[Federal Register Volume 68, Number 150 (Tuesday, August 5, 2003)]
[Proposed Rules]
[Pages 46119-46132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19906]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 7 and 34

[Docket No. 03-16]
RIN 1557-AC73


Bank Activities and Operations; Real Estate Lending and 
Appraisals

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) proposes 
to amend parts 7 and 34 of our regulations to add provisions clarifying 
the applicability of state law to national banks. These provisions 
would identify types of state laws that are preempted, as well as types 
of state laws that generally are not preempted, in the context of 
national bank lending, deposit-taking, and other authorized activities.

DATES: Comments must be received by October 6, 2003.

ADDRESSES: Please direct your comments to: Office of the Comptroller of 
the Currency, 250 E Street, SW., Public Information Room, Mailstop 1-5, 
Washington, DC 20219, Attention: Docket No. 03-16, fax number (202) 
874-4448; or Internet address: [email protected]. Due to 
delays in paper mail delivery in the Washington area, we encourage the 
submission of comments by fax or e-mail whenever possible. Comments may 
be inspected and photocopied at the OCC's Public Information Room, 250 
E Street, SW., Washington, DC. You can make an appointment to inspect 
comments by calling (202) 874-5043.

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

SUPPLEMENTARY INFORMATION:

Scope of National Bank Preemption

A. Introduction

    In recent years, the OCC has received numerous inquiries concerning 
the applicability of state law to national banks,\1\ and the extent to 
which state law applies to a national bank's exercise of powers 
authorized by Federal law has been the subject of litigation in 
different contexts.\2\ The number and variety of

[[Page 46120]]

these questions reflect a need for clarification of the circumstances 
when state laws or regulations apply to activities and operations of 
national banks. Without further clarification, national banks, 
particularly those with customers in multiple states, face uncertain 
compliance risks and substantial additional compliance burdens and 
expense that, for practical purposes, materially impact their ability 
to offer particular products and services.
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    \1\ In response to such requests, the OCC has issued a number of 
interpretive opinions providing our views with respect to the 
applicability to national banks of various state laws. See, e.g., 67 
FR 13405 (Mar. 22, 2002) (Massachusetts insurance sales law); 66 FR 
51502 (Oct. 9, 2001) (West Virginia insurance sales law); see also 
Cline v. Hawke, No. 02-2100, 2002 WL 31557392 (4th Cir. Nov. 19, 
2002), petition for review dismissed (upholding OCC opinion on the 
merits); 66 FR 28593 (May 23, 2001) (Michigan motor vehicle sales 
law); 66 FR 23977 (May 10, 2001) (Ohio automobile dealer licensing 
law); 65 FR 15037 (Mar. 20, 2000) (Pennsylvania law governing 
auctioneers and the conduct of auctions); OCC Interpretive Letter 
No. 866 (Oct. 8, 1999) (multi-state fiduciary operations); OCC 
Interpretive Letter No. 872 (Oct. 28, 1999) (California restrictions 
on the exercise of fiduciary powers); and OCC Interpretive Letter 
No. 695 (Dec. 8, 1995) (multi-state fiduciary operations).
    \2\ 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), 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 ATMs; municipal 
ordinances prohibiting such fees are invalid under the Supremacy 
Clause); Wells Fargo Bank, Texas, N.A. v. James, 321 F.3d 488 (5th 
Cir. 2003) (Texas statute prohibiting certain check cashing fees is 
preempted by the National Bank Act); Metrobank v. Foster, 193 F. 
Supp. 2d 1156 (S.D. Iowa 2002) (national bank authority to charge 
fees for ATM use preempted Iowa prohibition on such fees). See also 
Bank One, Utah v. Guttau, 190 F.3d 844 (8th Cir. 1999), cert. denied 
sub nom Foster v. Bank One, Utah, 529 U.S. 1087 (2000) (holding that 
Federal law preempted Iowa restrictions on ATM operation, location, 
and advertising).
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    A recent inquiry by National City Bank, National City Bank of 
Indiana, and two operating subsidiaries of these banks (collectively, 
National City) concerning the Georgia Fair Lending Act (GFLA)\3\ 
illustrates the impact that state laws can have on a national bank's 
lending activities. Our analysis of the issues raised by National City 
in the response to the bank, which is discussed below and published in 
full elsewhere in this edition of the Federal Register (National City 
Order), underscores the need for clarity and more predictability in our 
regulations concerning the extent to which state laws apply to national 
banks' real estate lending activities as well as other aspects of 
national bank activities.
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    \3\ GA Code Ann. Sec. Sec.  7-6A-1 et seq.
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    Due to the number and significance of the questions that continue 
to arise with respect to the preemption of state laws in these areas, 
we believe it is now timely to provide more comprehensive standards 
regarding the applicability of state laws to lending, deposit-taking, 
and other authorized activities of national banks. Accordingly, we are 
proposing to amend our regulations to provide such standards.

B. Principles of Preemption in the National Bank Context

    Preemption is not a new concept. It is a doctrine, based on 
Constitutional principles, that has been recognized by the Supreme 
Court since the earliest years of our Nation's history. In 1819, in the 
landmark case of McCulloch v. Maryland, the Court held that under the 
Supremacy Clause of the U.S. Constitution, states ``have no power, by 
taxation or otherwise, to retard, impede, burden, or in any manner 
control, the operations'' of an entity created under Federal law.\4\ 
Notably, the entity involved in that case was a bank chartered under 
Federal law, the Second Bank of the United States. As discussed below, 
since the creation of the national banking system in 1863, courts have 
applied comparable principles of Federal preemption in connection with 
many aspects of national banks' operations, and have repeatedly found 
that the exercise by Federally-chartered national banks of their 
Federally-authorized powers is ordinarily not subject to state law.
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    \4\ McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 436 (1819).
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1. Legislative History of the National Banking Laws
    Congress enacted the National Currency Act (Currency Act) in 1863 
and modified it with the National Bank Act a year thereafter for the 
purpose of establishing a new national banking system that would 
operate distinctly and separately from the existing system of state 
banks. The Currency Act and the National Bank Act were intended to 
create a uniform and secure national currency and a system of national 
banks designed to help stabilize and support the national economy both 
during and after the Civil War.
    Both proponents and opponents of the new national banking system 
expected that it would replace the existing system of state banks.\5\ 
Given this anticipated impact on state banks and the resulting 
diminution of control by the states over banking in general,\6\ 
proponents of the national banking system were concerned that states 
would attempt to undermine it. Remarks of Senator Sumner illustrate the 
sentiment of many legislators of the time: ``Clearly, the [national] 
bank must not be subjected to any local government, State or municipal; 
it must be kept absolutely and exclusively under that Government from 
which it derives its functions.''\7\
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    \5\ Representative Samuel Hooper, who reported the bill to the 
House, stated in support of the legislation that one of its purposes 
was ``to render the law [i.e., the Currency Act] so perfect that the 
State banks may be induced to organize under it, in preference to 
continuing under their State charters.'' Cong. Globe, 38th Cong. 1st 
Sess. 1256 (Mar. 23, 1864). While he did not believe that the 
legislation was necessarily harmful to the state bank system, Rep. 
Hooper did ``look upon the system of State banks as having outlived 
its usefulness.'' Id. Opponents of the legislation believed that it 
was intended to ``take from the States * * * all authority 
whatsoever over their own State banks, and to vest that authority * 
* * in Washington.'' Cong. Globe, 38th Cong., 1st Sess. 1267 (Mar. 
24, 1864) (statement of Rep. Brooks). Rep. Brooks made that 
statement to support the idea that the legislation was intended to 
transfer control over banking from the states to the Federal 
government. Given that the legislation's objective was to replace 
state banks with national banks, its passage would, in Rep. Brooks's 
opinion, mean that there would be no state banks left over which the 
states would have authority. Thus, by observing that the legislation 
was intended to take authority over state banks from the states, 
Rep. Brooks was not suggesting that the Federal government would 
have authority over state banks; rather, he was explaining the bill 
in a context that assumed the demise of state banks. Rep. Pruyn 
opposed the bill stating that the legislation would ``be the 
greatest blow yet inflicted upon the States.'' Cong. Globe, 38th 
Cong., 1st Sess. 1271 (Mar. 24, 1864). See also John Wilson Million, 
The Debate on the National Bank Act of 1863, 2 J. Pol. Econ. 251, 
267 (1893-94) regarding the Currency Act (``Nothing can be more 
obvious from the debates than that the national system was to 
supersede the system of state banks.'').
    \6\ See, e.g., Tiffany v. Nat'l Bank of Missouri, 85 U.S. 409, 
412-413 (1874) (``It cannot be doubted, in view of the purpose of 
Congress in providing for the organization of National banking 
associations, that it was intended to give them a firm footing in 
the different States where they might be located. It was expected 
they would come into competition with State banks, and it was 
intended to give them at least equal advantages in such competition. 
* * * National banks have been National favorites. They were 
established for the purpose, in part, of providing a currency for 
the whole country, and in part to create a market for the loans of 
the General government. It could not have been intended, therefore, 
to expose them to the hazard of unfriendly legislation by the 
States, or to ruinous competition with State banks.''). See also B. 
Hammond, Banks and Politics in America from the Revolution to the 
Civil War 725-34 (1957); P. Studenski & H. Krooss, Financial History 
of the United States 155 (1st ed. 1952).
    \7\ Cong. Globe, 38th Cong., 1st Sess., at 1893 (Apr. 27, 1864). 
See also Beneficial Nat'l Bank v. Anderson, 123 S.Ct. 2058, 2064 
(2003) (``[T]his Court has also recognized the special nature of 
Federally chartered banks. Uniform rules limiting the liability of 
national banks and prescribing exclusive remedies for their 
overcharges are an integral part of a banking system that needed 
protection from `possible unfriendly State legislation.' '') 
(citations omitted.).
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    The allocation of any supervisory responsibility for the new 
national banking system to the states would have been inconsistent with 
this need to protect national banks from state interference. Congress, 
accordingly, established a Federal supervisory regime and created a 
Federal agency within the Department of Treasury--the OCC--to carry it 
out. Congress granted the OCC the broad authority ``to make a thorough 
examination of all the affairs of [a national bank],''\8\ and 
solidified this Federal supervisory authority by vesting the OCC with 
exclusive visitorial powers over national banks, except where Federal 
law provided otherwise. These provisions assured, among other things, 
that the OCC would have comprehensive authority to examine all the 
affairs of a national bank and protect national banks from potentially 
hostile state interference by establishing that the authority to 
examine, supervise, and regulate

