[Federal Register Volume 69, Number 8 (Tuesday, January 13, 2004)]
[Rules and Regulations]
[Pages 1904-1917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-586]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 7 and 34

[Docket No. 04-04]
RIN 1557-AC73


Bank Activities and Operations; Real Estate Lending and 
Appraisals

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

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
publishing a final rule amending parts 7 and 34 of our regulations to 
add provisions clarifying the applicability of state law to national 
banks' operations. The provisions concerning preemption identify types 
of state laws that are preempted, as well as the types of state laws 
that generally are not preempted, with respect to national banks' 
lending, deposit-taking, and other operations. In tandem with these 
preemption provisions, we are also adopting supplemental anti-predatory 
lending standards governing national banks' lending activities.

EFFECTIVE DATE: February 12, 2004.

FOR FURTHER INFORMATION CONTACT: For questions concerning the final 
rule, contact Michele Meyer, Counsel, or Mark Tenhundfeld, Assistant 
Director, Legislative and Regulatory Activities Division, (202) 874-
5090.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    The OCC is adopting this final rule to specify the types of state 
laws that do not apply to national banks' lending and deposit taking 
activities and the types of state laws that generally do apply to 
national banks. Other state laws not specifically listed in this final 
rule also would be preempted under principles of preemption developed 
by the U.S. Supreme Court, if they obstruct, impair, or condition a 
national bank's exercise of its lending, deposit-taking, or other 
powers granted to it under Federal law.
    This final rule also contains a new provision prohibiting the 
making of any type of consumer loan based predominantly on the bank's 
realization of the foreclosure value of the borrower's collateral, 
without regard to the borrower's ability to repay the loan according to 
its terms. (A consumer loan for this purpose is a loan made for 
personal, family, or household purposes). This anti-predatory lending 
standard applies uniformly to all consumer lending activities conducted 
by national banks, wherever located. A second anti-predatory lending 
standard in the final rule further specifically prohibits national 
banks from engaging in practices that are unfair and deceptive under 
the Federal Trade Commission Act (FTC Act) \1\ and regulations issued 
thereunder, in connection with all types of lending.
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    \1\ 15 U.S.C. 45(a)(1).
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    The provisions concerning preemption of state laws are contained in 
12 CFR part 34, which governs national banks' real estate lending, and 
in three new sections to part 7 added by this final rule: Sec.  7.4007 
regarding deposit-taking activities; Sec.  7.4008 regarding non-real 
estate lending

[[Page 1905]]

activities; and Sec.  7.4009 regarding the other Federally-authorized 
activities of national banks. The first anti-predatory lending standard 
appears both in part 34, where it applies with respect to real estate 
consumer lending, and in part 7, with respect to other consumer 
lending. The provision prohibiting a national bank from engaging in 
unfair or deceptive practices within the meaning of section 5 of the 
FTC Act and regulations promulgated thereunder \2\ similarly appears in 
both parts 34 and 7.
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    \2\ 12 CFR part 227.
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II. Description of Proposal

    On August 5, 2003, the OCC published a notice of proposed 
rulemaking (NPRM or proposal) in the Federal Register (68 FR 46119) to 
amend parts 7 and 34 of our regulations to add provisions clarifying 
the applicability of state law to national banks. These provisions 
identified the types of state laws that are preempted, as well as the 
types of state laws that generally are not preempted, in the context of 
national bank lending, deposit-taking, and other Federally-authorized 
activities.

