[Federal Register Volume 66, Number 100 (Wednesday, May 23, 2001)]
[Notices]
[Pages 28593-28596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-12946]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 01-10]


Preemption Determination

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
publishing its response to a written request for the OCC's opinion of 
whether Federal law would preempt a Michigan statute, as interpreted by 
the Michigan Financial Institutions Bureau, that limits the ability of 
national banks to make loans to finance motor vehicle sales. The OCC 
has determined that the state law, as interpreted, would be preempted 
under Federal law.

FOR FURTHER INFORMATION CONTACT: MaryAnn Nash, Counsel, or Mark 
Tenhundfeld, Assistant Director, Legislative and Regulatory Activities 
Division, (202) 874-5090.

SUPPLEMENTARY INFORMATION: The request for a preemption opinion was 
submitted by two national banks, headquartered in Ohio, that are 
engaged in the business of motor vehicle financing in Ohio and other 
states (collectively, the Requesters). As part of that business, the 
Requesters engage in motor vehicle sales financing through automobile 
dealers. In these arrangements, the Requesters enter into agreements 
with dealers under which the dealers act as the Requesters' agents for 
the purpose of soliciting loans to finance motor vehicles, taking 
applications for the vehicle loans,

[[Page 28594]]

preparing loan documentation, and obtaining the buyers' signatures. The 
Requesters prescribe the terms of the loan, including the interest 
rate, fund the loan, and issue loan approvals in Ohio.
    In a ruling dated January 1, 2000, the Michigan Financial 
Institutions Bureau (FIB) issued a declaratory ruling in which it 
concluded that the proposed arrangement between the Requesters and the 
dealers would result in ``installment sales contracts'' governed by the 
Michigan Motor Vehicle Sales Act (MVSFA). Compliance with the MVSFA 
effectively would prohibit the Requesters from originating motor 
vehicle loans using dealers as agents.
    The Requesters have asked for the OCC's opinion on whether the 
National Bank Act would preempt the MVSFA as interpreted by the FIB. 
The Requesters note that the National Bank Act expressly authorizes 
national banks to make loans as well as to engage in activities 
incidental to lending. 12 U.S.C. 24 (Seventh). The Requesters assert 
the FIB's characterization of its proposed program as an ``installment 
sales contract'' subject to the provisions of the MVSFA impairs their 
ability to exercise a Federally authorized power.
    As is explained in greater detail in the response, the OCC agrees 
that national banks are authorized under 12 U.S.C. 24 (Seventh) to 
engage in the business of lending, either directly or through an agent. 
The OCC further agrees that the Michigan law, as interpreted by the 
FIB, would be preempted. It frustrates the Requesters ability to 
exercise their lending authority by limiting the Requesters' use of 
agents, it prohibits the Requesters from charging interest rates 
permitted by their home state as authorized by 12 U.S.C. 85, and it 
seeks to apply a state licensing requirement to national banks, as a 
precondition to their exercise of powers granted under Federal law.
    Section 114 of the Riegle-Neal Interstate Banking and Branching 
Efficiency Act of 1994 generally requires the OCC to publish notice in 
the Federal Register of requests for preemption opinions in one of the 
four specified areas: community reinvestment, consumer protection, fair 
lending, or the establishment of intrastate branches. 12 U.S.C. 43. 
Section 114 also requires the OCC to publish any final opinion letter 
in which the OCC concludes that Federal law preempts a state law in one 
of these four areas. Without expressly determining whether section 114 
applied to this request, the OCC published a Notice of Request for 
Preemption Determination dated October 25, 2000 (65 FR 63917). The OCC 
is publishing its response to the request as an appendix to this 
notice.

    Dated: May 15, 2001.
John D. Hawke, Jr.,
Comptroller of the Currency.

Appendix

Thomas A. Plant
Senior Vice President, Assistant General Counsel, National City 
Bank, 1900 East Ninth Street, Cleveland, OH 44114-3484

Daniel W. Morton
Vice President and Senior Counsel, The Huntington National Bank, 
Legal Department, 10th Floor, Huntington Center, Columbus, OH 43287

Re: Michigan Motor Vehicles Sales Finance Act

    Dear Messrs. Plant and Morton: This responds to your letters 
dated September 14, 2000 and September 21, 2000 (collectively, the 
Letters) on behalf of National City Bank, Cleveland, Ohio and The 
Huntington National Bank, Columbus, Ohio (collectively, the Banks). 
In the Letters, you request confirmation by the Office of the 
Comptroller of the Currency of your view that Federal law preempts a 
Michigan statute, as interpreted by the Michigan Financial 
Institutions Bureau (FIB), that limits the ability of national banks 
to make loans to finance motor vehicle sales. For the reasons 
discussed below, we conclude that Federal law would preempt the 
Michigan statute as interpreted by the FIB.