[[Page 46121]]

national banks is vested only in the OCC, unless otherwise provided by 
Federal law.\9\
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    \8\ Act of June 3, 1864, c. 106, Sec.  54, 13 Stat. 116, 
codified at 12 U.S.C. 481.
    \9\ Writing shortly after the Currency Act and the National Bank 
Act were enacted, then-Secretary of the Treasury, and formerly the 
first Comptroller of the Currency, Hugh McCulloch observed that 
``Congress has assumed entire control of the currency of the 
country, and, to a very considerable extent, of its banking 
interests, prohibiting the interference of State governments.'' 
Cong. Globe, 39th Cong., 1st Sess., Misc. Doc. No. 100, at 2 (Apr. 
23, 1866).
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2. The Supremacy Clause and the Federal Preemption Standards 
Articulated by the Supreme Court
    A state law may be preempted by Federal law and thus rendered 
invalid by operation of the Supremacy Clause of the Constitution.\10\ 
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.\11\ Second, Congress can adopt a framework for 
regulation that ``occupies the field'' and leaves no room for states to 
adopt supplemental laws.\12\ 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;'' 
\13\ or (ii) when the state law stands ``as an obstacle to the 
accomplishment and execution of the full purposes and objectives of 
Congress.''\14\
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    \10\ ``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, any Thing in the Constitution or Laws of any State to the 
Contrary notwithstanding.'' U.S. Const. Art. VI, cl. 2.
    \11\ See Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977).
    \12\ See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 
(1947).
    \13\ Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 
142-43 (1963).
    \14\ Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Barnett Bank 
of Marion County v. Nelson, 517 U.S. 25, 31 (1996) (quoting Hines).
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    Because the origins of Federal preemption are Constitutional, the 
underlying purpose of the state legislation, no matter how salutary, 
does not determine the essential issue of preemption. As explained in 
Association of Banks in Insurance, Inc. v. Duryee,\15\ ``[w]here state 
and federal laws are inconsistent, the state law is pre-empted even if 
it was enacted by the state to protect its citizens or consumers.''\16\
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    \15\ 55 F. Supp. 2d 799 (S.D. Ohio 1999).
    \16\ Id. at 802. Agreeing with this conclusion, the Sixth 
Circuit stated that ``the fact that the state legislature enacted 
the [state law at issue] to protect general insurance agents and 
consumers does not, for that reason alone, preclude federal 
preemption.'' Ass'n of Banks in Ins., Inc. v. Duryee, 270 F.3d 397, 
408 (6th Cir. 2001); see also Franklin Nat'l Bank of Franklin Square 
v. New York, 347 U.S. 373, 378 (1954).
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3. Supreme Court Precedents Leading to Barnett
    From the earliest years of the national banking system, up to and 
including a decision rendered just months ago, the Supreme Court has 
consistently recognized the unique status of the national banking 
system and the limits placed on states by the National Bank Act.\17\ In 
one of the first cases to address the role of the national banking 
system, the Supreme Court stated that ``[t]he national banks organized 
under the [National Bank Act] are instruments designed to be used to 
aid the government in the administration of an important branch of the 
public service. They are means appropriate to that end.''\18\
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    \17\ See Beneficial Nat'l Bank, 123 S.Ct. at 2064.
    \18\ Farmers' & Mechanics' Nat'l Bank v. Dearing, 91 U.S. 29, 33 
(1875).
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    Subsequent opinions of the Supreme Court have been equally clear 
about national banks' unique role and status. See Marquette Nat'l Bank 
of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299, 314-315 
(1978) (``Close examination of the National Bank Act of 1864, its 
legislative history, and its historical context makes clear that, . . . 
Congress intended to facilitate . . . a `national banking system'.'') 
(citation omitted); Franklin Nat'l Bank, 347 U.S. at 375 (``The United 
States has set up a system of national banks as Federal 
instrumentalities to perform various functions such as providing 
circulating medium and government credit, as well as financing commerce 
and acting as private depositories.''); Davis v. Elmira Sav. Bank, 161 
U.S. 275, 283 (1896) (``National banks are instrumentalities of the 
federal government, created for a public purpose, and as such 
necessarily subject to the paramount authority of the United 
States.''); Guthrie v. Harkness, 199 U.S. 148, 159 (1905) (``It was the 
intention that this statute should contain a full code of provisions 
upon the subject, and that no state law or enactment should undertake 
to exercise the right of visitation over a national corporation.'').
    The Supreme Court also has recognized the clear intent on the part 
of Congress to limit the authority of states over national banks 
precisely so that the nationwide system of banking that was created in 
the Currency Act could develop and flourish. For instance, in Easton v. 
Iowa,\19\ the Court stated that Federal legislation affecting national 
banks--

has in view the erection of a system extending throughout the 
country, and independent, so far as powers conferred are concerned, 
of state legislation which, if permitted to be applicable, might 
impose limitations and restrictions as various and as numerous as 
the States. * * * It thus appears that Congress has provided a 
symmetrical and complete scheme for the banks to be organized under 
the provisions of the statute. * * * [W]e are unable to perceive 
that Congress intended to leave the field open for the States to 
attempt to promote the welfare and stability of national banks by 
direct legislation. If they had such power it would have to be 
exercised and limited by their own discretion, and confusion would 
necessarily result from control possessed and exercised by two 
independent authorities.\20\
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    \19\ 188 U.S. 220 (1903).
    \20\ Id. at 229, 231-232 (emphasis added).
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    The Court in Farmers' & Mechanics' National Bank, after 
observing that national banks are means to aid the government, 
stated--

    Being such means, brought into existence for this purpose, and 
intended to be so employed, the States can exercise no control over 
them, nor in any wise affect their operation, except in so far as 
Congress may see proper to permit. Any thing beyond this is ``an 
abuse, because it is the usurpation of power which a single State 
cannot give.'' \21\

    \21\ Farmers' & Mechanics' Nat'l Bank, 91 U.S. at 34 (citation 
omitted).

    Thus, as recognized by the Supreme Court in Barnett, the history of 
national bank powers is one of ``interpreting grants of both enumerated 
and incidental `powers' to national banks as grants of authority not 
normally limited by, but rather ordinarily pre-empting, contrary state 
law.''\22\ ``[W]here 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.''\23\
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    \22\ Barnett, 517 U.S. at 32 (1996). The Supreme Court has 
recognized that the ``business of banking'' is not limited to the 
powers enumerated in section 24 (Seventh). See NationsBank v. 
Variable Annuity Life Ins. Co., 513 U.S. 251, 258 n.2 (1995). As the 
scope of the underlying national bank power may evolve, the OCC 
``may authorize additional activities if encompassed by a reasonable 
interpretation of Sec.  24 (Seventh).'' Indep. Ins. Agents of Am., 
Inc. v. Hawke, 211 F.3d 638, 640 (D.C. Cir. 2000). Thus, the effect 
of a state law on the exercise of a Federal power may change as the 
character of the power changes.
    \23\ Barnett, 517 U.S. at 34.
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4. Recent Lower Federal Court Decisions Concluding that State Laws Are 
Preempted
    These principles have been recognized and applied in a series of 
recent cases invalidating state and local restrictions upon national 
bank activities that are authorized under Federal law. In each case, 
the court determined that the state or local restriction obstructed, in 
whole or in part, the exercise of an authorized

[[Page 46122]]

national bank power and therefore was preempted by operation of the 
Supremacy Clause.
    For example, ordinances passed by four municipalities in California 
and New Jersey specifically to prohibit ATM access fees were enjoined 
by district court order on grounds that included National Bank Act 
preemption. In California, the district court entered a preliminary 
injunction against the fee prohibition ordinances adopted by San 
Francisco and Santa Monica, and the Ninth Circuit affirmed. On remand, 
the district court entered a permanent injunction against the 
ordinances, and the Ninth Circuit once again affirmed.\24\ Similarly, a 
Federal district court in New Jersey entered temporary restraining 
orders preventing fee prohibition ordinances adopted by Newark and 
Woodbridge from becoming effective. The combined case was ultimately 
settled by each city's consent to a permanent injunction against its 
ordinance.\25\ A Federal district court in Des Moines declared a 
longstanding Iowa prohibition on ATM access fees to be in conflict with 
the national bank power to charge fees and therefore preempted.\26\ For 
similar reasons, the Fifth Circuit upheld a Federal district court 
ruling that Federal law displaced a Texas statute that prohibited the 
charging of fees for cashing checks drawn upon accounts at the payor 
bank.\27\ A Federal district court in Georgia reached the same 
conclusion with respect to a Georgia law that similarly attempted to 
restrict the authority of national banks under Federal law to charge 
such fees.\28\
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    \24\ See Bank of America, N.A. v. City & County of San 
Francisco, 2000 WL 33376673 (N.D. Cal. June 30, 2000), aff'd, Bank 
of America, 309 F.3d 551.
    \25\ See New Jersey Bankers Ass'n v. Township of Woodbridge, No. 
CV-00-702 (JAG) (D.N.J. Nov. 8, 2000).
    \26\ See Metrobank, 193 F. Supp. 2d 1156.
    \27\ See Wells Fargo Bank Texas, 321 F.3d 488.
    \28\ See Bank of America, N.A. v. Sorrell, 248 F. Supp. 2d 1196 
(N.D. Ga. 2002).
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    Restrictions on national bank activities other than the charging of 
fees have also been held preempted. Deferring to the OCC's 
interpretations of the National Bank Act, the Eighth Circuit held that 
Federal law preempted Iowa restrictions on ATM location, operation, and 
advertising as applied to national banks.\29\ More recently, a Federal 
district court in California permanently enjoined the California 
Attorney General and Director of the Department of Consumer Affairs 
from enforcing a California statute requiring that certain language and 
information be placed on the billing statements credit card issuers 
provide their cardholders.\30\ In so doing, the Court held that there 
is ``no indication in the NBA that Congress intended to subject that 
power [to loan money on personal security] to local restriction.'' 
Thus, the court applied ``the ordinary rule * * * of preemption of 
contrary state law.''\31\ Contrary state law also may be preempted by 
Federal regulation. ``Federal regulations have no less pre-emptive 
effect than federal statutes.''\32\
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    \29\ See Bank One, Utah, 190 F.3d 844.
    \30\ See American Bankers Ass'n v. Lockyer, 239 F. Supp. 2d 1000 
(E.D. Cal. 2002).
    \31\ Id. at 1016; see also Wells Fargo Bank, N.A. v. Boutris, 
2003 WL 21277203 at *3 (E.D. Cal. May 9, 2003) (Wells Fargo Bank II) 
(The National Bank Act ``was enacted to `facilitate * * * a national 
banking system,' and `to protect national banks against intrusive 
regulation by the States.''') (citations omitted).
    \32\ Fid. Fed. Sav. & Loan Ass'n. v. de la Cuesta, 458 U.S. 141, 
153 (1982).
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5. Limited Circumstances Under Which State Laws Apply to National Banks
    Federal courts apply no general presumption that state laws are 
applicable to national banks. As explained recently by the Supreme 
Court, a presumption against preemption is ``not triggered when the 
States regulate in an area where there has been a history of 
significant federal presence.''\33\ As further explained by the Ninth 
Circuit in Bank of America, ``because there has been a ``history of 
significant federal presence'' in national banking, the presumption 
against preemption of state law is inapplicable.''\34\
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    \33\ United States v. Locke, 529 U.S. 89, 108 (2000).
    \34\ 309 F.3d at 559.
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    Moreover, no Federal statute endorses the presumptive application 
of state laws to national banks. Although the national bank branching 
statute makes applicable the laws of the host state regarding community 
reinvestment, consumer protection, and fair lending to branches of an 
out-of-state national bank located in the host state to the same extent 
as those laws apply to a bank chartered by that state, the statute 
expressly excepts any case where Federal law preempts the application 
of state law to national banks.\35\
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    \35\ See 12 U.S.C. 36(f)(1)(A). This provision was added to the 
branching statute by the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994, Pub. L. 103-328, 108 Stat. 2338, 
2350 (1994).
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    In a few situations, Federal law has incorporated provisions of 
state law for specific purposes,\36\ and Congress may more generally 
establish standards that govern when state law will apply to national 
banks' activities.\37\ In such cases, the OCC applies the law or the 
standards that Congress has required or established.
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    \36\ See, e.g., 12 U.S.C. 92a(a) (the extent of a national 
bank's fiduciary powers is determined by reference to the law of the 
state where the national bank is located).
    \37\ See, e.g., 15 U.S.C. 6701 (codification of section 104 of 
the Gramm-Leach-Bliley Act, Public Law 106-102, 113 Stat. 1338, 1352 
(1999), which establishes standards for determining the 
applicability of state law to different types of activities 
conducted by national banks, other insured depository institutions, 
and their affiliates).
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    State laws also may apply to national banks' activities under 
circumstances that have been described variously by the courts as not 
altering or conditioning a national bank's ability to exercise a power 
that Federal law grants to it.\38\ ``Thus, states retain some power to 
regulate national banks in areas such as contracts, debt collection, 
acquisition and transfer of property, and taxation, zoning, criminal, 
and tort law.''\39\ Notably, these types of laws typically do not 
regulate the manner or content of the business of banking authorized 
for national banks under Federal law, but rather establish the legal 
infrastructure that surrounds and supports the conduct of that 
business. In other words, they promote a national bank's ability to 
conduct business; they do not obstruct a national bank's exercise of 
powers granted under Federal law.\40\
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    \38\ See Barnett, 517 U.S. at 33.
    \39\ Bank of America, 309 F.3d at 559. As stated in 12 U.S.C. 
548, for the purposes of state tax laws, ``a national bank shall be 
treated as a bank organized and existing under the laws of the State 
* * * within which its principal office is located.'' With regard to 
state criminal laws, it is important to recognize the distinction 
drawn by the Supreme Court in Easton between ``crimes defined and 
punishable at common law or by the general statutes of a State'' and 
``crimes and offences cognizable under the authority of the United 
States.'' 188 U.S. at 238. The Court stated that ``[u]ndoubtedly a 
State has the legitimate power to define and punish crimes by 
general laws applicable to all persons within its jurisdiction. * * 
* But it is without lawful power to make such special laws 
applicable to banks organized and operating under the laws of the 
United States.'' Id. at 239 (holding that Federal law governing the 
operations of national banks preempted a state criminal law 
prohibiting insolvent banks from accepting deposits). Further, as we 
note infra in footnote 86, we will look to the substance and effect 
of a state law in determining whether a particular state law falls 
into a category of state laws that are not preempted; a state may 
not immunize a law from preemption simply by applying a criminal 
penalty to it. Also, notably, ``[c]onsumer protection is not 
reflected in the case law as an area in which the states have 
traditionally been permitted to regulate national banks.'' Lockyer, 
239 F. Supp. 2d at 1016.
    \40\ See Barnett, 517 U.S. at 33-34.
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6. Examples of Types of State Laws Found to be Preempted
    The OCC and Federal courts have thus far concluded that a wide 
variety of state laws are preempted, either because the state laws fit 
within the express preemption provisions of an OCC regulation or 
because the laws