A. Proposed Revisions to Part 34--Real Estate Lending

    Part 34 of our regulations implements 12 U.S.C. 371, which 
authorizes national banks to engage in real estate lending subject to 
``such restrictions and requirements as the Comptroller of the Currency 
may prescribe by regulation or order.'' Prior to the adoption of this 
final rule, subpart A of part 34 explicitly preempted state laws 
concerning five enumerated areas with respect to national banks and 
their operating subsidiaries.\3\ Those are state laws concerning the 
loan to value ratio; the schedule for the repayment of principal and 
interest; the term to maturity of the loan; the aggregate amount of 
funds that may be loaned upon the security of real estate; and the 
covenants and restrictions that must be contained in a lease to qualify 
the leasehold as acceptable security for a real estate loan. Section 
34.4(b) stated that the OCC would apply recognized principles of 
Federal preemption in considering whether state laws apply to other 
aspects of real estate lending by national banks.
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    \3\ Prior 12 CFR 34.1(b) and 34.4(a).
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    Pursuant to our authority under 12 U.S.C. 93a and 371, we proposed 
to amend Sec.  34.4(a) and (b) to provide a more extensive enumeration 
of the types of state law restrictions and requirements that do, and do 
not, apply to the real estate lending activities of national banks. To 
the five types of state laws already listed in the regulations, 
proposed Sec.  34.4(a) added a fuller, but non-exhaustive, list of the 
types of state laws that are preempted, many of which have already been 
found to be preempted by the Federal courts or OCC opinions. As also 
explained in the preamble to the NPRM, consistent with the applicable 
Federal judicial precedent, other types of state laws that wholly or 
partially obstruct the ability of national banks to fully exercise 
their real estate lending powers might be identified and, if so, 
preemption of those laws would be addressed by the OCC on a case-by-
case basis.
    We also noted in the preamble that the nature and scope of the 
statutory authority to set ``requirements and restrictions'' on 
national banks' real estate lending may enable the OCC to ``occupy the 
field'' of the regulation of those activities. We invited comment on 
whether our regulations, like those of the Office of Thrift Supervision 
(OTS),\4\ should state explicitly that Federal law occupies the field 
of real estate lending. We noted that such an occupation of the field 
necessarily would be applied in a manner consistent with other Federal 
laws, such as the Truth-in-Lending Act (TILA) \5\ and the Equal Credit 
Opportunity Act (ECOA).\6\
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    \4\ 12 CFR 560.2.
    \5\ 15 U.S.C. 1601 et seq.
    \6\ 15 U.S.C. 1691 et seq.
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    Under proposed Sec.  34.4(b), certain types of state laws are not 
preempted and would apply to national banks to the extent that they do 
not significantly affect the real estate lending operations of national 
banks or are otherwise consistent with national banks' Federal 
authority to engage in real estate lending.\7\ These types of laws 
generally pertain to contracts, collection of debts, acquisition and 
transfer of property, taxation, zoning, crimes, torts, and homestead 
rights. In addition, any other law that the OCC determines to interfere 
to only an insignificant extent with national banks' lending authority 
or is otherwise consistent with national banks' authority to engage in 
real estate lending would not be preempted.
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    \7\ Federal law may explicitly resolve the question of whether 
state laws apply to the activities of national banks. There are 
instances where Federal law specifically incorporates state law 
standards, such as the fiduciary powers statute at 12 U.S.C. 92a(a). 
The language used in this final rule ``[e]xcept where made 
applicable by Federal law'' refers to this type of situation.
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    The proposal retained the general rule stated in Sec.  34.3 that 
national banks may ``make, arrange, purchase, or sell loans or 
extensions of credit, or interests therein, that are secured by liens 
on, or interests in, real estate, subject to terms, conditions, and 
limitations prescribed by the Comptroller of the Currency by regulation 
or order.'' That provision was unchanged, other than by designating it 
as paragraph (a).
    The proposal added a new paragraph (b), prescribing an explicit, 
safety and soundness-based anti-predatory lending standard to the 
general statement of authority concerning lending. Proposed Sec.  
34.3(b) prohibited a national bank from making a loan subject to 12 CFR 
part 34 based predominantly on the foreclosure value of the borrower's 
collateral, rather than on the borrower's repayment ability, including 
current and expected income, current obligations, employment status, 
and other relevant financial resources.
    This standard augments the other standards that already apply to 
national bank real estate lending under Federal laws. These other 
standards include those contained in the OCC's Advisory Letters on 
predatory lending; \8\ section 5 of the FTC Act,\9\ which makes 
unlawful ``unfair or deceptive acts or practices'' in interstate 
commerce; and many other Federal laws that impose standards on lending 
practices.\10\ The NPRM invited commenters to suggest other anti-
predatory lending standards that would be appropriate to apply to 
national bank real estate lending activities.
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    \8\ See OCC Advisory Letter 2003-2, ``Guidelines for National 
Banks to Guard Against Predatory and Abusive Lending Practices'' 
(Feb. 21, 2003) and OCC Advisory Letter 2003-3, ``Avoiding Predatory 
and Abusive Lending Practices in Brokered and Purchased Loans'' 
(Feb. 21, 2003). These documents are available on the OCC's Web site 
at http://www.occ.treas.gov/advlst03.htm.
    \9\ 15 U.S.C. 45(a)(1).
    \10\ There is an existing network of Federal laws applicable to 
national banks that protect consumers in a variety of ways. In 
addition to TILA and ECOA, national banks are also subject to the 
standards contained in the Real Estate Settlement Procedures Act, 12 
U.S.C. 2601 et seq., the Fair Housing Act, 42 U.S.C. 3601 et seq., 
the Home Mortgage Disclosure Act, 12 U.S.C. 2801 et seq., the Fair 
Credit Reporting Act, 15 U.S.C. 1681 et seq., the Truth in Savings 
Act, 12 U.S.C. 4301 et seq., the Consumer Leasing Act, 15 U.S.C. 
1667, and the Fair Debt Collection Practices Act, 15 U.S.C. 1692 et 
seq.
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    As a matter of Federal law, national bank operating subsidiaries 
conduct their activities subject to the same terms and conditions as 
apply to the parent banks, except where Federal law provides otherwise. 
See 12 CFR 5.34(e)(3) and 7.4006. See also 12 CFR 34.1(b) (real estate 
lending activities specifically). Thus, by virtue of regulations in 
existence prior to the proposal, the proposed changes to part 34, 
including the new anti-predatory lending standard, applied to both 
national banks and their operating subsidiaries.

