
three fundamental points, and one of the points you do not want
us to lose sight of it: ``There is no evidence that they are
the source of predatory lending practices.'' ``They'' being
national banks. I am quoting you correctly, I take it.
Now, I would like to ask you: Does this statement include
the operating subsidiaries of national banks?
Comptroller Hawke. Yes, it does, Senator.
Senator Sarbanes. Okay.
Comptroller Hawke. And the State attorneys general bear
that out.
Senator Sarbanes. No, that is not my understanding.
Comptroller Hawke. Well, that is what they have said. They
may be saying something different today, but they have said
that repeatedly in statements that they have filed.
Senator Sarbanes. What is it they have said?
Comptroller Hawke. They have said that the problems of
predatory lending are problems that exist almost entirely in
the unregulated segment of the financial services industry, and
they are not problems that are found to any extent with
national banks or Federal thrifts or their subsidiaries. That
is their statement.
Senator Sarbanes. Is that right, Mr. Cooper?
Mr. Cooper. I do not know what statement he is reading
from, Senator.
Comptroller Hawke. I can provide the statement.
Mr. Cooper. I think that may have been made by----
Chairman Shelby. We would like to have it for the record.
Mr. Cooper. One of the attorneys general in the OTS issue,
but I will back up and say that, yes, the majority of the
problems have been with the finance companies. But there are
problems with national banks, and, in fact, the only case that
has been brought under the North Carolina predatory lending
law--there was a class action case of consumers--was against a
national bank.
You know, we hope that they can do the job, but why
undercut us as well? And we are very concerned, too, that this
recruiting process and with these subsidiaries that that is
going to be attractive that they can skirt State predatory
lending laws. So there is just no need to undercut State
regulators here. We can work together. They can enforce, we can
enforce, just like we do with other Federal agencies. And these
banks are sophisticated, just like any other retailer.
Senator Sarbanes. My understanding is that, first of all,
that reference was in a different context and, in any event,
was not as absolute as your statement. And I want to pursue
your statement for a moment, Mr. Hawke. Let me just read it to
you again: ``There is no evidence that they''--meaning the
national banks--``are the source of predatory lending
practices.'' And you just said that you encompass within
national banks their operating subsidiaries.
Has the OCC conducted a survey or study of the extent of
predatory lending by national banks or their operating
subsidiaries?
Comptroller Hawke. We have not conducted a survey.
Senator Sarbanes. Has the OCC conducted a hearing on
predatory lending as a number of other governmental agencies
have done?
Comptroller Hawke. We have not held a hearing, but we have
had an extensive rulemaking process, and we have sent out
extensive guidance on the matter. We have also asked consumer
groups and State law enforcement officials, both, to provide us
with any evidence that they have of national banks or their
operating subsidiaries engaging in predatory practices.
Senator Sarbanes. Does the OCC know what percentage of
national bank mortgage lending is subprime?
Comptroller Hawke. I do not have that number at my
fingertips, Senator Sarbanes, but subprime lending in national
banks is a recognized subcategory of lending and----
Senator Sarbanes. Do you know what percentage of national
bank mortgage lending is subprime?
Comptroller Hawke. I cannot tell you that.
Senator Sarbanes. Does the OCC know the average points and
fees charged by national banks and operating subsidiaries of
national banks?
Comptroller Hawke. No, we have not calculated----
Senator Sarbanes. How do you make these flat-out judgments
about no evidence of predatory lending practices when you do
not know the underlying situation that would enable one to make
that conclusion?
Martin Eakes, who is testifying on the next panel, the head
of the Center for Responsible Lending in North Carolina, states
in his testimony that has been submitted to the Committee,
``The OCC ignores existing evidence of predatory lending within
national banks, and their affiliates and subsidiaries. Despite
some contradiction between this claim and the assertion that
OCC has led pioneering
efforts to shut down predatory lending, this claim is belied by
allegations brought by consumer advocates and researchers
regarding national banks.''
Comptroller Hawke. I do not know what Mr. Eakes is
referring to. He talks about national bank affiliates, which
are not subject to our jurisdiction. They are subject to
holding company jurisdiction. I base my statement not only on
the repeated statements of the State AG's, but also on the
absence of any referrals of complaints or evidence from
consumer groups or State law enforcement officials.
Senator Sarbanes. Well, we will have Mr. Eakes here, and we
will get his response to that.
Now, let me ask you this question. You cite as precedent
for your preemption action preexisting OCC regulations and
judicial preemption decisions. You also cite laws that have
been determined to be preemptive for Federal thrifts by the
OTS.
I take it that you are taking the OTS determination and
just folding them in. Is that correct?
Comptroller Hawke. We reflected the same scope that the OTS
has embodied in its longstanding regulation on the same
subject.
Senator Sarbanes. I guess the answer to my question is,
yes; is that right?
Comptroller Hawke. Yes, Senator.
Senator Sarbanes. The standard you cite is ``obstruct,
impair, or condition.'' You say that is the judicially
established standard for Federal preemption.
The Barnett Bank decision, which we understand is the most
prominent recent Supreme Court case on national bank preemption
and which was cited in Gramm-Leach-Bliley, used the standard
``prohibit or significantly interfere with a nationally bank's
Congressionally authorized powers.'' Do you view the standard
contained in your regulation as different from the standard in
the Barnett Bank decision?
Comptroller Hawke. No, I do not. There is a lot of language
in Barnett, and people have tended to pick up one or two words
from it, but I think Barnett completely supports the
articulation of the standard as I made it.
Senator Sarbanes. Do you have a view on that, General
Cooper?
Mr. Cooper. We believe that their interpretation of Barnett
Bank goes beyond significant impairment.
Senator Sarbanes. Well, obviously you think--and, Mr. Gee,
I guess you agree with this--that the Comptroller, to some
extent, is taking the view, well, you know, I have not really
done anything here. I mean, what I have done is just simply
state what the lay of the land is. But no one seems to perceive
it the same way as the Comptroller. I mean, everyone else seems
to think he really has done something in terms of preemption,
and I take it on the ground that is exactly the way it is
working. In fact, I have been told that banks have been told
just to ignore the attorney generals or the other State
officials; is that correct?
Mr. Cooper. That is correct, Senator. I think recently they
told them that it is okay for them to send forward the
complaint to them and to take the complaint, but they
reemphasized in that second letter that State attorneys general
did not have the authority to enforce them. So here we are
dealing with national banks with a complaint, and we have no
authority to enforce our State law against a national bank.
That is a concern.
Senator Sarbanes. Mr. Gee, do you have any observation on
that?
Mr. Gee. Senator, I would make the same observation. While
the OCC did come out with guidance, and it is guidance only--it
does not have the force and effect of a rule--clearly, the
direction that national banks were receiving before, and there
were a couple of well-publicized incidents where national banks
actually told either State attorneys general or State bank
commissioners, ``We do not have to deal with you any more. We
do not have to respond to you any more,'' and that is the
message that has clearly been indicated to national banks.
Comptroller Hawke. Senator Sarbanes, can I respond to that?
There was some misreading of what we said, and we moved very
quickly to clarify that. Our position should be understood very
emphatically. We do not encourage our banks to stiff-arm State
law enforcement authorities. We have advised them that when
they get a consumer complaint referred by a State law
enforcement authority or State attorney general, they should
take it seriously, they should respond, they should provide
information back as to the resolution of the matter. We have
adopted special procedures in our Customer Assistance group to
deal with referrals from State authorities.
We do not take the position that our visitorial powers
rule, which is really based on longstanding Federal statute, it
prevents State law enforcement authorities from calling a bank
and referring a consumer complaint to them. That is simply not
the case. What it does prevent is State law enforcement
officials going to court to enforce a State consumer protection
law against a national bank, and that is clearly grounded in
Riegle-Neal and in the basic visitorial powers statute.
Senator Sarbanes. Mr. Chairman, I see my time is up. I want
to be fair to Senator Allard.
Chairman Shelby. There will be another round.
Senator Sarbanes. I will wait until the next round.
Chairman Shelby. Senator Allard.
Senator Allard. Mr. Chairman, I want to follow up on the
direction of your first question. Did you say that the
Constitution is where you derive your authority and not from
legislation that was passed by the Congress?
Comptroller Hawke. What I meant, Senator Allard, is that
the Congress has plenary power to deal with these issues
however they see fit. But in the absence of----
Senator Allard. That is not entirely true either, but go
ahead.
Comptroller Hawke. I mean in terms of preemption. Congress
can decide that a Federal law that confers powers on a Federal
entity should not be viewed as preempting State law, and they
do that all the time. There are many examples where they have
done that. But in the absence of any expression by the Congress
as to the preemptive effect of a Federal law, the case law,
which goes back well into the 19th century, is very clear--that
the Supremacy Clause of the Constitution prohibits the States
from adopting any law that restricts, impair,s or conditions
the exercise of powers that Congress has conferred on a Federal
entity, like a national bank.
Senator Allard. Well, but that is right. I mean, the
Congress confers that, we do that through authorizing
legislation.
Comptroller Hawke. The Congress confers the power on the
banks, and in the absence of any expression of intent by
Congress that State law should be applicable to the exercise of
that power, the Constitution preempts the State law.
Senator Allard. In other words, what are the limitations on
how many rules and regulations you can pass? Is it your view
that you can pass any law or regulation, as long as Congress
does not tell you not to do it?
Comptroller Hawke. Not at all, Senator. First of all, our
regulation, in our view, and I do not recognize the description
of it from some of the comments, does no more than codify
longstanding principles. We have not created new standards of
preemption.
Senator Allard. Here is what I am looking at. I have the
Constitution here, and I am reading Section 8, 9, and 10. In
Section 8, it says what powers Congress has and what powers the
Federal Government has. It says what powers they do not have.
And then in 10 it says what powers the States do not have.
And then I look over here in Amendment No. 10, the Tenth
Amendment to the Constitution, ``The powers not delegated to
the United States by the Constitution nor prohibited by it to
the States are reserved to the States respectively or to the
people.''
And I am trying to figure where you come up with your
authority to be able to pass rules and regulations, unless it
is authorized by the Congress of the United States.
Comptroller Hawke. Senator, the Supremacy Clause of the
Constitution says that the Constitution and laws of the United
States shall be the supreme law of the land, and the Supreme
Court has consistently interpreted that in the context of
Federally created instrumentalities, like the national banks.
Senator Allard. I keep looking for that. The closest I can
come to that is ``to make all laws which shall be necessary and
proper for carrying into execution the foregoing powers and all
other powers vested by this constitutional Government of the
United States or in any department or officer thereof.'' Is
that what you are calling the Supremacy----
Comptroller Hawke. No, that is not the Supremacy Clause,
Senator. The Supremacy Clause says that this Constitution and
the laws passed pursuant to it shall be the supreme law of the
land.
Senator Allard. And where is that?
Comptroller Hawke. I do not recall what section.
Senator Allard. I was going through here, and I did not see
the----
Comptroller Hawke. It is in there.
Senator Allard. What I do see----
Comptroller Hawke. It is----
Senator Allard. I am not a lawyer.
Comptroller Hawke. I have not practiced law for a long
time.
Senator Allard. But I did not see anything with the kind of
language that you are talking about. However, I do see specific
powers granted to the Federal Government and to the Congress. I
see specific powers denied them. I see specific powers denied
to the States. And then I see an amendment here in the
Constitution that says specifically, that any other laws that
are not mentioned automatically go to the States and the
individual.
It seems to me that you are really stepping out quite a
ways on thinking----
Comptroller Hawke. Senator----
Senator Allard. --you have all of these rules to
promulgate----
Comptroller Hawke. I, respectfully----
Senator Allard. There is not any authorizing legislation.
Comptroller Hawke. I, respectfully, disagree, Senator. The
Supremacy Clause says that the laws of the United States are
the supreme law of the land. That is what the Supreme Court
relied on when it said----
Senator Allard. What is the rule----
Comptroller Hawke. Can I just finish my answer?
Senator Allard. Yes.
Comptroller Hawke. That is what the Supreme Court relied on
when they said that the States do not have the power to limit
the exercise of powers that Congress has conferred on Federally
created institutions. The Tenth Amendment does not reserve for
the States the right to regulate Federally created
institutions.
Senator Allard. I am not saying that.
Senator Sarbanes. Is it your position that a State cannot
effect, in any way, Federally created institutions?
Comptroller Hawke. Since McCulloch v. Maryland, the law has
been that the States, absent the conferral of explicit
authority by Congress, do not have the power to condition,
limit, or obstruct the exercise of powers that the Congress has
conferred on Federally created entities like national banks.
Senator Allard. That is not the argument I am making, and I
do not think that is the question that the Chairman was asking.
Where do you get your authority to promulgate the rules? We are
not talking about the Supremacy Clause and saying that the
States have any authority over what you are doing, but we are
talking about where you get your authority?
Comptroller Hawke. We have explicit rulemaking authority
under several statutes. One is the explicit power that Congress
gave us to write the rules relating to the exercise of real
estate lending powers by national banks, and there are other
statutes that confer rulemaking power on us. But absent----
Senator Allard. I think that is the question.
Chairman Shelby. In other words, what is the source of what
you are trying to do? Because as I hear from the--thank you for
yielding to me without asking.
Senator Allard. Mr. Chairman, any time.
[Laughter.]
Chairman Shelby. Thank you, Senator Allard. But as I
understand the Attorney General's Association, all 50
Republicans and Democrats have banded together and are going to
challenge whatever you do here, and you are trying to do, your
regulation, period. Is this correct, Mr. Cooper?
Mr. Cooper. That is correct.
Chairman Shelby. Do you believe he has the basis he is
talking about to do this?
Mr. Cooper. We do not believe that the----
Chairman Shelby. That is what I was asking and it is what
Senator Allard's----
Mr. Cooper. We do not believe that the combination of
Supreme Court precedent and laws that Congress has passed
allows him to do that.
Now, clearly, there is disagreement on what the law is. You
guys can decide what the law should be. We can fight all day
about this and probably will in court, unless Congress acts.
And I think it is critical for you all to look at this, and I
am glad that you are because you can say yea or nay on these
rules, and I think Mr. Hawke would probably agree with that.
Senator Allard. Yes, I just wanted to get that clarified a
little bit, Mr. Chairman.
Chairman Shelby. You go ahead. Since you graciously let me
take your time, you proceed.
Senator Allard. No, no. I took your question.
Chairman Shelby. Well, you added to my question.
Senator Sarbanes. Well, does Mr. Hawke agree that we can
say yea or nay?
Comptroller Hawke. Absolutely, Senator. The OCC is----
Senator Sarbanes. It comes not from the Constitution, but
from statute.
Comptroller Hawke. The Congress created the national
banking system. It can repeal it. It can do anything it wants
with the national banking system.
Chairman Shelby. Where does the Constitution come in? The
Constitution will preempt the statutes of the United States
Congress.
Comptroller Hawke. The Constitution comes in, Mr. Chairman,
when Congress has not spoken, when Congress has not
specifically said State law should apply, and it has in many
cases. When Congress has not said that State laws shall apply
to a Federally created entity like a national bank, then the
Constitution prohibits the States from acting to restrict or
condition or obstruct the exercise of those powers that
Congress has conferred on those entities.
Senator Sarbanes. Which are the powers we conferred on the
banks that constitute the basis of preemption of predatory
lending laws.
Comptroller Hawke. The basic power to conduct a banking
business, the statutory power----
Senator Sarbanes. So you believe the power to conduct a
lending business embraces the power to conduct the predatory
lending business; is that correct?
Comptroller Hawke. Not at all, Senator, and I also wanted
to mention----
Senator Sarbanes. Well, if it does not embrace it, then why
should the State not be able to act in the area of predatory
lending? If it is not embraced, I do not see any of the basis
for the preemption.
Comptroller Hawke. If I could finish my answer, Senator
Sarbanes----
Senator Sarbanes. The State would be able to act.
Comptroller Hawke. If I could finish my answer, the
Congress has explicitly provided that national banks can make
real estate loans under rules that the OCC has determined, and
we have issued such rules. What the State antipredatory lending
laws do is impose conditions on the exercise of the power to
make real estate loans by national banks.
I am not trying to justify predatory lending. We have ample
power to deal with predatory lending where we find it. What I
am saying is that the Constitution does not permit the States
to adopt rules that condition or limit the exercise of real
estate lending powers by national banks. Congress can change
that, if it sees fit. Congress can adopt a national predatory
lending standard that applies to the real estate lending powers
of all banks. But in the absence of that kind of law, the
constitutional principle operates.
Senator Sarbanes. Well, except the OCC is the one that is
putting forth the regulation. The fact of the matter, we have
been talking about power, but there is also the question of the
wisdom of what you are doing, over and above--there is nothing
in the Constitution that compels you to do this. So, in a
sense, we are back to the wisdom of what you are doing, about
which everyone is sounding an alarm bell.
Comptroller Hawke. Senator, I do not have the ability to
apply the constitutional principle based on my own judgment
about whether a particular law is a desirable one or an
undesirable one or a good one or a bad one. The constitutional
principle operates, and it has operated for almost two
centuries in our history.
I should say that these preemption issues are raised all
the time in the courts. One of the reasons that we put out this
rule was to try to bring some clarity to the subject. We win
these preemption cases all the time. When we preempted the
Georgia antipredatory lending statute, the Georgia attorney
general was asked to take us to court, and he reviewed the
precedents and said that he thought there was so little chance
of overturning us in court that he would not even sue us.
So, if the State attorneys general want to test these
issues in court, I think that is perfectly appropriate.
Chairman Shelby. Senator Carper, thanks for you indulgence.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Not at all.
Welcome Mr. Gee, Mr. Cooper. Mr. Gee, are you the bank
commissioner for your State?
Mr. Gee. Yes, Senator, I am.
Senator Carper. What do they call you back there--
commissioner? Commissioner Gee?
Mr. Gee. Director.
Senator Carper. Director Gee. Are you appointed by the
Governor or how do you serve?
Mr. Gee. Yes, I am, Senator.
Senator Carper. Governor Dirk Kempthorne?
Mr. Gee. Yes.
Senator Carper. You tell him an old Governor from Delaware
sends his best.
Mr. Gee. I will do that, Senator.
Senator Carper. Mr. Cooper, where are you from in North
Carolina?
Mr. Cooper. I am from Rocky Mount.
Senator Carper. Are you, really?
Mr. Cooper. On I-95, yes, sir.