Background

    The Banks are national banks headquartered in Ohio with offices 
in several other states. The Banks are engaged in the business of 
motor vehicle financing in Ohio and other states. The Banks 
typically engage in motor vehicle sales financing through automobile 
dealers. In these arrangements, the Banks enter into agreements with 
the dealers under which the dealers act as the Banks' agents for the 
purpose of soliciting loans to finance motor vehicles, taking 
applications for the vehicle loans, preparing the loan 
documentation, and obtaining the buyers' signatures on all required 
documents. The Banks prescribe the terms of the loan, including the 
minimum interest rate, and fund the loans and issue loan approvals 
in Ohio.
    Because of questions regarding the interpretation of Michigan 
law, the Banks first sought a declaratory ruling from FIB on the 
applicability of the Michigan Motor Vehicle Sales Act (the MVSFA) to 
this proposed arrangement. In a ruling dated January, 1, 2000 (the 
Ruling),\1\ the FIB concluded that, the proposed arrangement between 
the banks and Michigan motor vehicle dealers would result in 
``installment sale contracts'' subject to the MVSFA.\2\ However, in 
order for a motor vehicle installment sale contract to comply with 
the MVSFA: (1) The dealer must originate the loan as a licensed 
installment seller of motor vehicles; and (2) the bank may only 
purchase the loan as a licensed sales finance company.\3\ The 
transaction must also comply with the several other requirements of 
the MVSFA that apply to installment sale contracts.\4\ This 
interpretation of the MVSFA effectively prohibits a national bank 
from originating motor vehicle loans using a dealer as the bank's 
agent. You asked our view on whether Federal law would preempt the 
MVSFA as interpreted by the FIB.
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    \1\ In the Matter Of: Request by Rodney D. Martin on Behalf of 
National City Bank for a Declaratory Ruling on the Applicability of 
the Motor Vehicle Sales Finance Act to Certain Transactions (January 
1, 2000).
    \2\ Section 2 of the MVSFA defines an ``installment sale 
contract'' as one ``for the retail sale of a motor vehicle, or which 
has a similar purpose or effect, under which part or all of the 
price is payable in 2 or more scheduled payments subsequent to the 
making of the contract * * *.'' Michigan Compiled Laws (MCL) 
492.102(9); Michigan Sales Act (MSA) 23.628(2)(9).
    \3\ MCL 492.103(a)and (b); MSA 23.628(3)(a) and (b).
    \4\ These include, for example, provisions concerning the form 
and contents of an installment sales contract, disclosures that must 
be made to the buyer, the amount and computation of fees and finance 
charges, and prohibited charges. See MCL 492.112-492.134.
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    The OCC published a notice of your request in the Federal 
Register,\5\ and invited interested parties to comment. The OCC 
received thirteen comments in response to the notice. Several 
commenters opined that Federal law does preempt the state law in 
question. These commenters cited the authority of national banks 
under 12 U.S.C. 24(Seventh) to engage in lending activities and 
other activities necessary to carry on the business of banking. 
These commenters also noted that Federal law preempts state laws 
that purport to regulate an activity that is authorized by Federal 
law and that insured depository institutions are free to engage in 
the full range of permissible activities in accordance with the 
Gramm-Leach-Bliley-Act (GLBA).
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    \5\ See 65 FR 63917 (October 25, 2000)(the Notice). As stated in 
the Notice, section 114 of the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994 (the Riegle-Neal Act) (Pub. L. 103-
328, sec. 114, 108 Stat. 2338, 2366-68 (1994), codified at 12 U.S.C. 
43) requires the OCC to publish notice in the Federal Register 
before issuing a final written opinion about the preemptive effect 
of Federal law in the areas of community reinvestment, consumer 
protection, fair lending, and the establishment of interstate 
branches. Without making a determination as to whether section 114 
applies to this preemption opinion request, the OCC decided that it 
was appropriate to use notice and comment procedures given the 
significance of the legal issues presented.
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    The remaining commenters opined that Federal law should not be 
viewed as preempting the MVSFA as interpreted by the FIB. One of 
these commenters, the Michigan Commissioner of the Office of 
Financial and Insurance Services, submitted a lengthy comment 
restating the conclusions reached by the FIB in its Declaratory 
Ruling and raising several other arguments opposing Federal 
preemption of what the State regulator views as a State consumer 
protection act. The other commenters asserted, variously, that the 
Riegle-Neal Act requires a national bank to establish a branch in 
order to lend money in another state, that the OCC should not issue 
any opinion stating

[[Page 28595]]

or implying that non-bank entities may benefit from the preemptive 
effect of the National Bank Act when they act as agents for national 
banks, and that the OCC should defer to Michigan regulator's 
interpretation of the Michigan statute. One commenter adopted a more 
neutral stance and encouraged the OCC to be mindful of the vital 
interests of states in the area of consumer protection.