[[Page 1906]]

B. Proposed Amendments to Part 7--Deposit-Taking, Other Lending, and 
Bank Operations

    The proposal also added three new sections to part 7: Sec.  7.4007 
regarding deposit-taking activities, Sec.  7.4008 regarding non-real 
estate lending activities, and Sec.  7.4009 regarding other national 
bank operations. The structure of the proposed amendments was the same 
for Sec. Sec.  7.4007 and 7.4008 and was similar for Sec.  7.4009. For 
Sec. Sec.  7.4007 and 7.4008, the proposal first set out a statement of 
the authority to engage in the activity. Second, the proposal stated 
that state laws that obstruct, in whole or in part, a national bank's 
exercise of the Federally-authorized power in question are not 
applicable, and listed several types of state laws that are preempted. 
As with the list of preempted state laws set forth in the proposed 
amendments to part 34, this list reflects judicial precedents and OCC 
interpretations concerning the types of state laws that can obstruct 
the exercise of national banks' deposit-taking and non-real estate 
lending powers. Finally, the proposal listed several types of state 
laws that, as a general matter, are not preempted.
    As with the proposed amendments to part 34, the proposed amendment 
to part 7 governing non-real estate lending included a safety and 
soundness-based anti-predatory lending standard. As proposed, Sec.  
7.4008(b) stated that a national bank shall not make a loan described 
in Sec.  7.4008 based predominantly on the foreclosure value of the 
borrower's collateral, rather than on the borrower's repayment ability, 
including current and expected income, current obligations, employment 
status, and other relevant financial resources. The preamble to the 
NPRM pointed out that non-real estate lending also is subject to 
section 5 of the FTC Act.
    For proposed Sec.  7.4009, as with proposed Sec. Sec.  7.4007 and 
7.4008, the NPRM first stated that a national bank could exercise all 
powers authorized to it under Federal law. To address questions about 
the extent to which state law may permissibly govern powers or 
activities that have not been addressed by Federal court precedents or 
OCC opinions or orders, proposed new Sec.  7.4009(b) provided that 
state laws do not apply to national banks if they obstruct, in whole or 
in part, a national bank's exercise of powers granted to it under 
Federal law. Next, proposed Sec.  7.4009(c) noted that the provisions 
of this section apply to any national bank power or aspect of a 
national bank's operation that is not otherwise covered by another OCC 
regulation that specifically addresses the applicability of state law. 
Finally, the proposal listed several types of state laws that, as a 
general matter, are not preempted.
    As with the proposed changes to part 34, and for the same reasons, 
the proposal's changes to part 7 would be applicable to both national 
banks and their operating subsidiaries by virtue of an existing OCC 
regulation.

