[Federal Register Volume 68, Number 150 (Tuesday, August 5, 2003)]
[Notices]
[Pages 46264-46281]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19907]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 03-17]


Preemption Determination and Order

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

ACTION: Notice.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is issuing 
this Determination and Order, attached as an appendix to this Notice, 
in response to a request from National City Bank, National City Bank of 
Indiana, and their operating subsidiaries, National City Mortgage 
Company and First Franklin Financial Company (referred to collectively 
herein as National City). The request asks the OCC to determine whether 
the Georgia Fair Lending Act (GFLA)\1\ applies to the banks and their 
operating subsidiaries, and to issue an appropriate order. National 
City asserts that the GFLA is preempted under various provisions of 
Federal law and that, accordingly, the OCC should conclude that the 
Georgia law does not apply to it. For the reasons summarized here and 
described in detail in the appendix, the OCC has concluded that the 
provisions of the GFLA affecting national banks' real estate lending 
are preempted by Federal law. Therefore, we are issuing an order 
providing that the GFLA does not apply to National City or to any other 
national bank or national bank operating subsidiary that engages in 
real estate lending activities in Georgia.
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    \1\ The GFLA codified at GA Code. Ann Sec. Sec.  7-6A-1 et seq.

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

SUPPLEMENTARY INFORMATION: In brief, the reasons supporting our 
Determination and Order are as follows:
    [sbull] National banks' authority to engage in real estate lending 
activities derives exclusively from Federal law. Under applicable 
Federal preemption principles, based on the Supremacy Clause of the 
U.S. Constitution and articulated by the U.S. Supreme Court, a state 
law may not modify a Congressional grant of power to national banks by 
limiting, conditioning, or otherwise impermissibly affecting a national 
bank's exercise of that power.
    [sbull] The Federal statute that authorizes national banks' real 
estate lending activities, 12 U.S.C. 371, precludes

[[Page 46265]]

application of many provisions of the GFLA to national banks. First, by 
its terms, the statute grants real estate lending power unconditioned 
by the application of any state's law. As it said in Barnett Bank of 
Marion County, N.A. v. Nelson,\2\ the Supreme Court ordinarily finds 
that state law conditions on the exercise of national bank powers are 
preempted if Congress has not expressly directed the application of 
state law. Second, the text of the statute specifically gives the OCC 
authority to determine the ``restrictions and requirements'' that apply 
to national banks'' real estate lending activities. The exclusion of 
state authority in this regard is consistent with the history of the 
statute, which has, since its inception, imposed only Federal limits 
and conditions on national banks' real estate lending activities.
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    \2\ 517 U.S. 25 (1996).
---------------------------------------------------------------------------

    [sbull] National banks' real estate lending standards are subject 
to a comprehensive Federal regulatory framework that addresses the 
types of abusive and predatory practices that the GFLA seeks to 
prohibit. In addition, the OCC has recently issued detailed guidance 
applicable to national banks' mortgage originations, use of mortgage 
brokers, and purchases of loans from others. This guidance targets 
abusive and predatory practices and will be administered by the OCC as 
part of its comprehensive supervision of national banks, in addition to 
the already-applicable Federal restrictions on high-cost real estate 
lending, Federal consumer protections and disclosure requirements that 
apply to all home mortgage lending, and Federal standards that require 
national banks to base lending decisions on the borrower's ability to 
repay and not the foreclosure value of the collateral.
    [sbull] The OCC regulations implementing 12 U.S.C. 371 currently 
provide that certain types of state laws do not apply to national 
banks. For instance, part 34 of our rules says expressly that state 
laws concerning the schedule for the repayment of principal and 
interest and state laws concerning the term to maturity of a loan do 
not apply to national banks. Thus, Federal law, comprised of the 
statute and OCC regulations, already preempts the GFLA provisions that 
modify a national bank's real estate lending authority by imposing 
limits or restrictions that concern the schedule for repayment of 
principal and interest or the term to maturity of a loan.
    [sbull] Section 371 and our rules also preempt the GFLA provisions 
that, pursuant to the Barnett standards and the growing body of lower 
Federal court case law applying those standards, impose conditions on, 
or otherwise impermissibly affect, a national bank's exercise of its 
real estate lending powers. Thus, provisions of the GFLA that 
prescriptively prohibit or limit practices that are lawful under 
Federal law (but, in many cases, subject to Federal standards directed 
at eliminating abusive or predatory practices) also do not apply to 
national banks.
    [sbull] Some provisions of the GFLA purport to limit the interest a 
national bank may charge for certain types of loans. As the Supreme 
Court has recently reaffirmed, the rate of interest that is permissible 
for national banks is determined exclusively by Federal law, at 12 
U.S.C. 85. Section 85 permits national banks to charge the most 
favorable rate permitted by the laws of the state in which the bank is 
located, regardless of where the borrower is located. Under this 
standard, National City uses the most favored lender rates of Indiana, 
not Georgia, and thus is not subject to limits on the rates of interest 
imposed by the GFLA. (Moreover, national banks located in Georgia are 
not subject to the GFLA provisions concerning interest. The Office of 
Thrift Supervision has previously determined that the GFLA does not 
apply to Federal savings associations. By virtue of the parity 
provision in the GFLA, that law also would not apply to a Georgia state 
savings association. Thus, for purposes of section 85, a Georgia state 
savings association is the most favored lender with respect to the 
types of loans covered by the GFLA, and, accordingly, a national bank 
located in Georgia is similarly not subject to limits on the rate of 
interest it may charge for loans within the scope of the GFLA.)
    [sbull] Other provisions of the GFLA purport to limit the non-
interest fees a national bank may charge in connection with certain 
types of loans. These provisions are preempted because they are 
inconsistent with national banks' well recognized authority to 
establish non-interest fees pursuant to the national bank powers 
provisions of 12 U.S.C. 24(Seventh) and the OCC's rules that govern 
national bank fees.
    [sbull] The GFLA is also preempted with respect to national bank 
operating subsidiaries. Federal law authorizes national banks to 
conduct through operating subsidiaries activities that are permissible 
for the bank itself. Activities conducted through operating 
subsidiaries are subject to the same terms and conditions as apply to 
the parent bank and, pursuant to OCC regulations, are subject to state 
law only to the extent that the parent bank is subject to state law.
    This Determination and Order provides that the GFLA does not apply 
to National City. Because our conclusions rest on an analysis of the 
legal effects of the GFLA under Constitutional preemption principles, 
they would not differ with respect to any other national bank or 
national bank operating subsidiary engaged in real estate lending 
activities in Georgia. The scope of our Order providing that the GFLA 
is preempted therefore includes any national bank or national bank 
operating subsidiary that is engaged in real estate lending activities 
in Georgia.
    Finally, although National City has asked us to address whether 
Federal law occupies the field of real estate lending regulation, such 
that no state real estate lending law applies to national banks or 
their operating subsidiaries, our Determination and Order does not take 
up that issue. National City's request asked us to review only one 
state's law, the GFLA. A conclusion that Federal law occupies the field 
of real estate lending regulation would have implications beyond the 
applicability of the Georgia law. For that reason, we believe it is 
appropriate to consider the question of occupation of the field, as 
that theory may apply in the case of real estate lending, in a 
rulemaking. Contemporaneously with the issuance of this Determination 
and Order, therefore, we are initiating a rulemaking that addresses 
that issue.

    Dated: July 30, 2003.
John D. Hawke, Jr.,
Comptroller of the Currency.

Appendix--Determination and Order; In the Matter of National City Bank, 
National City Bank of Indiana, and Their Operating Subsidiaries; 
Introduction and Summary Conclusions

    The Office of the Comptroller of the Currency (OCC) is issuing this 
Determination and Order in response to a request from National City 
Bank, National City Bank of Indiana, and their operating subsidiaries, 
National City Mortgage Company and First Franklin Financial Company 
(referred to collectively herein as National City). The request asks 
the OCC to determine whether the Georgia Fair Lending Act (GFLA)\1\ 
applies to the banks and their operating subsidiaries, and to issue an 
appropriate order. National City asserts that the GFLA is preempted 
under various provisions of Federal law and

[[Page 46266]]

that, accordingly, the OCC should conclude that the Georgia law does 
not apply to it. For the reasons summarized here and described in 
detail later in this Determination and Order, the OCC has concluded 
that the provisions of the GFLA affecting national banks' real estate 
lending are preempted by Federal law. Therefore, we are issuing an 
order providing that the GFLA does not apply to National City or to any 
other national bank or national bank operating subsidiary that engages 
in real estate lending activities in Georgia.
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    \1\ The GFLA is codified at GA Code. Ann. Sec. Sec.  7-6A-1 et 
seq.
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    In brief, the reasons supporting our Determination and Order are as 
follows:
    [sbull] National banks' authority to engage in real estate lending 
activities derives exclusively from Federal law. Under applicable 
Federal preemption principles, based on the Supremacy Clause of the 
U.S. Constitution and articulated by the U.S. Supreme Court, a state 
law may not modify a Congressional grant of power to national banks by 
limiting, conditioning, or otherwise impermissibly affecting a national 
bank's exercise of that power.
    [sbull] The Federal statute that authorizes national banks' real 
estate lending activities, 12 U.S.C. 371, precludes application of many 
provisions of the GFLA to national banks. First, by its terms, the 
statute grants real estate lending power unconditioned by the 
application of any state's law. As it said in Barnett Bank of Marion 
County, N.A. v. Nelson,\2\ the Supreme Court ordinarily finds that 
state law conditions on the exercise of national bank powers are 
preempted if Congress has not expressly directed the application of 
state law. Second, the text of the statute specifically gives the OCC 
authority to determine the ``restrictions and requirements'' that apply 
to national banks' real estate lending activities. The exclusion of 
state authority in this regard is consistent with the history of the 
statute, which has, since its inception, imposed only Federal limits 
and conditions on national banks' real estate lending activities.
---------------------------------------------------------------------------

    \2\ 517 U.S. 25 (1996).
---------------------------------------------------------------------------

    [sbull] National banks' real estate lending standards are subject 
to a comprehensive Federal regulatory framework that addresses the 
types of abusive and predatory practices that the GFLA seeks to 
prohibit. In addition, the OCC has recently issued detailed guidance 
applicable to national banks' mortgage originations, use of mortgage 
brokers, and purchases of loans from others. This guidance targets 
abusive and predatory practices and will be administered by the OCC as 
part of its comprehensive supervision of national banks, in addition to 
the already-applicable Federal restrictions on high-cost real estate 
lending, Federal consumer protections and disclosure requirements that 
apply to all home mortgage lending, and Federal standards that require 
national banks to base lending decisions on the borrower's ability to 
repay and not the foreclosure value of the collateral.
    [sbull] The OCC regulations implementing 12 U.S.C. 371 currently 
provide that certain types of state laws do not apply to national 
banks. For instance, part 34 of our rules says expressly that state 
laws concerning the schedule for the repayment of principal and 
interest and state laws concerning the term to maturity of a loan do 
not apply to national banks. Thus, Federal law, comprised of the 
statute and OCC regulations, already preempts the GFLA provisions that 
modify a national bank's real estate lending authority by imposing 
limits or restrictions that concern the schedule for repayment of 
principal and interest or the term to maturity of a loan.
    [sbull] Section 371 and our rules also preempt the GFLA provisions 
that, pursuant to the Barnett standards and the growing body of lower 
Federal court case law applying those standards, impose conditions on, 
or otherwise impermissibly affect, a national bank's exercise of its 
real estate lending powers. Thus, provisions of the GFLA that 
prescriptively prohibit or limit practices that are lawful under 
Federal law (but, in many cases, subject to Federal standards directed 
at eliminating abusive or predatory practices) also do not apply to 
national banks.
    [sbull] Some provisions of the GFLA purport to limit the interest a 
national bank may charge for certain types of loans. As the Supreme 
Court has recently reaffirmed, the rate of interest that is permissible 
for national banks is determined exclusively by Federal law, at 12 
U.S.C. 85. Section 85 permits national banks to charge the most 
favorable rate permitted by the laws of the state in which the bank is 
located, regardless of where the borrower is located. Under this 
standard, National City uses the most favored lender rates of Indiana, 
not Georgia, and thus is not subject to limits on the rates of interest 
imposed by the GFLA. (Moreover, national banks located in Georgia are 
not subject to the GFLA provisions concerning interest. The Office of 
Thrift Supervision (OTS) has previously determined that the GFLA does 
not apply to Federal savings associations. By virtue of the parity 
provision in the GFLA, that law also would not apply to a Georgia state 
savings association. Thus, for purposes of section 85, a Georgia state 
savings association is the most favored lender with respect to the 
types of loans covered by the GFLA, and, accordingly, a national bank 
located in Georgia is similarly not subject to limits on the rate of 
interest it may charge for loans within the scope of the GFLA.)
    [sbull] Other provisions of the GFLA purport to limit the non-
interest fees a national bank may charge in connection with certain 
types of loans. These provisions are preempted because they are 
inconsistent with national banks' well recognized authority to 
establish non-interest fees pursuant to the national bank powers 
provisions of 12 U.S.C. 24(Seventh) and the OCC's rules that govern 
national bank fees.
    [sbull] The GFLA is also preempted with respect to national bank 
operating subsidiaries. Federal law authorizes national banks to 
conduct through operating subsidiaries activities that are permissible 
for the bank itself. Activities conducted through operating 
subsidiaries are subject to the same terms and conditions as apply to 
the parent bank and, pursuant to OCC regulations, are subject to state 
law only to the extent that the parent bank is subject to state law.
    This Determination and Order provides that the GFLA does not apply 
to National City. Because our conclusions rest on an analysis of the 
legal effects of the GFLA under Constitutional preemption principles, 
they would not differ with respect to any other national bank or 
national bank operating subsidiary engaged in real estate lending 
activities in Georgia. The scope of our Order providing that the GFLA 
is preempted therefore includes any national bank or national bank 
operating subsidiary that is engaged in real estate lending activities 
in Georgia.
    Finally, although National City has asked us to address whether 
Federal law occupies the field of real estate lending regulation, such 
that no state real estate lending law applies to national banks or 
their operating subsidiaries, our Determination and Order does not take 
up that issue. National City's request asked us to review only one 
state's law, the GFLA. A conclusion that Federal law occupies the field 
of real estate lending regulation would have implications beyond the 
applicability of the Georgia law. For that reason, we believe it is 
appropriate to consider the question of occupation of the field, as 
that theory may apply in the case of real estate lending, in a 
rulemaking. Contemporaneously with the issuance

[[Page 46267]]

of this Determination and Order, therefore, we are initiating a 
rulemaking that addresses that issue.