[[Page 46123]]

conflict with a Federal power vested in national banks. Types of state 
laws that have been addressed by the OCC or the courts include:
    [sbull] Licensing laws. State statutes that require national banks 
to obtain a license or to register with the state before exercising a 
Federally-granted authority have been found to be preempted.\41\
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    \41\ See First Nat'l Bank of Eastern Arkansas v. Taylor, 907 
F.2d 775 (8th Cir. 1990) (the National Bank Act precludes a state 
regulator from prohibiting a national bank, through either 
enforcement action or a licensing requirement, from conducting an 
authorized activity); and Bank of America Nat'l Trust & Sav. Ass'n 
v. Lima, 103 F. Supp. 916 (D. Mass. 1952) (states have no authority 
to require national banks to obtain a license to engage in an 
activity permitted to them by Federal law). See also Wells Fargo 
Bank, N.A. v. Boutris, 252 F. Supp. 2d 1065, 1074 (E.D. Cal. 2003 
(Wells Fargo Bank I) (bank becoming a state licensee does not affect 
its right to conduct Federally permissible banking activities 
authorized by the OCC); Nat'l City Bank of Indiana v. Boutris, Civ. 
No. S-03-0655-GEB JFM at 14 (May 7, 2003) (when banking activities 
are governed by Federal preemption, Federal law applies even where 
an instrumentality of a national bank has needlessly subjected 
itself to state licensing law); Letter dated May 15, 2001 from Julie 
L. Williams to Messrs. Thomas Plant and Daniel Morton (66 FR 28593, 
May 23, 2001) (regarding state license requirement in the sale of 
motor vehicles); Letter dated Mar. 7, 2000, from Julie L. Williams 
to Thomas P. Vartanian (65 FR 15037, Mar. 20, 2000) (regarding 
Pennsylvania auctioneer licensing law); OCC Interpretive Letter No. 
866 (Oct. 8, 1999) (regarding state laws requiring national bank to 
obtain license before soliciting or engaging in proposed fiduciary 
arrangements); OCC Interpretive Letter No. 749 (Sept. 13, 1996) 
(regarding state law requiring national banks to be licensed to sell 
annuities); and OCC Interpretive Letter No. 644 (Mar. 24, 1994) 
(regarding state registration and fee requirements imposed on 
mortgage lenders). While several precedents cited address activities 
other than real estate lending, the principles articulated in the 
precedents apply to all national bank activities, including making 
real estate loans.
---------------------------------------------------------------------------

    [sbull] Filing requirements. State statutes that require national 
banks to make filings with, or report to, states conflict with the 
OCC's exclusive visitorial powers over national banks.\42\
---------------------------------------------------------------------------

    \42\ See OCC Interpretive Letter No. 616 (Feb. 26, 1993) (state 
statute requiring national banks to report quarterly to state 
banking commissioner would be preempted based upon OCC's exclusive 
visitorial powers); and OCC Interpretive Letter No. 614 (Jan. 15, 
1993) (state statutes requiring national banks to keep records and 
file notifications and data with the state would be preempted 
because they purport to grant the state visitorial powers over 
national banks); See, e.g., Guthrie, 199 U.S. 148 (discussing OCC's 
exclusive visitorial powers).
---------------------------------------------------------------------------

    [sbull] Terms of real estate loans. The OCC's current regulations 
in subpart A of part 34 address real estate lending generally. Section 
34.4(a) expressly preempts state laws concerning five areas of fixed-
rate mortgage lending. Section 34.4(a)(1) preempts state laws 
concerning loan-to-value ratios. Section 34.4(a)(2) preempts state laws 
concerning the schedule for repayment of principal and interest. In 
this regard, the key elements of any repayment schedule are: (1) the 
timing of the expected payments, and (2) the amount of expected 
payments.\43\ Section 34.4(a)(3) preempts state laws concerning the 
term to maturity of real estate loans.\44\ Subpart B of part 34, 
governing adjustable rate mortgages (ARMs), states that national banks 
may engage in ARM lending without regard to any state law 
limitation.\45\
---------------------------------------------------------------------------

    \43\ See Section III. A. 1. of the National City Order, in which 
we concluded that state laws governing balloon payments, negative 
amortization, limitations on advance payments, late fees, prepayment 
fees, and default rates of interest were preempted because they 
concerned the schedule for repayment of principal and interest in 
contravention of 12 CFR 34.4(a)(2).
    \44\ See id. at Section III. A. 2., in which we concluded that 
state laws governing acceleration of indebtedness and rights to cure 
a default were preempted because they concerned the term to maturity 
in contravention of 12 CFR 34.4(a)(3).
    \45\ See 12 CFR 34.21(a).
---------------------------------------------------------------------------

    [sbull] Advertising. Courts have consistently held that state laws 
limiting the ability of a national bank to advertise are preempted.\46\
---------------------------------------------------------------------------

    \46\ See Franklin Nat'l Bank, 347 U.S. 373 (state law 
restricting national bank's ability to advertise its services held 
preempted); Bank One, Utah, 190 F.3d 844 (state law limiting the 
placement of advertising on ATMs held preempted). See also OCC 
Interpretive Letter No. 789 (June 27, 1997) (a state law that 
prohibited the use of a bank's name on ATMs unless the bank put the 
names of all other banks whose customers may use the ATM was 
preempted).
---------------------------------------------------------------------------

    [sbull] Permissible rates of interest. Federal law establishes that 
national banks may charge interest (both the rate and amount \47\) 
permitted by the state where the bank is located without regard to the 
laws of the state where the borrower is located.\48\
---------------------------------------------------------------------------

    \47\ See 12 U.S.C. 1735f-7a; Wells Fargo Bank II, 2003 WL 
21277203.
    \48\ See 12 U.S.C. 85; 12 CFR 7.4001. See, e.g., Marquette Nat'l 
Bank, 439 U.S. 299; Tiffany, 85 U.S. 409 (construing 12 U.S.C. 85). 
See also Section III. B. of the National City Order.
---------------------------------------------------------------------------

    [sbull] Permissible fees and non-interest charges. Section 7.4002 
of the OCC's rules outlines the framework for national banks' ability 
to impose non-interest fees and charges; courts have consistently held 
that state laws limiting the ability of national banks to charge such 
fees are preempted.\49\
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    \49\ See Bank of America, 309 F.3d 551, Wells Fargo Bank, Texas, 
321 F.3d 488, and Metrobank, 193 F. Supp. 2d 1156. See also Section 
III. C. of the National City Order.
---------------------------------------------------------------------------

    [sbull] Management of credit accounts. The OCC has taken the 
position that state laws that interfere with a national bank's 
Federally-granted power to lend and to engage in activities incidental 
to its lending operations are preempted. For example, in our view, a 
state law that imposed restrictions or requirements that, under the 
Barnett standards, interfere with or burden a national bank's 
communication with its credit card holders, management of credit 
accounts, or terms of offers of credit was preempted. A Federal 
district court in California recently upheld this position.\50\
---------------------------------------------------------------------------

    \50\ See Lockyer, 239 F. Supp. 2d 1000.
---------------------------------------------------------------------------

    [sbull] Due-on-sale clauses. Section 34.5 of the OCC's rules and 12 
U.S.C. 1701j-3 preempt state restrictions on due-on-sale clauses.
    [sbull] Leaseholds as acceptable security. The provision set out in 
proposed Sec.  34.4(a)(14) preempting state laws governing covenants 
and restrictions that must be contained in a lease to qualify the 
leasehold as acceptable security for a real estate loan is a 
restatement of the provision in current Sec.  34.4(a)(5).
    [sbull] Mandated statements and disclosures. State attempts to 
require national banks to make disclosures in connection with specified 
credit card repayment terms have been held preempted as an 
impermissible interference with the ability to extend credit.\51\ OCC 
regulations already address the applicability of state law to national 
bank activities in some of these areas,\52\ but to date, unlike the 
Office of Thrift Supervision (OTS),\53\ we have not adopted regulations 
that more broadly codify the application of principles of preemption 
according to major groupings of activities, such as lending, deposit-
taking, and other authorized bank activities. Our positions in some 
instances also have not clearly reflected whether we were employing an 
``occupation of the field'' or ``conflicts'' approach, although our 
individual preemption decisions have more commonly reflected a 
``conflict'' type approach to preemption analysis. The proposal 
clarifies the types of state law restrictions and requirements that do, 
and do not, apply to major types of activities and operations of 
national banks and, for those types of activities and operations, 
articulates the standards that determine whether particular types of 
state law restrictions and requirements are preempted.
---------------------------------------------------------------------------

    \51\ See id.
    \52\ See, e.g., 12 CFR 7.4001 (interest); 7.4002 (fees); 7.4006 
(operating subsidiaries); 9.7 (fiduciary activities); 34.4 (real 
estate lending generally); 34.5 (due-on-sale clauses); 34.21 
(adjustable-rate mortgage lending); and 34.23 (prepayment fees).
    \53\ See 12 CFR 557.11-.13; 12 CFR 560.2; and 12 CFR 545.2.
---------------------------------------------------------------------------

C. Revisions to Part 34--Real Estate Lending

1. Current OCC Regulations
    Part 34 of our rules implements 12 U.S.C. 371, which authorizes 
national banks to engage in real estate lending

[[Page 46124]]

subject to ``such restrictions and requirements as the Comptroller of 
the Currency may prescribe by regulation or order.'' Under subpart A of 
part 34 (which sets forth the general authority for national banks to 
engage in real estate transactions), state laws concerning five 
enumerated areas already are explicitly preempted in their application 
to national banks and their operating subsidiaries. 12 CFR 34.1(b) and 
34.4(a). Section 34.4(b) then states that the OCC will apply recognized 
principles of Federal preemption in considering whether state laws 
apply to other aspects of real estate lending by national banks.
2. Codification of Preemption
    Pursuant to our authority under section 371, the proposal amends 
Sec.  34.4(a) and (b) to provide a more complete statement of the types 
of state law restrictions and requirements that do, and do not, apply 
to real estate lending activities of national banks. However, as 
recognized by the Supreme Court, Federal law may preempt state law 
expressly (by an express statement of preemption in the law) or 
implicitly (because the Federal law is so complete that it ``occupies 
the field'' or because the state law conflicts with a Federal power). 
Although the regulation proposed today would address state laws by 
type, for reasons discussed below, we invite comment on whether our 
regulations, like those of the OTS,\54\ should state explicitly that 
Federal law occupies the entire field of national banks' real estate 
lending activities.\55\
---------------------------------------------------------------------------

    \54\ See 12 CFR 560.2.
    \55\ This issue was raised by National City in its request 
concerning the GFLA. As explained in the National City Order, we 
deferred expressing any views on the field preemption issue until we 
could seek comment in connection with a rulemaking rather than a 
decision confined to the law of a single state.
---------------------------------------------------------------------------

    Section 371 provides a broad grant of authority to national banks 
to engage in real estate lending. The only qualification in the statute 
is that these Federal powers are subject ``to section 1828(o) of this 
title [which requires the adoption of uniform Federal safety and 
soundness standards governing real estate lending] and such 
restrictions and requirements as the Comptroller of the Currency may 
prescribe by regulation or order.''\56\ On its face, section 371 does 
not condition the grant of authority to national banks to engage in 
real estate lending upon engaging in that activity only to the extent 
that a state permits it.
---------------------------------------------------------------------------

    \56\ 12 U.S.C. 371(a).
---------------------------------------------------------------------------

    The breadth of the Federal power and the OCC's rulemaking authority 
created by section 371 can be understood by comparing the text and 
structure of that section to that of 12 U.S.C. 92, a statute similar in 
both respects and one that vests comparably broad rulemaking authority 
in the OCC. In Barnett, the Supreme Court analyzed the extent to which 
section 92 leaves room for state regulation of the activities the 
statute authorizes, and is thus instructive for purposes of analyzing 
section 371. The Supreme Court stated that--

[section 92's] language suggests a broad, not a limited, permission. 
That language says, without relevant qualification, that national banks 
``may . . . act as the agent'' for insurance sales. 12 U.S.C. 92. It 
specifically refers to ``rules and regulations'' that will govern such 
sales, while citing as their source not state law, but the Federal 
Comptroller of the Currency.\57\
---------------------------------------------------------------------------

    \57\ Barnett, 517 U.S. at 32.