III. Overview of Comments

    The OCC received approximately 2,600 comments, most of which came 
from the following groups:
    Realtors. The vast majority--approximately 85%--of the opposing 
comments came from realtors and others representing the real estate 
industry, who expressed identical concerns about the possibility that 
national banks' financial subsidiaries would be permitted to engage in 
real estate brokerage activities \11\ and that, if that power were 
authorized, the proposal would permit them to do so without complying 
with state real estate brokerage licensing laws. This final rule will 
not have that result because it does not apply to the activities of 
national bank financial subsidiaries. Thus, should the Department of 
the Treasury (Treasury) and the Board of Governors of the Federal 
Reserve System (Board) proposal to permit financial subsidiaries and 
financial holding companies to engage in real estate brokerage 
activities go forward, this final rule would not affect the application 
of state real estate licensing requirements to national bank financial 
subsidiaries.
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    \11\ Pursuant to procedures established by the Gramm-Leach-
Bliley Act, Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999), for 
determining that an activity is ``financial in nature,'' and thus 
permissible for financial holding companies and financial 
subsidiaries, the Board and Treasury jointly published a proposal to 
determine that real estate brokerage is ``financial in nature.'' See 
66 FR 307 (Jan. 3, 2001). No final action has been taken on the 
proposal.
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    Many realtor comments also raised arguments concerning the impact 
of this rulemaking on consumers and market competition and some argued 
that preemption of state licensing requirements related to real estate 
lending is inappropriate on the basis of field or conflict preemption. 
These issues also were raised by other commenters and are addressed in 
sections IV and VI of this preamble.
    Community and consumer advocates. In addition to the comments from 
realtors, the OCC received opposing comments from community and 
consumer advocates. These commenters argued that the OCC should not 
adopt further regulations preempting state law and, in particular, 
should not adopt in the final rule an ``occupation of the field'' 
preemption standard for national banks' real estate lending activities. 
The community and consumer advocates also asserted that the proposed 
``obstruct, in whole or in part'' preemption standard is inconsistent 
with, and a lowering of, the preemption standards articulated by the 
U.S. Supreme Court. Whatever the standard, the community and consumer 
advocates expressed concern that preemption would allow national banks 
to escape some state tort, contract, debt collection, zoning, property 
transfer, and criminal laws, and would expose consumers to wide-spread 
predatory and abusive practices by national banks. These commenters 
asserted that the OCC's proposed anti-predatory lending standard is 
insufficient and urged the OCC to further strengthen consumer 
protections in parts 7 and 34, including prohibiting specific practices 
characterized as unfair or deceptive. These issues are addressed in 
sections IV and VI of this preamble.
    State officials and members of Congress. State banking regulators, 
the Conference of State Bank Supervisors (CSBS), the National 
Conference of State Legislators, individual state legislators, the 
National Association of Attorneys General (NAAG), and individual state 
attorneys general questioned the legal basis of the proposal and argued 
that the OCC lacks authority to adopt it. These commenters, like the 
community and consumer advocates, also challenged the OCC's authority 
to adopt in the final rule either a ``field occupation'' preemption 
standard or the proposed ``obstruct, in whole or in part'' standard. 
These commenters raised concerns about the effect of the proposal, if 
adopted, on the dual banking system, and its impact on what they assert 
is the states' authority to apply and enforce consumer protection laws 
against national banks, and particularly against operating 
subsidiaries. Several members of Congress submitted comments, or 
forwarded letters from constituents and state officials, that echoed 
these concerns. The arguments concerning the dual banking system are 
addressed in the discussion of Executive Order 13132 later in this 
preamble.\12\ The remaining issues raised by the state commenters are 
addressed in sections IV and VI of this preamble.\13\
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    \12\ See also OCC publication entitled National Banks and the 
Dual Banking System (Sept. 2003).
    \13\ See also Letter from John D. Hawke, Jr., Comptroller of the 
Currency, to Senator Paul S. Sarbanes (Dec. 9, 2003), available on 
the OCC's Web site at http://www.occ.treas.gov/foia/SarbanesPreemptionletter.pdf; and identical letters sent to nine 
other Senators; and Letters from John D. Hawke, Jr., Comptroller of 
the Currency, to Representatives Sue Kelly, Peter King, Carolyn B. 
Maloney, and Carolyn McCarthy (Dec. 23, 2003).