Senator Carper. My wife is from Boone, up in the mountains,
and we have a lot of family up there in Watauga County and down
around Cary and Holly Springs.
Chairman Shelby. Everybody knows why Senator Carper carries
all three counties in Delaware.
[Laughter.]
Chairman Shelby. All of them.
[Laughter.]
Chairman Shelby. Go ahead.
Senator Carper. We have not carried any counties in North
Carolina yet, though.
Chairman Shelby. There are just three.
Senator Carper. I am glad you are here and look forward to
working with you.
Was Governor Easley your predecessor?
Mr. Cooper. Yes, he was.
Senator Carper. Mr. Hawke, how are you doing?
[Laughter.]
Comptroller Hawke. Well, I hope I feel as good when I leave
as I did when I came in.
Senator Carper. We hope so, too. We appreciate your being
here. We appreciate all of you being here.
A person who is not here is Senator Zell Miller, and he has
shared with me, the staff has actually shared with me a note
from him, and I am going to just go ahead and ask this one on
the record. I will just read it, rather than paraphrase it,
since it is not very long. It is from Senator Miller to Mr.
Hawke. It deals with a letter that was written to you--you may
have heard of this--a letter that was written to you by the
bank commissioner, I guess by Director Gee's counterpart in
Georgia.
It was written to you back on August 21, 2003, requesting
clarification on several matters relating to the OCC's
preemption. Apparently, Zell Miller's staff got involved in
February of this year because the State bank commissioner had
not received a response to his or her August 21 request. And,
finally, the response came to the commissioner of Georgia on
April 2, 2004, which is probably about 8 months after it was
made.
There may be a perfectly good excuse for the delay in that
kind of response. We got our mail lost after the anthrax
attacks and ricin attacks. Some mail gets lost for months, and
maybe you have a similar problem, I do not know. But just for
the record could you tell us why it took so long to respond to
Commissioner Sorrell.
Comptroller Hawke. There is no excuse for that, Senator
Carper. I learned about this several weeks ago. I was extremely
upset. This is not the way we should be treating inquiries from
State officials. Frankly, it is black mark on our record. I
called Commissioner Sorrell the other day and told him that we
would have a letter to him the next day, and we did. I am
deeply regretful that that incident occurred, and I have
apologized profusely to him about it.
Senator Carper. Thanks very much. We will convey that to
Senator Miller.
The reason why I was willing to raise this, on behalf of
Senator Miller, is that it relates to a question I am going to
ask of Director Gee and General Cooper, and particularly to
Director Gee.
In our State, as the Chairman says, we are a pretty small
State. We only have three----
Chairman Shelby. A very important State, the first State.
[Laughter.]
Senator Carper. I yield to the Chairman for however much
time he wishes to consume.
[Laughter.]
Chairman Shelby. Any time you want.
Senator Carper. We focus a lot in my Senate office, we did
when I was governor of Delaware, and our bank commissioner's
office focuses a lot on constituent service, being able to
respond in a timely way to the people who inquire on particular
issues.
How does it work in Idaho? You are not a little state
geographically, but you are a fairly small State, in terms of
population, like us. But how would constituents, consumers, if
you will, who had a gripe or a beef or a concern with a
practice of a nationally charted bank, how would they have
acted or behaved in your State prior to the promulgation of
this rule and how might they be expected to take their beef or
complaint or gripe now under this new rule? How has it changed?
Mr. Gee. Thank you, Senator, for the question.
The difference is, before the rule, as I mentioned in my
testimony, most consumer complaints do come to our office or
the Attorney General's Office. Whether it is against a national
bank or a national bank subsidiary, those complaints and
inquiries come to our office. This is especially true when
there is some type of major transaction involving a national
bank; for example, a merger or consolidation, acquisition,
closing of a branch office.
Those kinds of major transactions generally facilitate a
lot of complaints or inquiries to our office. And before this
rule went into effect, our office responded to those
complaints. Our office has a very good working relationship
with the national banks that operate in our State. We have
contact people in all of those national banks. We work out the
resolution of those complaints with those contact individuals.
Quite often they will make restitution or resolve the
complaints in an appropriate way.
The operating subsidiaries quite often, as I mentioned, are
actually regulated by either our State or other States licensed
by the States and overseen and examined by the States. After
this rule goes into effect, we have lost all of that power and
authority to regulate operating subsidiaries of national banks.
We no longer have jurisdiction. A lot of those companies not
only in our State, but around the country, are turning in their
licenses to the States.
States no longer have jurisdiction to respond to consumer
complaints or inquiries or any authority over those operating
subsidiaries. And it is primarily those operating subsidiaries
is where our concern about predatory lending and other abusive
lending practices occur, and we have lost our authority. The
attorney generals have lost their authority. The attorney
general in our state has lost their authority with respect to
those operating subsidiaries and also complaints against the
national bank.
We no longer have authority, under our State's consumer
protection laws or other laws. Generally speaking, as the
Comptroller points out, there are some laws that still apply,
but, as a general rule, if you look at all of the actions, for
example, the attorney general in our State over the last 3
years, has brought three major enforcement actions against
national banks.
Those actions now cannot be brought under the consumer
protection laws of our State. Those have been preempted by
these regulations. So our ability to help consumers, resolve
their complaints, whether it is the national bank, and
especially the subsidiaries of national banks, has been
preempted.
Senator Carper. If I could ask General Cooper a similar
question, then, Mr. Hawke, I am going to ask you to respond as
well. I am going to give you extra time, if we could.
Mr. Cooper. Senator, let me state clearly, and I think the
director may agree, we do not concede that these new rules take
away our authority because we are going to fight this every
step of the way in court. We believe you can do something about
it now, but we do not concede that in expressing our concern to
you.
But right now thousands of North Carolina consumers call my
office because they want help. I testified earlier that we
receive thousands of phone calls regarding national banks and
that in the last 2 years, we have received about a thousand
written complaints regarding national banks, and they file
these complaints because they believe that I have the authority
to do something about it.
If the OCC ultimately is successful here, I will not have
the authority to do something about it. What I said earlier is
this takes 50 cops off the beat. We believe that they have the
authority, and we have the authority. We should both have the
authority because there are enough problems that are around
regarding these issues where we all need to be involved in
protecting consumers.
There are numerous examples where Federal authorities and
our offices work closely together. We have even had that with
the OCC in the past. We want to continue that, but do not take
away our authority.
Senator Carper. Mr. Hawke, in responding, let me just----
Comptroller Hawke. Senator----
Senator Carper. But before you say it, one of the concerns
that I have, and it is really underlined by what was shared
with us by Senator Miller was, you know, if you happen to be a
constituent in Idaho or a consumer in North Carolina, Delaware,
Maryland, or Alabama, and if the State Bank Commissioner of
Georgia has to wait 8 months for a response, what can a
consumer expect?
Comptroller Hawke. The failure of us to respond in Georgia
was a unique situation and something that I apologized for.
Consumers do not have to wait, and law enforcement
officials do not have to wait. For the day-to-day complaints
that consumers have, and Members of Congress know only too
well, they hear from their constituents about a variety of
things. We hear 60,000 or 70,000 times a year from customers of
banks, not just national banks, about the kinds of everyday
problems they have with their banks. Fifteen thousand of those
we refer back to other agencies because they do not apply to
national banks. We have an enormously effective system of
getting complaints to the right people.
We receive hundreds and hundreds of complaints from State
law enforcement officials in that process. Nothing that we have
done in our new regulation prevents the attorney general or his
staff in North Carolina from calling a national bank and
saying, ``I have got this complaint. What is this all about?
Can you get this fixed?''
What Federal statutes do prohibit, and this has been the
case since the beginning of the national banking system, and it
was reinforced 10 years ago in Riegle-Neal, is State attorneys
general taking administrative or judicial enforcement actions
against national banks. The law is absolutely clear on that, in
my view, and I do not think it is a close call. We are happy to
have that tested in court because I think it is very clear, and
we have won that case in court on several occasions.
The important thing here, Senator, is getting customers'
problems solved. And I think that if we take a cooperative and
coordinated attitude about these things, we can get that done.
The Attorney General of New York recently filed a lawsuit
against the subsidiary of one of our national banks. That suit
will go on for months, if not years. When we found out what the
customer's complaint was, we called the bank and got it fixed
overnight. We had a similar complaint last year from another
bank that came into our customer assistance group. They called
the examiner in charge of the bank. He went down the hall to
the bank's consumer affairs person, and the problem was fixed
immediately.
When a bank examiner goes to an officer of a bank with a
customer complaint, he or she has enormous influence to get
those things resolved. If we could work together with the
States and use our clout though examiners, use our customer
assistance group, use the very far-reaching enforcement powers
that we have, we could all do a better job of solving the
problems of consumers. This should not be a competitive game.
It should be a cooperative game.
Senator Sarbanes. Do you apply that line of thinking to
State-chartered operating subsidiaries of national banks?
State-chartered operating subsidiaries of national banks,
do you apply that line of thinking to them?
Comptroller Hawke. Absolutely, Senator. And this is another
issue that----
Senator Sarbanes. The State, it has no reach over them,
even though they come in for a State charter?
Comptroller Hawke. They are organized under State corporate
laws, and they are licensed by us to carry out Federally
granted banking powers. Operating subsidiaries can only do what
the parent bank can do, and they are carrying out their
Federally granted powers. This case has been litigated at least
three times. In each case, our view on this has been upheld.
There are two cases pending now in which the same issue is
being raised, and we are awaiting decisions.
This is a lawyer's issue. We will either win it or lose it.
It is not going to be the end of the world one way or the
other. But, I think our position on this one is absolutely
sound, and we have had three court decisions that have agreed
with us on that.
Chairman Shelby. Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. Once again, thank
you and Senator Sarbanes for holding a timely hearing. I thank
our witnesses.
I think this is a very interesting issue, and obviously you
have two conflicting values at hand. On the one hand, as we
move into the 21st century, financial markets tend to be
national. We have had some of the insurance industry come to us
and say they want a national charter because they do not want
to go through 50 States to get every new regulation approved.
They have a new annuity product. Even when they have friendly
regulators, they do not want to take the time.
On the other hand, we have always had a Federal system. And
as I think it was Judge Brandeis said, the States are the
laboratories. And when you go preempt, you undercut the States
being laboratories. And so I think there is not a clear-cut
answer. I tend to think, on pure financial issues, the way
money flows back and forth, and those kinds of things, you tend
to have a Federal bias. But it seems to me on consumer issues,
particularly where different practices occur in different
States, your ruling is going to have an adverse effect, and I
am troubled by it.
I am also troubled, as I know the Chairman, and Ranking
Member, and others were, that you rushed to judgment before we
could have hearings. This seemed, to me, to be an ideal issue,
and I have great respect for you, and we have known each other
maybe close to 2 decades in these banking areas, but this is an
ideal area where hearings should have occurred because of these
conflicting values.
Take the issue that has raised the hue and cry in my State,
and that is the predatory lending. It may well be that
predatory lending is only endemic in a few States--certainly
when it starts. Those States become what Brandeis calls the
laboratories, and we see, as they pass laws, how well they
work. And that is what has happened with predatory lending.
There have been a few States that have been way ahead of the
game.
In New York, we have laws that protect consumers from
balloon payments, increased interest rates after default, loan
flipping, negative amortization, oppressive mandatory
arbitration clauses, lending without due regard to repayment
ability, and financing of points and fees in excess of 3
percent of the loan amount.
You point to an example where our State attorney general
brought an issue and you solved it. But I have to tell you, I
have been around for 20 years, and let me tell you, for even a
Senator or Congressman to knock on the OCC's door and say we
have a problem and get quick action, when it is a local problem
in particular, does not happen very often.
Senator Sarbanes. If at all.
Senator Schumer. If at all. So maybe that happened once,
but this is our experience. You know, you are busy with a
million other things. This is not your jurisdiction.
My question to you is, now, what is going to happen in New
York State if, in New York State, there are serious problems of
the types I listed, with heavy penalties, including allowing
the mortgage to be void, does the OCC have identical
protections? What are you going to do in the event that a
complaint is issued against the lender on some of these
violations that I have mentioned?
Comptroller Hawke. Well, two things, Senator Schumer.
First of all, in our preemption regulation, we set out what
I think is an extremely important standard that goes to the
heart of predatory lending. That is what I call the
underwriting standard.
Second, we made clear----
Senator Schumer. Wait. Can you elaborate? How does the
underwriting standard deal with something like loan flipping?
Comptroller Hawke. The underwriting standard does not
expressly deal with loan flipping.
Senator Schumer. Does it deal with balloon payments?
Comptroller Hawke. No, but we have addressed those in other
contexts.
Senator Schumer. Well, tell me how.
Comptroller Hawke. First of all, we put out very extensive
advisories to national banks on these very practices that are
associated with----
Senator Schumer. And if they violate the advisories?
Comptroller Hawke. We will go after them for unfair and
deceptive practices under the Federal Trade Commission.
Senator Schumer. How many have you begun to look into in
New York since February 12?
Comptroller Hawke. I cannot tell you what----
Senator Schumer. Could you get that back to me?
Comptroller Hawke. Sure. We have gone after----
Senator Schumer. The bottom line, sir, is this is an awful
and serious problem. It is generally done not by the major
banks, but by lots of others. It is done by the smaller ones.
They will go seek a national charter because there will be a
lesser regulation there, and, I mean, let us be real here. It
is going to take years before you go after them.
Furthermore, it is my understanding the OCC, you know, that
it was never my understanding that you had the authority to
define unfair or deceptive acts. Do you?
Comptroller Hawke. We do not have the authority to adopt
rules. The Fed has the exclusive rulemaking authority, but we
do have the authority, on a case-by-case basis, using years and
years of Federal Trade Commission precedent to go after banks
for unfair and deceptive practices. And we have done that. We
have done that.
Senator Schumer. So, on balloon payments, if there were
this serious problem with these huge balloon payments, and poor
people who finally were able to buy a house. You know, they pay
the mortgage for 2 years, and then there is this big balloon
payment, and no one ever explained to them adequately that that
is what was going to happen, what would happen? Let us say we
found some small national institution doing this repeatedly,
would you have to go to the Fed first to get permission?
Comptroller Hawke. No, not at all. And balloon payments are
not inherently unfair or deceptive or illegal. They have to be
looked at in context.
Senator Schumer. No, but let us say in the case of this
bank they were deceptive, and a guy making $20,000 a year was
able to pay $200 a month, and then in the third year he had to
pay $1,000 a month.
Comptroller Hawke. We could go after them using our unfair
and deceptive practices authority, and we would if it came to
our attention.
Senator Schumer. Can you tell me how many balloon payments
in the history of the OCC you have gone after?
Comptroller Hawke. I cannot tell you that we have gone
after balloon payments as such, but we have gone after----
Senator Schumer. It is not balloon payments. The point
being we are all in the real world here, and we all know,
having dealt with the OCC for a long time what you do very well
and what you do not do all that well. And going after smaller
institutions, the bottom-feeders in a certain way, that do some
of these horrible things has never been an OCC strength. And we
all know it takes a very long time. It takes time to convince
people to even look at something new. That is what is so
frustrating here.
Now, you come in, without waiting for the Chairman's
admonition to let us have some hearings and ask you maybe we
would open a window of your thinking, and you just go
preemption. And I have got to tell you, even though I tend to
believe in national powers, as I say in financial things, I do
not think that that is an across-the-board statement and should
be an across-the-board view.
I have to tell you, I think the OCC has hurt itself by
doing this.
Senator Sarbanes. Badly.
Senator Schumer. I have to tell you, and I would hope you
would even reconsider and maybe sit down with us. I mean, this
Committee is hardly known as a radical Committee.
[Laughter.]
And to not sit down with us and try to figure out how to
deal with this fairly, and sit down with others, instead of
just doing this, I would strongly urge you to do it. You have
created an outcry, and it is not on everything. It is not on
even the idea of a national banking system. Again, I know the
State regulators all want to have as much say in this brave new
world. They should have less say than they used to. But there
are certain areas, particularly consumer and predatory lending,
which are different in different States, that do not interfere
with the national banking system at all, that you should be
leaving it up to the States, and that is the trouble with a
blanket resolution.
Just explain this to me. Who defines what an unfair and
deceptive action is, and what is your definition of it? That is
a very broad term.
Comptroller Hawke. It is a very broad term. It is like
unsafe and unsound banking practices. The Federal Trade
Commission Act gives the Federal Reserve the exclusive
authority to write across-the-board rules. They have done very
little in that respect.
Senator Schumer. Right.
Comptroller Hawke. We asserted the right to take individual
actions--this is something no one else had ever done before
until very recently--and we have taken a number of actions
where we issued cease-and-desist orders and remedial orders for
violations of the Federal Trade Commission Act. And we have
decades of precedents from the Federal Trade Commission as to
what constitutes unfair and deceptive practices.
Senator Schumer. Do you think anyone out there in the
banking world knows what you think they are?
Comptroller Hawke. If they read what we say, they should
know, because we have described it in our advisories on
predatory lending.
Senator Schumer. Right. Somebody has told me, since 2000,
you have taken a grand total of five enforcement actions. Does
that sound correct?
Comptroller Hawke. The first time we asserted this
authority was very recently. It had gone unused for many, many
years until we took the position that we had the authority to
do it.
Senator Schumer. Well, I would posit to you that, A, there
are probably many more than five violations since 2000 and, B,
if the 50 States could be involved in some of these areas--I do
not know what the five were--you would get a lot more
enforcement without--underline ``without''--interfering with
the need for a national banking system and the fact that
banking has become much more of a national business than it was
before.
Someone showed me the list here. Here is one of them. One
bank in Marin County, I guess, did not inform customers of
extremely low credit limits. Another one did not disclose
application fees. Providian, it says multiple deceptive
marketing practices.
Comptroller Hawke. We got a $300-million restitution
judgment against Providian.
Senator Schumer. But the others----
Senator Sarbanes. Who brought that action, the Providian
action? Who brought it?
Comptroller Hawke. We brought it jointly with the local law
enforcement authorities.
Senator Schumer. Who was first?
Comptroller Hawke. We brought it together.
Senator Sarbanes. That is not my understanding.
Chairman Shelby. Let Mr. Cooper answer that.
Mr. Cooper. It is my understanding that the local district
attorney there in California began investigating it and later
was joined by the California Attorney General and the OCC, and
that it was a team effort because they all----
Chairman Shelby. But it was initiated locally or State.
Mr. Cooper. That is correct.