Table of Contents

I. Background
    A. Relevant Provisions of State and Federal Law and Regulations
    1. The Georgia Fair Lending Act
    2. Federal Law and Regulations
    a. National banks' real estate lending authority
    b. Permissible rate of interest for national banks
    c. National banks' authority to charge fees
    d. Standards applicable to operating subsidiaries
    e. Anti-predatory lending standards applicable to national banks
    B. National City's Preemption Request
    C. Notice of, and Comments on, National City's Request
II. Overview of Federal Preemption of State Laws with Respect to 
National Banks
    A. Legislative History of the Early National Banking Laws
    B. The Supremacy Clause and the Federal Preemption Standards 
Articulated by the Supreme Court
    C. Supreme Court Precedents Leading to Barnett
    D. Recent Lower Federal Court Decisions Concluding that State 
Laws Are Preempted
    E. The Limited Circumstances under which State Laws Apply to 
National Banks
III. Discussion and Analysis
    A. The GFLA Conflicts with the Federal Grant of Power to a 
National Bank to Engage in Real Estate Lending Activities
    1. Provisions of GFLA preempted by Sec.  34.4(a)(2) (State laws 
concerning the schedule for repayment of principal and interest)
    2. Provisions of GFLA preempted by Sec.  34.4(a)(3) (State laws 
concerning term to maturity)
    3. GFLA provisions preempted under recognized principles of 
preemption as provided by Sec.  34.4(b)
    B. The GFLA Provisions Limiting the Rate of Interest a National 
Bank Charges Are Inapplicable to National Banks Pursuant to 12 
U.S.C. 85 and 12 CFR 7.4001
    C. The GFLA Conflicts with the Federal Grant of Power to 
National Banks to Charge Non-Interest Fees
    D. Certain GFLA Provisions Are Moot in Light of the Preceding 
Analysis
    E. Applicability of the GFLA to National Bank Operating 
Subsidiaries
IV. Results of the Analysis Order

I. Background

A. Relevant Provisions of State and Federal Law and Regulations

1. The Georgia Fair Lending Act
    The GFLA became effective October 1, 2002. As originally enacted, 
the GFLA restricted the ability of creditors or servicers to charge 
certain fees and engage in certain practices for three categories that 
it defined: ``home loans,'' ``covered home loans,'' and ``high-cost 
home loans.'' Whether a loan was covered by one of these categories 
depended on the annual percentage rate and the amount of points and 
fees charged.\3\ All ``home loans'' were subject to certain 
restrictions on the terms of credit and loan-related fees, including 
prohibitions on the financing of credit insurance, debt cancellation or 
suspension coverage, and limitations on late fees and payoff statement 
fees.
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    \3\ See GFLA Sec.  7-6A-2.
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    In addition to the restrictions on ``home loans,'' ``covered home 
loans'' were subject to restrictions on the number of times a loan 
could be refinanced and the circumstances in which a refinancing could 
occur. For example, the GFLA prohibited a creditor from refinancing an 
existing home loan that was less than five years old with a ``covered 
home loan'' that did not provide a reasonable ``tangible net benefit'' 
to the borrower, considering all the circumstances.
    ``High-cost home loans'' were subject to the restrictions on ``home 
loans'' and ``covered home loans,'' as well as numerous disclosure 
requirements and restrictions on the terms of credit and loan-related 
fees. Creditors were required to disclose to borrowers that the loan is 
high-cost, and borrowers were required to be provided with certain loan 
counseling before the creditor could make the loan. In addition, the 
GFLA prohibited certain pre-payment penalties; balloon payments; 
negative amortization; increases in interest rates after default; 
advance payments from loan proceeds; fees to modify, renew, extend, 
amend, or defer a payment; and accelerating payments at the creditor's 
or servicer's sole discretion.
    The original GFLA provided a private right of action for borrowers 
against lenders and mortgage brokers for injunctive and declaratory 
relief as well as for actual, statutory, and punitive damages, and 
permitted recovery of a plaintiff's attorney's fees. In addition, the 
Georgia Attorney General, district attorneys, the Commissioner of 
Banking and Finance and, with respect to the insurance provisions, the 
Commissioner of Insurance were given the jurisdiction to enforce the 
GFLA through their general regulatory powers and civil processes 
permitted under state law.
    The original GFLA also provided that any purchaser or assignee of a 
high-cost home loan would be subject to all affirmative claims and 
defenses that the borrower could assert against the original lender. 
This extension of lender liability to assignees and purchasers had the 
potential to seriously impede the secondary market for Georgia mortgage 
loans and, following the enactment of the original GFLA, Moody's 
Investors Service concluded that including GFLA-covered loans in 
securitizations was too risky, causing lenders to scale back loans in 
the state and leading issuers to remove Georgia loans from 
securitizations. Standard and Poor's also announced that it would no 
longer rate mortgage-backed securities that included Georgia mortgage 
loans.
    On March 7, 2003, the Georgia legislature amended the GFLA. The 
amendments eliminated the ``covered home loan'' category, but all of 
the original GFLA restrictions on ``high-cost home loans'' remain in 
effect under the current version of the law. The amendments did not 
change the civil liability provisions applicable to loan originators 
and mortgage brokers. The amendments did, however, limit purchaser or 
assignee liability by providing a due diligence defense in the event of 
a borrower claim and by capping the amount of the purchaser's or 
assignee's potential liability. However, Moody's and Standard and 
Poor's still apply significant limits on their willingness to rate 
mortgage-backed securities that include Georgia high-cost home loans.
    As amended, the GFLA provides that if the GFLA has been determined 
to be preempted by Federal law for Federally-chartered institutions, 
the comparable state-chartered institutions (e.g. state banks, thrifts, 
trust companies, or their subsidiaries) will likewise not be subject to 
the GFLA.\4\ Under this parity law, most of the provisions in the GFLA 
are already inapplicable to state-chartered savings and loan 
associations because the OTS has determined that most of the GFLA is 
inapplicable to Federally-chartered thrifts.\5\
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    \4\ The statute provides that ``[t]he provisions of this chapter 
shall not apply to any bank, trust company, savings and loan, 
savings bank, credit union, or subsidiary thereof, respectively, 
that is chartered under the laws of this state or any other state 
only to the extent federal law precludes or preempts or has been 
determined to preclude or preempt the application of the provisions 
of this chapter to any federally chartered bank, trust company, 
savings and loan, savings bank, credit union, or subsidiary thereof, 
respectively, and such federal preclusion or preemption shall apply 
only to the same type of state chartered entity as the federally 
chartered entity affected; provided, however, the provisions of this 
chapter . . . shall be applicable to an independent mortgage broker 
for any loan originated or brokered by the broker that is initially 
funded by any state or federally chartered bank, trust company, 
savings and loan, savings bank, or credit union.'' GFLA Sec.  7-6A-
12.
    \5\ See OTS Op. Chief Counsel, P-2003-1 (Jan. 21, 2003), 
available at http://www.ots.treas.gov/docs/56301.pdf.

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[[Page 46268]]

2. Federal Law and Regulations
    The real estate lending activities covered by the GFLA are 
authorized for national banks by Federal law and regulated under 
Federal standards.
    a. National banks' real estate lending authority. Federal law 
authorizes national banks to engage in real estate lending activities 
and vests in the OCC comprehensive authority to regulate and supervise 
those activities:
    [a]ny national banking association may make, arrange, purchase or 
sell loans or extensions of credit secured by liens on interests in 
real estate, subject to section 1828(o) of this title and such 
restrictions and requirements as the Comptroller of the Currency may 
prescribe by regulation or order.\6\
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    \6\ 12 U.S.C. 371(a). The cross-reference in this provision is 
to the Federal requirement for safety and soundness standards that 
apply to real estate lending. The standards for national banks and 
their operating subsidiaries are set forth in 12 CFR part 34, 
Subpart D, Appendix A.

The exercise of the powers granted by section 371 is not conditioned on 
compliance with any state requirement, but subject only to a Federal 
law and such rules and regulations as the Comptroller may prescribe.\7\
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    \7\ Federal legislation occasionally provides that national 
banks shall conduct certain activities subject to state law 
standards. For example, national banks conduct insurance sales, 
solicitation, and cross-marketing activities subject to certain 
types of state restrictions expressly set out in the Gramm-Leach-
Bliley Act (GLBA). See 15 U.S.C. 6701(d)(2)(B). There is no similar 
Federal legislation subjecting national banks' real estate lending 
activities to state law standards.
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    The OCC has implemented section 371 in regulations set forth at 12 
CFR part 34.\8\ Twelve CFR 34.3 establishes the general rule that a 
national bank and its operating subsidiaries may engage in real estate 
lending, and qualifies this rule by reference only to the ``terms, 
conditions, and limitations prescribed by the Comptroller of the 
Currency by regulation or order.'' Twelve CFR 34.4(a) expressly 
provides that five types of state law limitations are not applicable to 
real estate loans made by national banks and their operating 
subsidiaries:
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    \8\ Some of the OCC's regulations, such as part 34, apply by 
their terms to national bank operating subsidiaries. See 12 CFR 
34.1(b). As explained below, however, a national bank operating 
subsidiary is treated the same as its parent bank and, thus, is also 
subject to OCC regulations that do not expressly refer to national 
bank operating subsidiaries.
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    (a) Specific preemption. 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) The amount of a loan in relation to the appraised value of the 
real estate;
    (2) The schedule for the repayment of principal and interest;
    (3) The term to maturity of the loan;
    (4) The aggregate amount of funds that may be loaned upon the 
security of real estate; and
    (5) The covenants and restrictions that must be contained in a 
lease to qualify the leasehold as acceptable security for a real estate 
loan. Twelve CFR 34.4(b) states:
    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.
    b. Permissible rate of interest for national banks. The limitations 
on charges that comprise rates of interest on loans by national banks 
are determined exclusively by Federal law.\9\ Under 12 U.S.C. 85, a 
national bank is authorized to charge interest based on the laws of the 
state in which the bank is located.\10\ OCC regulations further provide 
that:
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    \9\ See Beneficial Nat'l Bank v. Anderson, 123 S.Ct. 2058 
(2003).
    \10\ See Marquette Nat'l Bank of Minneapolis v. First of Omaha 
Service Corp., 439 U.S. 299 (1978).

    A national bank located in a state may charge interest at the 
maximum rate permitted to any state-chartered or licensed lending 
institution by the law of that state.\11\
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    \11\ 12 CFR 7.4001(b); see also Northway Lanes v. Hackley Union 
Nat'l Bank & Trust Co., 464 F.2d 855 (6th Cir. 1972).