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[[Page 1907]]

    National banks and banking industry trade groups. National banks, 
other financial institutions, and industry groups supported the 
proposal. Many of these commenters argued that Congress has occupied 
the fields of deposit-taking and lending in the context of national 
banks and urged the OCC to adopt a final rule reflecting an extensive 
occupation of the field approach. These commenters concluded that 
various provisions of the National Bank Act establish broad statutory 
authority for the activities and regulation of national banks, and that 
these provisions suggest strongly that Congress did in fact intend to 
occupy the fields in question. In addition to these express grants of 
authority, the commenters noted that national banks may, under 12 
U.S.C. 24(Seventh), ``exercise * * * all such incidental powers as 
shall be necessary to carry on the business of banking,'' and that this 
provision has been broadly construed by the Supreme Court.\14\ These 
commenters concluded that this broad grant of Federal powers, coupled 
with equally broad grants of rulemaking authority to the OCC,\15\ 
effectively occupy the field of national bank regulation.
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    \14\ See, e.g., Nationsbank of North Carolina, N.A. v. Variable 
Annuity Life Ins. Co., 513 U.S. 251, 258 n.2 (1995) (VALIC).
    \15\ See, e.g., 12 U.S.C. 93a.
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    Many of the supporting commenters also urged the adoption of the 
proposal for the reasons set forth in its preamble. These commenters 
agreed with the OCC's assertion in the preamble that banks with 
customers in more than one state ``face uncertain compliance risks and 
substantial additional compliance burdens and expense that, for 
practical purposes, materially impact their ability to offer particular 
products and services.'' \16\ The commenters stated that, in effect, a 
national bank must often craft different products or services (with 
associated procedures and policies, and their attendant additional 
costs) for each state in which it does business, or elect not to 
provide all of its products or services (to the detriment of consumers) 
in one or more states. These commenters believe that the proposal, if 
adopted, would offer much-needed clarification of when state law does 
or does not apply to the activities of a national bank and its 
operating subsidiaries. Such clarity, these commenters argued, is 
critical to helping national banks maintain and expand provision of 
financial services. Without such clarity, these commenters assert, the 
burdens and costs, and uncertain liabilities arising under a myriad of 
state and local laws, are a significant diversion of the resources that 
national banks otherwise can use to provide services to customers 
nationwide, and a significant deterrent to their willingness and 
ability to offer certain products and services in certain markets. 
These issues are addressed in sections IV and VI of this preamble.
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    \16\ 68 FR 46119, 46120.
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IV. Reason and Authority for the Regulations

A. The Regulations Are Issued in Furtherance of the OCC's 
Responsibility To Ensure That the National Banking System Is Able To 
Operate As Authorized by Congress