Analysis

Permissibility of the Activity

    The threshold question in any preemption analysis is whether the 
activities in question are permissible for a national bank under 
Federal law. If they are not, then there is no preemption issue.
    The Banks' proposed activity is fashioned from three component 
parts: The Banks propose to engage in the business of lending, they 
seek to use third-party agents in connection with that business, and 
they seek to apply the interest rates permissible in their home 
state to these motor vehicle loans. All three activities are 
permissible under Federal law.
    First, section 24(Seventh) specifically authorizes national 
banks to make loans. Thus, a national bank need look no further than 
the express language of the statute for authorization to make loans. 
Section 24(Seventh) also authorizes national banks to engage in the 
more general ``business of banking'' and activities incidental 
thereto. The Supreme Court has made clear that the ``business of 
banking'' authorized by section 24(Seventh) is a broad, flexible 
concept that allows the National Bank Act to adapt to changing 
times. See NationsBank of North Carolina, N.A. v. Variable Annuity 
Life Ins. Corp., 513 U.S. 251, 258, n.2 (1995) (``We expressly hold 
that the ``business of banking'' is not limited to the enumerated 
powers in section 24 Seventh and that the Comptroller therefore has 
discretion to authorize activities beyond those specifically 
enumerated.''). An activity will be deemed ``incidental'' to the 
business of banking if it is ``convenient or useful in connection 
with the performance of'' a power authorized under Federal law. 
Arnold Tours, Inc. v. Camp, 472 F.2d 427, 432 (1st Cir. 1972).
    Second, the authority of national banks under section 
24(Seventh) permits a national bank to use the services of agents 
and other third parties in connection with a bank's lending 
business. Federal banking regulations specifically provide that a 
national bank may ``use the services of, and compensate persons not 
employed by, the bank for originating loans.'' \6\ 12 CFR 7.1004(a). 
Likewise, the regulations permit national banks to utilize the 
services of third parties to disburse loan proceeds. 12 CFR 
Sec. 7.1003(b). These agents may undertake these activities at sites 
that are neither the main office nor a branch office of the bank 
provided the requirements of those regulations are satisfied. 12 CFR 
Secs. 7.1003(b), 7.1004(b).
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    \6\ This is not a situation where a loan product has been 
developed by a non-bank vendor that seeks to use a national bank as 
a delivery vehicle, and where the vendor, rather than the bank, has 
the preponderant economic interest in the loan.
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    Finally, under 12 U.S.C. 85, national banks may charge interest 
in accordance with the laws of the state where the bank's main 
office is located without regard to where the borrower resides and 
despite contacts between the loan and another state. The U.S. 
Supreme Court has specifically upheld this authority. Marquette 
National Bank v. First of Omaha Service Corp., 439 U.S. 299 
(1978).\7\ Based on this analysis, it is clear that each of the 
component activities that together comprise the Banks' proposed 
activities through Michigan automobile dealers is permissible under 
well-settled authority.\8\
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    \7\ See also OCC Interpr. Ltr. No. 822 (February 17, 1998), 
reprinted in (1997-1998 Transfer Binder) Fed. Banking L. Rep. (CCH) 
P 81-265 (identifying circumstances, not applicable here, under 
which national banks must use rates permitted by a state, other than 
its main office state, in which the bank has a branch).
    \8\ As mentioned above, several commenters questioned the 
permissibility of the Banks activities under the Riegle-Neal Act. 
These commenters argued that, under the Riegle-Neal Act, the Banks 
would be required to establish branches in Michigan in order to lend 
money there and that Michigan state consumer protection laws would 
apply to the branches. Nothing in the Riegle-Neal Act, however, 
requires that a bank have a branch in a state as a prerequisite to 
lending in that state. (We note that both banks have branches in 
Michigan. Consequently, the provision of the Riegle-Neal Act 
relating to the applicability of state law to a branch of an out-of-
state bank is discussed subsequently in this letter.)
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Preemptive Effect of Federal Law

    In our opinion, Federal law preempts the MVSFA as interpreted by 
the FIB in its Declaratory Ruling, because the statute, as 
interpreted, conflicts with Federal law authorizing the Bank to 
engage in the activities in question and with the OCC's exclusive 
visitorial powers over national banks. These points are addressed in 
more detail below, following a brief summary of the law governing 
preemption and the OCC's visitorial powers.