    The Court noted that ``[i]n defining the pre-emptive scope of 
statutes and regulations granting a power to national banks, [prior 
U.S. Supreme Court decisions] 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.''\58\ The Supreme 
Court concluded that ``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.''\59\
---------------------------------------------------------------------------

    \58\ Id. at 33.
    \59\ Id. at 34.
---------------------------------------------------------------------------

    This analysis of section 92 by the Supreme Court is instructive in 
addressing section 371 as well. Like section 92, section 371 creates a 
broad power for national banks. By its terms, section 371 also is not a 
limited permission, that is, it does not authorize national banks to 
engage in real estate lending only to the extent state law allows.\60\ 
Moreover, section 371 differs from section 92 in two respects that are 
even more telling. First, section 371 refers expressly and exclusively 
to the OCC as the entity possessing authority to set restrictions and 
requirements that apply to national banks' real estate lending 
activities. Second, unlike the activity to which section 92 pertains--
the sale of insurance--which historically has been predominantly 
regulated at the state level, national bank real estate lending 
authority has been extensively regulated at the Federal level since the 
power first was codified.
---------------------------------------------------------------------------

    \60\ See id. at 31-32.
---------------------------------------------------------------------------

    Beginning with the enactment of the Federal Reserve Act of 1913, 
national banks' real estate lending authority has been governed by the 
express terms of section 371. As originally enacted in 1913, section 
371 contained a limited grant of authority to national banks to lend on 
the security of ``improved and unencumbered farm land, situated within 
its Federal reserve district.''\61\ In addition to the geographic 
limits inherent in this authorization, the Federal Reserve Act also 
imposed limits on the term and amount of each loan as well as an 
aggregate lending limit. Over the years, section 371 was repeatedly 
amended to broaden the types of real estate loans national banks were 
permitted to make, to expand geographic limits, and to modify loan term 
limits and per-loan and aggregate lending limits.
---------------------------------------------------------------------------

    \61\ Federal Reserve Act, ch. 6, section 24, 38 Stat. 251, 273 
(1913).
---------------------------------------------------------------------------

    In 1982, Congress removed these ``rigid statutory limitations'' 
\62\ in favor of a broad provision authorizing national banks to 
``make, arrange, purchase or sell loans or extensions of credit secured 
by liens on interests in real estate, subject to such terms, 
conditions, and limitations as may be prescribed by the Comptroller of 
the Currency by order, rule, or regulation.''\63\ The purpose of the 
1982 amendment was ``to provide national banks with the ability to 
engage in more creative and flexible financing, and to become stronger 
participants in the home financing market.''\64\ In 1991, Congress 
removed the term ``rule'' from this phrase and enacted an additional 
requirement, codified at 12 U.S.C. 1828(o), that national banks (and 
other insured depository institutions) conduct real estate lending 
pursuant to uniform standards adopted at the Federal level by 
regulation of the OCC and the other Federal banking agencies.\65\ Thus, 
the history of national banks' real estate lending activities under 
section 371 is one of extensive Congressional involvement gradually 
giving way to a streamlined approach in which Congress has delegated 
broad rulemaking authority to the Comptroller. The two versions of 
section 371--namely, the lengthy and prescriptive approach prior to 
1982 and the more recent statement of broad authority qualified only by 
reference to Federal law--may be seen as evolving articulations of the 
same idea.
---------------------------------------------------------------------------

    \62\ S. Rep. No. 97-536, at 27 (1982).
    \63\ Garn-St Germain Depository Institutions Act of 1982, Public 
Law 97-320, Sec.  403, 96 Stat. 1469, 1510-11 (1982).
    \64\ S. Rep. No. 97-536, at 27 (1982).
    \65\ See section 304 of the Federal Deposit Insurance 
Corporation Improvement Act, codified at 12 U.S.C. 1828(o). These 
standards governing national banks' real estate lending are set 
forth in subpart D of part 34.

---------------------------------------------------------------------------

[[Page 46125]]

    Prior to 1982, the field of national bank real estate lending was 
pervasively regulated by the detailed statutory provisions of section 
371. After the 1982 amendment, Congress left open the possibility that 
the OCC would occupy the field by regulation. The statute granted the 
Federal power and directed that not just ``requirements'' for the 
exercise of the power, but any ``restrictions'' on the power, would 
come from the OCC. In no respect does the statute express or imply that 
the power granted is limited, to some variable degree, by application 
of fifty different state laws.
    Although this authority arguably enables the OCC to occupy the 
field of regulation of national banks' real estate lending, thus far we 
have not exercised the full authority inherent in section 371. Instead, 
in Sec.  34.4(a) we have provided that certain types of state 
requirements and restrictions are not applicable to national banks and 
have elected to address whether other types of laws are preempted based 
on the existence of a conflict between a particular state or local law 
and national banks' Federal power under section 371. Since section 371 
conditions the exercise by a national bank of its Federal power to 
engage in real estate lending only on compliance with Federal law, 
however, our regulation is more conservative than what the statute 
arguably allows.
    The regulation we propose today further implements our authority 
under section 371 to identify types of state law restrictions 
concerning real estate lending that are, and are not, applicable to 
national banks. We have chosen to identify additional types of state 
laws that, in various respects, obstruct or condition national banks' 
exercise of real estate lending powers granted under section 371. As 
noted above, many of these types of laws have previously been addressed 
in OCC interpretations or Federal court decisions. We note, however, 
that our authority under section 371 is not necessarily limited to 
specifying types of law restrictions that are applicable or 
inapplicable, nor does section 371 appear to necessitate that the state 
laws specified be only those that in some manner obstruct or condition 
national banks' exercise of their powers under section 371. Thus, we 
invite comment on whether our regulation should state expressly that 
Federal law occupies the entire field of national bank real estate 
lending.
3. Federal Safeguards
    Preemption of state laws governing national banks' real estate 
lending does not mean that that activity would be unregulated. On the 
contrary, national banks' real estate lending is pervasively regulated 
under Federal standards and subject to comprehensive supervision.
    This Federal framework includes standards governing, and oversight 
of, national banks' real estate lending activities to prevent abusive 
or predatory lending. In addition to the many Federal statutory 
standards that apply to national banks, the OCC recently issued 
comprehensive supervisory standards to address predatory and abusive 
lending practices. 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 OCC standards on predatory lending make 
clear that national banks should adopt--and vigorously adhere to--
policies and procedures to prevent predatory lending practices in 
direct lending and in transactions involving brokered and purchased 
loans.
    Significantly, AL 2003-2 provides that bank policies and procedures 
on direct lending should reflect the degree of care that is appropriate 
to the risk of a particular transaction. In some cases, this will 
entail making the determination that a loan is reasonably likely to 
meet the borrower's individual financial circumstances and needs. AL 
2003-2 also emphasizes that if the OCC has evidence that a national 
bank has engaged in abusive lending practices, we will review those 
practices to determine whether they violate specific provisions of the 
Federal laws, including the Homeowners Equity Protection Act of 1994 
(HOEPA), the Fair Housing Act, or the Equal Credit Opportunity Act. The 
OCC also will evaluate whether such practices involve unfair or 
deceptive practices in violation of the Federal Trade Commission Act 
(FTC Act). Indeed several practices cited in AL 2003-2, such as equity 
stripping, loan flipping, and the refinancing of special subsidized 
mortgage loans that originally contained terms favorable to the 
borrower, can be found to be unfair practices that violate the FTC Act.
    The OCC's second advisory, AL 2003-3, addresses concerns that have 
been raised about the link between predatory lending and non-regulated 
lending intermediaries, and the risk that a national bank could 
indirectly and inadvertently facilitate predatory lending through the 
purchase of loans and mortgage-backed securities and in connection with 
broker transactions. Pursuant to our standards, a national bank needs 
to perform adequate due diligence prior to entering into any 
relationships with loan brokers, third party loan originators, and the 
issuers of mortgage-backed securities, to ensure that the bank does not 
do business with companies that fail to employ appropriate safeguards 
against predatory lending in connection with loans they arrange, sell, 
or pool for securitization. AL 2003-3 also advises national banks to 
take specific steps to address the risk of fraud and deception in 
brokered loan transactions relating to broker-imposed fees and other 
broker compensation vehicles.
    Evidence that national banks are engaged in predatory lending 
practices is scant. Based on the dearth of such information--from third 
parties, our consumer complaint database, and our supervisory 
activities--we have no reason to believe that national banks are 
engaged in such practices to any discernible degree. This observation 
is consistent with an extensive study of predatory lending conducted by 
HUD and the Treasury Department,\66\ and with comments submitted in 
connection with an OTS rulemaking concerning preemption of state 
lending standards by 46 State Attorneys General.\67\
---------------------------------------------------------------------------

    \66\ A Treasury-HUD joint report issued in 2000 found that 
predatory lending practices in the subprime market are less likely 
to occur in lending by--
    Banks, thrifts, and credit unions that are subject to extensive 
oversight and regulation. * * * The subprime mortgage and finance 
companies that dominate mortgage lending in many low-income and 
minority communities, while subject to the same consumer protection 
laws, are not subject to as much federal oversight as their prime 
market counterparts--who are largely federally-supervised banks, 
thrifts, and credit unions. The absence of such accountability may 
create an environment where predatory practices flourish because 
they are unlikely to be detected.
    Departments of Housing and Urban Development and the Treasury, 
``Curbing Predatory Home Mortgage Lending: A Joint Report'' 17-18 
(June 2000) (Treasury-HUD Joint Report).
    In addition, the report found that a significant source of 
abusive lending practices is non-regulated mortgage brokers and 
similar intermediaries who, because they ``do not actually take on 
the credit risk of making the loan, . . . may be less concerned 
about the loan's ultimate repayment, and more concerned with the fee 
income they earn from the transaction.'' Id. at 40.
    \67\ Cited in Nat'l Home Equity Mortgage Ass'n v. OTS, Civil 
Action No. 02-2506 (GK) (D.D.C. 2003) at 26.
---------------------------------------------------------------------------

    More recently, a coalition of State Attorneys General repeated the 
same view in a brief filed earlier this year in connection with a 
challenge to that OTS rulemaking.\68\ In supporting the OTS's

[[Page 46126]]

decision to distinguish between supervised depository institutions and 
unsupervised housing creditors and to retain preemption of state laws 
with respect to the former but not for the latter, the State Attorneys 
General stated:
---------------------------------------------------------------------------

    \68\ The case involves a revised regulation issued by the OTS to 
implement the Alternative Mortgage Transaction Parity Act (AMTPA). 
The revised regulation distinguishes between Federally-supervised 
thrift institutions and non-bank mortgage lenders, making non-bank 
mortgage lenders subject to state law restrictions on prepayment 
penalties and late fees. See id.