    This ``most favored'' lender status permits a national bank to 
contract with borrowers in any state for interest at the maximum rate 
permitted for any state-chartered or licensed lending institution by 
the law of the state in which the national bank is located.
    c. National banks' authority to charge fees. Twelve U.S.C. 
24(Seventh) authorizes a national bank to engage in activities that are 
part of, or incidental to, the business of banking \12\ as well as to 
engage in certain specified activities listed in the statute. Mortgage 
lending is expressly authorized for national banks and is thus 
inarguably part of the business of banking. Moreover, ``negotiating * * 
* promissory notes'' is one of the activities specified in section 
24(Seventh). A bank's authority to provide these products or services 
to its customers necessarily encompasses the ability to charge a fee 
for the product or service.\13\
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    \12\ The powers clause of section 24(Seventh) provides that a 
national bank may ``exercise by its board of directors or duly 
authorized officers or agents, subject to law, all such incidental 
powers as shall be necessary to carry on the business of banking.'' 
12 U.S.C. 24(Seventh). See NationsBank v. Variable Annuity Life Ins. 
Corp., 513 U.S. 251 (1995) (the ``business of banking'' is not 
limited to the list of powers enumerated in section 24(Seventh)).
    \13\ Cf. Franklin Nat'l Bank v. New York, 347 U.S. 373, 377 
(1954) (stating, in the context of bank advertising, ``[w]e cannot 
believe that the incidental powers granted to national banks should 
be construed so narrowly as to preclude the use of advertising in 
any branch of their authorized business.'').
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    The authority to charge fees for the bank's services is expressly 
set out in 12 CFR 7.4002(a), which provides:
    (a) Authority to impose charges and fees. A national bank may 
charge its customers non-interest charges and fees, including deposit 
account service charges.\14\
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    \14\ A bank's authority in this, as in all other, areas must be 
exercised in a manner that is consistent with safe and sound banking 
practices. Paragraph (b) of section 7.4002 sets out the factors that 
the bank should consider to ensure that its process for setting its 
fees and charges is consistent with safety and soundness. If a bank 
uses a decisionmaking process that takes these factors into 
consideration, then there is no supervisory impediment to the bank 
exercising its discretionary authority to charge non-interest fees 
and charges pursuant to Sec.  7.4002(a). National City has not 
sought, nor provided information to support, a determination by the 
OCC that its processes in deciding to charge the fees at issue here 
are consistent with safe and sound banking. However, as we have 
pointed out in other contexts, national banks are not required to 
obtain a determination from the OCC that their fees comport with 
Sec.  7.4002 in order to be able to exercise the federal power to 
charge fees. See, e.g., OCC Interpretive Letter No. 934 (Aug. 20, 
2001).
---------------------------------------------------------------------------

    d. Standards applicable to national bank operating subsidiaries. 
Pursuant to their authority under 12 U.S.C. 24(Seventh) to exercise 
``all such incidental powers as shall be necessary to carry on the 
business of banking,'' national banks may use separately incorporated 
entities to engage in activities that the bank itself is authorized to 
conduct. The OCC's Operating Subsidiary Rule, codified at 12 CFR 5.34, 
specifies the licensing requirements when national banks seek 
permission from the OCC to conduct business through an operating 
subsidiary.\15\ Pursuant to this licensing process, the OCC licenses 
the operating subsidiary as a means through which a national bank is 
authorized to conduct activities permissible for the bank itself. Under 
this regulation, ``[a] national bank may conduct in an operating 
subsidiary activities that are permissible for a national bank to 
engage in directly either as part of, or incidental to, the business of 
banking, as determined by the OCC, or otherwise under other statutory 
authority.'' \16\
---------------------------------------------------------------------------

    \15\ See 12 CFR 5.34(b).
    \16\ 12 CFR 5.34(e)(1).
---------------------------------------------------------------------------

    The regulation further clarifies that in conducting permissible 
activities on behalf of its parent bank, 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.'' 
\17\ When established in

[[Page 46269]]

accordance with the procedures mandated by the OCC's Operating 
Subsidiary Rule and approved by the OCC, the operating subsidiary is a 
Federally-authorized means by which a national bank may conduct 
Federally-authorized activities.
---------------------------------------------------------------------------

    \17\ 12 CFR 5.34(e)(3).
---------------------------------------------------------------------------

    e. Anti-predatory lending standards applicable to national banks. 
Recently, the OCC issued comprehensive supervisory standards to address 
predatory and abusive lending practices.\18\ 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 purchase loans.
---------------------------------------------------------------------------

    \18\ See OCC Advisory Letter 2003-2, ``Guidelines for National 
Banks to Guard Against Predatory and Abusive Lending Practices'' 
(Feb. 21, 2003) (AL 2003-2) and OCC Advisory Letter 2003-3, 
``Avoiding Predatory and Abusive Lending Practices in Brokered and 
Purchased Loans'' (Feb. 21, 2003) (AL 2003-3).
---------------------------------------------------------------------------

    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 re-financing 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.

B. National City's Preemption Request

    On January 29, 2003, National City submitted to the OCC a request 
for a determination or order under 12 U.S.C. 24(Seventh), 12 U.S.C. 
371, 12 U.S.C. 85, and the OCC's implementing regulations, that the 
GFLA does not apply to National City.\19\ National City originates and 
funds home equity loans and lines of credit on a nationwide basis. It 
also originates and funds first and second mortgage loans throughout 
the United States for the purpose of financing and refinancing the 
acquisition and construction of real property containing one to four 
family residential dwellings. National City receives loan applications 
from third party mortgage brokers, and those mortgage brokers perform 
many services resulting in the origination of the loans and lines of 
credit issued by National City.
---------------------------------------------------------------------------

    \19\ Following the amendments to the GFLA, National City 
reaffirmed its interest in obtaining such a determination or order.
---------------------------------------------------------------------------

    In its request, National City asked the OCC to determine that 12 
U.S.C. 24(Seventh) and 12 U.S.C. 371 preempt the GFLA with respect to 
the bank and its operating subsidiaries. National City asserts that the 
structure of section 371 and Sec.  34.3, together with the express 
preemption delineated in Sec.  34.4(a), evidence a presumption that 
state law does not apply to the real estate lending activities of 
national banks and their operating subsidiaries unless the OCC 
determines under Sec.  34.4(b) that a particular state law is not 
preempted. In other words, in ``considering whether state laws apply'' 
for purposes of issuing an order under section 371, National City 
asserted that the OCC could either issue an order confirming that the 
law is not applicable or providing that it will be applicable after 
applying the ``recognized principles of preemption'' referred to in 
Sec.  34.4(b). Thus, National City argued that section 371, in effect, 
authorizes the OCC to ``occupy the field'' of real estate lending 
regulation for national banks, and that, through its regulations, 
including Sec.  34.4(a) and (b), the OCC has done so.
    For purposes of determining whether any of the GFLA provisions not 
otherwise preempted under Sec.  34.4(a) apply to National City, 
National City analyzed the degree to which the GFLA, in the words of 
Barnett, ``stands as an obstacle to the accomplishment and execution of 
the full purposes and objectives of Congress.'' \20\ In this regard, 
National City asserted that various GFLA provisions place impermissible 
limits on the exercise of national banks' real estate lending powers 
under 12 U.S.C. 371.
---------------------------------------------------------------------------

    \20\ Barnett, 517 U.S. at 31 (quoting Hines v. Davidowitz, 312 
U.S. 52, 67 (1941)).
---------------------------------------------------------------------------

    In addition to its arguments under section 371 and the OCC's 
implementing regulations, National City asserts that the GFLA places 
impermissible limits on the exercise of national banks' authority to 
lend money generally under 12 U.S.C. 24(Seventh) and to charge fees for 
lending products or services pursuant to 12 CFR 7.4002.
    Finally, National City contends that the GFLA has the effect of 
restricting its ability to use third party mortgage brokers and 
compensate them for the services they provide.

C. Notice of, and Comments on, National City's Request

    On February 26, 2003, the OCC published for comment a Notice of 
National City's request (the Notice).\21\ The OCC received 76 comments 
on the Notice. National banks, financial services providers, and trade 
associations submitted comments in support of the issuance of a 
preemption determination or order in this matter. Consumer 
organizations, state officials (including the Governor of Georgia and 
the Acting Commissioner of the Georgia Department of Banking and 
Finance), the Conference of State Bank Supervisors, the National 
Association of Attorneys General, certain members of the Committee on 
Financial Services of the United States House of Representatives, and 
one member of the Senate Committee on Banking, Housing, and Urban 
Affairs submitted comments in opposition.
---------------------------------------------------------------------------

    \21\ 68 FR 8959 (Feb. 26, 2003).
---------------------------------------------------------------------------

    As an initial matter, several commenters assert that National 
City's request is moot in light of the recent amendments to the GFLA. 
Others urged the OCC to rescind its notice until such time as it 
receives a revised request for preemption that reflects these 
amendments. Still others assert that, despite the amendments, the

[[Page 46270]]

fundamental issues raised in National City's request remain unchanged.
    We have reviewed the law as amended and, as discussed in greater 
detail below, conclude that the issue of whether Georgia may determine 
how national banks conduct real estate lending activities is not 
rendered moot, or fundamentally altered, by the changes adopted by the 
Georgia legislature. In addition, National City continues to assert 
that the GFLA remains impermissibly burdensome. Thus, we have proceeded 
with our consideration of National City's request.
    National City's assertion that section 371 authorizes the OCC to 
``occupy the field'' of national bank real estate lending generated 
considerable debate among the commenters over which preemption theory 
applies to National City's request. As explained further below, 
``occupation of the field'' is one of the three ways in which Congress 
can preempt state law. In addition to field occupation, Congress can 
expressly provide in a Federal statute that the statute preempts state 
law or can adopt a statute that is in irreconcilable conflict with 
state law.\22\
---------------------------------------------------------------------------

    \22\ See infra notes 40-45 and accompanying text.
---------------------------------------------------------------------------

    Many commenters favoring preemption argue that the OCC should adopt 
an ``occupation of the field'' analysis. Those commenters assert that 
Congress's intent that Federal law would ``occupy the field'' of 
national bank real estate lending is evident in the express language of 
section 371, its legislative history, and other Federal statutes. Many 
of these commenters suggest, however, that the OCC apply, either as an 
addition or alternative to the ``occupation of the field'' analysis, a 
``conflicts'' analysis under Barnett. These commenters assert that the 
GFLA conflicts with the Federal grant of power to a national bank to 
engage in real estate lending activities.
    Opponents of preemption argue that the statute, its legislative 
history, and Federal case law provide no support for field preemption. 
Several of these commenters also cite the preamble of an earlier 
version of the OCC's regulations implementing section 371, in which the 
OCC stated that it was clarifying ``the limited scope'' of the 
regulation's preemption. Because they believe that field preemption 
theory is inapplicable here, the opposing commenters assert that the 
OCC should apply only a Barnett ``conflicts'' analysis to National 
City's request to determine the extent to which each provision of the 
GFLA interferes with the exercise of national banks' authority to 
engage in real estate lending. Under this analysis, the commenters 
argue that the GFLA does not prevent or significantly interfere with 
the exercise of national banks' real estate lending powers.
    As discussed in detail below, our construction of section 371 and 
the results of a Barnett conflicts analysis of the GFLA provisions, 
both demonstrate that the GFLA places impermissible limits on national 
banks' real estate lending activities and, therefore, is preempted by 
Federal law. National City's request raises issues about only the laws 
in one state, however, and, in our view, is therefore not the 
appropriate vehicle to consider whether Federal law occupies the field 
of national bank real estate lending because that legal conclusion 
would have implications for other types of real estate lending laws and 
for real estate lending laws in all states. Accordingly, this 
Determination and Order does not address whether Federal law occupies 
the field of national banks' real estate lending activities. That issue 
will be considered, however, in a notice of proposed rulemaking that we 
are releasing simultaneously with this Determination and Order, to 
amend, among other parts of our rules, the rules in part 34 governing 
the applicability of state law to national banks' real estate lending 
activities.
    In addition, the commenters debate the meaning of the considerable 
body of case law that has developed around the application of state law 
to the exercise of national banks powers. Commenters in favor of 
preemption note a long line of Supreme Court and lower Federal court 
precedent ``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.'' \23\ 
Commenters opposed to preemption argue that the courts have avoided 
finding preemption in areas of law, such as consumer protection, 
traditionally occupied by the states. These commenters assert that 
Congress specifically endorsed this presumptive application of state 
laws to national banks in the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994 (Riegle-Neal Act).\24\
---------------------------------------------------------------------------

    \23\ Barnett, 517 U.S. at 32.
    \24\ Pub. L. 103-328, 108 Stat. 2338 (1994).
---------------------------------------------------------------------------

    As discussed in greater detail below, the presumption against 
preemption of state law is inapplicable when the states attempt to 
regulate in an area, such as national banking, where there is a history 
of significant Federal presence.\25\ Moreover, the Riegle-Neal Act 
applies 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 only to the extent those laws 
are not otherwise preempted by Federal law.
---------------------------------------------------------------------------

    \25\ See Bank of America v. City & County of San Francisco, 309 
F.3d 551, 559 (9th Cir. 2002); see also American Bankers Ass'n. v. 
Lockyer, 239 F. Supp. 2d 1000, 1016 (E.D. Cal., 2002); United States 
v. Locke, 529 U.S. 89, 108 (2000).
---------------------------------------------------------------------------

    Many of the comments concerned potential harm to consumers. 
Commenters opposed to preemption recite a host of abusive and predatory 
lending practices perpetrated against vulnerable borrowers, including 
minorities, the elderly, and the poor. These commenters believe such 
practices demonstrate the necessity of state predatory lending laws 
such as the GFLA. Commenters supportive of preemption argue that 
Federal law already prohibits these types of practices and that 
multiple, and often conflicting, state and local predatory lending laws 
will raise the cost of consumer credit, limit access to credit for 
borrowers with impaired credit histories, and restrict banks' ability 
to develop and implement new products or product features and customize 
services to meet consumers' needs.
    The OCC shares the view of the commenters that predatory and 
abusive lending practices are inconsistent with national objectives of 
encouraging home ownership and community revitalization, and can be 
devastating to individuals, families, and communities. This does not 
lead, however, to the conclusion suggested by some commenters that the 
OCC should have no objection to state predatory lending laws being made 
applicable to national banks.
    First, laws such as the GFLA apply to loans with rates of interest 
and other features typical of risk-based pricing of subprime loans. 
These laws generally prohibit certain mortgage loan terms and impose 
extra compliance obligations when other loan terms and conditions are 
present. These laws introduce new standards for subprime lending that 
are untested, sometimes vague, often complex, and, in many cases, 
different from established and well-understood Federal requirements. 
They also create new potential liabilities and penalties for any lender 
that missteps in its efforts to comply with those new standards and 
restrictions. Thus, these laws materially increase a bank's costs and 
compliance risks in connection with subprime lending. Given the already 
generally higher credit risk of lending to subprime borrowers, bank 
lenders will conclude--