Preemption and Visitorial Powers

    When the Federal government acts within the sphere of authority 
conferred upon it by the Constitution, Federal law is paramount 
over, and may preempt, state law. U.S. Const. art. VI, cl. 2 (the 
Supremacy Clause); Cohen v. Virginia, 19 U.S. (6 Wheat.) 264, 414 
(1821) (Marshall, C.J.). Federal authority over national banks stems 
from several constitutional sources, including the Necessary and 
Proper Clause and the Commerce Clause of the United States 
Constitution. U.S. Const. art. I, section 8, cl.3, cl. 18; McCulloch 
v. Maryland, 17 U.S. (4 Wheat.) 316, 409 (1819).
    The United States Supreme Court has identified several bases for 
Federal preemption of state law. First, Congress may expressly state 
that it intends to preempt state law. E.g., Jones v. Rath Packing 
Co., 430 U.S. 519 (1977). Second, a Federal statute may create a 
scheme of Federal regulation ``so pervasive as to make reasonable 
the inference that Congress left no room for the States to 
supplement it.'' Rice v. Norman Williams Co., 458 U.S. 654, 659 
(1982). Third, the state law may conflict with a Federal law. See, 
e.g., Franklin National Bank, 347 U.S. 373 (1954); Davis v. Elmira 
Savings Bank, 161 U.S. 275 (1896). In elaborating on this third 
test, the Supreme Court has stated--
    Federal law may be in ``irreconcilable conflict'' with state 
law. Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982). 
Compliance with both statutes, for example, may be a ``physical 
impossibility,'' Florida Lime & Avocado Growers, Inc. v. Paul, 373 
U.S. 132, 142-143 (1963); or, the state law may ``stan[d] as an 
obstacle to the accomplishment and execution of the full purposes 
and objectives of Congress.'' Hines v. Davidowitz, 312 U.S. 52, 67 
(1941).
    Barnett Bank v. Nelson, 517 U.S. 25, 31 (1996). The Court in 
Barnett went on to state that--
    In defining the pre-emptive scope of statutes and regulations 
granting a power to national banks, these cases (i.e., national bank 
preemption cases) take the view that normally Congress would not 
want States to forbid, or to impair significantly, the exercise of a 
power that Congress explicitly granted. To say this is not to 
deprive States of the power to regulate national banks, where * * * 
doing so does not prevent or significantly interfere with the 
national bank's exercise of its powers.

517 U.S. at 33.
    A conflict between a state law and Federal law need not be 
complete in order for Federal law to have preemptive effect. Where a 
Federal grant of authority is unrestricted, for example, state law 
that attempts to place limits on the scope and exercise of that 
authority will be preempted. See, e.g., New York Bankers 
Association, Inc. v. Levin, 999 F. Supp. 716 (W.D.N.Y. 1998). Thus, 
Federal law preempts not only state laws that purport to prohibit a 
national bank from engaging in an activity permissible under Federal 
law but also state laws that condition or confine the exercise by a 
national bank of its express or incidental powers.
    As the Court stated in Barnett,
    * * * where Congress has not expressly conditioned the grant of 
``power'' upon a grant of state permission, the Court has ordinarily 
found that no such condition applies. In Franklin Nat. Bank, the 
Court made this point explicit. It held that Congress did not intend 
to subject national banks' power to local restrictions, because the 
Federal power-granting statute there in question contained ``no 
indication that Congress [so] intended * * * as it has done by 
express language in several other instances.''

517 U.S. at 34 (citations omitted; emphasis in original).

Application of Federal Law to State Statutes

    As noted above, it is well established that a national bank may 
engage in the business of lending, either directly or through an 
agent. See 12 U.S.C. 24(Seventh). In our view, the FIB's 
interpretation of Michigan law to include bank originated loans 
within the definition of ``installment sales contracts'' subject to 
the MVSFA conflicts with Federal law and significantly interferes 
with the Banks' ability to exercise their lending authority in three 
distinct ways.