Comptroller Hawke. It was a team effort, but we got a
nationwide remedy, and what they got was a local remedy.
Senator Schumer. Well, but----
Comptroller Hawke. Senator Schumer, if I may----
Senator Schumer. Please.
Comptroller Hawke. --take off on your point about the
national scope of financial services. In a State like
Massachusetts, for example, 75 percent of the mortgages
originated in that State are originated in offices of banks
that are headquartered out of State. When we find problems in a
local office of a bank like that, we can get a centralized
remedy against that institution that covers their operations
nationwide, and that is something that nobody else can do.
Senator Schumer. But, sir, without your preemption, you
could do the same thing. You could have done just what you did
with Providian. As the local began to look at it, you could
then join them. In fact, I would argue, if I were the San
Francisco or if someone, Mr. X, were the San Francisco D.A.,
after this ruling, he would say, Look, I think this is
horrible, but there is nothing I can do about it other than go
knock at the door of the friendly OCC and hope that they will
listen to me.
Comptroller Hawke. The State's action in Providian was
against the holding company. Our action was against the bank.
Senator Schumer. I understand, but----
Comptroller Hawke. And we joined together very effectively
to get a----
Senator Schumer. Can I just ask, it may have been asked,
why did you rush this thing through and not wait for hearings?
Comptroller Hawke. Senator, we had had an extensive
rulemaking proceeding on this. We believed that the legal
precedents were absolutely clear. We were facing great
uncertainty in the marketplace. The States were increasingly
adopting laws that they attempted to apply to national banks.
There was an increasing amount of litigation. We have had 4
dozen lawsuits.
Senator Schumer. But would it not have made sense, sir,
since we have somewhat of a different experience than you, just
because we see different parts of the world, that before you
did this, you came, you heard our viewpoints, maybe you would
have passed a better rule? There is a feeling, I guess I have
it, and I do not think I am alone here, that there was a rush
to almost avoid us looking at this, making suggestions, et
cetera, that you better get this done before the heat continues
to build.
And as I said, for a man of your distinguished record, I do
not think you served your institution well by doing this, even
if some change might have been warranted.
Chairman Shelby. Thank you.
Comptroller Hawke, you are not here every day. I am going
to move on to something outside the parameters of the scope of
this hearing and just as important.
Comptroller Hawke. I will be back in 2 weeks, Mr. Chairman.
Chairman Shelby. This has to do with the Bank Secrecy Act
compliance. The public has been reading about the failure of
Riggs Bank to comply with the Bank Secrecy Act, especially in
the area of failure to file Suspicious Activity Reports, called
SAR's. You are aware of all of this.
We are aware of the July 16, 2003 consent order issued by
agreement between your office, the Office of Comptroller of the
Currency, and Riggs Bank. The order required Riggs to
significantly improve and upgrade its compliance, internal
controls, and audit functions concerning Riggs' duties under
the Bank Secrecy Act, within 60, 90, and 100 days,
respectively.
Can you provide the Committee a brief overview of how the
issue of BSA--Bank Secrecy Act--compliance is handled by our
examiners. Specifically, do the examiners look at a general
program, a list of activities or programs the bank engages in?
Do the examiners ever look at individual transactions to gauge
a bank's compliance with the Bank Secrecy Act?
Has Riggs met the deadlines established in the order that I
referred to just a minute ago? Are you satisfied with their
progress as the Comptroller of the Currency to date? And given
the emphasis--I know this is a lot, but this is important--on
the SAR's, the Suspicious Activity Reports, as a tool that
would allow bank examiners, your bank examiners and others in
the Government, to gauge whether the integrity of the banking
system is being exploited by criminals and terrorists?
Is the OCC adequately resourced, trained, and staffed to
examine the banks, under your jurisdiction, to fully inspect
their compliance with the Bank Secrecy Act? And you have
recently named, I believe, is it Mark Levonin--is that his
name? L-e-v-o-n-i-n--as the Deputy Comptroller for Modeling and
Analysis, a new position. Do you see his duties as including a
quantitative analysis of the risk created within the banking
community for failure to comply with the Bank Secrecy Act
requirements?
To better explain, will this gentleman, with his new post,
create models which will allow the Office of Comptroller of the
Currency--your office--and others within the Government to
focus limited resources by using models to identify banks which
are most at risk to be used for illicit purposes, including
criminal activity and especially terrorism? You are very
familiar with this order, I know.
Comptroller Hawke. If we may, Mr. Chairman, submit a
response to those questions in writing, I would be pleased to
do that.
Chairman Shelby. Will you do this, and will you do it soon?
Comptroller Hawke. Yes, sir.
Chairman Shelby. Because this is a current object of
concern to not only this Committee, as the Banking Committee of
jurisdiction over this, but what people are reading and hearing
and we know has been going on.
Comptroller Hawke. We will turn right to that.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you, Mr. Chairman.
I know we have another panel, and we need to move along,
but, Comptroller Hawke, where does your budget come from?
Comptroller Hawke. It comes principally from assessments
that we levy on national banks.
Senator Sarbanes. So the more national banks there, and the
larger they are, the more potential you have for a bigger
budget; is that right?
Comptroller Hawke. Our assessments are based on assets, and
there is a sliding scale of assets, so there is a relationship
between the volume of assets we supervise and our assessment
revenue.
Senator Sarbanes. When the OTS did its preemption ruling,
did some financial institution subsequently shift their
charters into charters that brought them under the jurisdiction
of the OTS instead of State or Federal banking authorities?
Comptroller Hawke. Conversions occur quite frequently,
Senator. I cannot pinpoint whether a conversion of a national
bank to a thrift or vice versa occurred in particular
relationship to an OTS regulation.
Senator Sarbanes. Well, you have been concerned about your
budgetary situation. I believe I think I can remember you
testifying at the table on previous occasions that you were not
getting the same number of institutions of the same size and
that that was creating budgetary problems for you.
Comptroller Hawke. Not at all, Senator. Our budget has been
in extremely good shape during all of the years that I have
been Comptroller. It has been well-balanced. We do not spend
everything that we get. We have created a significant
contingency reserve.
What I had addressed this Committee about before was the
enormous inequity that exists between State and national banks
because the Federal Reserve and the FDIC, in effect, provide a
billion dollars a year in subsidy to State banks by absorbing
the cost of their supervision. National banks pay the full cost
of their supervision. State banks pay about 20 percent of the
cost of their supervision, and I think that is an inequity that
should be addressed. That is one of the principal recruiting
devices that the States use in trying to persuade national
banks to convert to a State charter.
Senator Sarbanes. The Wall Street Journal has an article in
which they say, speaking about you, ``Still, he does not
apologize for using the OCC's power to override State and local
laws
designed to protect consumers. Enjoying this aid provides an
incentive banks to sign up with the OCC. He says it is one of
the advantages of a national charter, `and I am not the least
bit ashamed to promote it.' '' Actually, they put that part of
it in quotation marks.
Comptroller Hawke. Yes. There is no question, Senator, that
preemption is an important attribute of the national bank
charter, and I am a strong believer in the quality of the
national bank charter.
Senator Sarbanes. Now, you seem to be getting some pretty
quick results. I gather that on March 22, HSBC announced that
it was going to apply for a national shift from a New York
charter, but to a national charter; is that correct?
Comptroller Hawke. Yes. HSBC is a very sophisticated
organization that knows all of the rules. Their decision on
charter choice is something that takes a lot of factors into
account. I should point out that HSBC was a national bank until
about 10 years ago, and 5 years ago they acquired a large
national bank in New York. They know what the value of the
national bank charter is, and they have made a decision, on
their own, based on a variety of corporate considerations.
Senator Sarbanes. Mr. Chairman, I am going to quote from it
a little bit, and then I would like to include in the record--
--
Chairman Shelby. Without objection.
Senator Sarbanes. --a statement put out by the Conference
of State Bank of Supervisors with respect to this HSBC
announcement that they were filing an application with the
Office of the Comptroller of the Currency to convert its U.S.
bank operations from its New York charter to a national
charter. Thereby, highlighting the State's serious concerns
about recent sweeping preemptions from the OCC for national
banks and their subsidiaries.
They all go on to say:
We are encouraged that HSBC has indicated that it intends
to maintain Household, HFC, as a State-licensed affiliate, in
compliance with State laws and the historic settlement with
State attorneys general and banking departments.
And we know something around here about the practices of
Household that led to those.
However, the loopholes created by the OCC's recent
regulations preempting State consumer protection licensing and
enforcement laws, unfortunately, create incentives to do
otherwise.
In January, the OCC unilaterally preempted State laws
regulating the operating subsidiaries of national banks. That
action has created opportunities for financial institutions to
escape State supervision and State enforcement while
effectively operating outside of the national bank.
If the OCC's regulations stand and HSBC were to convert
Household to an operating subsidiary, they could shield
Household from enforcement of the agreement it reached with the
States. This change in structure would require not much more
than a move on HSBC's organizational chart. Household would
still be a State-chartered corporate entity, but the State's
authority would be voided.
While the OCC's regulations may seem esoteric, the
consequences are very real for American consumers.
And I want to inject my own comment at this point here. You
said earlier, when we were having a discussion, well, these are
lawyers' issues you said, when we were arguing about the
preemption. They are people's issues. You might characterize
them as lawyers' issues, and they may get resolved in a
judicial proceeding, but the impact of them are on people,
real, live people, many of whom are exploited and taken
advantage of.
This statement goes on to say,
According to the OCC, the States no longer have the
authority to investigate or enter into enforcement agreements
with an entity like Household if it is a national bank or a
State-chartered operating subsidiary of a national bank.
This makes no sense to the American public. State financial
regulators and attorneys general have been at the forefront of
pursuing predatory lending and a host of other consumer abuses.
We believe the local accountability must be a part of our
Nation's new and rapidly evolving system of nationwide
financial services. As an organization, the Conference of State
Bank Supervisors is committed to a system of financial
regulation that is responsive to consumers at the State level,
while also evolving to provide a rational environment for all
financial institutions, large and small, to operate.
That seems to me to be a good, common-sense statement, and
I think it, in part, explains why there is so much concern
about the actions you have taken.
Thank you.
Comptroller Hawke. Let me just say, on Household, we are
not contemplating doing anything that would change the
applicability of the settlement agreement. The Household entity
that is the subject of that agreement is a holding company
subsidiary and not part of the bank.
And on this issue, Senator, of operating subsidiaries, I
want to point out again that the only activities that operating
subsidiaries can engage in are those that are permissible for
the parent bank. All of these activities could just as readily
be carried on in the parent bank and, if they were, there would
be no question at all about the inapplicability of State law or
the inapplicability of State law enforcement jurisdiction.
Senator Sarbanes. Why do you think they use the operating
subsidiaries?
Comptroller Hawke. There are a whole host of reasons,
Senator, why institutions use the operating subsidiary.
Sometimes it is an accident of the way the company happened to
get into the business. Sometimes they use it for the
establishment of different compensation plans within the
organization. There are a whole variety of reasons why they do
it.
Chairman Shelby. Thank you. I thank all of you gentlemen.
We have another panel here, and I want to thank them for the
indulgence. Thank you very much.
Chairman Shelby. Our second panel will be Mr. Martin Eakes,
Chief Executive Officer, Center for Responsible Lending; Mr.
Joe Belew, President, Consumer Bankers Association; Mr. Walt
McDonald, President, National Association of
Realtors'; Mr. William M. Isaac, Chairman, The
Secura Group; Mr. Art Wilmarth, Professor of Law, George
Washington University Law Center; Mr. James McLaughlin,
Director, Regulatory and Trust Affairs, American Bankers
Association.
Gentlemen, if you will all take your seats at the table.
Your written testimony will be made part of the record of the
Banking Committee in its entirety, and I would ask that you
briefly sum up your remarks.
Mr. Eakes, we will start with you, if we could. Thank you,
sir.
STATEMENT OF MARTIN EAKES
CHIEF EXECUTIVE OFFICER
CENTER FOR RESPONSIBLE LENDING
Mr. Eakes. Good afternoon. Chairman Shelby, Ranking Member
Sarbanes, and Members of the Committee, thank you for holding
this important hearing.
Senator Sarbanes. I think if you pull that microphone
closer to you, it would be helpful.
Mr. Eakes. I am the CEO of Self-Help, a community
development lender based on North Carolina. With $1 billion of
assets, we are the largest single nonprofit community
development lending organization in the country, which makes us
about the size of one Bank of America branch, for perspective.
Self-Help is a lender. We are one of the oldest subprime
lenders in the country. In 1984, we started making loans to
credit-impaired, minority, single parents. Now, 20 years later,
we have provided financing of $3 billion to 37,000 families in
47 States. We have had very few defaults. If a subprime lender
has a high number of defaults or foreclosures, they are doing
something wrong.
I am also CEO of an organization called the Center for
Responsible Lending, a national organization with a staff of 40
lawyers and business analysts that are dedicated to trying to
stop predatory lending nationwide. It is nonpartisan, research,
legal focused. I and my staff helped craft the North Carolina
bill, and we have worked in many of the States that have passed
predatory lending bills modeled on the North Carolina bill.
I am not going to say too much about North Carolina unless
you ask questions, since my friend, Roy Cooper, was here
earlier. What I would like to jump to is to respond to some of
the comments that were made in the earlier panel.
The first is the statement by Comptroller Hawke that he has
no evidence of national banks being involved in predatory
lending. I have to say that for that statement to hold, it
means the OCC has to have covered its eyes and closed its ears
because it has been hearing a ton from people for at least the
last 5 years. Let me give you examples.
The first was Equicredit, which was a subprime lending
organization as an operating subsidiary of Barnett Bank. Bank
of America, which is one of my favorite banks, we have some of
the greatest banks in the world based in North Carolina, and I
have worked with every single one of them. Barnett Bank had
this subsidiary that turned out to be one of the worst
predatory lenders in the country, second only to the Associates
First Capital. When Bank of America--Nations Bank at that
time--took it over, they inherited this company that had all
kinds of problems, had the largest number of foreclosures in
Chicago and New York City of any lender. Not once, never, did
the OCC intervene to get restitution for--I am not talking
about hundreds of borrowers here. I am talking about tens of
thousands.
Second, First Union, which owned the Money Story--and,
again, to its credit, shut it down, as Bank of America did
Equicredit--documented abuses in almost every State where the
Money Store operated.
Third, Guaranty National Bank of Tallahassee, as you have
heard, was doing thousands of predatory second mortgages and
renting its charter to other lenders in North Carolina and
other States. The OCC never once provided restitution to any of
these borrowers. It took private enforcement and attorneys
general. These were all national banks.
First Horizon in New York, which basically decided that it
would not cancel a loan even after the loan date, had come and
gone. The person had been paying by automatic debit.
Mr. Hawke's statement that, if you tell us, we can, with
just a glance, get a resolution I think is really disingenuous.
For every set of abuses you have, you only have one out of 200
people who has the savvy and the fortitude to stand up and be
the champion to fight an abuse. If you solve it for just that
one person and you ignore it for the other 199, you have not
solve the problem at all.
Finally, Wells Fargo. I have personally petitioned and
provided information. Wells Fargo has become one of the most
abusive lenders in the country. The OCC's response to me when I
requested a hearing, it reminds me of some of the comments we
have just had. I actually got a written response back from the
OCC that said, ``We have received written comments. We see no
reason to have any kind of hearing. The hearing won't add any
additional substance.''
On that point, I can tell you with 100 percent certainty
that they are wrong. Until you have, as I have, met with
hundreds if not thousands of people who break down and cry in
front of you because they no longer have a home because of
these abuses, you do not understand the problem of predatory
lending.
What I really want to say is that the OCC is simply not
capable of being an honest broker in the area of abusive loans.
It is a structural problem. First, they have a financial
conflict of interest. We have heard that. Bank of America pays
$40 million of fees each year, thereabouts, to the OCC. How
easy would it be for the OCC to say we are going to really
clamp down on you?
Now, Bank of America is a good bank. They do not have any
problems. Let us just stipulate that. But if they did, if they
inherited it, how easy would it be to say we are going to cut
10 percent of your budget at the OCC by having this one bank
leave? We have had estimates that the top 10 banks represent 30
to 40 percent of the total operating budget of the OCC.
Comptroller Hawke has made personal appeals to AmSouth,
banks in Alabama. BB&T has half of the State banking assets for
State banks in North Carolina. If they were recruited to become
a national bank, the supervision in North Carolina would be
significantly hurt.
The second reason that they are structurally unable to work
in this arena is that their interest is almost exclusively
safety and soundness. It trumps all other concerns. Even in its
website and its consumer pamphlets, it states: The OCC does not
have a mandate to engage in consumer advocacy, but is
responsible for ensuring the safety and soundness of the
national banking system.
Number three, the OCC operates in secret. Essentially
because they believe that having public debate about a bank's
problems could create a safety and soundness problem, they do
not believe that anything should be aired. In normal law
enforcement, you would think that having public enforcement is
very critical to providing deterrence to other bad actors. So
unlike HUD, the Treasury, the Federal Reserve, the GSE's, and
Congress, the OCC has never held a hearing on predatory lending
concerns whatsoever, ever. Even when the Associates was being
purchased by Citibank, it was viewed by the advocate community,
by the lending community as the most notorious predatory
lending acquisition in history, the OCC said, well, we just do
not have the authority, even though they are three little banks
connected with Associates, we do not have the authority.
Next, when Wells Fargo said we are going to combine all of
the 20 different bank charters we have into a single bank, with
some newspaper reporting that the reason for that was they did
not want to have any privacy concerns if there was information
shared among those 20 banks, we requested a hearing of the OCC
and we documented the Wells Fargo abusive lending, and the
response was, well, we are not going to have a hearing either.
Clearly within their power.
My problem is not whether the OCC could have the ability to
take on the mantle of consumer protection. Mine is from the
real world, down in the trenches with lots of borrowers to tell
you that the OCC simply does not have the will or the backbone
to stand up and solve these problems.
My fourth reason: The OCC never requires restitution. It is
one thing to find a problem after it is already done, after
people have already lost their homes. In the mortgage lending
arena, with all the publicity of predatory lending that we have
had over the years, the OCC, to my knowledge, has one
enforcement action ever of 30 borrowers for $1 million in the
mortgage lending arena. That is pathetic.