    Based on consumer complaints received, as well as investigations 
and enforcement actions undertaken by the Attorneys General, 
predatory lending abuses are largely confined to the subprime 
mortgage lending market and to non-depository institutions. Almost 
all of the leading subprime lenders are mortgage companies and 
---------------------------------------------------------------------------
finance companies, not banks or direct bank subsidiaries.

Brief for Amicus Curiae State Attorneys General, National Home Equity 
Mortgage Association v. OTS, Civil Action No. 02-2506 (GK) (D.D.C.) at 
10-11 (emphasis added).
    Against this background, the OCC's approach to predatory lending, 
embodied in the anti-predatory lending standards discussed above, 
implemented through the OCC's comprehensive supervision of national 
banks, minimizes the potential for harm from predatory or abusive 
lending without reducing the credit available to subprime borrowers. By 
focusing on lending practices rather than banning specific lending 
products, this approach reduces the likelihood of predatory lending 
rather than the availability of credit to subprime borrowers.
    Notwithstanding the foregoing, there are certain principles that 
should be fundamental to all real estate lending by national banks. 
First is the principle that national banks should not make loans when 
they lack a reasonable basis to believe that the borrower has the 
capacity to repay the loan. This standard addresses a central 
characteristic of predatory lending, namely, lending based on the 
foreclosure value of the collateral rather than on the borrower's 
ability to make the scheduled payments under the terms of the loan, 
based on consideration of the borrower's current and expected income, 
current obligations, employment status, and other relevant financial 
resources. In such a situation, the lender is effectively relying on 
its ability to seize the equity in the borrower's collateral--often the 
borrower's home--to satisfy the outstanding debt.\69\
---------------------------------------------------------------------------

    \69\ See, e.g., Treasury-HUD Joint Report, supra note 66. The 
report notes that while factors such as the overall size of the 
loan, the borrower's credit history, and the value of the collateral 
also play into the decision, ``[a] creditor's decision on whether to 
originate a mortgage loan should be guided by his/her assessment of 
the borrower's ability to repay the loan from liquid sources (e.g., 
income and non-housing assets).'' Id. at 76. The report goes on to 
note that ``[t]here is widespread concern * * * that some 
unscrupulous creditors are making loans to borrowers who clearly 
cannot afford to repay them.'' Id. The report notes further that the 
results of predatory lending are ``loans with onerous terms and 
conditions that the borrower often cannot repay, leading to 
foreclosure or bankruptcy.'' Id. at 17.
---------------------------------------------------------------------------

    To prevent this, the proposal would prohibit a national bank from 
making a loan based predominantly on the foreclosure value of the 
borrower's collateral. Such practices are inconsistent with safe and 
sound banking and antithetical to the OCC's expectations concerning the 
prudence and integrity with which national banks do business. The 
proposal would establish a uniform, national standard, applicable to 
all national banks and their operating subsidiaries that, consistent 
with existing OCC guidance,\70\ would prohibit this essential 
characteristic of predatory lending.
---------------------------------------------------------------------------

    \70\ See AL 2003-2, which, as explained above, provides 
supervisory guidance concerning predatory and abusive lending 
practices. AL 2003-2 contains a recommendation that national banks 
establish specific policies and procedures for underwriting to 
ensure that the appropriate determination has been made that each 
borrower has the capacity to repay his or her loan. See id. at 7-8.
---------------------------------------------------------------------------

    A second principle is that national banks should treat all their 
customers fairly and honestly. National banks' lending activities also 
are subject to provisions of section 5 of the FTC Act that prohibit 
unfair or deceptive practices in connection with real estate lending 
(as well as other activities authorized for national banks).\71\ 
Section 5 serves as a standard to ensure that national banks conduct 
all their activities free from unfair or deceptive practices.
---------------------------------------------------------------------------

    \71\ See 15 U.S.C. 45(a)(1). See also AL 2003-2. Courts recently 
have confirmed the application of the FTC Act to national banks. 
See, e.g., Minnesota v. Fleet Mortgage Corp., 181 F. Supp. 2d 995, 
1002 (D.Minn. 2001); Roberts v. Fleet Bank, 2001 WL 1486226, *2 
(E.D.Pa. 2001). The Federal Deposit Insurance Corporation (FDIC) and 
the Board of Governors of the Federal Reserve System recently issued 
statements recognizing the application of section 5 of the FTC Act 
to the state banks within each agency's respective jurisdiction. See 
FIL-57-2002, issued by the FDIC May 30, 2002; Letter from Chairman 
Greenspan to the Hon. John J. LaFalce, May 30, 2002.
---------------------------------------------------------------------------

    Practices may be found to be deceptive and thereby unlawful under 
section 5 of the FTC Act if three factors are present.\72\ First, 
practices will be deceptive if there is a representation, omission, 
act, or practice that is likely to mislead. Practices that can be 
misleading or deceptive include false oral and written representations; 
misleading claims about costs or benefits of services or products; use 
of bait-and-switch techniques; and failure to provide promised services 
or products.
---------------------------------------------------------------------------

    \72\ These principles are derived from the Policy Statement on 
Deception, issued by the Federal Trade Commission on October 14, 
1983.
---------------------------------------------------------------------------

    Second, a practice may be found to be deceptive if the act or 
practice would be deceptive from the perspective of a reasonable 
consumer. In this context, a reasonable consumer is a member of the 
group targeted by the acts or practices in question. The totality of 
the circumstances and the net impression that is made will be evaluated 
in making this determination. Failure to provide information also may 
be a deceptive act or practice and will be evaluated from the 
perspective of whether a reasonable consumer is likely to have been 
misled by the omission. In this regard, a consumer's reaction to an act 
or practice may be reasonable even if it is not the only reaction that 
a consumer might have.
    Third, in order for a practice to be found to be deceptive, it must 
be material. A material misrepresentation or practice is one that is 
likely to affect a consumer's choice or conduct concerning a product or 
service. Consumer injury is likely if inaccurate or omitted information 
is important to the consumer's decision. Generally, information, or 
omission of information, about costs, benefits, purpose, and efficacy 
(including significant limitations) related to the product or service 
would be material.
    A practice may be found to be unfair and thereby unlawful under 
section 5 of the FTC Act if the following factors are present.\73\ 
First, the practice causes substantial consumer injury. Generally, 
monetary harm, such as when a consumer pays a fee or interest charge, 
or incurs other similar costs to obtain a bank product or service as a 
result of an unfair practice, is deemed to involve substantial injury. 
Second, the injury is not outweighed by benefits to the consumer or to 
competition. To be unfair, a practice must be injurious in its net 
effects. Third, the injury caused by the practice is one that consumers 
could not reasonably have avoided. Consumer harm caused by a practice 
that is coercive or that otherwise effectively inhibits the consumer 
from making an informed choice would be considered not reasonably 
avoidable.
---------------------------------------------------------------------------

    \73\ These principles are derived from the Policy Statement on 
Unfairness, issued by the Federal Trade Commission on December 17, 
1980.
---------------------------------------------------------------------------

    Credit practices commonly referred to as predatory, such as loan 
``flipping,''

[[Page 46127]]

equity ``stripping,'' and the refinancing of special subsidized 
mortgage loans, may well be indicative of practices that are unfair or 
deceptive practices that violate section 5 of the FTC Act.\74\ For 
example, loan flipping is generally understood to mean the refinancing 
of a loan, which results in little or no economic benefit to the 
borrower, for the primary or sole objective of generating additional 
loan points, loan fees, prepayment penalties, and fees from financing 
the sale of credit-related products.\75\ Loan flipping can have 
particularly harmful results when it involves the practice of 
encouraging refinancing of special mortgage loans that contain 
nonstandard payment terms beneficial to the borrower, such as those 
originated in conjunction with a subsidized governmental or nonprofit 
organization program, when such refinancing entails the loss of one or 
more of the beneficial loan terms or is otherwise detrimental to the 
borrower.\76\ Home equity stripping typically involves making loans 
with excessively high, up-front fees that are financed and secured by 
the borrower's home, often with an excessively high penalty upon 
prepayment of the loan, for the sole or primary objective of stripping 
the borrower's home equity.\77\ Because the nature and impact of such 
practices are inherently highly fact-specific, the application of the 
standards of section 5 and use of the OCC's authority to enforce 
compliance with those standards are a particularly appropriate approach 
to ensure that such practices are not occurring in the national banking 
system.\78\
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    \74\ AL 2003-2 contains guidance recommending the establishment 
by national banks of policies and procedures to specify whether and 
under what circumstances the banks will make loans involving 
features or circumstances that have been associated with abusive 
lending practices.
    \75\ Federal law prohibits a creditor within one year of having 
extended credit subject to HOEPA from refinancing that loan to 
another loan subject to HOEPA, unless the refinancing is ``in the 
borrower's interest.'' 12 CFR 226.34(a)(3).
    \76\ If a national bank engages in the practice of ``steering'' 
a borrower to a loan with higher costs instead of to a comparable 
loan offered by the bank with lower costs for which the borrower 
could qualify, and does this on the basis of the borrower's race, 
national origin, age, or gender, for example, the OCC will take 
appropriate enforcement action under the Federal fair lending laws.
    \77\ Frequently equity stripping occurs in connection with loan 
flipping. ``Lenders who flip loans tend to charge high origination 
fees with each successive refinancing, and may charge these fees 
based on the entire amount of the new loan. * * * In addition, each 
refinancing may trigger prepayment penalties, which could be 
financed as part of the total loan amount, adding to the borrower's 
debt burden. * * * Each time the loan is flipped, more equity is 
lost in the home.'' Treasury-HUD Joint Report, supra note 66, at 73-
74.
    \78\ Case-by-case enforcement actions by the OCC to address such 
predatory lending practices also is particularly appropriate because 
such activities appear to be limited, if not rare, in the national 
banking system. See Treasury-HUD Joint Report, supra note 66, at 13 
(``[T]here is a growing body of anecdotal evidence that an 
unscrupulous subset of * * * subprime actors--lenders (often those 
not subject to federal banking supervision), as well as mortgage 
brokers, realtors, and home improvement contractors--engage in 
abusive lending practices that strip borrowers' home equity and 
place them at increased risk of foreclosure.'').
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    Section 8 of the Federal Deposit Insurance Act, 12 U.S.C. 1818, 
provides the OCC with the authority to bring enforcement actions 
against national banks and their subsidiaries for violations of any law 
or regulation, which necessarily includes section 5 of the FTC Act.\79\ 
The OCC has taken enforcement actions against banks involved in 
practices the OCC believed were unfair or deceptive and will continue 
to exercise its enforcement authority in this area where appropriate. 
Thus, while many types of state laws are not applicable to national 
banks' deposit-taking and lending activities, the OCC's guidance, the 
new, national anti-predatory lending standard of the proposed rule, the 
OCC's enforcement of the FTC Act, and a host of other Federal 
regulations \80\ will apply on a uniform basis to ensure that the real 
estate lending activities of national banks are conducted according to 
high standards.
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    \79\ In section 8, Congress gave the OCC broad powers to compel 
national banks' compliance with Federal and state laws. This 
includes the ability to issue cease and desist orders when the OCC 
determines that a national bank is violating or has violated any 
``law, rule, or regulation.'' 12 U.S.C. 1818(b)(1). Recent decisions 
have acknowledged the OCC's authority to enforce national banks' 
compliance with the FTC Act. See, e.g., Chavers v. Fleet Bank, 2002 
WL 481797 (R.I. Super. Feb. 25, 2002); Rossman v. Fleet Bank, C.A. 
No. PB01-0479 (R.I. Super. 2001) (transcript of hearing on Nov. 26, 
2001, pp. 25-28). See also Roberts, 2001 WL 1486226 at *2.
    \80\ As set forth above, there is an existing network of Federal 
laws applicable to national banks that protect consumers in a 
variety of ways. For lending activities, in addition to the Truth in 
Lending Act (TILA), Real Estate Settlement Procedures Act, Equal 
Credit Opportunity Act, and the Fair Housing Act, the Home Mortgage 
Disclosure Act, the Fair Credit Reporting Act, the Consumer Leasing 
Act, and the Fair Debt Collection Practices Act may also apply.
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4. Description of the Proposed Amendments to Part 34
    Current Sec.  34.3 states the general rule that national banks may 
``make, arrange, purchase, or sell loans or extensions of credit, or 
interests therein, that are secured by liens on, or interests in, real 
estate, subject to terms, conditions, and limitations prescribed by the 
Comptroller of the Currency by regulation or order.'' The proposal 
would leave this statement of the general rule unchanged, other than 
designating it as paragraph (a) of Sec.  34.3.\81\
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    \81\ We note that in a notice of proposed rulemaking to amend 12 
CFR parts 3, 5, 6, 7, 9, 28, and 34, published on February 7, 2003, 
we have proposed to amend 12 CFR 34.3 to reflect the amendment to 12 
U.S.C. 371 that added a reference to 12 U.S.C. 1828(o). See 68 FR 
6363.
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    A new paragraph (b) would add an explicit safety and soundness-
based anti-predatory lending standard to the general statement of 
authority concerning lending. As proposed, Sec.  34.3(b) states that a 
national bank shall not make a loan subject to 12 CFR part 34 based 
predominantly on the foreclosure value of the borrower's collateral, 
rather than on the borrower's repayment ability, including current and 
expected income, current obligations, employment status, and other 
relevant financial resources. This requirement reflects a bedrock 
principle of sound banking practices and is consistent with views 
repeatedly expressed by the OCC concerning the safety and soundness 
implications arising from loans made in reliance on the foreclosure 
value of the borrower's home or other collateral.\82\ The OCC believes 
that it is axiomatic that lenders following safe and sound lending 
practices will take reasonable steps to assure themselves and to verify 
that the borrower has the capacity to make scheduled payments to repay 
a loan, taking into account all of the borrower's obligations, 
including other indebtedness, insurance, and taxes, as well as 
principal and interest.\83\
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    \82\ See, e.g., Testimony of John D. Hawke, Jr. Before the 
Committee on Banking and Financial Services of the U.S. House of 
Representatives, May 24, 2000; AL 2003-2. See also OCC Advisory 
Letter 2000-7 (July 25, 2000). The standard is reflected elsewhere 
in Federal law. HOEPA prohibits creditors from engaging in a pattern 
or practice of extending credit subject to HOEPA ``based on the 
consumers'' collateral without regard to the consumers' repayment 
ability, including the consumers' current and expected income, 
current obligations, and employment.'' 15 U.S.C. 1639(h).
    \83\ OCC regulations provide that a national bank must 
``establish and maintain loan documentation practices that * * * 
[i]dentify the * * * source of repayment, and assess the ability of 
the borrower to repay the indebtedness in a timely manner.'' 12 CFR 
part 30, App. A, II. C.
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    The new prudential standard proposed in Sec.  34.3(b), the 
preexisting standard under the FTC Act, which the OCC enforces, and the 
many other applicable Federal laws that we have mentioned, ensure that 
national banks are subject to consistent and uniform Federal standards, 
administered and enforced by the OCC, that provide strong and extensive 
customer protections and appropriate safety and soundness-based 
criteria for their real estate lending activities. We invite interested 
parties to suggest other