    As the courts have recognized, Federal law authorizes the OCC to 
issue rules that preempt state law in furtherance of our responsibility 
to ensure that national banks are able to operate to the full extent 
authorized under Federal law, notwithstanding inconsistent state 
restrictions, and in furtherance of their safe and sound operations.
    Federal law is the exclusive source of all of national banks' 
powers and authorities. Key to these powers is the clause set forth at 
12 U.S.C. 24(Seventh) that permits national banks to exercise ``all 
such incidental powers as shall be necessary to carry on the business 
of banking.'' This flexible grant of authority furthers Congress's 
long-range goals in establishing the national banking system, including 
financing commerce, establishing private depositories, and generally 
supporting economic growth and development nationwide. \17\ The 
achievement of these goals required national banks that are safe and 
sound and whose powers are dynamic and capable of evolving so that they 
can perform their intended roles. The broad grant of authority provided 
by 12 U.S.C. 24(Seventh), as well as the more targeted grants of 
authority provided by other statutes,\18\ enable national banks to 
evolve their operations in order to meet the changing needs of our 
economy and individual consumers.\19\
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    \17\ For a more detailed discussion of Congress's purposes in 
establishing a national banking system that would operate to achieve 
these goals distinctly and separately from the existing system of 
state banks, see the preamble to the proposal, 68 FR 46119, 46120, 
and National Banks and the Dual Banking System, supra note 12.
    \18\ See, e.g., 12 U.S.C. 92a (authorizing national banks to 
engage in fiduciary activities) and 371 (authorizing national banks 
to engage in real estate lending activities).
    \19\ The Supreme Court expressly affirmed the dynamic, 
evolutionary character of national bank powers in VALIC, in which it 
held that the ``business of banking'' is not limited to the powers 
enumerated in 12 U.S.C. 24(Seventh) and that the OCC has the 
discretion to authorize activities beyond those specifically 
enumerated in the statute. See 513 U.S. at 258 n.2.
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    The OCC is charged with the fundamental responsibility of ensuring 
that national banks operate on a safe and sound basis, and that they 
are able to do so, if they choose, to the full extent of their powers 
under Federal law. This responsibility includes enabling the national 
banking system to operate as authorized by Congress, consistent with 
the essential character of a national banking system and without undue 
confinement of their powers. Federal law gives the OCC broad rulemaking 
authority in order to fulfill these responsibilities. Under 12 U.S.C. 
93a, the OCC is authorized ``to prescribe rules and regulations to 
carry out the responsibilities of the office'' \20\ and, under 12 
U.S.C. 371, to ``prescribe by regulation or order'' the ``restrictions 
and requirements'' on national banks'' real estate lending power 
without state-imposed conditions.\21\
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    \20\ 12 U.S.C. 93a.
    \21\ 12 U.S.C. 371(a).
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    In recent years, the financial services marketplace has undergone 
profound changes. Markets for credit (both consumer and commercial), 
deposits, and many other financial products and services are now 
national, if not international, in scope. These changes are the result 
of a combination of factors, including technological innovations, the 
erosion of legal barriers, and an increasingly mobile society.
    Technology has expanded the potential availability of credit and 
made possible virtually instantaneous credit decisions. Mortgage 
financing that once took weeks, for example, now can take only hours. 
Consumer credit can be obtained at the point of sale at retailers and 
even when buying a major item such as a car. Consumers can shop for 
investment products and deposits on-line. With respect to deposits, 
they can compare rates and duration of a variety of deposit products 
offered by financial institutions located far from where the consumer 
resides.
    Changes in applicable law also have contributed to the expansion of 
markets for national banks and their operating subsidiaries. These 
changes have affected both the type of products that may be offered and 
the geographic region in which banks--large and small--may conduct 
business. As a result of these changes, banks may branch across state 
lines and offer a broader array of products than ever before. An even 
wider range of

[[Page 1908]]