Finally, the fifth reason, the OCC simply does not
understand predatory mortgage lending. They just do not
understand it. The OCC defines predatory lending as collateral-
based, asset-based lending. I have to tell you, that is not the
problem. Maybe that is 2 percent of the problem, maybe 3
percent, and that definition would be great if it really was
the heart of the matter. But it is not. The problem of program
is a focus on individual homeowners and the effort to strip the
value of those homes away from them--not to take the home. In
fact, it is this hateful case of musical chairs. The lenders
want to have as much equity stripped but not be the last lender
that actually ends up foreclosing. The actual foreclosing
lender will lose $20,000 or $30,000, so no one wants to be
that. They want to calculate: Can I be the next to the last
lender that strips away the equity?
The OCC, in publishing its rules, had to trash all of the
State predatory lending bills, including North Carolina,
reflections on New Jersey and others, all of which I have been
involved in.
I have been as provocative as I can be over the last 5
years saying that any lender who finds a single borrower who
cannot get credit in North Carolina, bring them to me and I
will make the loan. Guess how many borrowers I have had
presented? I have said it in every forum. I have spoken
probably a thousand times on the topic. Never, not a one. They
say, well, that is not fair for you to ask. I said, well, that
is what was asked of me when we started the North Carolina
predatory lending bill. Show me the abuses. Show me that it is
not just an anecdotal, case-by-case, one time. And I showed
dozens first, and then hundreds, and eventually thousands.
So all I am saying is show me one, give me one. There are
none. Our bank commissioner says he gets 1,000 complaints. Not
a single complaint from a borrower who could not get a loan. It
is just absolute, outright disinformation. And the OCC has
played a role in that. They had a working paper which stated,
just cavalierly, that all of these laws are eliminating access
to credit for poor people. There is no evidence of that. Their
working paper never even looked at the fees piece of the
problem. They were simply saying, well, the interest rate may
correlate with risk. The problem is that up-front fees, back-
end prepayment penalty fees, single-premium credit insurance,
all these things that are loaded into a loan so that a borrower
who does not understand loses their cash value equity.
The example I give is an elderly grandmother who has
$50,000 of cash, provides multiple ways for someone to con her
out of her $50,000. There are a thousand different ways. But if
that same person has $50,000 of equity in a house, there is
only one way, and that is to refinance the loan and add fees
into the value that essentially eliminate--you want me to wrap
it up? Is that what you are saying?
In conclusion, I could talk about the legal issues, but it
is really more a moral issue and wisdom issue that I want to
present to you. I believe that Congress should intervene to
overturn these rules. It will do great harm. In North Carolina,
we had the banks come together with the credit unions, which
never happens on any topic. And they come together to request a
law that would govern all of them, the banks, large and small,
State and Federal, credit unions, asking because we want to
stop the scourge in our State and the damage to our own
reputations, we are willing to have a law that applies to every
one of us. When do you remember industry coming in jointly to
ask for a law and to have one distant Federal bureaucrat say we
are going to wipe that out with the strike of a pen?
I have to tell you, I did not choose to get into this work.
I chose to help people build wealth through homeownership. To
have him wipe that away is really infuriating to me.
Thank you.
Chairman Shelby. Mr. Belew.
STATEMENT OF JOE BELEW
PRESIDENT, CONSUMER BANKERS ASSOCIATION
Mr. Belew. Good afternoon, Mr. Chairman, Members of the
Committee, Senator Sarbanes. My name is Joe Belew. I am
President of the Consumer Bankers Association, and we very much
appreciate the chance to give voice to our views on these
issues. I will try to keep my remarks brief.
As I have made clear in my written testimony, the CBA very
strongly supports the OCC's recent rulemaking efforts to
clarify the extent of its authority over national banks and
their operating subsidiaries. These actions are in keeping with
the letter and the spirit of the National Bank Act as
interpreted by over a century of court opinions. They were only
finalized after an extensive notice and comment period that
generated over 2,600 comments.
The proposals were issued against a backdrop of stringent
OCC examinations and a broad sweep of consumer protection, as
well as safety and soundness laws. We call the Committee's
attention to the list we have provided of all these Federal
statutes. They cover virtually every imaginable area of
consumer protection.
OCC enforcement is effective, in our view, because the
agency employs nearly 1,700 examiners to ensure compliance and
safe and sound operations. Many CBA members house some of the
300 or so on-site examiners who are engaged in continuous--24/7
almost--supervision of the largest banks.
Furthermore, the OCC has been forceful in enforcement of
these laws, when necessary. The Agency wants national banks to
remain the gold standard in their dealings with the public and
to take swift action in the rare instances when it discovers
wrongdoing. This tough approach by the OCC is not new. For
instance, as far back as June 2000, OCC Counsel Julie Williams
put the industry on notice at a CBA conference that the Agency
would use all its powers to anticipate and address any
predatory lending concerns, one reason such problems do not
usually show up in national banks. Another reason is that our
members, predominantly national banks, are also going well
beyond the requirements of the law to promote financial
literacy programs that will help shield consumers, and these
help customers of other institutions and other companies.
For the fourth year, we are surveying our member banks to
determine the extent of their involvement in financial literacy
efforts as a measure of their sense of responsibility to the
communities and the markets they serve. The last survey showed
that 98 percent of our respondents sponsor financial literacy
programs or partner with others on financial education
initiatives. The preliminary results of the current survey show
that the involvement of banks in the financial education of
homebuyers, students, the elderly, and small business
continues. We will be pleased to share the results when they
appear.
Financial literacy efforts are important, but they are not
enough. It is widely acknowledged that national banks are not
the main point of the problem. The OCC still is vigilant in its
oversight. The old expression holds true: ``An ounce of
prevention is worth a pound of cure.'' And that is why the
Agency's extensive examination and oversight, coupled with
swift enforcement when needed, lead us to support the OCC's
rules as sound public policy.
I must say, departing from my text, that the bankers that I
talk to do not share a view that the OCC is somehow lax and
asleep at the wheel.
To be sure, there is another reason for our support, to be
candid, and that is, the banks' need for predictability and
uniformity across their operations. CBA's members, generally
the country's larger financial institutions, typically operate
in multiple States. Some are in over half the States of the
Union. Many operate literally thousands of branches and have
millions of customers, many of whom relocate and maintain their
old principal banking relationship in their new State.
Increasingly, in recent years, national banks have been
facing the intrusion of State and local laws on their federally
created powers. These actions created the need for greater
clarity and predictability for the banks and their subs
operating in multiple jurisdictions nationwide under the
uniform guidance of the OCC. And these regulations help provide
that guidance and that clarity.
In summary, we support the OCC rules as being firmly
grounded in historical precedent and Congressional law, and we
welcome the clarity they provide for national bank operations.
We thank you again for the opportunity to be with you.
Chairman Shelby. Mr. McDonald.
STATEMENT OF WALTER T. McDONALD
PRESIDENT, NATIONAL ASSOCIATION OF REALTORS'
Mr. McDonald. Chairman Shelby, Senator Sarbanes and,
Members of the Committee, thank you very much for holding this
hearing and for inviting us here today to share the views of
the National Association of Realtors. My name is Walt McDonald,
and I am broker-owner of Walt McDonald Real Estate, a single-
office, independent firm in Riverside, California, specializing
in property sales, leasing, and lending. I have been a Realtor
for 40 years, and as President of the National Association of
Realtors, I represent over 1 million Realtors--Realtors who are
involved in all aspects of the residential and commercial real
estate industry.
NAR's members operate real estate brokerage, leasing,
management companies, and many own affiliated businesses such
as title agencies and mortgage lending companies. NAR members
represent roughly 80 percent of consumers who buy and sell
homes in America.
Let me be clear at the outset. The OCC preemption rule
favors big business at the expense of the American consumer. It
is bad for consumers, it is bad for small business, and it is
bad for Realtors.
But do not take just our word for it. There are many
others--and you have heard from a lot of them today--who oppose
this rule and the improper overstepping of the OCC, including
all 50 State attorneys general, all 50 State banking
supervisors, all 50 Governors, the National Conference of State
Legislators, State real estate commissioners, AARP, Consumer
Federation of America, to name just a few.
This rule is the latest in a series of Federal regulators'
decisions that give special treatment to big corporations
without considering the potential negative impact on consumers.
The rule is helping to create an industry that is dominated by
a few large mega-banks, leaving consumers with fewer choices
and higher fees. And it sends a clear message to consumers that
the Federal Government cares more about corporate America than
about American consumers.
What is more, this rule and its tremendous potential impact
has been made without input from Congress. NAR believes that
policy decisions having such a profound effect on a whole
industry, on States rights, and on consumers should only be
made by elected officials in Congress, and that is why we are
here today urging the Members of this Committee and the entire
Congress to reassert its authority in this area and to rein in
the regulatory authorities and to repeal the action of the OCC.
As recently as last week at the House Financial Services
Committee oversight hearing on the OCC, Comptroller Hawke
insisted that real estate brokerage is not affected by this
rule. While its response is consistent with the correspondence
between OCC and NAR's offices, it fails to recognize the
immediate anticompetitive effect that this rule has on our
members who own affiliated lending operations.
Realtors will continue to be subject to all State laws,
licensing, and registration requirements. These rules protect
consumers, and they are good for our business, and we are happy
to comply with them. Unfortunately, though, under the OCC
preemption rule, national banks and their operating
subsidiaries no longer will need to abide by these same rules
and these same laws. It is simply not fair that the local
mortgage company will be required to pay various fees to the
State and comply with numerous State regulations, while the
local branch for the mega-bank next door will be exempt from
those same rules and laws.
At a time when the mega-banks are becoming even larger and
more profitable, why does the OCC think that it is necessary to
remove State oversight and State regulation? State laws,
regulations, and consumer protections have not kept big banks
from enjoying the largest profit margin that they have earned
in decades. If the current regulatory system is not broken, why
does the OCC need to fix it?
Moreover, this rule has other potential negative
consequences for both consumers and the real estate industry.
Before February 12, mortgage brokers in my home State of
California had to be licensed. Now if they work for a national
bank or its operating subsidiary, mortgage brokers will not
need that license. But there is no comparable Federal mortgage
broker license or regulation, and neither the State law
enforcement nor real estate officials can investigate or
regulate those mortgage brokers.
NAR is disappointed that Comptroller Hawke once again is
unwilling to acknowledge that his new rule clearly and
unmistakably declares that any State law that obstructs,
impairs, or conditions a national bank's ability to fully
exercise its powers to conduct active business is preempted.
The impact of the new rule goes well beyond the type of laws
that are listed in this rule. The Comptroller's rule gives
national banks wide latitude to simply ignore any State law
that they conclude conditions their activities.
It is difficult to imagine any State law that would not in
some way condition banking. It is this open-ended nature of the
rule that gives Realtors so much concern. Perhaps--and I think
the question was asked earlier, but perhaps this Committee can
point to the condition language of the rule and ask the
question of Mr. Hawke as to his view of the breadth of that
term of the language. No one else has been able to gain any
specific definition from OCC.
NAR is concerned that the Comptroller's new rule is yet
another link in the chain that will lead to national banks
engaging in activities beyond their current activities, such as
real estate brokerage, while remaining unconstrained by State
consumer protection safeguards and licensing requirements. It
is clear to NAR that the expansion of national bank activities
at the expense of State consumer protections is bad for
consumers, it is bad for the community-based businesses that
serve them best, and NAR is firmly committed to ensuring that
Congress carefully scrutinizes the implications of the
Comptroller's actions and takes the appropriate legislative
action to ensure that only Congress make such profound policy
decisions.
I thank you again for the opportunity to be here today, and
I look forward to any questions you might have.
Chairman Shelby. Mr. Isaac.
STATEMENT OF WILLIAM M. ISAAC
CHAIRMAN, THE SECURA GROUP
Mr. Isaac. Thank you, Mr. Chairman, Members of the
Committee. It is my pleasure to be here. I am Bill Isaac,
Chairman of the Secura Group, and prior to founding Secura in
1986, I served for 8 years on the Board of the FDIC, including
5 years as Chairman during the banking crisis of the 1980's. My
entire career has been spent in the financial services industry
in one capacity or another, including a number of years as an
attorney specializing in banking law.
I must say I am confused by the uproar over the
Comptroller's regulations because the Comptroller says that he
is attempting to codify, not change existing law, and I could
not agree more. When I went into the banking law practice in
1969, that was the law of the land. I was representing national
banks and State banks, and everyone understood that national
banks were governed by the Comptroller of the Currency with
respect to their activities, their deposit and loan-taking
activities, and that the States had no authority over them. And
then I became general counsel of a bank, and I still understood
that. And then I became Chairman of the FDIC and I still
understood that. And so I do not understand how anybody thinks
that the Comptroller of the Currency has done anything to
change existing law. He simply is putting it down in one easy
place for everybody to see and make their judgments about it.
If he is acting illegally, I presume the courts will overturn
him. But I do not think we would be having these hearings today
if the attorneys general really thought that he was going to
get overturned. I think they believe that what he the
Comptroller has done is perfectly legal under existing law.
They do not like existing law, and they would like the Congress
to change it. And so that is why we are having these hearings.
The Conference of State Bank Supervisors and the attorneys
general have been claiming that the Comptroller is forging new
ground and, if his actions are upheld, it is going to undermine
the dual or State-Federal, banking system and will injure
consumers. My personal view is that nothing could be further
from the truth. I believe the Comptroller's preemption
regulations are proconsumer. They are very much in the interest
of all banks, State and national chartered. The Comptroller's
rules are essential to the preservation of our dual banking
system because if the States are allowed to regulate national
banks, we will not have a national banking system anymore.
The Comptroller's rules are fully in accord with 140 years
of statutory and case law, including decisions by the U.S.
Supreme Court, and are quite similar to the Federal preemption
rules governing federally chartered thrift and credit unions,
which do not seem to be in dispute at all. I am not sure why we
are singling out banks and not talking about credit unions and
thrifts, if we are going to talk about this issue.
The larger national banks do business throughout the
Nation, and they cannot operate effectively and efficiently if
they must tailor their products to the laws of 50 States and
who knows how many local jurisdictions. As I have sat through
the hearing today I have noticed that this issue is not
discussed at all. How are these banks going to operate if they
have to comply with every law that every city council decides
they want to impose on a bank?
We had an example a few years ago in Santa Monica, when
Santa Monica's City Council decided to regulate ATM fees
different than anybody else in California or the Nation was
doing. The large banks said to their customers in Santa Monica,
``you cannot do business in our ATM machines until this gets
straightened out.'' I do not believe this was a proconsumer
move on the part of Santa Monica. Ultimately, the courts
overturned the Santa Monica City Council and said it could not
interfere with the national banks' ATM charges.
Inefficient regulation takes an even higher toll on
regional or community banks that serve customers across
jurisdictional lines, whether they are county, State, or city
lines. The smaller the bank, the smaller the base of customers
over which to apply the extra compliance, legal, technology,
and paperwork expenses caused by multiple regulatory schemes.
Those who care about the vitality of our Nation's regional and
community banks should not overlook the impact of this issue.
The contention of the various State attorneys general and
bank commissioners that they are more effective than the
Comptroller of the Currency in enforcing their laws, their
consumer protection measures, strains credulity. The
Comptroller has nearly 2,000 supervisory personnel dealing with
national banks each day. Those personnel have enormous legal
authority and even greater moral suasion with respect to
national banks. While an attorney general is huffing and
puffing and threatening to go to court against a bank without
much effect, all it takes is a frown from the Comptroller of
the Currency to bring a national bank into line. This is
particularly true of the larger banks, which simply have no
choice but to be on the good side of the Comptroller's office.
I worked closely with State regulators throughout the
country when I served as Chairman of the FDIC. Indeed, the FDIC
shared oversight with the States of some 8,000 State banks. I
know of no State banking department that is better equipped
than the Comptroller of the Currency to supervise banks for
either compliance or safety and soundness purposes.
I want to make one last point, because I am a little bit
over my time. Many if not most of the State banking
departments, when I was Chairman of the FDIC, were chronically
short of financial and personnel resources and relied heavily
on the FDIC to assist in the supervision of their banks and in
the training of their personnel. To my knowledge, they still
rely on the FDIC heavily for both.
I find it somewhat difficult to imagine how or where the
State banking departments could possibly find the resources to
take on the additional duties of overseeing national banks
within their borders. Indeed, the chart shown in my written
testimony reveals that the Comptroller of the Currency has
nearly one examiner for every bank under its supervision, while
the State banking departments have one examiner for every 48
institutions under their supervision. It is kind of like the
dog chasing the car. I do not know what they are going to do
when they catch it. I hope they do not.
Thank you.
Chairman Shelby. Mr. Wilmarth.
STATEMENT OF ARTHUR E. WILMARTH, JR.
PROFESSOR OF LAW
GEORGE WASHINGTON UNIVERSITY LAW SCHOOL
Mr. Wilmarth. Thank you, Chairman Shelby, Senator Sarbanes,
and Members of the Committee. I appreciate this opportunity to
appear before you to discuss my concerns regarding these two
regulations that the OCC has issued. The scope of the OCC's
regulations is really not in dispute. As Comptroller Hawke has
said, the new preemption regulations effectively bar the
application of all State laws to national banks except in areas
where Congress has incorporated State-law standards into a
Federal statute or where the OCC deems that State laws have
only a ``incidental'' effect on national banks. In describing
what the term ``incidental'' means, the OCC has said that a
State law is incidental only if it is part of the ``legal
infrastructure'' that makes it practicable for national banks
to conduct their federally authorized activities. According to
the OCC, a State law may not regulate the manner or content of
the business of banking authorized for national banks.
So, in other words, State laws apply to national banks only
if the OCC finds that they promote the ability of national
banks to do business. And, of course, as you have heard, the
OCC's preemption rule applies not only to national banks
themselves, but also to their State-chartered operating
subsidiaries.
Comptroller Hawke has also said that the OCC's preemption
and visitorial powers rules are deliberately designed to
provide the same field preemption regime to national banks that
the OTS has established for Federal savings associations and
their operating subsidiaries.
The OCC's new regulation on visitorial powers prohibits any
attempt by State officials to sue in Federal or State courts to
compel national banks or their operating subsidiaries to comply
with State laws. As further explained in OCC Advisory Letter
2002-9, the OCC exercises sole and unfettered discretion to
decide whether any particular State law is applicable to a
national bank, and even if it is applicable, whether that law
should be enforced. The States have no role to play beyond
simply providing a referral of information to the OCC.
Unless the OCC's new rules are overturned by Congress or
the courts, I believe the rules will destroy the competitive
balance between State and national banks that Congress has long
maintained within the dual banking system. The dual banking
system simply cannot survive unless there is a basic parity of
competitive opportunities between State and national banks.