[[Page 46128]]

general standards that would be appropriate to apply to national bank 
real estate lending activities that would further these objectives.
    State laws that are preempted. Pursuant to section 371, we propose 
to amend Sec.  34.4(a) to specify more completely the types of state 
law restrictions and requirements that are not applicable to national 
banks. This list, promulgated under our authority under section 371 to 
prescribe the types of restrictions and requirements to which national 
banks' real estate lending activities shall be subject, reflects our 
experience with types of state laws that obstruct, in whole or in part, 
or condition, national banks' exercise of real estate lending powers 
granted under Federal law. The list is not intended to be exhaustive. 
Other types of state laws that similarly affect the exercise of 
national banks' real estate lending powers may be identified. Under the 
regulation, those would be addressed by the OCC on a case-by-case 
basis.
    State laws that are not preempted. Section 34.4(b) also provides 
that certain types of state laws are not preempted and would be 
applicable to national banks to the extent that they do not materially 
affect the real estate lending powers of national banks or are 
otherwise consistent with national banks' Federal authority to engage 
in real estate lending.\84\ These types of laws generally pertain to 
contracts, debt collection, acquisition and transfer of property, 
taxation, zoning, crimes, torts,\85\ and homestead rights. In addition, 
any other law that the OCC determines to interfere to only an 
insignificant extent with national banks' real estate lending powers or 
is otherwise consistent with national banks' authority to engage in 
real estate lending would not be preempted under the proposal.\86\ In 
general, these would be laws that do not attempt to regulate the manner 
or content of national banks' real estate lending, but that instead 
form the legal infrastructure that surrounds and supports the conduct 
of that business. In general, the types of laws that are not preempted 
are those that promote national banks' ability to conduct business, 
rather than obstruct national banks' exercise of their real estate 
lending powers.
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    \84\ As set forth above in note 36, there are instances where 
Federal law specifically requires the application of state law to 
national banks, such as in 12 U.S.C. 92a(a). The language used in 
the regulation ``unless otherwise made applicable . . . by Federal 
law'' refers to this type of situation. Federal statutes such as 
TILA that contain clauses that preserve state law from preemption by 
that statute do not make those state laws applicable to national 
banks; in fact, such state laws may still be preempted by other 
Federal law such as the National Bank Act. See, e.g., Bank One, 
Utah, 190 F.3d at 850; and Bank of America, 309 F.3d at 565.
    \85\ See Bank of America, 309 F.3d at 559 (``[S]tates retain 
some power to regulate national banks in areas such as contracts, 
debt collection, acquisition and transfer of property, and taxation, 
zoning, criminal, and tort law.'').
    \86\ We note that the label a state attaches to its laws will 
not affect the analysis of whether that law is preempted. We will 
analyze the substance of any state law to determine whether the 
state law has only an incidental impact on the Federal powers. For 
instance, laws related to the transfer of real property may contain 
provisions that give borrowers the right to ``cure'' a default upon 
acceleration of a loan if the lender has not foreclosed on the 
property securing the loan. Viewed one way, this could be seen as 
part of the state laws governing foreclosure, which historically 
have been within a state's purview. However, as we concluded in the 
National City Order, to the extent that this type of law also limits 
the ability of a national bank to adjust the terms of a loan once 
there has been a default, it would be a state law limitation 
``concerning * * * (2) The schedule for repayment of principal and 
interest; [or] (3) The term to maturity of the loan.'' 12 CFR 
34.4(a). In such a situation, we would look to the effect of the 
state statute. If the primary effect of the state law is to regulate 
in the areas listed in our regulation, the state law would be 
preempted.
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D. Revisions to Part 7--Deposit-Taking, Other Lending, and Bank 
Activities

1. Background
    Preemption issues arising in the context of national bank deposit-
taking, other lending activities, and bank activities, while involving 
the application of different sources of Federal authority than that of 
real estate lending, nevertheless need similar rules that address more 
completely the types of state law restrictions and requirements that 
are, and are not, applicable to national banks and the standard 
employed to produce that result. Here, the proposal again focuses on 
state laws that obstruct, in whole or in part, or condition, national 
banks' exercise of powers granted under Federal law.\87\
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    \87\ See Hines v. Davidowitz, 312 U.S. 52, 67 (state law is 
preempted when it ``stands as an obstacle to the accomplishment and 
execution of the full purposes and objectives of Congress.''); 
Barnett, 517 U.S. at 33-34.
---------------------------------------------------------------------------

    This result recognizes the Federal source of national bank powers 
and the inherent design of the national banking system as a nationwide 
system of Federally-empowered banks operating under Federal standards, 
as discussed in section B., above.
    Consistent with the purpose of establishing a national banking 
system subject to uniform standards, Congress has vested the OCC with 
broad authority to facilitate the safe and sound exercise by national 
banks of their Federal powers. For example, 12 U.S.C. 93a vests the OCC 
with the authority to ``prescribe rules and regulations to carry out 
the responsibilities of the office * * *,'' except ``to the extent that 
authority to issue such rules and regulations has been expressly and 
exclusively granted to another regulatory agency.''\88\ Clearly, one of 
the ``responsibilities of the office'' is to administer the National 
Bank Act to enable national banks to employ the powers vested in them 
by Congress, free of obstacles to their ability to fully exercise those 
powers, and governed under the framework of Federal regulation and 
national standards envisioned by Congress in its design of the national 
banking system. The OCC fulfills this responsibility in part by setting 
the Federal standards under which national banks operate and clarifying 
when state standards do, and do not, affect their operations.
---------------------------------------------------------------------------

    \88\ 12 U.S.C. 93a (emphasis added). Section 93a also contains 
exceptions to our rulemaking authority in areas unrelated to 
deposit-taking or lending.
---------------------------------------------------------------------------

    In this regard, we believe it is appropriate to provide greater 
certainty and clarity to national banks concerning the extent to which 
state laws governing deposit-taking, non-real estate lending, and other 
authorized bank activities are applicable to national banks. The 
proposed amendments thereby further the OCC's responsibility to 
administer the National Bank Act by allowing national banks to conduct 
these activities, free of the specified types of state-imposed 
obstacles to their ability to fully exercise their powers in these 
areas. The amendments also further the ability of national banks to 
operate pursuant to the framework of national standards envisioned by 
Congress and enhance the safe and sound exercise by national banks of 
their Federal authority to conduct the business of banking by promoting 
efficiency of national bank activities.
2. Description of the Proposed Amendments to Part 7
    The proposal adds three new sections to part 7, Sec.  7.4007 
regarding deposit-taking activities, Sec.  7.4008 regarding non-real 
estate lending activities, and Sec.  7.4009 regarding other authorized 
national bank activities. The structure of the amendments is the same 
for Sec. Sec.  7.4007 and 7.4008 and is similar for Sec.  7.4009. For 
Sec. Sec.  7.4007 and 7.4008, the proposed rule first sets out a 
statement of the authority to engage in the activity. Second, the rule 
notes that state laws that obstruct, in whole or in part, or condition, 
a national bank's exercise of powers granted under Federal law are not 
applicable, and lists several types of state laws that are preempted. 
Finally,

[[Page 46129]]

the rule lists several types of state laws that, as a general matter, 
are not preempted. In Sec.  7.4009, the proposal first states that 
national banks may exercise all powers authorized to it under Federal 
law. Second, the proposal states that except as otherwise made 
applicable by Federal law, state laws that obstruct, in whole or in 
part, or condition, a national bank's exercise of powers granted under 
Federal law are not applicable. Finally, the proposal lists several 
types of state laws that, as a general matter, are not preempted.
    As with the proposed amendments to part 34, the proposed amendment 
to part 7 governing non-real estate lending includes a safety and 
soundness-based anti-predatory lending standard. As proposed, Sec.  
7.4008(b) states that a national bank shall not make a loan described 
in Sec.  7.4008 based predominantly on the foreclosure value of the 
borrower's collateral, rather than on the borrower's repayment ability, 
including current and expected income, current obligations, employment 
status, and other relevant financial resources. As noted in the 
discussion of proposed amendments to part 34, this requirement reflects 
a bedrock principle of sound banking practices and is consistent with 
views repeatedly expressed by the OCC concerning the safety and 
soundness implications arising from loans made in reliance on the 
foreclosure value of the borrower's home or other collateral.
    Non-real estate lending also is subject to section 5 of the FTC 
Act, which makes unlawful ``unfair or deceptive acts or practices'' in 
interstate commerce.\89\ Together, the new prudential standard proposed 
in Sec.  7.4008(b) and the preexisting standard under the FTC Act, plus 
Federal laws such as the Truth-in-Savings Act, ensure that national 
banks are subject to consistent and uniform Federal standards, 
administered and enforced by the OCC, that provide strong and extensive 
customer protections and appropriate safety and soundness-based 
criteria for their deposit-taking and lending activities. We invite 
interested parties to suggest other general standards that would be 
appropriate to apply to national bank lending activities that would 
further these objectives.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 45(a)(1).
---------------------------------------------------------------------------