[[Page 46271]]

and have concluded--that they simply are unable to effectively cover 
these increased costs and risks. Accordingly, they reduce their product 
offerings to avoid subprime mortgage lending, in order to concentrate 
on making loans for which they can receive acceptable compensation for 
the risks they undertake. The practical result of these laws, 
therefore, is to obstruct, or for practical purposes, prevent, national 
banks from making certain types of real estate loans, causing an 
overall reduction in credit available to subprime borrowers. This means 
that non-predatory, risk-priced credit will become more limited, or 
unavailable, to creditworthy subprime borrowers.\26\
---------------------------------------------------------------------------

    \26\ For a more detailed discussion of the reasons why anti-
predatory lending laws may impede the flow of legitimate credit to 
homebuyers and for other economic analysis relevant to evaluating 
state anti-predatory lending laws, see Office of the Comptroller of 
the Currency, Global Banking and Financial Analysis Department, 
``OCC Working Paper: Economic Issues in Predatory Lending'' (July 
30, 2003) (OCC Paper).
    As noted in the OCC Paper, a growing body of evidence indicates 
that state anti-predatory lending laws are likely to restrict the 
availability of credit to subprime borrowers. For example, studies 
of subprime lending activity in North Carolina before and after 
enactment of that state's anti-predatory lending law have shown a 
post-enactment decline in subprime mortgage originations of about 
15%. See Keith Harvey & Peter Nigro, ``Do Predatory Lending Laws 
Influence Mortgage Lending? An Analysis of the North Carolina 
Predatory Lending Law,'' Paper Presented at the Credit Research 
Conference on Subprime Lending, September 2002 (publication 
forthcoming in 2003 in a conference volume of the Journal of Real 
Estate Research); Gregory Elliehausen & Michael Staten, ``Regulation 
of Subprime Mortgage Products: An Analysis of North Carolina's 
Predatory Lending Law,'' Credit Research Center Working Paper 
66, November 2002.
    Other studies also have documented that an unfortunate and 
unintended consequence of legislation similar to the GFLA adopted in 
other jurisdictions has been the overall reduction in subprime loans 
being originated. See Robert E. Litan, ``Unintended Consequences: 
The Risks of Premature State Regulation of Predatory Lending,'' 
available at http://www.aba.com/NR/rdonlyres/000070c7qvaumpweszqozjnk/PredReport20095.pdf, and studies discussed 
therein. One study also documented that the impact of this reduction 
was greater for minority and low-income applicants. See Keith Harvey 
& Peter Nigro, ``How Do Predatory Lending Laws Influence Mortgage 
Lending in Urban Areas? A Tale of Two Cities,'' 26 J. Real Est. Res. 
No. 2 (forthcoming in 2003).
    Some proponents of state anti-predatory lending laws have 
nonetheless argued that these laws inhibit predatory and abusive 
lending practices without reducing the availability of credit to 
subprime borrowers. A recently released study concludes that the 
North Carolina law worked, as intended, to reduce loans with 
predatory terms without a reduction in access to credit for high-
risk borrowers. See Roberto G. Quercia, Michael A. Stegman, & Walter 
R. Davis, ``The Impact of North Carolina's Anti-Predatory Lending 
Law: A Descriptive Assessment,'' Center for Community Capitalism, 
The Frank Hawkins Kenan Institute for Private Enterprise, University 
of North Carolina at Chapel Hill (June 25, 2003) (the Stegman 
Study), available at http://www.kenan-flagler.unc.edu/News/DetailsNewsPage.cfm?id=466&menu=ki. However, the data presented in 
this Study contain variables and uncertainties that may limit the 
Study's utility for evaluating the effects of state anti-predatory 
lending laws on the availability of credit to the full range of 
subprime borrowers. See OCC Paper.
---------------------------------------------------------------------------

    Second, evidence that national banks are engaged in predatory 
lending practices is scant to non-existent. Based on the absence of 
such information--from third parties, our consumer complaint database, 
and our supervisory process--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,\27\ and with comments 
submitted in connection with an OTS rulemaking concerning preemption of 
state lending standards by 46 State Attorneys General.\28\
---------------------------------------------------------------------------

    \27\ 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), available at http://www.treas.gov/press/releases/report3076.htm.
    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.
    \28\ 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. The case involves a revised 
regulation issued by the OTS to implement the Alternative Mortgage 
Transaction Parity Act (AMTPA). The revised regulation seeks to 
distinguish between federally supervised thrift institutions and non-
bank mortgage lenders and makes non-bank mortgage lenders subject to 
state law restrictions on prepayment penalties and late fees. In 
supporting the OTS's 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:

    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.\29\
---------------------------------------------------------------------------

    \29\ Brief for Amicus Curiae State Attorneys General, Nat'l Home 
Equity Mortgage Ass'n, Civil Action No. 02-2506 (GK) (D.D.C.) at 10-
11 (emphasis added).

    According to the State Attorneys General, ``OTS looked to where the 
problems were and was well justified in addressing prepayment penalties 
and late fee regulation for state housing creditors only, not for 
supervised thrifts.''\30\ By not addressing supervised thrifts in its 
rule change, the OTS was retaining for those institutions preemption of 
state laws under its existing regulations. In practical effect, the 
State Attorneys General agreed that in matters of preemption, 
supervised depository institutions are distinguishable from other 
housing lenders, and did not take issue with OTS's preemption of state 
laws where the entity that benefits from the preemption is subject to 
substantial federal regulation and supervision, which effectively 
addresses the risk of abusive or predatory practices by those entities.
---------------------------------------------------------------------------

    \30\ Id. at 11.
---------------------------------------------------------------------------

    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. We 
recognize that certain loan terms and conditions are more likely to be 
used unfairly or abusively, but that does not mean that all risk-priced 
loans with those features are, necessarily, predatory. Thus, it is 
generally necessary to consider the totality of the circumstances to 
assess whether a loan is predatory and likely to lead to practices such 
as equity stripping. The OCC's supervisory approach, implemented by 
trained examiners reviewing on-site the lending practices of national 
banks, allows for this type of consideration.\31\ By focusing

[[Page 46272]]

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.
---------------------------------------------------------------------------

    \31\ Our supervisory track record also demonstrates that where 
we find abuse, or the potential for abuse, we will take strong 
action. See, e.g., In the Matter of Providian Nat'l Bank, Tilton, 
New Hampshire, Consent Order No. 2000-53 (June 28, 2000) (requiring 
payment by the bank in excess of $300 million and imposing numerous 
conditions on the conduct of future business), available at http://www.occ.treas.gov/ftp/release/2000%2D49b.pdf. This approach seems to 
be successful, as explained in the 2000 Treasury-HUD Joint Report, 
supra note 27.
---------------------------------------------------------------------------

    Numerous commenters also raised issues concerning the scope of the 
Determination or Order requested by National City and the appropriate 
procedure for the OCC to follow in responding to the request. Many of 
the commenters supporting preemption urge that the determination or 
order apply to all national banks, not just National City, and to their 
operating subsidiaries. These commenters note that national banks have 
long used separately incorporated entities to engage in activities that 
the bank itself is authorized to conduct and that courts have 
consistently treated the operating subsidiary and the national bank as 
equivalents. Thus, these commenters argue that the preemption order or 
determination requested by National City should apply to operating 
subsidiaries consistent with the OCC's regulations set forth at 12 CFR 
7.4006 providing 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.'' Commenters in favor of preemption who assume that the 
preemption order or determination would apply only to National City's 
activities in Georgia urge the OCC to issue a rule in conjunction with 
the determination or order that would apply to all national banks and 
national bank operating subsidiaries and conclude that all state and 
local predatory lending laws are preempted.
    A number of the commenters opposed to preemption argue that the 
OCC's response to National City's request should be narrowly tailored 
and not apply to operating subsidiaries. These commenters believe that 
the OCC has no legal authority to preempt state laws insofar as they 
apply to operating subsidiaries of national banks because operating 
subsidiaries are chartered under state law and must therefore comply 
with all applicable state laws. One commenter also argues that the OCC 
may not take the position that Sec.  7.4006 preempts the GFLA with 
respect to operating subsidiaries because the OCC did not comply with 
the Federalism requirements of Executive Order 13132 when it adopted 
the rule. This commenter also contends that if the OCC grants National 
City's request, it would create a ``decisional rule'' applicable to all 
national banks doing business in Georgia. As such, the commenter 
believes that Executive Order 13132 also would apply to this proceeding 
and the OCC should postpone any decision on National City's request 
until it satisfies its obligations under the Executive Order to consult 
with state officials.
    We recognize that this preemption determination necessarily will 
affect the practices of lenders in Georgia in addition to National 
City. As discussed at length below, most of the GFLA provisions already 
are preempted by Federal law. Accordingly, those provisions are 
preempted for all national banks and their operating subsidiaries. For 
the remaining GFLA provisions preempted by operation of this 
determination and order, it would be incongruous for the law to preempt 
GFLA provisions for only one institution.\32\ Therefore, this order 
will apply to all national banks engaged in real estate lending 
activities in Georgia.
---------------------------------------------------------------------------

    \32\ This determination depends on an analysis of the GFLA and 
national bank authority and is therefore not fact-specific to 
National City.
---------------------------------------------------------------------------

    We also agree with the commenters who argued that, consistent with 
12 CFR 7.4006, the GFLA is preempted for national bank operating 
subsidiaries to the same extent it is preempted for their parent 
banks.\33\ Accordingly, this determination applies equally to national 
bank operating subsidiaries engaged in real estate lending activities 
in Georgia. This determination will not, however, affect lenders who 
are not otherwise subject to the GFLA. Therefore, we decline to adopt 
the suggestion of some commenters that this order apply to all national 
banks and national bank operating subsidiaries, regardless of whether 
they make real estate loans. Those lenders will, however, be subject to 
the results of the rulemaking commenced today, which proposes to apply 
the results of our analysis here by expanding the list of the types of 
state laws that are expressly preempted by Federal law concerning 
national banks' real estate lending powers.
---------------------------------------------------------------------------

    \33\ See infra note 110 and accompanying text for a detailed 
discussion of the commenter's arguments concerning the Federalism 
order.
---------------------------------------------------------------------------

    These and other comments will be addressed in more detail in the 
following sections, which present an overview of the national banking 
laws and the Federal court precedents concerning the applicability of 
state law to national banks, followed by an analysis of the extent to 
which provisions of the GFLA are preempted by Federal law.

II. Overview of Federal Preemption of State Laws With Respect to 
National Banks

    In the earliest decades of this country's existence, the Supreme 
Court recognized that under the Supremacy Clause of the U.S. 
Constitution--paragraph 2 of Article VI--states ``have no power, by 
taxation or otherwise, to retard, impede, burden, or in any other 
manner control, the operations'' of an entity created by lawful 
exercise of Federal authority.\34\ The entity involved in the landmark 
case in which these principles were articulated was the Second Bank of 
the United States. The history of the national banking laws and 140 
years of Federal court precedents considering the applicability of 
state laws to national banks consistently reflect this principle and 
demonstrate that the exercise by a national bank of a Federally 
authorized power is ordinarily not subject to state law.
---------------------------------------------------------------------------

    \34\ M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 436 (1819).
---------------------------------------------------------------------------

A. Legislative History of the Early National Banking Laws

    Congress enacted the National Currency Act (Currency Act) in 1863 
and modified it with the National Bank Act the year after 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 National Bank Act were enacted 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 supersede the existing system of state 
banks.\35\ Given this

[[Page 46273]]

anticipated impact on state banks and the resulting diminution of 
control by the states over banking in general,\36\ 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.''\37\
---------------------------------------------------------------------------

    \35\ 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 Rep. Hooper did not believe that 
the legislation was necessarily harmful to the state bank system, he 
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 the legislation's objective, its passage would, in Rep. 
Brooks' 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.'').
    \36\ 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).
    \37\ Cong. Globe, 38th Cong., 1st Sess., at 1893 (Apr. 27, 
1864). See also Beneficial Nat'l Bank, 123 S.Ct. at 2064 (``[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).
---------------------------------------------------------------------------

    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],''\38\ and 
solidified this Federal supervisory authority by vesting the OCC with 
exclusive visitorial powers over national banks. These provisions 
assure, among other things, that the OCC will have comprehensive 
authority to examine all the affairs of a national bank and protect 
national banks from potential state hostility by establishing that the 
authority to examine, supervise, and regulate national banks is vested 
only in the OCC, unless otherwise provided by Federal law.\39\
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    \38\ Act of June 3, 1864, c. 106, Sec.  54, 13 Stat. 116, 
codified at 12 U.S.C. 481.
    \39\ Writing shortly after the Currency Act and 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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B. The Supremacy Clause and the Federal Preemption Standards 
Articulated by the Supreme Court