customers can be reached through the use of technology, including the 
Internet. Community national banks, as well as the largest national 
banks, use new technologies to expand their reach and service to 
customers.
    Our modern society is also highly mobile. Forty million Americans 
move annually, according to a recent Congressional report issued in 
connection with enactment of the Fair and Accurate Credit Transactions 
Act of 2003.\22\ And when they move, they often have the desire, if not 
the expectation, that the financial relationships and status they have 
established will be portable and will remain consistent.
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    \22\ See S. Rep. No. 108-166, at 10 (2003) (quoting the hearing 
testimony of Secretary of the Treasury Snow).
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    These developments highlight the significance of being able to 
conduct a banking business pursuant to consistent, national standards, 
regardless of the location of a customer when he or she first becomes a 
bank customer or the location to which the customer may move after 
becoming a bank customer. They also accentuate the costs and 
interference that diverse and potentially conflicting state and local 
laws have on the ability of national banks to operate under the powers 
of their Federal charter. For national banks, moreover, the ability to 
operate under uniform standards of operation and supervision is 
fundamental to the character of their national charter.\23\ When 
national banks are unable to operate under national standards, it also 
implicates the role and responsibilities of the OCC.
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    \23\ As we explained last year in the preamble to our amendments 
to part 7 concerning national banks' electronic activities, 
``freedom from State control over a national bank's powers protects 
national banks from conflicting local laws unrelated to the purpose 
of providing the uniform, nationwide banking system that Congress 
intended.'' 67 FR 34992, 34997 (May 17, 2002).
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    These concerns have been exacerbated recently, by increasing 
efforts by states and localities to apply state and local laws to bank 
activities. As we have learned from our experience supervising national 
banks, from the inquiries received by the OCC's Law Department, by the 
extent of litigation in recent years over these state efforts, and by 
the comments we received on the proposal, national banks' ability to 
conduct operations to the full extent authorized by Federal law has 
been curtailed as a result.
    Commenters noted that the variety of state and local laws that have 
been enacted in recent years--including laws regulating fees, 
disclosures, conditions on lending, and licensing--have created higher 
costs and increased operational challenges.\24\ Other commenters noted 
the proliferation of state and local anti-predatory lending laws and 
the impact that those laws are having on lending in the affected 
jurisdictions. As a result, national banks must either absorb the 
costs, pass the costs on to consumers, or eliminate various products 
from jurisdictions where the costs are prohibitive. Commenters noted 
that this result is reached even in situations where a bank concludes 
that a law is preempted, simply so that the bank may avoid litigation 
costs or anticipated reputational injury.
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    \24\ Illustrative of comments along these lines were those of 
banks who noted that various state laws would result in the 
following costs: (a) Approximately $44 million in start-up costs 
incurred by 6 banks as a result of a recently-enacted California law 
mandating a minimum payment warning; (b) 250 programming days 
required to change one of several computer systems that needed to be 
changed to comply with anti-predatory lending laws enacted in three 
states and the District of Columbia; and (c) $7.1 million in costs a 
bank would incur as a result of complying with mandated annual 
statements to credit card customers.
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    As previously noted, the elimination of legal and other barriers to 
interstate banking and interstate financial service operations has led 
a number of banking organizations to operate, in multi-state 
metropolitan statistical areas, and on a multi-state or nationwide 
basis, exacerbating the impact of the overlay of state and local 
standards and requirements on top of the Federal standards and OCC 
supervisory requirements already applicable to national bank 
operations. When these multi-jurisdictional banking organizations are 
subject to regulation by each individual state or municipality in which 
they conduct operations, the problems noted earlier are compounded.
    Even the efforts of a single state to regulate the operations of a 
national bank operating only within that state can have a detrimental 
effect on that bank's operations and consumers. As we explained in our 
recent preemption determination and order responding to National City 
Bank's inquiry concerning the Georgia Fair Lending Act (GFLA),\25\ the 
GFLA caused secondary market participants to cease purchasing certain 
Georgia mortgages and many mortgage lenders to stop making mortgage 
loans in Georgia. National banks have also been forced to withdraw from 
some products and markets in other states as a result of the impact of 
state and local restrictions on their activities.
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    \25\ See 68 FR 46264 (Aug. 5, 2003).
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    When national banks are unable to operate under uniform, 
consistent, and predictable standards, their business suffers, which 
negatively affects their safety and soundness. The application of 
multiple, often unpredictable, different state or local restrictions 
and requirements prevents them from operating in the manner authorized 
under Federal law, is costly and burdensome, interferes with their 
ability to plan their business and manage their risks, and subjects 
them to uncertain liabilities and potential exposure. In some cases, 
this deters them from making certain products available in certain 
jurisdictions.\26\
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    \26\ As was recently observed by Federal Reserve Board Chairman 
Alan Greenspan (in the context of amendments to the Fair Credit 
Reporting Act), ``[l]imits on the flow of information among 
financial market participants, or increased costs resulting from 
restrictions that differ based on geography, may lead to an increase 
in the price or a reduction in the availability of credit, as well 
as a reduction in the optimal sharing of risk and reward.'' Letter 
of February 28, 2003, from Alan Greenspan, Chairman, Board of 
Governors of the Federal Reserve System, to The Honorable Ruben 
Hinojosa (emphasis added).
---------------------------------------------------------------------------