    Deposit-taking and lending are powers specifically enumerated in 
statute. The same Federal statute--12 U.S.C. 24 (Seventh)--also grants 
to national banks the broader power to engage in activities that are 
part of, or incidental to, the business of banking. Questions about the 
applicability of state law are resolved, as we have described, with 
reference to the Federal character of the national bank charter; the 
fact that national bank powers derive exclusively from Federal law; and 
the purposes of the National Bank Act, including Congress's creation of 
a ``complete'' national banking system, free from state control, and 
subject to uniform, national standards. In this context, the Supreme 
Court and the lower Federal courts have said that state laws affecting 
the exercise of Federally authorized powers ordinarily do not apply to 
national banks.\90\ This is so whether the Federal grant of authority 
is specific, as in the case of deposit-taking or lending, or general, 
like the powers clause in section 24 (Seventh).
---------------------------------------------------------------------------

    \90\ See Barnett, 517 U.S. at 32.
---------------------------------------------------------------------------

    The OCC's regulations already address the applicability of state 
law with respect to a number of specific types of activities. The 
question may persist, however, about the extent to which state law may 
govern powers or activities that have not been addressed by Federal 
court precedents or OCC opinions or orders. Accordingly, proposed new 
Sec.  7.4009 provides that state laws do not apply to national banks if 
they obstruct, in whole or in part, or condition, a national bank's 
exercise of powers granted under Federal law.\91\
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    \91\ We note that the OTS has issued a regulation providing 
generally that state laws purporting to address the operations of 
Federal savings associations are preempted. See 12 CFR 545.2. The 
extent of Federal regulation and supervision of Federal savings 
associations under the Home Owners' Loan Act is substantially the 
same as for national banks under the national banking laws, a fact 
that warrants similar conclusions about the applicability of state 
laws to the conduct of the Federally authorized activities of both 
types of entities. Compare, e.g., 12 U.S.C. 1464(a) (OTS authorities 
with respect to the organization, incorporation, examination, 
operation, regulation, and chartering of Federal savings 
associations) with 12 U.S.C. 21 (organization and formation of 
national banking associations), 481 (OCC authority to examine 
national banks and their affiliates), 484 (OCC's exclusive 
visitorial authority), 93a (OCC authority to issue regulations).
---------------------------------------------------------------------------

    In some circumstances, of course, Federal law directs the 
application of state standards to a national bank. The wording of Sec.  
7.4009 reflects the fact that a Federal statute may require the 
application of state law,\92\ or it may incorporate--or 
``Federalize''--state standards.\93\ In those circumstances, the state 
standard applies. State law may also apply if it has only an incidental 
effect on a national bank's exercise of its Federally authorized powers 
or if it is otherwise consistent with national banks' uniquely Federal 
status. Like the other provisions we are proposing, Sec.  7.4009 
recognizes the potential applicability of state law in these 
circumstances. This approach is consistent with the Supreme Court's 
observation that national banks ``are governed in their daily course of 
business far more by the laws of the state than of the nation.'' \94\ 
As the Ninth Circuit recently has said: ``[S]tates retain some power to 
regulate national banks in areas such as contracts, debt collection, 
acquisition and transfer of property, and taxation, zoning, criminal, 
and tort law.'' \95\ However, as noted previously, these types of laws 
typically do not regulate the manner or content of the business of 
banking authorized for national banks, but rather establish the legal 
infrastructure that surrounds and supports the conduct of that 
business. They promote national banks' ability to conduct business; 
they do not obstruct the ability of national banks to exercise their 
Federally-granted powers.
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    \92\ See, e.g., 15 U.S.C. 6711 (insurance activities of national 
banks are ``functionally regulated'' by the states, subject to the 
provisions on the operation of state law contained in section 104 of 
the Gramm-Leach-Bliley Act).
    \93\ See, e.g., 12 U.S.C. 92a (permissible fiduciary activities 
for national banks determined by reference to state law).
    \94\ Nat'l Bank v. Commonwealth, 76 U.S. (9 Wall.) 353, 362 
(1869) (holding that shares held by shareholders of a national bank 
were lawfully subject to state taxation) (``All [national banks'] 
contracts are governed and construed by State laws. Their 
acquisition and transfer of property, their right to collect debts, 
and their liability to be sued for debts, are also based on State 
law.'').
    \95\ Bank of America, 309 F.3d at 559.
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E. Application of Proposed Changes to Operating Subsidiaries

    In accordance with our regulation set out in 12 CFR 7.4006, the 
rules governing national bank deposit-taking and lending apply equally 
to national bank operating subsidiaries. The OCC and Federal courts 
long have recognized that national banks may exercise permissible 
Federal powers through the separately incorporated operating 
subsidiary. Our regulations make clear that activities conducted in 
operating subsidiaries must be permissible for a national bank to 
engage in directly either as part of, or incidental to, the business of 
banking.\96\ Moreover, the operating subsidiary is acting ``pursuant to 
the same authorization, terms and conditions that apply to the conduct 
of such activities by its parent national bank.'' \97\ These 
regulations reflect express Congressional recognition in section 121 of 
the Gramm-Leach-Bliley Act that national banks may own subsidiaries 
that engage ``solely in activities that national banks are permitted to 
engage in directly and are conducted subject to the same terms and

[[Page 46130]]

conditions that govern the conduct of such activities by national 
banks.'' \98\ Courts have consistently treated operating subsidiaries 
and their parent banks as equivalents, unless Federal law requires 
otherwise, in considering whether a particular activity is 
permissible.\99\
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    \96\ See 12 CFR 5.34(e)(3).
    \97\ Id.
    \98\ Pub. L. 106-102, Sec.  121, 113 Stat. 1338, 1373 (1999), 
codified at 12 U.S.C. 24a(g)(3)(A).
    \99\ See, e.g., NationsBank of North Carolina, N.A. v. Variable 
Annuity Life Ins. Co., 513 U.S. 251 (sale of annuities by operating 
subsidiary); Clarke v. Securities Industry Ass'n, 479 U.S. 388 
(1987) (securities brokerage operating subsidiary); Marquette Nat'l 
Bank, 439 U.S. 299 (credit card subsidiary); American Ins. Ass'n v. 
Clarke, 865 F.2d 278 (D.C. Cir. 1988) (bond insurance subsidiary); M 
& M Leasing Corp. v. Seattle First Nat'l Bank, 563 F.2d 1377 (9th 
Cir. 1977) (auto leasing subsidiary); and Valley Nat'l Bank v. 
Lavecchia, 59 F. Supp. 2d 432 (D.N.J. 1999) (title insurance 
subsidiary).
---------------------------------------------------------------------------

    In accordance with the longstanding regulatory and judicial 
recognition of operating subsidiaries as corporate extensions of the 
parent bank, OCC regulations specifically provide that ``[u]nless 
otherwise provided by Federal law or OCC regulation, State laws apply 
to national bank operating subsidiaries to the same extent that those 
laws apply to the parent national bank.'' \100\ The only court to have 
considered the application of state law to an operating subsidiary 
after Sec.  7.4006 was promulgated agreed with our position.\101\ We 
also note that the OTS takes the same approach with respect to 
operating subsidiaries of Federal thrifts. 12 CFR 559.3(n) of the OTS 
regulations provides that state law applies to Federal savings 
associations' operating subsidiaries to the extent that the law applies 
to the parent thrift. This OTS regulation was upheld by a Federal 
district court.\102\
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    \100\ 12 CFR 7.4006.
    \101\ See Wells Fargo Bank I, 252 F. Supp. 2d 1065, and Wells 
Fargo Bank II, 2003 WL 21277203, granting plaintiff's motion for 
preliminary and permanent injunction on Supremacy Clause preemption 
claims, respectively. See also Nat'l City Bank of Indiana v. 
Boutris, Civ. No. S-03-0655 GEB JFM (E.D. Cal. May 7, 2003), and 
Nat'l City Bank of Indiana v. Boutris, 2003 WL 21536818 (E.D. Cal. 
July 2, 2003).
    \102\ See WFS Financial, Inc. v. Dean, 79 F. Supp. 2d 1024 (W.D. 
Wis. 1999); see also Chaires v. Chevy Chase Bank, F.S.B., 748 A.2d 
34, 44 (Md. App. 2000).
---------------------------------------------------------------------------

    Accordingly, the proposed amendments to parts 7 and 34 apply 
equally to operating subsidiaries of national banks.

Request for Comments

    In addition to the specific issues noted previously on which 
comment is specifically invited, the OCC invites comment on all aspects 
of the proposed regulation.

Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, sec. 
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. We invite your comments on how to make 
this proposal easier to understand. For example:
    [sbull] Have we organized the material to suit your needs? If not, 
how could this material be better organized?
    [sbull] Are the requirements in the proposed regulation clearly 
stated? If not, how could the regulation be more clearly stated?
    [sbull] Does the proposed regulation contain language or jargon 
that is not clear? If so, which language requires clarification?
    [sbull] Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes to the format would make the regulation 
easier to understand?
    [sbull] What else could we do to make the regulation easier to 
understand?

Community Bank Comment Request

    In addition, we invite your comments on the impact of this proposal 
on community banks. The OCC recognizes that community banks operate 
with more limited resources than larger institutions and may present a 
different risk profile. Thus, the OCC specifically requests comments on 
the impact of this proposal on community banks' current resources and 
available personnel with the requisite expertise, and whether the goals 
of the proposed regulation could be achieved, for community banks, 
through an alternative approach.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise 
required under section 604 of the RFA is not required if the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities and publishes its certification 
and a short, explanatory statement in the Federal Register along with 
its rule.
    Pursuant to section 605(b) of the RFA, the OCC hereby certifies 
that this proposal will not have a significant economic impact on a 
substantial number of small entities. Accordingly, a regulatory 
flexibility analysis is not needed. The amendments address the 
applicability of state law to national banks' deposit-taking, lending, 
and other authorized activities. These amendments simply provide the 
OCC's analysis and do not impose any new requirements or burdens. As 
such, they will not result in any adverse economic impact.

Executive Order 12866

    The OCC has determined that this proposal is not a significant 
regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (2 U.S.C. 1532) (Unfunded Mandates Act), requires that an agency 
prepare a budgetary impact statement before promulgating any rule 
likely to result in a Federal mandate that may result in the 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector of $100 million or more in any one year. If a 
budgetary impact statement is required, section 205 of the Unfunded 
Mandates Act also requires an agency to identify and consider a 
reasonable number of regulatory alternatives before promulgating a 
rule. The OCC has determined that the proposed rule will not result in 
expenditures by State, local, and tribal governments, or by the private 
sector, of $100 million or more in any one year. Accordingly, this 
rulemaking is not subject to section 202 of the Unfunded Mandates Act.

Executive Order 13132

    Executive Order 13132 requires Federal agencies, including the OCC, 
to certify their compliance with that Order when they transmit to the 
Office of Management and Budget any draft final regulation that has 
Federalism implications. Under the Order, a regulation has Federalism 
implications if it has ``substantial direct effects on the States, on 
the relationship between the national government and the States, or on 
the distribution of power and responsibilities among the various levels 
of government.'' In the case of a regulation that has Federalism 
implications and that preempts state law, the Order imposes certain 
consultation requirements with state and local officials; requires 
publication in the preamble of a Federalism summary impact statement; 
and requires the OCC to make available to the Director of the Office of 
Management and Budget any written communications submitted by state and 
local officials. By the terms of the Order, these requirements apply to 
the extent that they are practicable and permitted by law and, to that 
extent, must be

[[Page 46131]]

satisfied before the OCC promulgates a final regulation.
    This proposal may have Federalism implications, as that term is 
used in the Order. Therefore, before promulgating a final regulation 
based on this proposal, the OCC will, to the extent practicable and 
permitted by law, seek consultation with state and local officials, 
include a Federalism summary impact statement in the preamble to the 
final rule, and make available to the Director of OMB any written 
communications we receive from state or local officials.