    In certain circumstances, a state law may be preempted by Federal 
law and thus rendered invalid by reason of the Supremacy Clause of the 
Constitution.\40\ The Supreme Court has identified three ways in which 
Congress can displace state law. First, Congress can adopt express 
language setting forth the existence and scope of preemption.\41\ 
Second, Congress can adopt a scheme of regulation that ``occupies the 
field'' and leaves no room for states to adopt supplemental laws.\42\ 
Third, Congress can adopt a statute that is in ``irreconcilable 
conflict'' with state law.\43\ Irreconcilable conflict will be found 
when either: (i) Compliance with both laws is a ``physical 
impossibility;''\44\ or (as noted by National City in its request) (ii) 
when the state law stands ``as an obstacle to the accomplishment and 
execution of the full purposes and objectives of Congress.''\45\
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    \40\ ``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.
    \41\ See Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977).
    \42\ See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 
(1947).
    \43\ Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982).
    \44\ Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 
142-43 (1963).
    \45\ Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Barnett, 517 
U.S. at 31 (quoting Hines).
---------------------------------------------------------------------------

    As noted above, many commenters pointed to the consumer protective 
nature of the GFLA in support of their position that preemption of the 
statute would be inappropriate. Because the origins of Federal 
preemption are Constitutional, however, the underlying purpose of the 
state legislation, albeit salutary, is not relevant to determining 
whether the law applies. As explained in Association of Banks in 
Insurance, Inc. v. Duryee,\46\ ``[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.''\47\
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    \46\ 55 F. Supp. 2d 799 (S.D. Ohio 1999).
    \47\ 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).
---------------------------------------------------------------------------

C. Supreme Court Precedents Leading to Barnett

    From the earliest years of the national banking system, up to and 
including a decision rendered only 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.\48\ 
The Supreme Court stated in one of the first cases to address the role 
of the national banking system 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.''\49\ 
Subsequent opinions of the Supreme Court have been equally clear about 
national banks' unique role and status.\50\
---------------------------------------------------------------------------

    \48\ See Beneficial Nat'l Bank, 123 S.Ct. at 2064.
    \49\ Farmers' & Mechanics' Nat'l Bank v. Dearing, 91 U.S. 29, 33 
(1875).
    \50\ See Marquette Nat'l Bank 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 (1954) (``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

[[Page 46274]]

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,\51\ the Court stated that 
Federal legislation affecting national banks--
---------------------------------------------------------------------------

    \51\ 188 U.S. 220 (1903).
---------------------------------------------------------------------------

    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.\52\ The Court 
in Farmers' & Mechanics' Bank, after observing that national banks are 
means to aid the government, stated--
---------------------------------------------------------------------------

    \52\ Id. at 229, 231-232 (emphasis added).
---------------------------------------------------------------------------

    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.''\53\
---------------------------------------------------------------------------

    \53\ Farmers' & Mechanics' 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.''\54\ ``[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.''\55\
---------------------------------------------------------------------------

    \54\ Barnett, 517 U.S. at 32. The Supreme Court has recognized 
that the ``business of banking'' is not limited to the powers 
enumerated in section 24(Seventh). 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 America, 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.
    \55\ Barnett, 517 U.S. at 34.
---------------------------------------------------------------------------

D. Recent Lower Federal Court Decisions Concluding that State Laws Are 
Preempted

    This principle has been recognized and applied in a series of 
recent cases invalidating state and local restrictions upon national 
bank practices 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 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 promptly 
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.\56\ 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.\57\ 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.\58\ 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.\59\ 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.\60\
---------------------------------------------------------------------------

    \56\ 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.
    \57\ See New Jersey Bankers Ass'n v. Township of Woodbridge, No. 
CV-00-702 (JAG) (D.N.J. Nov. 8, 2000).
    \58\ See Metrobank v. Foster, 193 F. Supp. 2d 1156 (S.D. Iowa 
2002).
    \59\ See Wells Fargo Bank of Texas, N.A. v. James, 321 F.3d 488 
(5th Cir. 2003).
    \60\ See Bank of America, N.A. v. Sorrell, 248 F. Supp. 2d 1196 
(N.D. Ga. 2002).
---------------------------------------------------------------------------

    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.\61\ 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.\62\ 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.'' \63\ 
Thus, the court applied ``the ordinary rule . . . of preemption of 
contrary state law.''\64\ Contrary state law may be preempted by 
Federal regulation. ``Federal regulations have no less pre-emptive 
effect than federal statutes.''\65\
---------------------------------------------------------------------------

    \61\ See 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).
    \62\ See Lockyer, 239 F. Supp. 2d 1000.
    \63\ Id. at 1016; see also Wells Fargo Bank, N.A. v. Boutris, 
252 F. Supp. 2d 1065, 1069 (E.D. Cal. 2003) (``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).
    \64\ Lockyer, 239 F. Supp. 2d at 1016.
    \65\ Fid. Fed. Sav. & Loan Ass'n. v. de la Cuesta, 458 U.S. 141, 
153 (1982).
---------------------------------------------------------------------------

E. The Limited Circumstances Under Which State Laws Apply to National 
Banks

    State laws 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.\66\ ``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.'' \67\ Notably, these types of laws do not actually regulate the 
manner and 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. They promote 
a national bank's ability to conduct business; they do not

[[Page 46275]]

obstruct a national bank's exercise of powers granted under Federal 
law.\68\
---------------------------------------------------------------------------

    \66\ See Barnett, 517 U.S. at 33.
    \67\ Bank of America, 309 F.3d at 559. 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.
    \68\ See Barnett, 517 U.S. at 15, 33-34, and cases cited 
therein.
---------------------------------------------------------------------------

    This does not mean, as asserted by some commenters, that state laws 
presumptively apply to national banks. These commenters suggest that 
all preemption analysis begins with the presumption against preemption. 
As explained recently by the Court, however, this presumption is ``not 
triggered when the States regulate in an area where there has been a 
history of significant federal presence.'' \69\ 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.'' \70\
---------------------------------------------------------------------------

    \69\ United States v. Locke, 529 U.S. at 108.
    \70\ 309 F.3d at 559.
---------------------------------------------------------------------------

    Nor, contrary to these commenters' assertions, did Congress 
specifically endorse the presumptive application of state laws in the 
Riegle-Neal Act. Although the Riegle-Neal Act, at 12 U.S.C. 
36(f)(1)(A), initially 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, 
the statute expressly excepts any state laws that are preempted under 
Federal law. In a few situations, Federal law has incorporated 
provisions of state law for specific purposes.\71\ Congress may more 
generally establish standards that govern when state law will apply to 
national banks' activities.\72\ In such cases, the OCC applies the law 
or the standards that Congress has required or established.
---------------------------------------------------------------------------

    \71\ 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).
    \72\ See, e.g., 15 U.S.C. 6701 (codification of section 104 of 
the GLBA, Pub. L. 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).
---------------------------------------------------------------------------

III. Discussion and Analysis

    The GFLA affects a national bank's ability to engage in real estate 
lending, the rate of interest a national bank may charge for a loan, 
and a national bank's ability to charge non-interest fees. Our 
discussion analyzes the provisions of the GFLA according to these 
categories. Following that analysis, we discuss the extent to which 
Federal law preempts the remaining provisions. We first review the 
provisions of the GFLA as they apply to a national bank, then apply 
those conclusions to the bank's operating subsidiaries.

A. The GFLA Conflicts With the Federal Grant of Power to a National 
Bank to Engage in Real Estate Lending Activities

    In Barnett, the Supreme Court analyzed a statute, 12 U.S.C. 92, 
similar in structure to section 371, to determine the extent to which 
section 92 leaves room for state regulation of the activities the 
statute authorizes. There, 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.\73\
---------------------------------------------------------------------------

    \73\ Barnett, 517 U.S. at 32.

The 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.'' \74\
---------------------------------------------------------------------------

    \74\ Id. at 34.
---------------------------------------------------------------------------

    Section 371 authorizes national banks to engage in real estate 
lending ``subject to section 1828(o) of this title and such 
restrictions and requirements as the Comptroller of the Currency may 
prescribe by regulation or order.'' This express language specifically 
addresses the sources of restrictions on national banks' real estate 
lending activities and, by its terms, does not envision that the 
exercise of those powers, granted by section 371, would be subject to 
compliance with any state requirement.\75\
---------------------------------------------------------------------------

    \75\ One commenter argued that this construction of national 
banks' real estate lending authority is refuted by the 1896 case of 
McClellan v. Chipman, 164 U.S. 347 (1896). In that case, a national 
bank unsuccessfully asserted that the statute then applicable to 
national banks' real estate lending activities left no room for the 
application of a state insolvency law. The state insolvency law at 
issue in McClellan is easily distinguished from the GFLA, however. 
The Supreme Court recognized two propositions in McClellan. First, 
``general state laws upon the dealings and contracts of national 
banks'' apply to the banks' operations. Id. at 357. Second, there is 
an exception to this general rule for state laws that ``expressly 
conflict with the laws of the United States, or frustrate the 
purpose for which the national banks were created, or impair their 
efficiency to discharge the duties imposed upon them by the law of 
the United States.'' Id. The Supreme Court held that the state 
insolvency law at issue in McClellan was the type of law governed by 
the first proposition. The GFLA is not a general state contract law 
that only incidentally impacts national banks' real estate lending 
activities, however. Because the GFLA directly regulates the real 
estate lending of national banks, it is inapplicable to national 
banks pursuant to the second proposition recognized in McClellan.
---------------------------------------------------------------------------

    The legislative history of section 371 lends further support to 
this construction. National banks' real estate lending activities have 
consistently been subject to comprehensive Federal regulation ever 
since the authority to lend on the security of real estate was first 
granted to them in the Federal Reserve Act of 1913. For many years, 
national banks' real estate lending authority was 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.'' \76\ 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.
---------------------------------------------------------------------------

    \76\ Federal Reserve Act, ch. 6, Sec.  24, 38 Stat. 251, 273 
(1913).
---------------------------------------------------------------------------

    In 1982, Congress removed these ``rigid statutory limitations'' 
\77\ 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.'' \78\ 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.'' \79\ 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 
regulations of the OCC and the other Federal banking agencies.\80\ 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

[[Page 46276]]

as evolving articulations of the same idea.
---------------------------------------------------------------------------

    \77\ S. Rep. No. 97-536, at 27 (1982).
    \78\ Garn-St Germain Depository Institutions Act of 1982, Pub. 
L. 97-320, section 403, 96 Stat. 1469, 1510-11 (1982).
    \79\ S. Rep. No. 97-536, at 27 (1982).
    \80\ 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.
---------------------------------------------------------------------------

    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. Part 34 of our rules, which was issued pursuant 
to the OCC's authority under section 371, already identifies certain 
types of state laws that do not apply to national banks. Section 
34.4(a) expressly preempts state laws concerning five areas of fixed-
rate mortgage lending. Section 34.4(b) provides that, when considering 
whether to preempt state laws in other areas of mortgage lending, the 
OCC will apply recognized principles of Federal preemption.
    We analyze first the provisions of the GFLA that are preempted 
under Sec.  34.4(a). Two of the five types of state laws expressly 
preempted by Sec.  34.4(a)--state laws concerning the schedule for the 
repayment of principal and interest (Sec.  34.4(a)(2)) and the term to 
maturity of the loan (Sec.  34.4(a)(3))--are relevant here. Following 
our analysis of the GFLA provisions preempted by Sec. Sec.  34.4(a)(2) 
and (3), we analyze GFLA provisions preempted under recognized 
principles of Federal preemption as provided by Sec.  34.4(b).\81\
---------------------------------------------------------------------------

    \81\ Although National City's request does not raise issues 
under Federal law governing adjustable rate mortgage lending, we 
note that Subpart B of part 34 states as a general rule that 
national banks may engage in ARM lending without regard to any state 
law limitation. See 12 CFR 34.21(a).
---------------------------------------------------------------------------

1. Provisions of GFLA Preempted by Sec.  34.4(a)(2) (State Laws 
Concerning the Schedule for Repayment of Principal and Interest)
    Section 34.4(a)(2) preempts state laws ``concerning * * * [t]he 
schedule for the repayment of principal and interest.'' The inherent 
and inseparable elements of any repayment schedule are: (1) The timing 
of the expected payments; and (2) the amount of the expected payments. 
The following six provisions of the GFLA concern one or both of these 
elements and are therefore preempted pursuant to Sec.  34.4(a)(2):
    [sbull] Balloon payments. Under the GFLA, no scheduled payment on a 
high-cost home loan may be more than twice as much as the average of 
earlier scheduled payments, except where payment schedules are adjusted 
to the seasonal or irregular income of a borrower. A limitation on the 
ability to offer balloon loans limits the ability of the lender and the 
borrower to agree on a repayment schedule that would permit lower 
principal payments initially.
    [sbull] Negative amortization. The GFLA prohibits a high-cost home 
loan from including payment terms under which the principal balance 
increases because regular periodic payments fail to pay interest due. A 
prohibition on negative amortization limits the ability of the lender 
and borrower to agree on terms for the repayment and schedule of 
payment of principal and interest.\82\
---------------------------------------------------------------------------

    \82\ In other contexts, however, failure to disclose the 
existence of a negative amortization feature may be an unfair or 
deceptive practice. See, e.g., OCC, ``Interagency Account Management 
and Loss Allowance Guidance'' (Jan. 8, 2003), available at http://www.OCC.Treas.Gov./ftp/bulletin/2003-1a.pdf.
---------------------------------------------------------------------------