In addition, the OCC rules regarding operating subsidiaries
will seriously impair the States' authority to regulate State-
chartered corporations and also to protect consumers from
illegal, fraudulent, and unfair financial practices.
There are several reasons why, in my opinion, the OCC does
not have authority to adopt its new rules.
First, the OCC's attempt to create a regime of de facto
field preemption is contrary, in my view, to a long line of
decisions issued by the U.S. Supreme Court. For example, the
U.S. Supreme Court said in Atherton v. FDIC, in 1997, that
``federally chartered banks are subject to State law.'' And as
you have heard, the 1996 Supreme Court's decision in Barnett
Bank said that State laws apply to national banks unless they
``prevent or significantly interfere with'' the ability of
national banks to exercise their Congressionally authorized
powers. Congress specifically endorsed the Barrett Bank
particular standard as part of the Gramm-Leach-Bliley Act.
I would also like to refer to the decision of National Bank
v. Commonwealth in 1870, which is referred to in both Atherton
and Barnett. In that case, the Supreme Court expressly
distinguished McCulloch v. Maryland, which the Comptroller is
fond of quoting. In McCulloch, the Supreme Court found that a
particular State tax was being used to destroy the Second Bank
of the United States. In Commonwealth, the Supreme Court said
that where that is not the case, where the State is not trying
to destroy a national bank, then national banks are ``subject
to the laws of the State, and are governed in their daily
course of business far more by the laws of the State than of
the Nation.''
I would also like to refer to the case of Osborn v. Bank of
United States, an opinion written by Chief Justice John
Marshall, in which he elaborated on his earlier opinion
McCulloch. In Osborn, Chief Justice Marshall explained that it
was very important to understand that the Second Bank of the
United States was the fiscal agent of the U.S. Government. It
was, in practical effect, the central bank and was undertaking
important public functions for the Federal Government.
Chairman Shelby. You are referring to McCulloch v.
Maryland?
Mr. Wilmarth. I am discussing Osborn v. Bank of United
States, which was the next case.
Chairman Shelby. Okay.
Mr. Wilmarth. In Osborn, Chief Justice Marshall was trying
to defend what he had done in McCulloch. And he said that if
the Second Bank of the United States was carrying on the ``mere
business of banking,'' a merely private business, then that
business could be lawfully taxed, regulated, or restrained by
the States, even if it was carried on within a Federal
corporation. The Second Bank's Federal charter did not provide
an immunity from State laws. What gave the Bank its immunity
was the fact that it was carrying on important public
functions.
Today's national banks are not fiscal agents of the U.S.
Government. They do not issue currency. They are not the
funding device they used to be when they bought bonds of the
Federal Government and issued currency based on those bonds.
The Federal Reserve Act of 1913 gave all those functions to the
Federal Reserve Board and the Federal Reserve System.
As the dissenting opinion pointed out in the First
Agricultural National Bank case in 1968--and the majority
opinion did not disagree--today's national banks are entirely
private entities carrying on a private business. So, under
Chief Justice Marshall's analysis in Osborn v. Bank of United
States, they do not have any blanket immunity from State
regulation. They do have an immunity when State laws directly
conflict powers that with you, Congress, have granted to them.
But the OCC's news rules go far beyond that. To paraphrase
Comptroller Hawke, he has said that unless you, the Congress,
declare that State laws apply to national banks, the OCC will
preempt all State laws that impose any condition or impediment
on national banks. That simply is not the standard that the
Supreme Court has articulated in the cases I have discussed,
nor is it the standard that Congress adopted in the Riegle-Neal
Act of 1994 or in the Gramm-Leach-Bliley Act of 1999.
Perhaps if questions permit, I would like to indicate
further reasons why I believe that the OCC simply did not have
authority to adopt these rules. To conclude, in cases like New
York v. FERC, 535 U.S. 1, at page 18, and Ernst & Ernst v.
Hochfelder, 425 U.S. 185, at pages 213 and 214, the Supreme
Court declared that a Federal agency has no power to make law.
It has only the power to carry into effect the authority
granted to it by Congress. And an agency has no power to
preempt State law on its own.
Chairman Shelby. You believe this is an overreach, do you
not?
Mr. Wilmarth. Yes, in my humble opinion, it is by far an
overreach. And I think that is why you are seeing the extent of
opposition and controversy surrounding the OCC's rules. If it
were indeed not a matter of great controversy. I do not think
we would all be here today.
Thank you very much. I appreciate the opportunity to appear
before your Committee.
Chairman Shelby. Thank you, sir.
Mr. McLaughlin.
STATEMENT OF JAMES D. McLAUGHLIN
DIRECTOR, REGULATORY AND TRUST AFFAIRS
AMERICAN BANKERS ASSOCIATION
Mr. McLaughlin. Thank you, Mr. Chairman, Members of the
Committee. I am Jim McLaughlin from the American Bankers
Association. We appreciate your holding this hearing.
ABA strongly supports this rule. I would like to summarize
three key points from my written statement.
First, in creating a national banking system, Congress
explicitly gave to the OCC exclusive powers to regulate
national banks. Congress also gave the Comptroller the
authority to preempt State and local laws that would conflict
with those powers. It was 140 years ago that Congress clearly
gave the OCC the authority that is used in this rule, and
previous Comptrollers have used that power in many instances
over the 140 years.
Furthermore, court after court, including the Supreme Court
many times--and I will engage my associate in that debate if
you would like--has upheld that authority as shown in the list
of cases attached to my testimony.
Despite the controversy, to a very large degree the OCC
rule does not break new ground. The areas covered in the rule
have, in many cases, already been subject to preemption by the
OCC. In the past, these preemptive rules went forward generally
on a case-by-case basis. That approach worked when the State
and local actions that were preempted occurred infrequently.
But recently we have seen a proliferation of State and local
actions. Several have ended upon the courts where preemption
was upheld.
That leads to my second point. This rule is needed to make
it clear to all parties where the line on preemption is. While
most legal experts in this arena know that State and local laws
that impinge on the fundamental activities of national banks
are preempted, State and local officials have often proceeded
despite the virtual certainty that their efforts will be struck
down by the courts. In the meantime, national banks face costly
uncertainty as to how to proceed with the business. Banks, the
OCC, and taxpayers of those State and local governments end up
wasting considerable resources in litigation. This OCC rule
will help to avoid that uncertainty and litigation cost by
bringing together in one place what was, in fact, occurring on
a case-by-case basis.
Third, we are concerned that what many of the opponents of
this rule are advocating would render the dual banking system
virtually meaningless. The areas addressed by the OCC rule--
lending and deposit-taking--are fundamental to the business of
banking. If State and local governments can regulate these most
basic activities of national banks and if States can examine
national banks, what is left of the national system?
Finally, much of the debate over this rule has been in the
context of the need to address the terrible problem of
predatory lending. There are two approaches to predatory
lending that we believe would work well without undermining the
dual banking system. The first involves cooperation between the
OCC and State and local officials. The OCC has indicated its
strong interest in this kind of cooperation.
A second approach, which is not inconsistent with the
first, is the passage of targeted Federal legislation to
address predatory lending. There are a number of areas where
Congress has determined that a Federal approach to a given
consumer protection issue is warranted. As you know, this is
the approach recently taken by Congress with respect to the
Fair Credit Reporting Act. We would be happy to work with your
Committee, Mr. Chairman, should you choose to consider a
national approach to predatory lending.
Finally, if I may, Mr. Chairman, I would like to add a
footnote to my statement. I was very pleased to see the
representative from the National Association of Realtors here
at the panel acknowledge that real estate brokers are, in fact,
competing in financial services with national banks. He
mentioned their mortgage affiliates. He mentioned their title
insurance and other insurance affiliates. We welcome their
competition. But I think that is a subject for another hearing.
[Laughter.]
Chairman Shelby. To Mr. Eakes, if the OCC had not come
forward with these rules, what negative consequences would
there have been for national banks and their customers in their
absence?
Mr. Eakes. Sorry, say it again? If they had not come
forward, I do not think there would be any.
Chairman Shelby. None?
Mr. Eakes. Uniformity of rules is highly overrated.
Chairman Shelby. Mr. Belew.
Mr. Belew. Let me address his last point. Uniformity of
rules is not highly overrated. With the numbers of customers,
as I pointed out, and banks operating subject to at least 20 or
25 State laws, there is quite a lot to be said for national
uniformity among banks, thrifts, and credit unions.
Now, I may not have answered the first part of your
question.
Chairman Shelby. You did all right.
Mr. Belew. Thank you.
Chairman Shelby. Well, I will just ask you: In other words,
if the Comptroller had not come forth with these rules, what
would have happened?
Mr. Belew. Frankly, I think it would have left the
landscape open for vast numbers of class action suits and
litigation. More to the point, it leaves both consumers and the
financial industry at a loss as to what the rules really are,
and we want one set of rules.
Chairman Shelby. What impact will the new rules have on the
development and the enforcement of consumer protection
standards, Mr. Eakes?
Mr. Eakes. Well, my point on uniformity is that democracy
is messy, so is Federalism. If you do not have the
experimentation in eastern North Carolina dealing with mobile
homes to figure out how do you solve that problem, and you just
cut it off and say we are going to have one standard that is a
very weak standard, the problem is that we will never address
and solve the problem that we all abhor.
Chairman Shelby. Mr. McLaughlin, do you want to reply to
that? In other words, what impact will the new rules that the
Comptroller has brought forth have on the development and the
enforcement of consumer protection standards? It would preempt
a lot of the States, would it not?
Mr. McLaughlin. It would preempt some of the State laws,
but at the same time, we have seen consumer protecting
initiatives come from the OCC. This is part and parcel of the
dual banking system. The States charter, the States regulate
and oversee State-chartered banks. The Federal Government
charters, regulates, and oversees national banks. And if you,
as the Congress overseeing the OCC, think that the OCC should
do a better job enforcing consumer protection laws, you have
that power. Similarly, each State legislature has that
authority over the State banking department.
Chairman Shelby. Professor Wilmarth, I asked the previous
panel about the appropriate place to draw the preemption line.
In other words, where do you think the line needs to be drawn?
How do we do it?
Mr. Wilmarth. Well, I think the Barnett Bank decision tried
to give us guidance by saying that, yes, the States may not
prevent or significantly interfere with what you, the Congress,
have authorized for national banks. Certainly the courts have
found it possible to apply that standard and to say: Is this a
State condition that is properly designed to meet a legitimate
State interest and does not represent a significant impairment
or impediment to the national banks' ability to conduct their
federally authorized business? Or is this a very onerous State
restriction that greatly hampers the ability of a national bank
to exercise a particular power?
In Barnett Bank, the State of Florida was trying to
prohibit the exercise of an express national bank power. In the
case of Franklin National Bank v. New York, the State of New
York tried to say that a national bank could not advertise for
savings deposits, could not let it be known to the public that
it was offering savings deposits. That was obviously a
significant impairment on the ability of national banks to do
business. But the OCC's view is that any State condition, any
impediment of any nature will be preempted, which just sweeps
the field clean.
So my own view is that the Barnett Bank standard
establishes the proper guidlines, standard, and there was no
need for the OCC to go beyond that standard. By going beyond
Barnett Bank, particularly in the visitorial powers area, and
by saying that we are now going to prevent the State from
bringing action in court to enforce the law, even against an
operating subsidiary, the OCC is trying to prevent the kind of
State enforcement that has proven to be very effective and very
necessary in the securities scandals, in the mutual fund
scandals, in some of the privacy violations. That State
enforcement simply won't occur anymore.
Chairman Shelby. Are you saying there will not be a remedy?
Mr. Wilmarth. Right. There will be no remedy. Essentially,
as Attorney General Cooper said, the OCC is taking a whole set
of additional law enforcement authorities off the beat. We have
seen in other areas of this evolving, very complex financial
services marketplace, that uniform Federal regulation is not
able to catch all of the abuses that are occurring.
Chairman Shelby. On a long-term basis, what is your view as
to the impact of the rules on the operation of the dual banking
system, Professor?
Mr. Wilmarth. Well, as I say in my written statement and in
a forthcoming article, the impact will be very severe. The
decision of HSBC to convert to a national bank charter has
already been mentioned. Another very significant development is
the decision by JP Morgan Chase to take all 300 of their
consumer lending offices outside the New York City metro area
and put them into a Federal savings bank charter. And they said
in their press release: ``We are doing this because of
preemption.'' That was one of the big factors behind their
decision.
So, I think there is no doubt that if the OCC's preemption
standard stands, is not changed, within the next----
Chairman Shelby. It will be a big attraction, won't it?
Mr. Wilmarth. Within the next 5 to 10 years, I think there
won't be a single large multi-State bank that will be operating
under a State charter. And then the question becomes: Can the
States sustain any kind of meaningful banking system with only
community banks? At the same time, banks will no longer have
any effective choice of charter. There will not be much
incentive for innovation or flexibility among bank regulators.
I actually think that the large banks may well regret what they
are now pursuing when they get a regulator for which basically
there is no exit, there is no option. The dual banking system
has made our economy unique, has meant that all areas of our
great country have been developed. If you look north into
Canada where they have had a uniform Federal system with
comprehensive Federal preemption, many people will tell you
that the banks up there are not involved in community
development in the same way that they are down here. And you do
not have nearly as many banks being involved either.
Chairman Shelby. Gentlemen, I appreciate your patience
today. It has been a long afternoon. The first panel took a lot
of time. This is an important hearing, and we appreciate your
participation. Thank you very much.
The hearing is adjourned.
[Whereupon, at 5:18 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM JOHN D. HAWKE, JR.
Q.1. Can you provide the Committee a brief overview of how the
issue of BSA compliance is handled by your examiners?
Specifically, do the examiners look at a general program--a
sort of list of activities or programs the bank engages in? Do
the examiners ever look at individual transactions to gauge a
bank's compliance with the BSA?
A.1. The OCC has a longstanding commitment to combating money
laundering. We have always shared the Committee's belief in the
importance of preventing the financial institutions we regulate
from being used, wittingly or unwittingly, to aid in money
laundering and, with the events of September 11, we are now
equally vigilant about the need to combat terrorist financing.
We remain totally committed to working with the law enforcement
community to assist in the investigation and prosecution of
organizations and individuals who violate the law and engage in
money laundering, terrorist financing, and other criminal acts.
The primary responsibility for compliance with the Bank
Secrecy Act (BSA) and anti-money laundering (AML) compliance
rests with the Nation's financial institutions themselves--they
represent the front lines in the fight against money
laundering. The OCC has a statutory mandate to ensure that
national banks comply with these laws. Where deficiencies are
noted, we take supervisory and enforcement actions to ensure
that the bank promptly corrects them.
The OCC conducts regular examinations of national banks and
branches and agencies of foreign banks in the United States,
covering all aspects of an institution's operations, including
compliance with the BSA and review of AML efforts. The OCC
monitors compliance with the BSA and money laundering laws
through its BSA compliance and money laundering prevention
examination procedures. In September 2000, the OCC issued the
latest version of the Comptroller's Handbook for National Bank
Examiners (Handbook) on BSA/AML compliance. The Handbook
contains procedures designed to assess BSA compliance as well
as identify
suspected money laundering. These risk-based procedures were
developed by the OCC, in cooperation with the other Federal
banking agencies. The Handbook section also contains guidance
in a host of key areas such as suspicious conduct and
transactions, customer identification, high-risk areas,
entities, and countries, and common money laundering schemes.
We are presently revising the Handbook and expect that a new
version will be issued later in the year. The new Handbook will
contain revised examination procedures covering the new
regulations issued under the USA PATRIOT Act, as well as
updated information and guidance.
Strong internal policies, systems, and controls are the
best assurance of compliance with the reporting and
recordkeeping requirements of the BSA and the money laundering
laws. Consequently, the Handbook's procedures focus our
examination efforts on a national bank's system of internal
controls, audits, policies, and procedures in the BSA/AML area.
Where examiners note control weaknesses or when we receive a
lead from a law enforcement or other external source, the
examiners are directed to test the bank's policies, systems,
and controls by utilizing supplemental procedures and reviewing
certain individual transactions.
Combating money laundering depends on the cooperation of
law enforcement and regulatory agencies. Therefore, the OCC
participates in a number of interagency working groups aimed at
money laundering enforcement, and meets on a regular basis with
law enforcement agencies to discuss money laundering issues and
share information that is relevant to money laundering schemes.
Through these interagency contacts, we sometimes receive leads
as to possible money laundering in banks that we supervise.
Using these leads, we can target compliance efforts in areas
where we are most likely to uncover problems. For example, if
the OCC receives information that a particular account is being
used to launder money, our examiners would then review
transactions in that account for suspicious funds movements.
In certain cases where the OCC suspects that serious
violations of the BSA or money laundering have occurred, we
investigate. Once the FCC opens an investigation, we can use
our administrative subpoena power to compel the production of
documents and testimony from individuals and entities both
inside and outside of the bank. This information is not only
used for our supervisory purposes, but also , when it is
relevant to a potential criminal violation, it is shared with
the appropriate criminal law enforcement agencies. We also
provide the proper State and Federal governmental authorities
with active assistance as well as documents, information, and
expertise that are relevant to their money laundering
investigations. The OCC has conducted several investigations
into suspected money laundering activities, and we continue to
closely cooperate with Federal criminal law enforcement
agencies. These investigations may result in both criminal
convictions and significant asset forfeitures. In addition, the
OCC possesses broad enforcement authority, including the power
to issue cease and desist orders, civil money penalties, and
removals of bank officers, directors, and other institution-
affiliated parties. From 1998 to 2003, the OCC has taken a
total of 38 enforcement actions based, in whole or in part, on
BSA/AML violations.
All banks are required by regulation to report suspected
crimes and suspicious transactions that involve potential money
laundering or violate the BSA. In April 1996, the OCC, together
with the other Federal financial institution regulatory
agencies, and the Financial Crimes Enforcement Network
(FinCEN), unveiled the suspicious activity reporting system,
suspicious activity report (SAR) form, and database. This
system provides law enforcement and regulatory agencies online
access to the entire SAR database. Based upon the information
in the SAR's, law enforcement agencies will initiate an
investigation and, if appropriate, take action against
violators. By using a universal SAR form, consolidating filings
in a single location, and permitting electronic filing, the
system greatly improves the reporting process and makes it more
useful to law enforcement and to the regulatory agencies. As of
June 2003, banks and regulatory agencies had filed over 1.1
million SAR's, with national banks by far the biggest filers.
