[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


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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\
---------------------------------------------------------------------------
    \1\ Colo. Rev. Stat. Sec. 5-3.5-303(2).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \2\ Ga. Code Ann. Sec. 7-6A-12.
    \3\ Ga. House Bill 1171, Sec. 6.
---------------------------------------------------------------------------
    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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.



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