    [sbull] Advance payments. The GFLA provides that a high-cost home 
loan contract may not include a payment schedule that consolidates more 
than two periodic payments and pays them in advance from loan proceeds. 
This provision is an express limitation on a lender's and borrower's 
ability to agree to a schedule for the repayment of principal and 
interest.
    [sbull] Late fees. Under the GFLA, a creditor or servicer may not 
assess a late payment fee on a home loan unless the loan document 
specifically authorizes the fee, the payment is at least ten days late, 
and the fee does not exceed 5% of the amount of the late payment. Late 
fees may be imposed only once for each late payment. If a late fee is 
deducted from a payment and causes a default on a subsequent payment, 
no late fee may be imposed for such default. A lender may apply any 
payment made in order of maturity to a prior period's payment due even 
if it results in late payment charges accruing on subsequent payments 
due. Late fees are considered ``interest'' under the OCC's regulations 
at 12 CFR 7.4001(a).\83\ The GFLA limitation on this form of interest 
is an impermissible state law concerning the schedule for repayment of 
interest and principal under Sec.  34.4(a)(2). A limitation on late 
fees limits the ability of a lender and a borrower to agree to terms 
allowing for the imposition of increased interest charges if the 
borrower fails to adhere to the agreed-upon repayment schedule.
---------------------------------------------------------------------------

    \83\ For this reason, the GFLA limits on late fees are also 
analyzed below under 12 U.S.C. 85, and are preempted under that 
provision for national banks not located in Georgia that make loans 
secured by property located in Georgia.
---------------------------------------------------------------------------

    [sbull] Prepayment fees. Prepayment fees on a high-cost home loan 
under the GFLA are limited to 2% of the amount prepaid in first year of 
loan; 1% of the amount prepaid in second year of loan; and zero 
thereafter. Like late fees, prepayment fees, when imposed in connection 
with non-ARM loans, are considered ``interest.''\84\ A limitation on 
prepayment fees limits the ability of a lender and a borrower to agree 
to terms allowing for alteration of the timing and amount of expected 
payments.
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    \84\ See OCC Interpretive Letter No. 803 (Oct. 7, 1997). For 
this reason, the GFLA limits on prepayment fees are also analyzed 
below under 12 U.S.C. 85 and, like limits on late fees, are 
preempted under that provision for national banks not located in 
Georgia that make loans secured by property located in Georgia.
---------------------------------------------------------------------------

    [sbull] Default rates of interest. The GFLA prohibits increasing 
the interest rate charged after default on a high-cost home loan unless 
the rate is changed due to a variable-rate feature in the loan. This 
provision limits the ability of a borrower and lender to agree to loan 
terms permitting the imposition of increased interest charges if the 
borrower fails to adhere to the agreed-upon repayment schedule.
    Each provision of the GFLA summarized above concerns the schedule 
for repayment of principle and interest. Accordingly, each is preempted 
by Sec.  34.4(a)(2).
2. Provisions of GFLA Preempted by Sec.  34.4(a)(3) (State Laws 
Concerning Term to Maturity)
    The following three provisions of the GFLA concern the term to 
maturity of a real estate loan and, as such, are preempted by Sec.  
34.4(a)(3):
    [sbull] Prepayment fees limited. As described above, the GFLA 
limits prepayment fees on a high-cost loan to 2% of the amount prepaid 
in first year of loan; 1% of the amount prepaid in second year of loan; 
and zero thereafter. In addition to establishing impermissible 
restrictions on a national bank's authority to establish the schedule 
for repayment of interest and principal under Sec.  34.4(a)(2), this 
provision also frustrates the ability of a national bank to structure 
the maturity of loans it originates by prohibiting the use of 
incentives designed to achieve the desired maturities.
    [sbull] Acceleration in absence of default prohibited. Under the 
GFLA, a high-cost loan agreement may not contain a provision that 
permits a creditor or servicer, in its sole discretion, to accelerate 
the indebtedness unless there is a bona fide default by borrower. A 
limitation on the ability to accelerate the indebtedness in situations 
where there is no default but the borrower's creditworthiness may have 
significantly deteriorated limits the ability of a lender and a 
borrower to agree to terms that would alter the term to maturity of a 
loan.
    [sbull] Right to ``cure'' a default. If a high-cost home loan is 
accelerated, the GFLA gives the borrower the right to ``cure'' the 
default at any point up to foreclosure. Cure of default reinstates

[[Page 46277]]

the borrower to the same position as if the default had not occurred 
and nullifies the acceleration. This provision thus requires the 
original term of the loan to be reinstated upon curing a default, 
notwithstanding the possibility that prudent underwriting would suggest 
a modification of terms (including maturity).
3. GFLA Provisions Preempted Under Recognized Principles of Preemption 
as Provided by Sec.  34.4(b)
    Section 34.4(a) is not a comprehensive list of all of the types of 
state real estate lending laws that are inapplicable to national banks. 
Section 34.4(b) acknowledges that the OCC evaluates additional types of 
state laws on a case-by-case basis. It says:

    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.\85\
---------------------------------------------------------------------------

    \85\ 12 CFR 34.4(b). The OCC proposed to add this provision to 
part 34 in 1995. At that time, we explained that the purpose of 
Sec.  34.4(b) was to ``clarify that the list of areas [set forth 
currently in Sec.  34.4(a)] where State law is preempted * * * is 
not exhaustive.'' 60 FR 35353, 35355 (July 7, 1995) (emphasis 
added.) The final rule adopted the proposed rule with only minor 
stylistic edits. See 61 FR 11294, 11296 (Mar. 20, 1996). This 
rulemaking superseded a 1983 revision to part 34, in which the OCC 
stated that we were clarifying a ``limited scope of preemption'' by 
preempting ``at this time, only those state laws that govern in 
those areas'' now encompassed in Sec.  34.4(a). 48 FR 40698, 40700 
(Sept. 9, 1983) (emphasis added.) Thus, the 1983 rulemaking left 
room for an expanded preemptive scope in the future and has been 
superseded by the present text of Sec.  34.4.

The ``recognized principles of Federal preemption'' derive from the 
substantial body of Federal precedent considering the applicability of 
state law to the exercise of national bank powers. Courts and the OCC 
have consistently held that states may not condition the exercise of 
permissible Federal powers upon the approval of the states.\86\
---------------------------------------------------------------------------

    \86\ See, e.g., Barnett, 517 U.S. at 34-35; Franklin Nat'l Bank, 
347 U.S. at 378; Bank of America Nat'l Trust & Sav. Ass'n v. Lima, 
103 F. Supp. 916, 918, 920 (D. Mass. 1952) (exercise of national 
bank powers is not subject to state approval; states have no 
authority to require national banks to obtain a license to engage in 
an activity permitted to them by Federal law). See also Letter dated 
Mar. 7, 2000, from Julie L. Williams to Thomas P. Vartanian, 65 FR 
15037 (Mar. 20, 2000) (Federal law would preempt state statute 
regulating the conduct of auctions if applied to a national bank's 
online auction program); OCC Interpretive Letter No. 866 (Oct. 8, 
1999) (state law requirements that purport to preclude national 
banks from soliciting trust business from customers located in 
states other than where the bank's main office is located would be 
preempted); OCC Interpretive Letter No. 749 (Sept. 13, 1996) (state 
law requiring national banks to be licensed by the state to sell 
annuities would be preempted); OCC Interpretive Letter No. 644 (Mar. 
24, 1994) (state registration and fee requirements imposed on 
mortgage lenders would be preempted).
---------------------------------------------------------------------------

    Consistent with these precedents, we conclude that the following 
provisions of the GFLA are preempted. Even though based on laudable 
motives, they impermissibly seek to impose requirements that a national 
bank would have to satisfy before being permitted to exercise powers 
authorized under Federal law.
    [sbull] Restriction on financing of credit insurance and debt 
suspension and debt cancellation fees. A creditor of a home loan may 
not finance credit insurance premiums, debt suspension fees, debt 
cancellation fees,\87\ or certain other premiums. Premiums or fees paid 
for certain types of insurance on a monthly basis are permitted.\88\
---------------------------------------------------------------------------

    \87\ OCC regulations at 12 CFR part 37 already prohibit contract 
terms that require a lump sum, single payment for a debt 
cancellation contract or debt suspension agreement where the debt 
subject to the contract is a residential real estate loan. See 12 
CFR 37.3(c)(2). Part 37 applies to debt cancellation contracts and 
debt suspension agreements entered into by national banks in 
connection with extensions of credit they make and provides that 
those contracts and agreements are not governed by state law. See 
id. Sec.  37.1(c).
    \88\ When insurance is financed as part of a home loan, the GFLA 
restricts the options available to the lender and borrower 
concerning how the loan proceeds are to be applied. This has the 
effect of imposing a condition on real estate lending in violation 
of section 371. The applicability of state laws regarding credit 
insurance sales, solicitation, and cross-marketing is governed by 
section 104 of the GLBA. See 15 U.S.C. 6701. The National City 
request raises no issues pertaining to the preemption of such state 
laws.
---------------------------------------------------------------------------

    [sbull] Restriction on refinancings. Creditors may not knowingly or 
intentionally refinance a home loan in a transaction defined under the 
GFLA as ``flipping.'' ``Flipping'' occurs when (a) a creditor makes a 
high-cost home loan to a borrower that refinances an existing home loan 
that was consummated within the prior five years, and (b) the new loan 
does not provide a reasonable and tangible net benefit to the borrower 
considering all of the circumstances. ``Flipping'' will be presumed to 
have occurred if the loan refinances a home loan that was: (a) 
Consummated within the past five years; (b) a special mortgage 
originated, subsidized, or guaranteed by a state, tribal, or local 
government or nonprofit organization; and (c) originated at a below-
market interest rate or with nonstandard terms beneficial to the 
borrower. The refinance of a loan originated or purchased by the 
Georgia Housing and Finance Agency (GHFA) will be presumed not to have 
been flipped.
    [sbull] Borrower counseling required. A creditor may not make a 
high-cost home loan unless it receives a certificate from a counselor 
approved by HUD or the GFHA that the borrower has received counseling 
on the advisability of the loan transaction.
    [sbull] Underwriting standards limited. A creditor may not make a 
high-cost home loan unless a reasonable creditor would believe at the 
time the loan is consummated that the borrower can make scheduled 
payments based on income, obligations, employment status, and other 
financial resources. There is a rebuttable presumption that a borrower 
can make scheduled payments if total debt service does not exceed 50% 
of gross monthly income.
    [sbull] Restrictions on home improvement loans. A creditor or 
servicer may not pay a contractor under a home improvement contract 
from proceeds of a high-cost home loan unless (a) the lender or 
servicer receives an affidavit from the contractor that work has been 
completed, and (b) the loan proceeds are disbursed in an instrument 
payable either to the borrower alone, to the borrower and the 
contractor, or to a third-party escrow agent.
    [sbull] Notice requirements. A creditor of a high-cost home loan 
must comply with the GFLA's notice requirements for originating and 
foreclosing high-cost home loans. Under these requirements, a creditor 
must provide a borrower certain notices in the documents that create a 
debt or pledge collateral and before initiating foreclosure 
proceedings.
    We note, however, that although the foregoing provisions are 
inapplicable to national banks and their operating subsidiaries, the 
concerns underlying those provisions are addressed through the OCC's 
supervision of national banks and their subsidiaries. As mentioned 
above, the OCC recently issued Advisory Letters 2003-2 and 2003-3, 
which contain the most comprehensive supervisory standards ever 
published by any Federal financial regulatory agency to address 
predatory and abusive lending practices and detail steps for national 
banks to take to ensure that they do not engage in such practices. As 
explained in the Advisory Letters, if the OCC has evidence that a 
national bank has engaged in abusive lending practices, we will review 
those practices not only to determine whether they violate specific 
provisions of law such as HOEPA, the Fair Housing Act, or the Equal 
Credit Opportunity Act, but also to determine whether they involve 
unfair or deceptive practices that violate the FTC Act. Indeed, several 
practices that we identify as abusive in our Advisory Letters--such as 
equity stripping, loan flipping, and the refinancing of special 
subsidized mortgage loans that originally contained terms favorable to 
the borrower--generally can be found to be unfair practices that 
violate the FTC Act.