Nearly 50 percent of these SAR's were for suspected BSA/money
laundering violations.
The OCC also uses the SAR database as a means of
identifying high-risk banks and high-risk areas within banks.
In addition, the OCC uses the SAR database to identify
potential cases against bank insiders and employees for
administrative enforcement actions. For example, since 1996,
through our review of SAR's and its predecessor, the criminal
referral form, the OCC has prohibited hundreds of individuals
from participating in the banking industry.
In 1997, the OCC formed an internal task force on money
laundering called the National Anti-Money Laundering Group
(NAMLG). The purpose of the NAMLG is to serve as the agency's
focal point for BSA/AML supervision. Through the NAMLG, the OCC
has embarked on several important projects.
One major project of the NAMLG involves the targeting of
banks that may be vulnerable to money laundering for
examinations using expanded-scope procedures. We select banks
for these examinations based on law enforcement leads or
criteria developed by the OCC. Through the years, we have
conducted over 70 expanded-scope AML examinations based on law
enforcement leads and other criteria.
The NAMLG has developed guidance to assist our examination
staff in targeting institutions that might be vulnerable to
attempts by individuals or institutions to engage in money
laundering activities. The guidance sets forth a series of
factors in developing a prioritized list of institutions that
are considered most susceptible to money laundering. Some of
the factors are the extent of funds transfers to or from
entities in foreign countries that are believed to be money
laundering havens; the extent of account relationships with
individuals and entities located or otherwise associated with
the above-referenced countries; the strength of the bank's BSA/
AML program and monitoring mechanisms; and other factors which
may make the bank susceptible to money laundering.
The NAMLG has also worked with law enforcement agencies and
the other regulatory agencies to develop an interagency
examiner training curriculum that includes training on common
money laundering schemes. We are also continuing to work with
the other Federal banking agencies on new examination
procedures to address the USA PATRIOT Act requirements and
ensure that they are effective in identifying potential money
laundering activities.
Other responsibilities of the NAMLG include sharing
information about money laundering issues with the OCC's
District offices; analyzing money laundering trends and
emerging issues; and promoting cooperation and information
sharing with national and local anti-money laundering groups,
the law enforcement community, bank regulatory agencies, and
the banking industry.
The OCC believes that interagency coordination and
cooperation are critical to successfully addressing BSA and
money laundering issues. We actively participate in several
interagency groups seeking to curtail money laundering through
financial institutions by surfacing issues, sharing
information, and making recommendations to improve money
laundering enforcement and awareness. These include the BSA
Advisory Group, chaired by the U.S. Treasury Department, which
is composed of policy, legal, and operations representatives
from the major Federal and State law enforcement and regulatory
agencies involved in the fight against money laundering, as
well as industry representatives, and the National Interagency
Bank Fraud Working Group, of which we have been a very active
member since its founding in 1984. We also work on an
international basis with the Financial Action Task Force, an
inter-governmental body whose purpose is the development and
promotion of policies to combat money laundering. In addition,
we have participated in various State and Treasury Department
missions to assist foreign governments in their anti-money
laundering efforts. We expect that these international efforts
will continue.
Since passage of the USA PATRIOT Act in 2001, the OCC has
been heavily involved in several interagency work groups tasked
with writing regulations to implement the new law. These work
groups have issued final rules implementing Sections 313/319(b)
(foreign shell banks), 314 (information sharing), and 326
(customer identification) (the OCC was the lead drafter of the
customer identification rule). We were also involved in
drafting the interim final rule implementing section 312
(foreign private banking and correspondent banking). Now that
the new regulations are in place, the OCC is using the
specialized procedures that we have developed with the other
Federal banking agencies in our examinations to ensure that
banks are complying with the new requirements.
As mentioned above, the primary responsibility for ensuring
that banks are in compliance with the law remains with the
bank's management and its directors. To aid them in meeting
this responsibility, the OCC devotes time to educating the
banking industry about its responsibilities under the BSA. In
past years, this has included active participation in
conferences and training sessions across the country. For
example, in 2002 the OCC sponsored a nationwide teleconference
to inform the banking industry about the USA PATRIOT Act. We
will continue to be active in this area.
The OCC also provides guidance to national banks through:
(1) periodic bulletins that inform and remind banks of their
responsibilities under the law, applicable regulations, and
administrative rulings dealing with BSA reporting requirements
and money laundering; (2) publication and distribution of a
guide in this area entitled Money Laundering: A Banker's Guide
to Avoiding Problems; (3) publication and distribution of the
Handbook section; and (4) periodic alerts and advisories of
potential frauds or questionable activities, such as the alerts
on unauthorized banks.
Q.2. Has Riggs met the deadlines established in the Order? Are
you satisfied with their progress to date?
A.2. Because our answer to this question would entail
disclosure of confidential supervisory information involving an
open bank, it would be inappropriate to respond in this
context. Our staff has briefed members of the Committee staff
and would be willing to do so again if it would be useful to
the Committee. Please be assured, however, that Riggs continues
to receive a great deal of scrutiny from this office. We are
continuing to closely monitor the corrective action that the
bank has taken in response to the Order, and we are prepared to
take additional actions if necessary.
Q.3. Given the emphasis on the SAR as a tool that would allow
bank examiners and others in the Government to gauge whether
the integrity of the banking system is being exploited by
criminals and terrorists, is the OCC adequately resourced,
trained, and staffed to examine the banks under your
jurisdiction to fully inspect their compliance with the BSA?
A.3. Yes, we believe that we have adequate and properly trained
staff to fulfill our responsibilities. We also recognize that
maintaining an adequate number of staff, with appropriate
training to maintain a high level of expertise, is an ongoing
challenge. The OCC has approximately 1,700 field examiners that
are involved in conducting examinations of national banks. Many
of these examiners are not only responsible for assessing
safety and soundness, but also compliance with applicable laws
including the BSA. We also have BSA/AML specialists in our
Washington, DC headquarters office. In addition, the OCC has a
full-time examiner in the Offshore Banking and Fraud Unit in
Washington, DC, who is responsible for tracking the activities
of offshore shell banks and other types of suspicious
activities that may be designed to defraud legitimate banks and
the public. Over the years, this unit has issued hundreds of
industrywide alerts involving unauthorized banks, some of which
are suspected of being money-laundering vehicles.
With respect to training, OCC AML training is considered
the best in the regulatory industry. In fact, the World Bank
recently contracted with the OCC to tape our international BSA
school for worldwide broadcast. We conducted AML training for
foreign bank supervisors (examiners) two to three times per
year for the past 4 years (over 250 foreign supervisors). And
we partnered with the State Department to provide AML Training
to high-risk jurisdictions, including selected Middle Eastern
countries. We consistently provide instructors to FFIEC
schools, which are now patterned after the OCC's school. OCC
AML schools have trained over 600 OCC examiners over the past 5
years.
Q.4. You have recently named Mark Levonian as the Deputy
Comptroller for Modeling and Analysis, a new position. Do you
see his duties as including a quantitative analysis of the risk
created within the banking community for failure to comply with
BSA requirements? Better explained, will he create models,
which will allow the OCC and others within the Government to
focus limited resources by using models to identify banks,
which are most at risk to be used for illicit purposes?
A.4. No, Mr. Levonian was hired by the OCC because of his
expertise in modeling various financial risks in banking, that
is those associated with credit risk, derivatives, interest
rate risk, etc. He will head a group within our Economics
Department that provides expertise on modeling financial risk
issues to our examiners.
However, identifying banks having higher risk profiles with
respect to the BSA may also be addressed with qualitative
assessments, and we are experimenting with some judgmental
models in this regard. By doing so, we hope to make the most
productive use of our resources, as well as identify banks with
higher potential for BSA/AML problems. These judgmental models
consider high-risk factors such as:
Bank transactions with countries considered to be bank
secrecy havens, drug source countries with stringent
financial secrecy laws, or emerging countries seeking hard
currency investments.
Banking activity in high-intensity drug trafficking
areas (HIDT A) or high-intensity money laundering and
related financial crime areas (HIFCA).
Transactions with cash intensive businesses such as
currency exchange houses, money transmitters, check cashing
facilities, convenience stores, restaurants, retail stores,
or parking garages.
Products and services related to the transfer of
money, such as remittances, wire funds transfer, pouch
activity, international correspondent banking
relationships, payable through accounts, international
brokered deposits, or special use accounts.
Foreign private banking, foreign correspondent
accountholders, or politically exposed persons (PEP's).
Excessive currency flows (currency flows between the
Federal Reserve Banks and depository institutions).
Unusual suspicious activity reporting patterns.
Unusual large currency transaction reporting patterns.
Information from law enforcement.
The OCC is committed to preventing national banks from
being used to launder the proceeds of the drug trade and other
illegal activities. With these, and other AML initiatives,
active interagency working groups, increased international
cooperation, and a committed industry, the OCC intends to make
substantial additional progress in preventing the Nation's
financial institutions from, wittingly or unwittingly, being
used to launder money and engage in terrorist financing. We
stand ready to work with Congress, the other financial
institution regulatory agencies, the law enforcement agencies,
and the banking industry to continue to develop and implement a
coordinated and comprehensive response to the threat posed to
the Nation's financial system by money laundering and terrorist
financing.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM JOHN D. HAWKE, JR.
Q.1. A critical issue raised during the Senate Banking
Committee hearing on April 7 involved the extent to which
national banks and their State-chartered operating subsidiaries
are engaged in predatory lending practices. In order to begin
to develop a basis for reviewing this question, please provide
the Committee with a list containing the names of all operating
subsidiaries engaged in subprime mortgage lending, their
location, and parent bank. The Committee would like to receive
this information by the end of May.
A.1. The attached table lists the names of national bank
operating subsidiaries, their location, and their parent bank.
A version of this table is available on the OCC's website at
www.occ.treas.gov/OpSublist.pdf. This list includes operating
subsidiaries that do business directly with consumers, the
activities of which are not functionally regulated by another
regulator. (Many other operating subsidiaries are engaged in
activities such as securities brokerage and insurance sales,
which cause them to be ``functionally regulated'' by securities
or insurance regulators, rather than the OCC, pursuant to the
Gramm-Leach-Bliley Act.) Operating subsidiaries marked in red
text are engaged in subprime mortgage lending.
Q.2. I would like to ask about the application of your
preemption standard to State antidiscrimination laws. It is my
understanding that you have taken the position, in response to
questions submitted to you by Reps. Kelly and Gutierrez, that
``State antidiscrimination laws are not preempted by the
regulations. The rule only preempts those types of State laws
pertaining to making loans and taking deposits that appear on
the list contained in the rule . . . Any question about the
applicability of a particular State antidiscrimination law
would be dealt with on a case-by-case basis, applying the
``obstruct, impair, or condition' analysis.''
I would like to ask you how that would work in practice.
For example, the State of Michigan has an antidiscrimination/
antiredlining law that prohibits State or federally chartered
banks and other lenders from denying a loan or varying the
terms of the loan contract (interest rate, term of maturity, or
the percentage required for a downpayment) due to racial or
ethnic characteristics or trends of a neighborhood.
Among other things, the law requires the lender to make
available for public distribution at the home location and at
each branch a pamphlet or document explaining in general terms
the lender's criteria for the approval or denial of a loan
application. The pamphlet must prominently state that a person
has the right to make a loan inquiry and file a written
application for a mortgage or home improvement loan and receive
a written response to the application. The law also requires
the institution to retain for 25 months after the application
is submitted a complete record of each loan application, its
disposition, and any other documents relating to the
application. Would the Michigan antidiscrimination law be
preempted in whole or part under the OCC regulation? Why? Would
the general prohibition on varying the loan terms based on the
racial or ethnic composition of a neighborhood be preempted?
Why? Would the requirement that lenders make a pamphlet
available explaining the general terms of the lender's criteria
for approval or denial of a loan application be preempted? Why?
Would the record retention requirement be preempted? Why?
A.2. The preemption rule adds provisions to our regulations
expressly addressing the applicability of certain types of
State laws to national banks' lending and deposit-taking
activities. The listed types of laws are ones that already are
preempted under longstanding, preexisting OCC regulations, have
been found to be preempted in OCC preemption opinions, have
been found to be preempted by the courts, or have been
determined to be preempted for Federal thrifts by the Office of
Thrift Supervision. Thus, they are types of laws for which
substantial precedent exists recognizing the interference they
pose to the ability of federally chartered institutions to
operate under uniform Federal standards.
The regulation only preempts the types of laws that are
listed in the regulation. State antidiscrimination laws are not
listed in the regulation. We evaluate laws not listed in the
regulation under the preexisting, judicially established
standards for Federal preemption. Under existing judicial
precedent, laws that prohibit the denial of a loan or the
variance in loan terms based on the racial or ethnic
characteristics or trends of a neighborhood would not be
preempted.
For example, in National State Bank v. Long, 630 F.2d 981
(3d Cir. 1980), the U.S. Court of Appeals for the Third Circuit
was asked to consider whether a New Jersey antiredlining
statute similar to the Michigan statute you describe was
preempted by Federal banking laws. The New Jersey law
prohibited geographic discrimination; required lenders to
compile and disclose to the public statistical information
concerning the number and amount of mortgages originated or
purchased annually and the locations of the properties; and
authorized the New Jersey Banking Commissioner to bring
enforcement actions against lenders that violated the statute.
The Court held that insofar as the New Jersey statute required
disclosure of mortgage statistics, it was preempted by the
Federal Home Mortgage Disclosure Act of 1975.\1\ The Court also
determined that the antidiscrimination provision of the New
Jersey law was not preempted, however. Finally, the Court held
that the statute could be enforced against national banks by
the OCC, but not by State officials.
---------------------------------------------------------------------------
\1\ 12 U.S.C. Sec. Sec. 2801-2809 (1976).
---------------------------------------------------------------------------
As the Long case demonstrates, whether the portions of the
Michigan statute that do not concern redlining are preempted
depends on whether they conflict with Federal law. The record
retention requirement in the Michigan statute appears not to be
an issue because it is substantially similar to the record
retention requirements of the Equal Credit Opportunity Act
(ECOA).\2\
---------------------------------------------------------------------------
\2\ 12 CFR Sec. 202.12.
---------------------------------------------------------------------------
Whether the Michigan statute's requirement that a lender
make available a pamphlet explaining the lender's loan approval
criteria is preempted would depend on its specifics. If the
pamphlet requirement is essentially a precondition to making
the loan, the
requirement would be preempted under the judicial precedent
embodied in American Bankers Ass'n v. Lockyer, 239 F.Supp.2d
1000 (E.D. Cal. 2002), in which the Court considered whether a
California law requiring lenders to make certain disclosures in
connection with credit card lending was preempted for national
banks and other federally chartered lenders. The California
law's required disclosures were found by the Court to limit a
national bank's power to establish the terms and conditions of
credit as well as manage its credit accounts, and the Court
held that it was preempted by the National Bank Act and OCC
regulations. Our recently enacted regulation, at 12 CFR
Sec. 34.4(a)(10) codifies a position on preemption of
disclosure requirements that is consistent with the holding of
the Court in Lockyer.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON
FROM JOHN D. HAWKE, JR.
Q.1. Have you analyzed whether State-chartered institutions in
States with ``wild card'' statutes will be able to operate
under the new OCC preemption rules? If you have not, I would
ask that you conduct a survey of how many States have such
statutes, and what effect those provisions would have in terms
of numbers of institutions potentially covered by the rule.
A.1. Many States have wild card statutes, which vary in their
scope and implementation. Some arguably pertain to permissible
activities, and some wild card statutes require the State
banking commissioner (or the equivalent official) to trigger
their application. In general, this information is contained in
the 2002 Conference of State Bank Supervisors publication,
Profile of State Chartered Banking. We attach copies of the
relevant pages from that publication. For more detail on how
the statutes are administered, we would defer to the CSBS and
the individual States.
Some States also have adopted parity or ``wild card''
statutes for specific activities. For example, we are aware of
three State predatory lending laws that exempt State
institutions in the event that the State law is preempted with
respect to federally chartered institutions:
Colorado: Any provision of Colorado's Act Concerning
Protection of Consumers' Home Ownership Equity that is
preempted by Federal law with respect to a national bank or
Federal savings association shall also, to the same extent, not
apply to an operating subsidiary of a national bank or Federal
savings association, nor to a bank chartered under the laws of
Colorado or any operating subsidiary of such a State chartered
bank.\1\
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\1\ Colo. Rev. Stat. Sec. 5-3.5-303(2).
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Georgia: State banks, trust companies, savings
associations, credit unions, and their respective subsidiaries
are exempt from the Georgia Fair Lending Act (GFLA) if Federal
law preempts or has been determined to preempt the application
of the GFLA to any federally chartered bank, trust company,
savings association, or credit union. Such Federal preemption
shall apply only to the same type of State-chartered entity as
the federally chartered entity affected.\2\ There is
legislation currently pending that would repeal this
provision.\3\
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\2\ Ga. Code Ann. Sec. 7-6A-12.
\3\ Ga. House Bill 1171, Sec. 6.
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Wisconsin: State-chartered banks, trust companies, savings
and loans associations, savings banks, credit unions, and their
respective subsidiaries are exempt from the Wisconsin statute
to the extent Federal law preempts or prohibits the application
of the statute to federally chartered banks, trust companies,
savings and loans associations, savings banks, credit unions,
and their respective subsidiaries.\4\
---------------------------------------------------------------------------
\4\ 2003 Wisconsin Act 257 (to be codified at Wis. Stat.
Sec. 428.211).
---------------------------------------------------------------------------
In addition, in January 2004, New Mexico issued a
regulation to ensure that all New Mexico-chartered banks have
the same powers and authority as federally chartered savings
associations.\5\
---------------------------------------------------------------------------
\5\ 12.16.76.9 NMAC.
Q.2. I am interested in hearing more about how the wording in
the national bank charter differs from that of the Federal
thrift or credit union charters. My understanding is that the
national bank charter does not grant ``field preemption'' to
the OCC. Leaving aside whether the OCC has exceeded its
preemption authority in the current instance, would you please
provide examples of, in your view, what would be permitted
under a field preemption standard that is not available to the
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OCC under its charter?