List of Subjects

12 CFR Part 7

    Credit, Insurance, Investments, National banks, Reporting and 
recordkeeping requirements, Securities, Surety bonds.

12 CFR Part 34

    Mortgages, National banks, Reporting and recordkeeping 
requirements.

Authority and Issuance

    For the reasons set forth in the preamble, parts 7 and 34 of 
chapter I of title 12 of the Code of Federal Regulations are proposed 
to be amended as follows:

PART 7--BANK ACTIVITIES AND OPERATIONS

    1. The authority citation for part 7 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 71, 71a, and 93a.

Subpart D--Preemption

    2. A new Sec.  7.4007 is added to read as follows:


Sec.  7.4007  Deposit-taking.

    (a) Authority of national banks. A national bank may receive 
deposits and engage in any activity incidental to receiving deposits, 
including issuing evidence of accounts, subject to such terms, 
conditions, and limitations as the Comptroller of the Currency may 
prescribe by regulation or order and any other applicable Federal law.
    (b) Applicability of state law. (1) Except where made applicable by 
Federal law, state laws that obstruct, in whole or in part, or 
condition, a national bank's exercise of its Federally-authorized 
deposit-taking powers are not applicable to national banks.
    (2) The types of state laws referenced in paragraph (b)(1) of this 
section include state laws concerning--
    (i) Abandoned and dormant accounts;\3\
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    \3\ This does not apply to state laws of the type upheld by the 
United States Supreme Court in Anderson Nat'l Bank v. Luckett, 321 
U.S. 233 (1944), which obligate a national bank to ``pay [deposits] 
to the persons entitled to demand payment according to the law of 
the state where it does business.'' Id. at 248-249. State escheat 
laws are not included in this category. See also 12 CFR 557.12; 62 
FR 55759, 55761 (Oct. 22, 1997).
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    (ii) Checking accounts;
    (iii) Mandated statements and disclosure requirements;
    (iv) Funds availability;
    (v) Savings account orders of withdrawal;
    (vi) State licensing or registration requirements; and
    (vii) Special purpose savings services.\4\
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    \4\ State laws purporting to regulate national bank fees and 
charges are addressed in 12 CFR 7.4002.
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    (c) Except where made applicable by Federal law, state laws on the 
following subjects apply to national banks to the extent that they only 
incidentally affect the deposit-taking activities of national banks or 
are otherwise consistent with the purposes set out in paragraph (a) of 
this section:
    (1) Contracts;
    (2) Torts;
    (3) Criminal law; \5\
    (4) Debt collection;
    (5) Acquisition and transfer of property;
    (6) Taxation;
    (7) Zoning; and
    (8) Any other law that the OCC, upon review, determines to have 
only an incidental effect on the deposit-taking operations of national 
banks or is otherwise consistent with the purposes set out in paragraph 
(a) of this section.
    3. A new Sec.  7.4008 is added to read as follows:


Sec.  7.4008  Lending.

    (a) Authority of national banks. A national bank may make, sell, 
purchase, participate in, or otherwise deal in loans and interests in 
loans that are not secured by liens on, or interests in, real estate, 
subject to any terms, conditions, and limitations as the Comptroller of 
the Currency may prescribe by regulation or order and any other 
applicable Federal law.
    (b) Standards for loans. A national bank shall not make a loan 
described in paragraph (a) based predominantly on the foreclosure value 
of the borrower's collateral, without regard to the borrower's 
repayment ability, including the borrower's current and expected 
income, current obligations, employment status, and other relevant 
financial resources.
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    \5\ But see the distinction drawn by the Supreme Court in Easton 
v. Iowa, 188 U.S. 220, 238 (1903) between ``crimes defined and 
punishable at common law or by the general statutes of a State'' and 
``crimes and offences cognizable under the authority of the United 
States.'' The Court stated that ``[u]ndoubtedly a State has the 
legitimate power to define and punish crimes by general laws 
applicable to all persons within its jurisdiction. * * * But it is 
without lawful power to make such special laws applicable to banks 
organized and operating under the laws of the United States.'' Id. 
at 239 (holding that Federal law governing the operations of 
national banks preempted a state criminal law prohibiting insolvent 
banks from accepting deposits).
---------------------------------------------------------------------------

    (c) Applicability of state law. (1) Except where made applicable by 
Federal law, state laws that obstruct, in whole or in part, or 
condition, a national bank's exercise of its Federally-authorized non-
real estate lending powers are not applicable to national banks.
    (2) The types of state laws referenced in paragraph (c)(1) of this 
section include state laws concerning--
    (i) Licensing, registration, filings, or reports by creditors;
    (ii) The ability of a creditor to require or obtain insurance for 
collateral or other credit enhancements or risk mitigants, in 
furtherance of safe and sound banking practices;
    (iii) Loan-to-value ratios;
    (iv) The terms of credit, including schedule for repayment of 
principal and interest, amortization of loans, balance, payments due, 
minimum payments, or term to maturity of the loan, including the 
circumstances under which a loan may be called due and payable upon the 
passage of time or a specified event external to the loan;
    (v) Escrow accounts, impound accounts, and similar accounts;
    (vi) Security property, including leaseholds;
    (vii) Access to, and use of, credit reports;
    (viii) Mandated statements, disclosure and advertising, including 
laws requiring specific statements, information, or other content to be 
included in credit application forms, credit solicitations, billing 
statements, credit contracts, or other credit-related documents;
    (ix) Disbursements and repayments; and
    (x) Rates of interest on loans.\6\
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    \6\ The limitations on charges that comprise rates of interest 
on loans by national banks are determined under Federal law. Federal 
law applies a state's limits on rates of interest to loans made by 
national banks located in that state. See 12 U.S.C. 85; 12 CFR 
7.4001. State laws purporting to regulate national bank fees and 
charges that do not constitute interest are addressed in 12 CFR 
7.4002.
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    (d) Except where made applicable by Federal law, state laws on the 
following subjects apply to national banks to the extent that they only 
incidentally affect

[[Page 46132]]

the non-real estate lending activities of national banks or are 
otherwise consistent with national banks' Federal lending authority:
    (1) Contracts;
    (2) Torts;
    (3) Criminal law; \7\
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    \7\ See note 5 in 12 CFR 7.4007 regarding the distinction drawn 
by the Supreme Court in Easton v. Iowa, 188 U.S. 220, 238 (1903) 
between ``crimes defined and punishable at common law or by the 
general statutes of a State'' and ``crimes and offences cognizable 
under the authority of the United States.''
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    (4) Debt collection;
    (5) Acquisition and transfer of property;
    (6) Taxation;
    (7) Zoning; and
    (8) Any other law that the OCC, upon review, determines to have 
only an incidental effect on the non-real estate lending operations of 
national banks or is otherwise consistent with the purposes set out in 
paragraph (a) of this section.
    4. A new Sec.  7.4009 is added to read as follows:


Sec.  7.4009  Applicability of state law to other authorized national 
bank activities.

    (a) Authority of national banks. A national bank may exercise all 
powers authorized to it under Federal law, including conducting any 
activity that is part of, or incidental to, the business of banking, 
subject to such terms, conditions, and limitations as are imposed by 
the OCC or by any other applicable Federal law.
    (b) Applicability of state law generally. Except where made 
applicable by Federal law, state laws that obstruct, in whole or in 
part, or condition, a national bank's exercise of powers granted under 
Federal law do not apply to national banks.
    (c) Applicability of state law to particular national bank 
activities. (1) The provisions of this section govern with respect to 
any national bank power or aspect of a national bank's activities that 
is not covered by another OCC regulation specifically addressing the 
applicability of state law.
    (2) Except where made applicable by Federal law, state laws on the 
following subjects apply to national banks to the extent that they only 
incidentally affect the exercise of national bank powers:
    (i) Contracts;
    (ii) Torts;
    (iii) Criminal law;
    (iv) Debt collection;
    (v) Acquisition and transfer of property;
    (vi) Taxation;
    (vii) Zoning; and
    (viii) Any other law that the OCC, upon review, determines to have 
only an incidental effect on the exercise of national bank powers or is 
otherwise consistent with purposes set out in paragraph (a) of this 
section.

PART 34--REAL ESTATE LENDING AND APPRAISALS

Subpart A--General

    5. The authority citation for part 34 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 29, 93a, 371, 1701j-3, 1828(o), 
and 3331 et seq.

    6. In Sec.  34.3, the existing text is designated as paragraph (a), 
and a new paragraph (b) is added to read as follows:


Sec.  34.3  General rule.

* * * * *
    (b) A national bank shall not make a loan described in this part 
based predominantly on the foreclosure value of the borrower's 
collateral, without regard to the borrower's repayment ability, 
including the borrower's current and expected income, current 
obligations, employment status, and other relevant financial resources.
    7. Section 34.4 is revised to read as follows:


Sec.  34.4  Applicability of State law.

    (a) Except where State law is made applicable by Federal law, a 
national bank may make real estate loans under 12 U.S.C. 371 and Sec.  
34.3, without regard to State law limitations concerning:
    (1) Licensing, registration, filings, or reports by creditors;
    (2) The ability of a creditor to require or obtain private mortgage 
insurance, insurance for other collateral, or other credit enhancements 
or risk mitigants, in furtherance of safe and sound banking practices;
    (3) Loan-to-value ratios;
    (4) The terms of credit, including schedule for repayment of 
principal and interest, amortization of loans, balance, payments due, 
minimum payments, or term to maturity of the loan, including the 
circumstances under which a loan may be called due and payable upon the 
passage of time or a specified event external to the loan;
    (5) The aggregate amount of funds that may be loaned upon the 
security of real estate;
    (6) Escrow accounts, impound accounts, and similar accounts;
    (7) Security property, including leaseholds;
    (8) Access to, and use of, credit reports;
    (9) Mandated statements, disclosure and advertising, including laws 
requiring specific statements, information, or other content to be 
included in credit application forms, credit solicitations, billing 
statements, credit contracts, or other credit-related documents;
    (10) Processing, origination, servicing, sale or purchase of, or 
investment or participation in, mortgages;
    (11) Disbursements and repayments;
    (12) Rates of interest on loans;\1\
---------------------------------------------------------------------------

    \1\ The limitations on charges that comprise rates of interest 
on loans by national banks are determined under Federal law. See 12 
U.S.C. 85 and 1735f-7a; 12 CFR 7.4001. State laws purporting to 
regulate national bank fees and charges that do not constitute 
interest are addressed in 12 CFR 7.4002.
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    (13) Due-on-sale clauses except to the extent provided in 12 U.S.C. 
1701j-3 and 12 CFR part 591; and
    (14) Covenants and restrictions that must be contained in a lease 
to qualify the leasehold as acceptable security for a real estate loan.
    (b) Except where made applicable by Federal law, State laws on the 
following subjects apply to national banks to the extent that they only 
incidentally affect the real estate lending powers of national banks:
    (1) Contracts;
    (2) Torts;
    (3) Criminal law; \2\
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    \2\ But see the distinction drawn by the Supreme Court in Easton 
v. Iowa, 188 U.S. 220, 238 (1903) between ``crimes defined and 
punishable at common law or by the general statutes of a State'' and 
``crimes and offences cognizable under the authority of the United 
States.'' The Court stated that ``[u]ndoubtedly a State has the 
legitimate power to define and punish crimes by general laws 
applicable to all persons within its jurisdiction. * * * But it is 
without lawful power to make such special laws applicable to banks 
organized and operating under the laws of the United States.'' Id. 
at 239 (holding that Federal law governing the operations of 
national banks preempted a state criminal law prohibiting insolvent 
banks from accepting deposits).
---------------------------------------------------------------------------

    (4) Homestead laws specified in 12 U.S.C. 1462a(f);
    (5) Debt collection;
    (6) Acquisition and transfer of real property;
    (7) Taxation;
    (8) Zoning; and
    (9) Any other law that the OCC, upon review, determines to have 
only an incidental effect on the real estate lending powers of national 
banks or is otherwise consistent with the purposes set out in Sec.  
34.3(a).

    Dated: July 30, 2003.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 03-19906 Filed 8-4-03; 8:45 am]
BILLING CODE 4810-33-P