[[Page 46278]]

Moreover, our enforcement record amply demonstrates the OCC's 
commitment to using the FTC Act to address consumer abuses that are not 
specifically prohibited by regulation.\89\
---------------------------------------------------------------------------

    \89\ Since the Providian settlement in 2000, see supra note 31, 
the OCC has taken action under the FTC Act to address unfair or 
deceptive practices and consumer harm involving five other national 
banks. These orders can be found at http://www.occ.treas.gov/foia/foiadocs.htm.
---------------------------------------------------------------------------

    Finally, the following provisions of the GFLA impermissibly impose 
restrictions on, and interfere with, the exercise of the Federal power 
of national banks to make real estate loans and accordingly are 
preempted:
    [sbull] Discouraging use of ADR prohibited. ``[A]ny provision of a 
high-cost loan that allows a party to require a borrower to assert any 
claim or defense in a forum that is less convenient, more costly, or 
more dilatory for the resolution of a dispute than a judicial forum 
established in this state where the borrower may otherwise properly 
bring the claim or defense or limits in any way any claim or defense 
the borrower may have is unconscionable and void.''
    [sbull] No encouraging borrower to default. In connection with a 
home loan or high-cost home loan, ``[n]o creditor or servicer shall 
recommend or encourage default on an existing loan or other debt prior 
to and in connection with the closing or planned closing of a home loan 
that refinances all or any portion of such existing loan or debt.''
    [sbull] Assignee liability. A purchaser of a high-cost home loan is 
subject to all claims and defenses that the borrower could assert 
against the lender, unless the purchaser shows that it exercised 
reasonable due diligence to prevent the purchase of a high-cost home 
loan.
    [sbull] Assignment of contractor liability. Under the GFLA, where a 
home loan was ``made, arranged, or assigned by a person selling home 
improvements to the dwelling of a borrower, the borrower may assert 
against the creditor all affirmative claims and defenses that the 
borrower may have against the seller or home improvement contractor.'' 
This provision applies to high-cost home loans and home loans where 
applicable law requires a certificate of occupancy, inspection, or 
completion to be obtained and the certificate was not obtained.
    Each of these provisions adds a special restriction to the making 
of real state loans in Georgia. Unlike state laws that provide the 
legal infrastructure needed for real property conveyances generally, 
the GFLA provisions single out a subset of real estate transactions 
authorized by section 371 and our part 34 for additional regulation. 
They introduce new standards for a category of subprime loans that are 
untested, vague, and different from well-understood Federal 
requirements. They also create new potential liabilities and penalties 
for any lender that missteps in its efforts to comply with the new 
standards and restrictions. Thus, they materially increase a bank's 
costs and compliance risks in connection with an entire category of 
subprime lending. Given the already generally higher credit risk of 
lending to subprime borrowers, bank lenders are simply unable to 
effectively cover these increased costs and risks.
    For example, the standards of the alternative dispute provision--
``less convenient, more costly, or more dilatory''--are vague and not 
susceptible of certainty before an action is filed. Similarly, while a 
lender may not intend to ``recommend or encourage'' conduct that would 
fit within the GFLA prohibition on encouraging a borrower to default, 
an argument by a borrower that the lender did so may be difficult to 
disprove, given the imprecise nature of those words. Moreover, the 
assignment of contractor liability provision requires the impossible--
namely, that a creditor ascertain and manage all potential legal risks 
generated by third party contractors notwithstanding that the 
contractors act independently and beyond the lender's control. Where a 
bank cannot ascertain precisely what is necessary to comply with a 
statute, on pain of potential civil liability imposed on both the bank 
and assignees of loans originated by the bank, that uncertainty in 
itself imposes costs weighing upon national banks' ability to conduct 
real estate lending operations in Georgia.\90\
---------------------------------------------------------------------------

    \90\ The OCC made a similar argument recently in connection with 
a California statute requiring creditors to provide minimum payments 
warnings on credit card billing statements. In granting a permanent 
injunction against enforcement of the state statute, a federal 
district court found ``the OCC's interpretation of the preemptive 
effect of the NBA on [the state law] to be reasonable.'' Lockyer, 
239 F. Supp. 2d at 1014.
---------------------------------------------------------------------------

    These costs and uncertainties have been amply publicized in the 
months since the GFLA was enacted, particularly in connection with the 
assignee liability provision. As mentioned above, following the 
enactment of the original GFLA, Moody's Investors Service and Standard 
and Poor's took the unusual step of announcing that including GFLA-
covered loans in securitizations was too risky, causing lenders to 
scale back loans in the state and leading issuers to remove Georgia 
loans from securitizations. The recent amendments to the GFLA capped 
the originally unlimited liability imposed on assignees of GFLA loans, 
but did not entirely remove the threat of liability, which continues to 
create substantial uncertainty in the secondary market. For example, 
Standard and Poor's has announced that it ``may consider'' rating 
transactions that include GFLA ``high-cost'' loans.\91\ Moody's 
Investors Service recently indicated that loans subject to predatory 
lending laws may be included in residential mortgage-backed 
securitizations only if seven conditions are satisfied.\92\ In 
addition, GFLA high-cost home loans remain ineligible for purchase by 
Freddie Mac and Fannie Mae.\93\ Without a reliable secondary market for 
these loans, banks will be required to hold more of these loans to 
maturity. This, in turn, ties up more of a bank's resources, requiring 
it to hold capital against the full amount of these loans, and thus 
adversely affects the ability of the bank to originate or acquire other 
real estate loans. As such, the assignee liability provision of the 
GFLA, if the rest of the GFLA's provisions were applicable to national 
banks notwithstanding the conclusions reached in this Determination and 
Order, would stand as an obstacle to the exercise of national banks' 
real estate

[[Page 46279]]

lending powers, including the power to sell real estate loans into the 
secondary market or to securitize these loans.
---------------------------------------------------------------------------

    \91\ For such transactions, the criteria will be stringent. 
Standard and Poor's will require lenders to identify which loans are 
``high-cost'' and which of those loans are predatory, and prevent 
their transfer into the securitization. Natalie Abrams, Esq., 
``Evaluating Predatory Lending Laws: Standard & Poor's Explains its 
Approach'' (Apr. 15, 2003), available at http://www.standardandpoors.com. By putting the onus on the lender to 
identify which loans are predatory, many banks may simply decline to 
make any ``high-cost'' home loans to avoid exposure. Indeed, several 
studies have documented that an unfortunate and unintended 
consequence of legislation similar to the GFLA adopted in other 
jurisdictions has been the overall reduction in subprime loans being 
originated. See supra note 26 and studies discussed therein.
    \92\ ``Moody's Investors Service Special Report: Impact of 
Predatory Lending Laws on RMBS Securitizations'' (May 6, 2003). 
Among these seven conditions is that the ``statute must be 
sufficiently clear so that the lender can effectively comply.'' Id. 
at 5. The Moody's Report does not specifically address the GFLA but 
gives as an example of insufficiently clear statutory language a 
provision, such as the GFLA provision on ``flipping,'' that requires 
a lender to only make loans for which there is a ``tangible net 
benefit'' to the borrower. The Moody's Report notes that until such 
time that a regulation or court decision provides clear guidelines 
of what constitutes ``tangible net benefit,'' ``it may be impossible 
for a lender to demonstrate compliance.'' Id. at 3.
    \93\ See Fannie Mae Announcement 03-02, ``Purchase of Georgia 
and New York `High Cost Home Loans' '' (Mar. 31, 2002); see also 
Freddie Mac Industry Letter, ``Revisions to Freddie Mac's mortgage 
purchase requirements based on Section 6-L of the New York State 
Banking Law and amendments to the Georgia Fair Lending Act'' (Mar. 
31, 2003), available at http://www.freddiemac.com/sell/selbultn/0331indltr.html.
---------------------------------------------------------------------------

    Under Franklin, Barnett, and other Federal cases, a conflict 
between a state law and Federal law need not amount to a whole, or even 
partial, prohibition in order for the Federal law to have preemptive 
effect.\94\ Where a Federal grant of authority is unrestricted, state 
law that attempts to obstruct the scope and effective exercise by a 
national bank of its express or incidental powers will be 
preempted.\95\ Moreover, as noted in Lockyer, the degree of state 
interference or intrusion need not be notably high to warrant a 
conclusion that a state law is preempted.
---------------------------------------------------------------------------

    \94\ See Barnett, 517 U.S. at 31-32.
    \95\ See, e.g., Franklin Nat'l Bank, 347 U.S. at 378; Duryee, 
270 F.3d at 409 (``The intervenors' attempt to redefine 
``significantly interfere'' as ``effectively thwart'' is 
unpersuasive.''); New York Bankers Ass'n, Inc. v. Levin, 999 F. 
Supp. 716, 719 (W.D.N.Y. 1998) (holding that a New York statute that 
restricted the types of insurance banks could sell to their 
customers was preempted on the grounds that the state law 
``constitutes an interference with [banks'] rights'' to sell 
insurance).
---------------------------------------------------------------------------

B. The GFLA Provisions Limiting the Rate of Interest a National Bank 
Charges Are Inapplicable to National Banks Pursuant to 12 U.S.C. 85 and 
12 CFR 7.4001

    As we have described, under 12 U.S.C. 85, a national bank is 
authorized to charge interest according to the most favored lender rate 
permitted by the laws of the state in which the bank is located. OCC 
regulations at 12 CFR 7.4001 provide that a national bank located in a 
state may charge interest at the maximum rate permitted to any state-
chartered or licensed lending institution by the law of that state. 
This ``most favored lender'' status permits a national bank to contract 
with borrowers in any state for interest at the maximum rate permitted 
by the law of the state in which the national bank is located. As 
discussed below, for a bank, such as National City, which is not 
located in Georgia for purposes of section 85 and 7.4001, this means 
that its permissible rates of interest are not tied to Georgia law, but 
instead are determined by reference to the most favored lender rates in 
the state where the bank is located. Applying this rule to National 
City, any limits on interest imposed by Georgia are preempted by 
section 85 and 7.4001. For a national bank that is located in Georgia 
for this purpose, the limits on rates set by the GFLA are simply 
inapplicable, for the reasons explained below.
    Pursuant to the recent amendments to the GFLA and the OTS 
determination that the GFLA is preempted for Federal thrifts, state-
chartered savings associations are the most favored lenders in Georgia 
for purposes of national banks that apply Georgia rates of interest 
under section 85. As mentioned above, the recent amendments to the GFLA 
created preemption parity for state-chartered institutions if ``federal 
law * * * preempts or has been determined to * * * preempt the 
application of the provisions of [the GFLA]'' to their Federally-
chartered counterparts. The OTS concluded that, because it occupied the 
field of regulation for lending activities of Federal savings 
associations, the GFLA provisions that purport to regulate the terms of 
credit, loan-related fees, disclosures, or the ability of a creditor to 
originate or refinance a loan, do ``not apply to Federal savings 
associations'' home lending.'' \96\ As a result, the GFLA provisions 
that limit the rate of interest a lender may charge a borrower--those 
limiting late fees, prepayment fees for non-ARM loans, and default rate 
of interest--do not apply to state-chartered thrifts. By operation of 
section 85, these limits also would not apply to national banks located 
in Georgia because such banks are permitted to charge the maximum rates 
permitted to these ``most favored lenders.'' \97\
---------------------------------------------------------------------------

    \96\ OTS Op. Chief Counsel, supra note 5, at 3.
    \97\ We note that Federal thrifts have most favored lender 
authority under a statute (12 U.S.C. 1463(g)) and regulation (12 CFR 
560.110) that are identical to section 85 and Sec.  7.4001 in all 
material respects. It is not clear that the OTS opinion addressed 
preemption issues raised by the GFLA by applying section 1463(g) and 
Sec.  560.110 since the thrift requesting the OTS opinion appeared 
not to be located in Georgia. The OTS appears instead to have based 
its preemption analysis solely on the OTS's occupation of the entire 
field of lending. To the extent that (a) that theory supercedes 
specific standards in sections 1463(g) and 560.110, and (b) Federal 
thrifts are thus free to set interest either pursuant to the most 
favored lender rule set out in Sec.  560.110 or pursuant to the 
maximum rate permitted in light of the preemption rule set out in 
Sec.  560.2, national banks in Georgia would similarly be free to 
set interest under either part 34 or Sec.  7.4001.
---------------------------------------------------------------------------

C. The GFLA Conflicts With the Federal Grant of Power to National Banks 
to Charge Non-Interest Fees

    As described above, section 24(Seventh) authorizes national banks 
to engage in activities that are part of, or incidental to, the 
business of banking as well as to engage in certain specified 
activities listed in the statute. Mortgage lending is expressly 
authorized for national banks and therefore part of the business of 
banking. Moreover, a bank's authority to provide the products or 
services authorized by section 24(Seventh) to its customers necessarily 
encompasses the ability to charge a fee for the product or service.\98\ 
The authority to charge fees for the bank's services is expressly set 
out in the OCC's regulations at 12 CFR 7.4002(a).
---------------------------------------------------------------------------

    \98\ See supra note 13 and accompanying text.
---------------------------------------------------------------------------

    Three provisions of the GFLA restrict or prohibit a creditor or 
servicer from imposing various non-interest fees for its products and 
services:
    [sbull] Prohibition on payoff balance and release fees. Under the 
GFLA, a creditor or servicer may not charge a fee to inform a person of 
the payoff balance or to provide a release upon prepayment of a home 
loan. Payoff balances must be provided within five business days of a 
request. A processing fee of up to $10 may be charged if information is 
provided by fax or if provided within 60 days of a previous request.
    [sbull] Prohibition on certain other fees. The GFLA prohibits a 
creditor or servicer from charging a borrower any fee to modify, renew, 
extend, or amend a high-cost home loan or to defer any payment due.
    [sbull] Right to ``cure'' a default. A borrower may not be charged 
a fee attributable to curing a default of a high-cost home loan unless 
the fee is otherwise authorized by the GFLA.
    These provisions conflict with well-established statutory and 
regulatory authority permitting national banks to charge such fees. As 
explained above, section 24(Seventh) authorizes a national bank to 
engage in activities that are part of, or incidental to, the business 
of banking as well as to engage in certain specified activities listed 
in the statute. A bank's authority to provide these services to its 
customers necessarily encompasses the ability to charge a fee for them, 
and this ability to charge a fee for the bank's services is expressly 
affirmed in 12 CFR 7.4002(a).\99\
---------------------------------------------------------------------------