A.2 State laws are preempted by Federal law, and thus rendered
invalid with respect to federally chartered entities (for
example,
national banks, Federal thrifts, and Federal credit unions) by
operation of the Supremacy Clause of the U.S. Constitution.\6\
The Supreme Court has identified three ways in which this may
occur. First, Congress can adopt express language setting forth
the existence and scope of preemption.\7\ Second, Congress can
adopt a framework for regulation that ``occupies the field''
and leaves no room for States to adopt supplemental laws.\8\
Third, preemption may be found when State law actually
conflicts with Federal law. Conflict will be found when either:
(i) compliance with both laws is a ``physical impossibility;''
\9\ or (ii) when the State law stands ``as an obstacle to the
accomplishment and execution of the full purposes and
objectives of Congress.'' \10\
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\6\ ``This Constitution, and the Laws of the United States which
shall be made in Pursuance thereof . . . shall be the supreme Law of
the Land; and the Judges in every State shall be bound thereby,
anything in the Constitution or Laws of any State to the Contrary
notwithstanding.'' U.S. Const. art. VI, cl. 2.
\7\ See Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977).
\8\ See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947).
\9\ Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 143
(1963).
\10\ Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Barnett Bank of
Marion County, N.A. v. Nelson, 517 U.S. 25, 31 (1996) (quoting Hines).
---------------------------------------------------------------------------
The OTS has issued regulations asserting that it ``occupies
the field'' of deposit-taking and lending regulation for
Federal thrifts.\11\ But the OTS rule carves out of this
regulatory field a number of State laws. Thus, despite its
declared intention, the OTS rule does not appear to reflect
full field preemption.
---------------------------------------------------------------------------
\11\ Although the OTS asserts in its rules that is occupies the
field of lending and deposit-taking regulation for Federal savings
associations, its
---------------------------------------------------------------------------
If it did, one might expect the result that no State law
affecting deposit-taking or lending would apply to Federal
thrifts, regardless of how attenuated the law's relationship is
to those core activities. Instead, the OTS has listed in its
regulations types of State laws that generally do apply to
Federal thrifts.
In our preemption rulemaking, the OCC considered whether to
adopt an occupation of the field approach to the applicability
of State law in the real estate lending area. We concluded that
the statutory authority provided to the OCC by 12 U.S.C.
Sec. Sec. 93a and 371 was comparably broad to the OTS's
statutory authority, but we declined to assert occupation of
the field with respect to national banks' real estate lending
activities. Rather, our preemption rule lists particular types
of State laws that are preempted with respect to national banks
in the deposit-taking and lending areas (including real estate
lending). Separately, it lists types of State law that
generally are not preempted. Under an unqualified field
preemption approach, laws on this second, not-preempted list
would likely be preempted, as would a number of other types of
State laws ranging from State unfair and deceptive practices
statutes to mortgage recordation requirements.
Under the OCC's preemption rule, questions about the
applicability of State laws that are not listed as preempted
will be resolved by applying the same substantive,
Constitutional standards--as articulated by the Supreme Court
and lower Federal courts--that have governed preemption
analysis since the inception of the national bank charter.
Q.3. Do you support efforts to craft a Federal predatory
lending law? If not, why not? Would your position change if the
OCC rule is upheld by the courts?
A.3. As we have said repeatedly, predatory and abusive lending
practices are inconsistent with national objectives of
encouraging homeownership and community revitalization, and can
be devastating to individuals, families, and communities. Our
Advisory Letters on predatory lending,\12\ our pioneering
enforcement actions resulting in substantial restitution to
affected consumers, together with the new anti-predatory
lending provisions in the preemption rule demonstrate that we
do not tolerate abusive or predatory lending practices by
national banks or their operating subsidiaries.
---------------------------------------------------------------------------
\12\ See OCC Advisory Letter 2003-2, ``Guidelines for National
Banks to Guard Against Predatory and Abusive Lending Practices'' (Feb.
21, 2003) and OCC Advisory Letter 2003-3, ``Avoiding Predatory and
Abusive Lending Practices in Brokered and Purchased Loans'' (Feb. 21,
2003).
---------------------------------------------------------------------------
The key issue in any effort to develop new Federal anti-
predatory lending legislation is whether the legislation could
be crafted to target predatory lending practices effectively
without materially reducing availability of non-predatory, but
risk-priced subprime credit. Our support for such legislation
would not depend on whether our rule, if challenged, is upheld
by the Federal courts, but on whether the legislation achieves
that goal.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER
FROM JOHN D. HAWKE, JR.
Q.1. Mr. Hawke, I understand the Georgia State Banking
Commissioner wrote to you on August 21, 2003, requesting
clarification on several matters relating to the OCC's
preemption of the Georgia predatory lending statute. And my
staff person had contacted your staff people around the middle
of February--after your rule was released--about getting a
response for Commissioner Sorrell. Your staff kept delaying us.
Finally, your response came to Commissioner Sorrell on April 2,
2004. Please tell me why it took such a long time to respond to
Commissioner Sorrell?
A.1. The OCC issued its Preemption Determination and Order
concerning the Georgia Fair Lending Act (GFLA) \1\ in late July
2003, and at the same time we proposed the adoption of the
preemption rule. The proposed rule raised the possibility that
the answers to Commissioner Sorrell's questions would be
affected by the final preemption rulemaking. For this reason,
we initially delayed responding to Commissioner Sorrell's
inquiry pending the adoption of the final rule.
---------------------------------------------------------------------------
\1\ 68 Fed. Reg. 46264 (July 30, 2003).
---------------------------------------------------------------------------
Following the adoption of the final rule,\2\ on January 8,
2004, First Senior Deputy Comptroller and Chief Counsel Julie
Williams wrote to Commissioner Sorrell. Ms. Williams apologized
for the delay in responding and explained that because we had
been deliberating the final form of the rule, and because its
final form could have superceded Commissioner Sorrell's
questions concerning the Preemption Determination, we had
concluded that it was best to resolve our rulemaking before
responding to his inquiry. Because the rulemaking had been
resolved, Ms. Williams assured Commissioner Sorrell that we
would then review his questions in light of the final
regulation and respond to them.
---------------------------------------------------------------------------
\2\ 469 Fed. Reg. 1904 (January 13, 2004).
---------------------------------------------------------------------------
From that point, unfortunately, the press of work resulted
in delays that we regret. On March 16, 2004, the Comptroller
sent a letter of further apology to Commissioner Sorrell.
Sixteen days later, we provided our full response to the
Commissioner.
Q.2. Mr. Hawke, my Georgia Banking Commissioner tells me that
the reason the States are so upset with your rule--very simply
is that they feel the OCC is making new Federal law and a major
public policy change, sweeping aside State laws as they apply
to national banks and national bank subsidiaries, without
Congressional action and without a public debate. The States
are not concerned about a Federal law written by Congress that
applies uniformly across the country, but the States are
greatly concerned where an unelected Federal regulatory agency
is expanding its authority without Congressional authorization.
They think your unauthorized rule damages the dual banking
system across all States.
Please tell me why the OCC decided to adopt its broad
reaching rule without a public debate on the issue before
Congress since the rule was rigorously and unanimously opposed
by the Nation's governors, State legislators, attorneys
general, State bank supervisors, and consumer organizations who
all urged public debate and Congressional review? Where do you
derive your specific authorized regulatory authority to do
this?
A.2. To begin, it is useful to review our reasons for adopting
the rule. As you point out, many commenters opposed the rule
and suggested that the OCC should have waited longer before
finalizing our rules. Please be assured that we considered
these comments and timing concerns carefully, but we ultimately
concluded that taking action, following a formal rulemaking
process, was both respectful of the role of Congress and the
course most consistent with our responsibilities as supervisors
of the national banking system.
We reached this conclusion for several related reasons.
First, the laws under which we acted exist today, and the
principles incorporated in our preemption regulation are not
new. Precedents of the Supreme Court dating back to 1869 have
addressed preemption in the context of national banks and have
consistently and repeatedly recognized that national banks were
designed by Congress to operate, throughout the Nation, under
uniform, federally set standards of banking operations.\3\ As a
result, there is an extensive body of Federal court precedents
that reiterate and apply preemption principles to a variety of
different types of State laws.\4\ Yet, banks increasingly have
been forced to litigate--sometimes repeatedly on the same
issue--to clarify the applicability of specific types of State
laws, and the OCC has issued separate legal opinions that
address the applicability of State law. As national banks
operate in an increasingly complex and multi-State environment,
the shortcomings of this expensive and time-consuming case-by-
case approach have become increasingly apparent. In addition,
the financial and opportunity costs to banks of a case-by-case
approach may be significant--especially where repetitive
litigation becomes necessary to establish clear standards.
---------------------------------------------------------------------------
\3\ See Barnett Bank v. Nelson, 517 U.S. 25, 31-37 (1996)
(reviewing and relying on prior national bank preemption cases).
\4\ See, e.g., Bank of America v. City & County of San Francisco,
309 F.3d 551 (9th Cir. 2002), cert. denied, 123 S. Ct. 2220, 2003 U.S.
LEXIS 4253 (May 27,2003) (the National Bank Act and OCC regulations
together preempt conflicting State limitations on the authority of
national banks to collect fees for the provision of electronic services
through ATM's; municipal ordinances prohibiting such fees are invalid
under the Supremacy Clause); Wells Fargo Bank, Texas, N.A. v. James,
321 F.3d 488 (5th Cir. 2003) (Texas statute prohibiting certain check
cashing fees is preempted by the National Bank Act); Metrobank v.
Foster, 193 F.Supp. 2d 1156 (S.D. Iowa 2002) (national bank authority
to charge fees for ATM use preempted Iowa prohibition on such fees).
See also Bank One, Utah v. Guttau, 190 F.3d 844 (8th Cir. 1999), cert.
denied sub nom Foster v. Bank One, Utah, 529 U.S. 1087 (2000) (holding
that Federal law preempted Iowa restrictions on ATM operation,
location, and advertising).
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Rather than continuing to address preemption issues on a
piecemeal basis, the preemption rules address them
collectively--by clarifying and codifying prior judicial and
OCC interpretations based on long-established Constitutional
principles--to provide clear ground rules for national banks
concerning the applicability of specified types of State laws.
This has become more important in recent years as markets for
credit, deposits, and many other financial products and
services are have become national, if not international. Now,
more than ever before, the imposition of an overlay of 50 State
and an indeterminate number of local standards and requirements
on top of the Federal requirements and OCC supervisory
standards to which national banks already are subject has
costly consequences that can materially affect a national
bank's ability to serve its customers.
Second, the continuing uncertainty about the applicability
of State laws has already negatively affected national banks'
ability to lend in certain markets and to access the secondary
market, a curtailment of their business that is not only
inconsistent with their federally authorized powers but also
one that has the potential to adversely affect credit
availability. It is worthy of note that recently Standard &
Poor's announced it will now require significant additional
credit support for certain loans governed by anti-predatory
lending laws that are included in its rated transactions in
order to address the effect of the potential damages associated
with these loans. \5\ Some industry analysts have interpreted
this action to mean that loans subject to these State laws will
not be viewed favorably in securitization pools.\6\ Without a
certain secondary market for these loans, banks making risk-
priced loans covered by this type of State law will be required
to hold more of these loans to maturity. This, in turn, ties up
more of a bank's capital as it carries the mortgage assets on
its books, and thus adversely affects the ability of the bank
to originate or acquire other real estate loans.
---------------------------------------------------------------------------
\5\ Standard & Poor's Implements Credit Enhancement Criteria and
Revises Representation and Warranty Criteria for Including Anti-
Predatory Lending Law Loans in U.S. Rated Structured Finance
Transactions (May 13, 2004).
\6\ American Banker, Predator Laws: S&P's Awkward Position (May 18,
2004).
---------------------------------------------------------------------------
Moreover, we believed that the addition of anti-predatory
lending standards to our lending rules materially reinforces
national banks' obligation to operate pursuant to the highest
standards of integrity. Delaying the implementation of those
standards was, accordingly, inconsistent with our
responsibility to ensure that national banks satisfy those
obligations.
With this background, your question raises several
important issues. Your question suggests that the preemption
rule is a dramatic expansion of preemption. We believe it is
not. The preemption rule adds provisions to our regulations
expressly addressing the applicability of certain types of
State laws to national banks' lending and deposit-taking
activities.\7\ The rule only preempts the types of laws
concerning deposit-taking and lending that are listed in the
regulation. The listed types of laws are ones that already are
preempted under longstanding, preexisting OCC regulations, have
been found to be preempted in OCC preemption determinations,
have been found to be preempted by the courts, or have been
determined to be preempted for Federal thrifts by the OTS.
Thus, they are types of laws for which substantial precedent
exists recognizing the interference they pose to the ability of
federally chartered institutions to operate under uniform
Federal standards.
---------------------------------------------------------------------------
\7\ Fed. Reg. 1904 (January 13, 2004).
---------------------------------------------------------------------------
For the many types of laws that are not listed in the
regulations, the OCC will continue to evaluate whether such
laws are preempted under the preexisting, judicially
established standards for Federal preemption that are
summarized by the ``obstruct, impair, or condition'' phrasing
contained in the rule. This phrase does not itself preempt any
State law; rather we intended it simply to distill the
standards that we believe the courts would look to in deciding
questions of preemption for the types of laws not listed in the
regulation.
Third, you question the OCC's authority to adopt the
preemption rule. Federal law authorizes the OCC to issue rules
that preempt State law in furtherance of our responsibility to
ensure that national banks are able to operate to the full
extent authorized under Federal law, notwithstanding
inconsistent State restrictions, and in furtherance of their
safe and sound operations. The deposit-taking and non-real
estate lending provisions in the preemption rule are authorized
by 12 U.S.C. Sec. 93a, which authorizes the OCC ``to prescribe
rules and regulations to carry out the responsibilities of the
office.'' The real estate lending provisions are authorized by
Section 93a and by l2 U.S.C. 371(a), which authorizes the OCC
to ``prescribe by regulation or order'' the ``restrictions and
requirements'' on national banks' real estate lending power
without State-imposed conditions. The U.S. Court of Appeals for
the D.C. Circuit recognized that these statutes give the OCC
authority to issue regulations with preemptive effect. Over 20
years ago, the Court said:
It bears repeating that the entire legislative scheme is
one that contemplates the operation of State law only in the
absence of Federal law and where such State law does not
conflict with the policies of the National Banking Act. So long
as he does not authorize activities that run afoul of Federal
laws governing the activities of the national banks, therefore,
the Comptroller has the power to preempt inconsistent State
laws.\8\
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\8\ Conference of State Bank Supervisors v. Conover, 710 F.2d 878
(D.C. Cir. 1983) (emphasis added).
Fourth, you note others have expressed concern that the
preemption rule may damage the dual banking system. Frankly,
this contention is surprising, since, far from damaging the
dual banking system, the rule is fully consistent with it.
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 of national banks preempt inconsistent
State laws is entirely consistent with the distinctions that
make the dual banking system dual.
The national and State charters each have their own
distinct advantages. Indeed, today State banking regulators
vigorously assert that the State charter is superior, pointing
to various considerations, including the difference in
assessments paid by State banks compared to national banks. But
many national banks engage in multi-State businesses that may
particularly benefit from the efficiency of a uniform,
nationwide system of laws and regulations. Customers of
national banks enjoy protections that are as strong as--and in
some cases stronger than--those available to customers of State
banks. And they also benefit from the efficiencies of the
national banking system, and predictable, uniform, consistent
regulation. The dual banking system offers American consumers a
choice--those who believe the State system offers greater
protections, or desirable variety, are free to make that
choice.
Q.3. If you do not know the breadth of national bank operating
subsidiary numbers and therefore their activities, why were
they included in the rulemaking? Do any of these national bank
subsidiaries engage in making subprime mortgage loans and if so
are these subprime mortgage loans examined by the OCC?
A.3. The preemption rule made no changes to the OCC's
preexisting operating subsidiary rules. The rule covers
operating subsidiaries by operation of 12 CFR Sec. 5.34, which
provides that national bank operating subsidiaries conduct
their activities subject to the same terms and conditions as
apply to the parent banks, and 12 CFR Sec. 7.4006, which
provides that State law applies to operating subsidiaries to
the same extent as it applies to the parent bank. Finally, 12
CFR Sec. 34.1(b) expressly provides that the OCC's real estate
lending rules apply both to national banks and their operating
subsidiaries. The rules have contained provisions preempting
aspects of State laws with respect to both national banks and
their operating subsidiaries since 1996.
The OCC supervises national banks' compliance with consumer
protection laws and anti-predatory lending standards through
programs of ongoing supervision tailored to the size,
complexity and risk profile of different types of banks, and
through targeted enforcement actions. National banks and
national bank operating subsidiaries are subject to
comprehensive--and in the case of the largest banks,
continuous--supervision. With a network of approximately 1,700
examiners, the OCC conducts risk-based examinations of national
banks and national bank operating subsidiaries throughout the
United States. Thus, for example, whether a national bank
conducts its mortgage lending business in a department of the
bank, in a branch, or in an operating subsidiary, OCC
supervision focuses on that line of business wherever the bank
conducts it.
The attached table lists the names of national bank
operating subsidiaries, their location, and their parent bank.
A version of this table is available on the OCC's website at
www.occ.treas.gov/OpSublistpdf. This list includes non-
functionally regulated operating subsidiaries that do business
directly with consumers. (Many other operating subsidiaries are
engaged in activities such as securities brokerage and
insurance sales, which cause them to be ``functionally
regulated'' by securities or insurance regulators, rather than
the OCC, pursuant to the Gramm-Leach-Bliley Act) Please refer
to our answer to Senator Sarbanes' first question with respect
to subprime mortgage lending activity by national bank
operating subsidiaries.
Q.4. Mr. Hawke, What is your vision now of the relationship
between State and Federal enforcement regulators in enforcing
both State and Federal law as financial institutions
participate in global and national markets?
A.4. We believe the relationship should be cooperative and
respectful, and we welcome the opportunity to work
cooperatively with State authorities. Our jurisdiction over
national banks and their subsidiaries does not deprive State
regulators of a role in protecting consumers in their States.
Our rules do not affect the ability of States to regulate or
take enforcement action when Federal law authorizes them to do
so, for example, in the securities, insurance, and
telemarketing areas. Nor do the rules prevent State officials
from applying and enforcing generally applicable State laws
that do not attempt to control the content or conduct of
national banks' banking activities.
We are hopeful that a constructive dialogue will soon
emerge with State officials. It makes no sense for the OCC and
the States to be locked in some kind of competition to
supervise the same institutions when supervisory and
enforcement resources are so dear, and, as a result, so many
institutions--overwhelmingly nonbanks that probably need it
most--may be effectively undersupervised.