[[Page 28596]]

    First, the FIB's interpretation of Michigan law prohibits banks 
from using automobile dealers as agents to originate loans. Congress 
intended to permit national banks to have ``all such incidental 
powers as shall be necessary to carry on the business of banking.'' 
12 U.S.C. 24(Seventh). Federal regulations expressly interpret this 
grant to include the authority to use agents to originate loans. See 
12 CFR Sec. 7.1004. To the extent that a state asserts the right to 
restrict or condition a national bank's exercise of the Federally 
granted powers, that state's law will be preempted. Barnett, supra, 
at 34; Franklin, supra, at 378; Bank of America National Trust & 
Savings Ass'n. v. Lima, 103 F. Supp. 916, 918, 920 (D. Mass. 1952) 
(exercise of national bank powers is not subject to state approval; 
states have no authority to require national banks to obtain a 
license to engage in an activity permitted to them by Federal 
law).\9\
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    \9\ See also OCC Interpr. Ltr. No. 866 (Oct. 8, 1999), reprinted 
in [1999-2000 Transfer Binder] Fed. Banking L. Rep. (CCH) P 81-360 
(state law requirements that purport to preclude national banks from 
soliciting trust business from customers located in states other 
than where the bank's main office is located would be preempted); 
OCC Interpr. Ltr. No. 749 (Sept. 13, 1996), reprinted in [1996-1997 
Transfer Binder] Fed. Banking L. Rep. (CCH) P 81-114 (state law 
requiring national banks to be licensed by the state to sell 
annuities would be preempted); OCC Interpr. Ltr. 644 (March 24, 
1994), reprinted in [1994 Transfer Binder] Fed. Banking L. Rep. 
(CCH) P 83,553 (state registration and fee requirements imposed on 
mortgage lenders would be preempted).
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    Second, by effectively prohibiting the Banks from originating 
loans at an automobile dealership in Michigan, the FIB's 
interpretation of the MVSFA prevents the Banks from exercising its 
power under 12 U.S.C. 85, as previously discussed, to charge the 
interest rates permitted by its home state, Ohio. To the extent the 
FIB interprets the MVSFA to subject the Banks to interest rate 
limitations of other states, it is preempted by Federal law.
    Finally, it is our opinion that the FIB's interpretation of the 
MVSFA that would require a national bank to obtain a state license 
and treat the transaction as a loan purchase from a dealership also 
is preempted by the Federal law giving the OCC exclusive visitorial 
authority over national banks. A state requirement that a national 
bank obtain state approval or license to exercise a power authorized 
under Federal law is an assertion by the state that it has 
supervisory or regulatory authority over national banks. This is in 
direct conflict with the Federal law providing that the OCC has 
exclusive visitorial powers over national banks except as otherwise 
provided by Federal law. 12 U.S.C. 484; 12 CFR 7.4000. A state law 
that purports to vest this authority in a state is preempted. In 
this case, it is our opinion that the FIB's application of the state 
licensing requirement to national banks would be preempted on this 
basis as well.
    The characterization by several of the commenters of the MVSFA 
as a consumer protection statute does not alter this conclusion. 
With respect to banks with interstate branches, the Riegle-Neal Act 
provides:
    [t]he laws of the host State regarding community reinvestment, 
consumer protection, fair lending, and establishment of intrastate 
branches shall apply to any branch in the host State of an out-of-
state national bank to the same extent as such state laws apply to a 
branch of a bank chartered by that State except--
    (i) When Federal law preempts that application of such state 
laws to a national bank * * *

12 U.S.C. 36(f)(1)(A) (emphasis added).
    Thus, the Riegle-Neal Act does not protect state consumer laws 
to the extent that they are preempted by Federal law and, as 
discussed, it is our opinion that the MVFSA is preempted by Federal 
law.\10\
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    \10\ In addition, we note under the circumstances that section 
85 permits the bank to charge interest in accordance with Ohio law 
and preempts any state law requirement that Michigan usury law 
applies to the loans at issue. See OCC Interpr. Ltr. 822, supra n. 
6. Because the activities in question do not involve insurance, the 
unique preemption standard established under the McCarran-Ferguson 
Act is not at issue 12 U.S.C. 1012. Nor are the recently enacted 
provisions of the GLBA. 15 U.S.C. 6701.
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Conclusion

    To the extent the FIB interprets the MVSFA to limit the Banks' 
proposed motor vehicle financing arrangement, it is our opinion that 
it is preempted by Federal law. We trust that this is responsive to 
your inquiry. Our conclusions are based on the facts and 
representations made in your letters. Any material change in facts 
or circumstances could affect the conclusions stated in this letter.


        Sincerely,

Julie L. Williams,
First Senior Deputy Comptroller and Chief Counsel.

[FR Doc. 01-12946 Filed 5-22-01; 8:45 am]
BILLING CODE 4810-33-P