    \99\ We note that a fee to defer a payment due is, in substance, 
a debt suspension agreement subject to 12 CFR part 37, which 
expressly occupies the field in this area and imposes uniform, 
nationally applicable safeguards on national banks offering this 
product. Part 37 states:
    ``This part applies to debt cancellation contracts and debt 
suspension agreements entered into by national banks in connection 
with extensions of credit they make. National banks' debt 
cancellation contracts and debt suspension agreements are governed 
by this part and applicable Federal law and regulations, and not by 
part 14 of this chapter or by State law.''--12 CFR 37.1(c).
---------------------------------------------------------------------------

    Restrictions on a national bank's ability to impose fees have 
consistently been held to be preempted by section 24(Seventh) and 
7.4002.\100\ The fees at issue here are fees that a national bank may 
charge in the exercise of its authority under section 24(Seventh) and 
Sec.  7.4002. In accordance with the case

[[Page 46280]]

law, the GFLA's attempt to prevent national banks from charging these 
fees is, therefore, preempted.
---------------------------------------------------------------------------

    \100\ See supra notes 56-60 and accompanying text.
---------------------------------------------------------------------------

D. Certain GFLA Provisions Are Moot in Light of the Preceding Analysis

    [sbull] Structuring. The GFLA provides that no person may avoid 
application of the law by dividing one loan transaction into separate 
parts or structuring a home loan transaction as an open-end loan for 
the purpose of evading a provision of the GFLA.
    [sbull] Severability. As described above, the GFLA provides that if 
any portion of it is declared to be invalid or preempted by Federal law 
or regulation, the validity of its remaining provisions will not be 
affected.
    [sbull] Disclosure required. Documents that create a debt or pledge 
property as collateral for a high-cost home loan must contain a notice 
specifying that the mortgage is subject to special rules under GFLA and 
that purchasers or assignees may be liable for all claims and defenses 
of the borrower.
    The structuring provision has the salutary goal of preventing 
evasion of the state law. The question whether the provision applies to 
National City is moot, however, because, for the reasons set forth 
above, the substantive provisions of the GFLA are inapplicable. 
Accordingly, there is no state law to evade. For the same reason, the 
severability clause and disclosure requirements are also moot.
    As mentioned above, some commenters argued that the OCC does not 
enjoy exclusive visitorial powers over national banks under 12 U.S.C. 
484. These commenters assert that section 484 does not prevent state 
officials from suing in state courts to enforce applicable laws against 
national banks. It is unnecessary to address this issue, or other 
provisions related to enforcement of the GFLA, because the GFLA is not 
applicable to national banks.

E. Applicability of the GFLA to National Bank Operating Subsidiaries

    As mentioned above, pursuant to their authority under 12 U.S.C. 24 
(Seventh) to exercise ``all such incidental powers as shall be 
necessary to carry on the business of banking,'' national banks have 
long used separately incorporated entities to engage in activities that 
the bank itself is authorized to conduct. This authority to operate 
through such subsidiaries has been expressly recognized for nearly 40 
years.
    In 1966, the OCC issued rules codifying and regulating the 
authority of national banks to engage in activities through operating 
subsidiaries.\101\ The current version of this Operating Subsidiary 
Rule, codified at 12 CFR 5.34, specifies the licensing requirements 
when national banks seek permission from the OCC to conduct business 
through an operating subsidiary.\102\ Pursuant to this licensing 
process, the OCC licenses the operating subsidiary as a means through 
which a national bank is authorized to conduct activities permissible 
for the bank itself. That this relationship involves the bank 
conducting activities through the operating subsidiary is reflected in 
the express language of the regulation, which provides that ``[a] 
national bank may conduct in an operating subsidiary activities that 
are permissible for a national bank to engage in directly either as 
part of, or incidental to, the business of banking, as determined by 
the OCC, or otherwise under other statutory authority.''\103\
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    \101\ See 31 FR 11459 (Aug. 31, 1966).
    \102\ See 12 CFR 5.34(b).
    \103\ 12 CFR 5.34(e)(1).
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    Moreover, the regulation makes clear that in conducting permissible 
activities on behalf of its parent bank, 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.''\104\ These regulations reflect express Congressional 
recognition in section 121 of the GLBA 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 conditions that govern the conduct of such activities by 
national banks.''\105\
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    \104\ 12 CFR 5.34(e)(3).
    \105\ Pub. L. 106-102, section 121, 113 Stat. 1338, 1373 (1999), 
codified at 12 U.S.C. 24a(g)(3)(A) (emphasis supplied). One 
commenter argued that this section of GLBA only permits national 
banks to establish financial subsidiaries that are authorized to 
engage in activities that are not permissible for the bank and is 
intended solely to limit the authority of financial subsidiaries by 
stating that the definition of financial subsidiaries does not 
include operating subsidiaries. Thus, this commenter argues that 
this section of GLBA does not grant any powers and does not express 
any intent to bar the states from regulating operating subsidiaries. 
In Nat'l City Bank of Indiana v. Boutris, Civ. No. S-03-0655 GEB JFM 
(E.D.Cal. May 7, 2003), a Federal district court rejected a similar 
argument. In so doing, the Court noted that ``[n]ot only does this 
language [of GLBA section 121] reference operating subsidiaries, it 
indicates the OCC exercises visitorial authority over them.'' Id. at 
11. Moreover, as the Court also pointed out, the Report of the 
Senate Committee on Banking, Housing, and Urban Affairs on GLBA 
noted that:
    For at least 30 years, national banks have been authorized to 
invest in operating subsidiaries that are engaged only in activities 
that national bank may engage in directly. For example, national 
banks are authorized directly to make mortgage loans and engage in 
related mortgage banking activities. Many banks choose to conduct 
these activities through subsidiary corporations. Nothing in this 
legislation is intended to affect the authority of national banks to 
engage in bank permissible activities through subsidiary 
corporations, or to invest in joint ventures to engage in bank 
permissible activities with other banks or nonbank companies.
    S. Rep. No. 106-44, at 8 (1999).
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    When established in accordance with the procedures mandated by the 
OCC's Operating Subsidiary Rule and approved by the OCC, the operating 
subsidiary is a Federally-authorized means by which a national bank may 
conduct Federally-authorized activities. Recognizing this status, 
courts have consistently treated the operating subsidiary and the 
national bank as equivalents, unless Federal law requires otherwise, in 
considering whether a particular activity was permissible for a 
national bank.\106\ Recently, in Wells Fargo Bank, N.A. v. 
Boutris,\107\ a Federal district court issued a permanent injunction 
enjoining the Commissioner of the California Department of Corporations 
from exercising visitorial powers over a national bank operating 
subsidiary. In so doing, the Court took note of this well-established 
case law and concluded that ``[t]he OCC's regulation authorizing 
national banks to conduct permissible banking business activities 
through operating subsidiaries is within its discretionary authority 
delegated to it by Congress and is a reasonable interpretation of the 
Act.''\108\ Similarly, in National City Bank of Indiana v. 
Boutris,\109\ a Federal district court enjoined California officials 
from exercising visitorial powers over National City Bank of Indiana 
and its operating subsidiary, National City Mortgage Company.
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    \106\ See Variable Annuity Life Ins. Co., 513 U.S. at 254 
(brokerage subsidiary acting as an agent in the sale of annuities); 
Marquette, 439 U.S. at 299 (credit card subsidiary); American Ins. 
Ass'n v. Clarke, 865 F.2d 278 (D.C. Cir. 1988) (subsidiary offering 
municipal bond insurance); M & M Leasing Corp. v. Seattle First 
Nat'l Bank, 563 F.2d 1377 (9th Cir. 1977) (motor vehicle leasing by 
subsidiary).
    \107\ 2003 WL 21277203 (E.D.Cal. May 9, 2003).
    \108\ Id. at *6.
    \109\ 2003 WL 21536818 (E.D.Cal. July 2, 2003).
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    In accordance with this longstanding regulatory and judicial 
recognition of operating subsidiaries as corporate extensions of the 
parent bank, OCC regulations specifically address the application of 
state law to national bank operating subsidiaries. That regulation 
provides:

    Unless 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.\110\
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    \110\ 12 CFR 7.4006. One commenter argues that the OCC cannot 
rely on this regulation because the commenter contends that the OCC 
failed to abide by Executive Order 13132 in promulgating it. We 
disagree. Executive Order 13132 requires intergovernmental 
consultation if a rule preempts state law, and an agency must 
consult to the extent practicable with state and local officials 
early in the process of developing the proposed regulation. Office 
of Management and Budget guidance on the Executive Order notes that 
the consultation ``should seek comment on * * * preemption as 
appropriate to the nature of the rulemaking under development. The 
timing, nature, and detail of the consultation involved should also 
be appropriate to the nature of the regulation involved.'' M-00-02, 
``Guidance for Implementing E.O. 13132, `Federalism,'' at 5 (Oct. 
28, 1999), available at http://www.whitehouse.gov/omb/memoranda/m00-02.pdf. This process was followed in connection with the 
promulgation of Sec.  7.4006. As we explained in the preamble to the 
final rule adopting Sec.  7.4006:
    ``In addition to publishing our proposal for comment by all 
interested parties, including State and local officials, we also 
brought the proposal to the attention of the Conference of State 
Bank Supervisors and specifically invited its views, and the views 
of its constituent members, on the revisions we proposed. In the 
preamble to this final rule, we have described the comments we 
received from State officials or their representatives and our 
responses thereto. Finally, we have made those written comments we 
received from State or local officials available to the Director of 
OMB.''--66 FR 34784, 34790 (July 2, 2001).
    The same commenter argues that this order or determination 
should be delayed until the requirements of Executive Order 13132 
have been met by the OCC. We note that the consultative process 
required by the Executive Order has been met by our solicitation 
(and receipt) of comment from interested parties.

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[[Page 46281]]

    The provisions of part 34 expressly apply equally to national banks 
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and their operating subsidiaries:

    This part applies to national banks and their operating 
subsidiaries as provided in 12 CFR 5.34.\111\
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    \111\ 12 CFR 34.1(b).

Accordingly, the same preemption conclusions about the GFLA reached 
above for national banks pursuant to sections 34.4(a) and (b) of the 
OCC's regulations, and those concerning the GFLA's restrictions on 
components of interest \112\ or fees, apply equally to their operating 
subsidiaries.
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    \112\ See OCC Interpretive Letter No. 954 (Dec. 16, 2002) (12 
U.S.C. 85 applies equally to national bank operating subsidiaries 
and their parent national banks).
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IV. Results of the Analysis

    For the reasons stated above, we are issuing an order concluding 
that the GFLA does not apply to National City or any other national 
bank or national bank operating subsidiary that engages in real estate 
lending activities in Georgia. This order is expressly authorized by 
section 371.\113\ The authority vested in the OCC to establish the 
terms, conditions, and requirements that apply to national bank real 
estate lending necessarily encompasses the authority to say which 
terms, conditions, and requirements do not apply to national bank real 
estate lending. This Order has the force and effect of law.\114\
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    \113\ Even if the OCC's express authority under section 371 were 
construed not to be broad enough to permit it to issue this order, 
the Administrative Procedure Act (APA) authorizes agencies to issue 
orders ``to terminate a controversy or remove uncertainty.'' 5 
U.S.C. 554(e) (``The agency, with like effect as in the case of 
other orders, and in its sound discretion, may issue a declaratory 
order to terminate a controversy or remove uncertainty.''). Although 
section 554(e) is contained within the APA provisions for matters 
that are required by statute to be determined on the record after an 
opportunity for a hearing, there is considerable case law and agency 
practice of issuing orders in other circumstances. For example, in 
American Airlines, Inc. v. Dep't of Transp., 202 F.3d 788 (5th Cir. 
2000), the court of appeals upheld a DOT declaratory order under 
section 554(e) that preempted certain municipal regulations. The 
court specifically found authority for such an order and that 
procedural provisions of section 554 were not applicable. In short, 
the court found that section 554(e) was a source of authority for a 
declaratory order independent of the remainder of section 554.
    Examples of agencies issuing legally binding orders pursuant to 
authority other than section 554(e) of the APA are numerous. For 
example, under section 3 of the Bank Holding Company Act, 
applications to become a bank holding company are approved by 
Federal Reserve Board orders. In Farmers & Merchts. Bank of Las 
Cruces v. Bd. of Governors of Fed. Reserve Sys., 567 F.2d 1082 (D.C. 
Cir. 1977), the court of appeals affirmed the Board's order 
approving the formation of a holding company, noting that the 
protesting bank had no right to a hearing before the Board in light 
of the OCC's recommended approval of the acquisition. A similar 
result was reached in Grandview Bank & Trust Co. v. Bd. of Governors 
of Fed. Reserve Sys., 550 F.2d 415 (8th Cir. 1977).
    \114\ As noted above, the OCC is issuing at the same time as 
this Determination and Order is issued a Notice of Proposed 
Rulemaking that invites comments on a proposed codification of 
broadly applicable preemption provisions. We have elected to respond 
to National City through an order given the narrower focus of the 
request.
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Order

    The conditions imposed by the GFLA on the real estate lending 
activities of national banks do not apply to National City, or any 
other national bank, or national bank operating subsidiary, that 
engages in real estate lending activities in Georgia.

    Dated: July 30, 2003.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 03-19907 Filed 8-4-03; 8:45 am]
BILLING CODE 4810-33-P