The OCC took an important step in the direction of this
dialogue in our recent Advisory Letter concerning how national
banks and their subsidiaries should handle consumer complaints
forwarded by State authorities. We made clear that a complaint
forwarded by a State official for resolution did not constitute
an illegal ``visitation'' under the National Bank Act, and that
national banks should not cite the OCC's exclusive visitorial
power as a justification for not addressing the complaint. Nor
should they resist a request from the referring State agency
for information on how the complaint was resolved.
We also described how States may refer consumer issues
concerning national banks to the OCC, including directly to the
Chief Counsel's office, and the special procedures we have set
up to handle and track these referrals. By coordinating our
resources and working cooperatively with the States, we can
maximize benefits to consumers, close gaps between existing
consumer protection laws, and most effectively target financial
predators. We welcome further dialogue with the States to
explore these mutual goals.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON
FROM ROY COOPER
Q.1. If I understand your position correctly, you would like
Congress, in effect to nullify the OCC preemption rule. What is
your position with respect to the preemptive authority of
federally chartered thrifts and credit unions? Are you asking
Congress to modify those charters to prevent preemption of
State consumer protection laws, and if not, why not? What
distinctions do you see between national banks and these other
federally chartered entities?
A.1. Yes, I believe Congress should nullify the OCC's
preemption and visitorial powers rules. The OCC's legal
authority differs from that of the OTS and the NCUA. Without
conceding that the OTS and NCUA have acted within their
authority to preempt State consumer protection laws, their
authorizing statutes grants them more explicit authority than
the National Banking Act grants the OCC.
I do believe that the OTS and the NCUA are also wrong as a
matter of policy, and I would support efforts by Congress to
revisit this issue of diminished consumer protection of
customers of Federal thrifts and credit unions, as well as
national banks.
There is a race to the bottom going on. Because the OTS
issued its regulations, the OCC wants to issue its own. Now
that the OCC has done it, State banks will want parity and try
to obtain exemptions from State predatory lending laws. Once
State banks seek parity, then State housing creditors (finance
companies) will demand a ``leveling the playing field'' and
come knocking on your doors to seek similar preemptive
treatment.
A home is the most important purchase most families will
ever make. We should raise the floor when it comes to
protecting people from unfair home loans, not race to the
bottom. We owe that to consumers who are engaging in some of
the most important financial transaction of their lives.
Q.2. Do you support efforts to craft a Federal predatory
lending law? If not, why not? Would your position change if the
OCC rule is upheld by the courts?
A.2. I support efforts to craft a Federal predatory lending law
so long as the law sets a floor, not a ceiling. This is
particularly important for protecting people in States that
have no predatory lending laws. In other Federal consumer
protection efforts effecting real estate, Congress has adopted
this philosophy. The Home Ownership and Equity Protection Act
(HOEPA), the Real Estate Settlement Procedures Act (RESPA), the
Fair Housing Act, the Equal Credit Opportunity Act, the Truth
in Lending Act, and the Federal Trade Commission Act all
regulate the real estate finance market without broadly
preempting comparable State regulations. Predatory lending
should be no different.
North Carolina needs to retain its flexibility to legislate
according to the local conditions of our real estate and
mortgage market. Unlike, for example, the airline industry,
which is truly national and therefore more suitable for
preemption, real estate is inherently local, and States need to
have flexibility to respond to abuses in the local marketplace.
RESPONSE TO A WRITTEN QUESTION OF SENATOR MILLER
FROM ROY COOPER
Q.1. Mr. Cooper, give me an idea of what the historical working
relationship has been with the OCC and what the current working
relationship is with the OCC? Which Federal agencies do you
have the best working relationship with and why? Do you think
such a relationship is possible with the OCC?
A.1. Historically, my office has not had much interaction with
the OCC. The OCC's primary mission is to ensure the safety and
soundness of the national banking system. My office does not
supervise national banks, and thus we have little regulatory
overlap. Our office has historically enforced State consumer
protection laws against national banks. The OCC's consumer
protection role has been only a secondary and recent
development. It was not until 2000 that the OCC even determined
it had the authority to apply the unfair and deceptive trade
practices standards in the FTC Act against national banks. Over
the years, State attorneys general have simply enforced State
consumer protection laws against national banks without
objection from the OCC.\1\
---------------------------------------------------------------------------
\1\ See, e.g., State of Alaska v. First National Bank of Anchorage,
660 P.2d 406 (Alaska 1982) (holding that the Alaska Attorney General
could sue a national bank); Attornev General v. Michigan Nat'l Bank,
312 N.W.2d 405, 414 (Mich. App. 1981), overruled on other grounds 325
N.W.2d 777 (Mich. 1982) (holding that a national bank could be held
liable by the Attorney General under State and Federal consumer
protection laws related to mortgage escrow accounts); State of Arizona
v. Sgrillo and Valley National Bank of Arizona, 176 Ariz. 148, 859 P.2d
771 (1993); State of Wisconsin v. Ameritech Corp., Household Bank and
Household Credit Services, 185 Wis. 2d 686, 517 N.W.2d 70S (1994),
aff'd 532 N.W.2d 449 (Wisc. 1995); State of West Virginia v. Scott
Runyan Pontiac-Buick. Citizens National Bank. et al., 194 W.Va. 770,
461 S.E.2d 516 (W.Va. 1995) (holding that the attorney general had the
right to bring a civil action against the financial institutions,
including the national bank); State of Minnesota v. U.S. Bancorp.,
Inc., Case No. 99-872 (Consent Judgment, D. Minn. 1999).
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Unfortunately, since the OCC discovered its consumer
protection authority, its involvement with the States has been,
for the most part, troubling. In fact, the OCC has halted or
interfered with several consumer protection investigations and
lawsuits by various State attorneys general against national
banks or their operating subsidiaries in the last 3 years.\2\
This interference hurts consumers and lends credence to the
charge that the OCC is far more interested in protecting
national banks than in consumer protection.
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\2\ See Section C in the comments by State attorneys general on the
preemption rule attached to my submitted testimony. See, also, e.g.,
State of Minnesota v. Fleet Mortgage Corp., 158 F.Supp.2d 962 (D. Minn.
2001) (involving unfair and deceptive sales practices and
telemarketing); In the matters of Citibank and FirstUSA (involving an
investigation begun in 2001 by Florida, Illinois, California, and New
York into the telemarketing operations of national banks in which the
OCC unsuccessfully sought to dissuade banks from concluding settlements
with the States); In the matter of Citibank, US Banks et. al.
(involving an investigation of online gambling by New York); In the
matter of Key National Bank (involving an investigation by Maryland,
Missouri, and Illinois into student loans in which the OCC claimed it
alone would make a determination of liability and after issuing its
recent regulations, the OCC notified the Illinois Attorney General's
office that it would not pursue the case against Key).
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The OCC, to my knowledge, has participated in only one
significant consumer protection settlement involving Providian
Bank in California. The case actually was initiated by a local
district attorney who was investigating violations of
California's State unfair and deceptive practices law, and the
settlement was negotiated by the offices of the district
attorney and the California Attorney General, along with the
OCC. The OCC helped local and State officials with the case by
joining in the investigation and settlement.\3\ It is worth
noting that the OCC did not oppose the State and local
officials' participation or their ability to enforce the
agreement. This case is an example of why it is good to have a
State-Federal partnership. Yet, had the OCC's recently adopted
rules existed in 2001, California's law arguably could have
been preempted and neither the district attorney nor the
attorney general could have initiated the case, begging the
question: Would the OCC have ever brought the case if it had
not been initiated by local and State law enforcement? This
case underscores my central concern that having 51 cops on the
beat is better than having one.
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\3\ Another example of the OCC supporting State law enforcement
concerns payday lending. My office was concerned about entities
engaging in unauthorized payday lending in violation of North Carolina
usury law through a subterfuge known as ``charter renting.'' Charter
renting is when a payday lender affiliates with a bank in order to
benefit from the bank's preemptive authority concerning interest rates.
To its credit, the OCC acted on safety and soundness grounds to prevent
several national banks from renting their charters to payday lenders.
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I sincerely wish that the OCC would seek to partner with
the States in protecting consumers and solving their problems.
The State attorneys general and the OCC share common goals of
eliminating unfair and deceptive practices and in assuring a
fair and competitive credit marketplace. So it would be far
preferable if we acted to complement each other's efforts
because there is more than enough work for us all. Consumers
need more public officials to enforce the law, not fewer.
The attorneys general have worked well with other Federal
agencies in exercising our dual enforcement authority in other
areas. My office has an excellent working relationship with the
Federal Trade Commission (FTC). The FTC has made a commendable
effort to communicate and partner with State attorneys general.
We jointly bring lawsuits against scofflaws, participate in
common consumer education efforts, cosponsor conferences, share
information, and use the FTC's Consumer Sentinel Database. In
addition to the FTC, attorneys general have good working
relationships with other Federal law enforcement agencies,
including U.S. Attorneys, the FBI, the U.S. Postal Inspector,
U.S. Customs, and HUD, among others.
My office brought a predatory lending case that underscores
how having both State and Federal law enforcement ultimately
benefits consumers. In 2001, my office settled predatory
lending allegations against The Associates resulting in $20
million in consumer restitution to North Carolinians. A year
later, the FTC achieved a national settlement with the same
entity for $215 million. While North Carolina and the FTC
initiated separate investigations into The Associates' lending
practices, we avoided turf battles by consulting with each
other regularly. I believe that North Carolina's result helped
established a consumer friendly framework for the FTC and the
Nation. Instead of competing over jurisdiction, we complemented
each other's efforts, and most importantly, protected
consumers.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON
FROM GAVIN M. GEE
Q.1. Have you analyzed whether State-chartered institutions in
States with ``wild card'' statutes will be able to operate
under the new OCC preemption rules? If you have not, I would
ask that you conduct a survey of how many States have such
statutes, and what effect those provisions would have in terms
of numbers of institutions potentially covered by the rule.
A.1. Most ``wild card'' statutes authorize State chartered
institutions to engage in activities that are allowed for
national banks and do not preempt State consumer protection
laws regarding any activity. While a few States have enacted
statutes that preempt their own law if it is preempted for a
national bank, it is not something that has been widely
adopted. I do not believe that any more States will be adopting
those types of statutes because virtually all State consumer
protection laws have now been preempted by the OCC. At this
point a State would just be giving up its right to protect its
consumers by adopting such a provision. Attached is a summary
of the wild card statutes that are currently in place.
Q.2. Do you support efforts a Federal predatory lending law? If
not, why not? Would your position change if the OCC rule is
upheld by the courts?
A.2. If the U.S. Congress wants to craft a uniform Federal
predatory lending law we stand ready to help you accomplish
that goal. We do not oppose Federal preemption when it is done
by elected officials after serious public debate. Remember,
though, that the vast majority of institutions in the country
do not have to comply with a State or Federal predatory lending
law at this point in time. In effect you would be adding a new
regulatory burden in States that have been using their unfair
and deceptive practices acts effectively to deter predatory
lending without adding new burdens to institutions that are not
engaged in those types of practices.
An alternative that groups of State regulators are
considering is for the States to agree upon, and adopt, a
uniform approach to predatory lending.
The Comptroller of the Currency has stepped in and created
its own predatory lending standard with no guidance from the
U.S. Congress, it has told the States that they have no
authority to enforce State consumer protection statutes against
national banks and their subsidiaries, and the courts have used
the Chevron Doctrine to give the Comptroller unfettered
discretion. It is time for Congress to reassert its authority
over this agency and restore the balance of power.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER
FROM GAVIN M. GEE
Q.1. Mr. Gee, one of the other witnesses says that if States
regulate operating subs, these operating subs will simply roll
up into the national bank or a Federal thrift to avoid State
regulation. Do you think this is a real possibility for the
operating subs? And what might be the impact on the State
regulatory system?
A.1. There are a number of reasons that a national bank or a
Federal thrift may want to engage in certain lending activities
through a subsidiary. For example, a national bank may want to
avoid branching restrictions by engaging in limited activities
across State lines through a subsidiary. A national bank or a
Federal thrift may want the benefits of protections provided by
a separate corporation afforded through State law to engage in
riskier activities without putting the parent corporation in
jeopardy.
States have traditionally licensed and regulated these
entities. After the sweeping preemption of State law for
operating subsidiaries of national banks, we have reason to
believe that these entities will now turn in their State
licenses and ignore State law. There is no reason to believe
that, if these entities were brought back under the scrutiny of
the State regulators, they would roll up into the national bank
to avoid State regulation. In addition, it is my understanding
that the OCC is offering this protection from State oversight
to an entity with as little as 25 percent ownership by a
national bank. The national bank would have to own 100 percent
of the stock in a subsidiary to roll it up into the bank
itself.
Q.2. Mr. Gee, give me an historical working relationship has
been with current working relationship is with the OCC? Which
Federal agencies do you have the best and why? Do you think
such a relationship is possible with the OCC?
A.2. There has always been a competitive tension between the
OCC and the State banking departments. Unfortunately at the
moment, given the OCC's current actions, the impression in the
States is that the OCC is using regulatory interpretations to
preempt State consumer protection law in order to gain a
competitive advantage and bring more institutions under the
jurisdiction of the Comptroller. Sweeping aside all State
consumer protection laws that ``condition'' the activities of a
national bank and eliminating any State authority over
subsidiaries of national banks has done nothing to foster a
positive working relationship or trust between the States and
the Office of the Comptroller of the Currency.
The State regulators have a good working relationship with
the Federal Deposit Insurance Corporation and the Federal
Reserve. In 1996, all 50 States signed a nationwide State-
Federal supervisory agreement with the FDIC and the Federal
Reserve laying out how multi-State, State-chartered banks would
be supervised while minimizing the burdens imposed on banks. In
Idaho, every safety and soundness examination of every bank is
currently conducted jointly with the FDIC or the Federal
Reserve.
The sweeping nature of the OCC's recent preemption
pronouncements and the absolute disregard for any State
authority have made this kind of relationship with the OCC
difficult at best. Starting over with a Congressional Review
Act repeal of these regulations and having the OCC reach out
for serious consultation with State regulators and attorneys
general on how consumer protection issues for customers of
national banks will be handled would be a good start in
repairing the relationship with the States.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON
FROM MARTIN EAKES
Q.1. If I understand your position correctly, you would like
Congress, in effect, to nullify the OCC preemption rule. What
is your position with respect to the preemptive authority of
federally chartered thrifts and credit unions? Are you asking
Congress to modify those charters to prevent preemption of
State consumer protection laws, and if not, why not? What
distinctions do you see between national banks and these other
federally chartered entities?
A.1. I support efforts in Congress to overturn the OCC's final
rule on preemption of State anti-predatory lending laws and on
States' visitorial powers. As I stated in my written testimony,
I oppose the OCC's actions for four main reasons:
The OCC's final regulation rolls back State
legislation that has curbed abusive lending practices while
preserving access to credit. The OCC's action will
undermine creative efforts by States to protect their
citizens from evolving financial abuses.
The OCC's final regulation has all but eliminated the
essential role that States have played in enforcing State
laws against abusive lending by national banks, and
particularly, by their operating subsidiaries. Instead of
complementing a State's efforts, the OCC seeks to replace
them, at a catastrophic cost to American homeowners.
The OCC has blatantly ignored Congressional directives
to refrain from interfering with State efforts to protect
its citizens from abusive lending unless the Federal policy
interest is clear and the legal basis is compelling.
The OCC's actions will make the national bank charter
a safe haven for abusive lenders, an outcome that is bad
for borrowers and bad for banks.
I also do not support the OTS and NCUA rulings that Federal
law preempts State predatory lending laws. However, there are
distinct differences between the OCC preemption ruling and the
OTS and NCUA rulings. Regarding NCUA, credit unions are already
strongly regulated. Credit unions are prohibited from charging
more than 18 percent interest on loans, and are banned from
charging prepayment penalties, among other limits on lending
practices. Further, credit unions make up a very small
percentage of the overall mortgage lending market in the United
States. As such, NCUA's footprint is very limited. The OTS
order affects a larger number of institutions, but still a much
smaller universe than OCC-regulated institutions.
The OCC's announcement and its subsequent public statements
go beyond preemption of State laws. The OCC has shown outright
enmity toward anti-predatory lending laws in general. Its
specific criticism of the North Carolina law is based solely on
poor research that shows the OCC's outright bias against State
laws of any sort. In addition, it is the view of many legal
commentators that the OCC's preemption order is based on much
weaker legal ground than the OTS and NCVA orders. And, the
OCC's order reverses decades of its own precedent in using
preemption only when a law presents a clear conflict with
Federal law or with existing OCC regulations. State anti-
predatory lending laws do neither.
The combination of the OCC's very aggressive use of
preemption in this case, the complete disregard for the OCC's
own precedent and established legal doctrine, and the OCC's
misplaced hostility toward anti-predatory lending laws in
general--and North Carolina's in particular--led me to take a
much stronger stance on the OCC's misplaced use of preemption.
Q.2. Do you support efforts to craft a Federal predatory
lending law? If not, why not? Would your position change if the
OCC rule is upheld by the courts?
A.2. I have had and continue to have good-faith discussions
with those in industry who would like to replace State anti-
predatory lending laws with a single Federal standard. I
cannot, however, support a law that sets a weak standard and
preempts State laws. The progression of State laws makes clear
that we are starting to see agreement on certain issues. The
flipping standard in the North Carolina law and others, which
requires that lenders provide borrowers in refinance
transactions with a reasonable, net tangible benefit, does not
evoke much, if any, controversy from lenders, ratings agencies,
or other mortgage players.
The standard Congress sets has to be strong, and should be
a floor for States, not a ceiling. With a strong Federal
standard as a floor, State legislatures will undertake the
arduous work of enacting State legislation that is often
opposed by large industry players only when absolutely
necessary to address problems unique to that State. States must
retain the flexibility to deal with new abuses that may crop up
in their jurisdictions. Congress does not have the ability to
foresee local abuses that lurk just around the corner. As such,
Congress should not deny States the ability to act to protect
its citizens.
Because the courts give great deference to the actions of
Federal agencies, I assume the courts may uphold the OCC's
decision. That result does not mean that the OCC's recent
actions represent good policy. A Federal law that sets a floor,
that sets explicit boundaries for the OCC's preemptive
authority, and that restores the ability of States to protect
their citizens would be a positive step for Congress to take.