    The OCC therefore is issuing this final rule in furtherance of its 
responsibility to enable national banks to operate to the full extent 
of their powers under Federal law, without interference from 
inconsistent state laws, consistent with the national character of the 
national banking system, and in furtherance of their safe and sound 
operations. The final rule does not entail any new powers for national 
banks or any expansion of their existing powers. Rather, we intend only 
to ensure the soundness and efficiency of national banks' operations by 
making clear the standards under which they do business.

B. Pursuant to 12 U.S.C. 93a and 371, the OCC May Adopt Regulations 
That Preempt State Law

    The OCC has ample authority to provide, by regulation, that types 
of state laws are not applicable to national banks. As mentioned 
earlier, 12 U.S.C. 93a grants the OCC comprehensive rulemaking 
authority to further its responsibilities, stating that--
    Except to the extent that authority to issue such rules and 
regulations has been expressly and exclusively granted to another 
regulatory agency, the Comptroller of the Currency is authorized to 
prescribe rules and regulations to carry out the responsibilities of 
the office * * *.\27\
---------------------------------------------------------------------------

    \27\ 12 U.S.C. 93a.
---------------------------------------------------------------------------

    This language is significantly broader than that customarily used 
to convey rulemaking authority to an agency, which is typically focused 
on a particular statute. This was recognized, some 20 years ago, by the 
United States Court of Appeals for the D.C. Circuit in

[[Page 1909]]

its decision confirming that 12 U.S.C. 93a authorizes the OCC to issue 
regulations preempting state law. In Conference of State Bank 
Supervisors v. Conover,\28\ the Conference of State Bank Supervisors 
(CSBS) sought to overturn a district court decision upholding OCC 
regulations that provided flexibility regarding the terms on which 
national banks may make or purchase adjustable rate mortgages (ARMs) 
and that preempted inconsistent state laws. The regulations provided 
generally that national banks may make or purchase ARMs without regard 
to state law limitations. The district court granted the OCC's motion 
for summary judgment on the ground that the regulations were within the 
scope of the OCC's rulemaking powers granted by Congress.
---------------------------------------------------------------------------

    \28\ 710 F.2d 878 (D.C. Cir. 1983).
---------------------------------------------------------------------------

    On appeal, the CSBS asserted that 12 U.S.C. 93a grants the OCC 
authority to issue only ``housekeeping'' procedural regulations. In 
support of this argument, the CSBS cited a remark from the legislative 
history of 12 U.S.C. 93a by Senator Proxmire that 12 U.S.C. 93a 
``carries with it no new authority to confer on national banks powers 
which they do not have under existing law.'' CSBS also cited a 
statement in the conference report that 12 U.S.C. 93a ``carries no 
authority [enabling the Comptroller] to permit otherwise impermissible 
activities of national banks with specific reference to the provisions 
of the McFadden Act and the Glass-Steagall Act.'' \29\
---------------------------------------------------------------------------

    \29\ Id. at 885 (emphasis in original).
---------------------------------------------------------------------------

    The Court of Appeals rejected the CSBS's contentions concerning the 
proper interpretation of 12 U.S.C. 93a. The Court of Appeals explained 
first that the challenged regulations (like this final rule) did not 
confer any new powers on national banks. Moreover,

[t]hat the Comptroller also saw fit to preempt those state laws that 
conflict with his responsibility to ensure the safety and soundness 
of the national banking system, see 12 U.S.C. Sec.  481, does not 
constitute an expansion of the powers of national banks.\30\
---------------------------------------------------------------------------

    \30\ Id. (emphasis in original).

Nor did the Court of Appeals find support for the CSBS's position in 
---------------------------------------------------------------------------
the conference report:

    As the ``specific reference'' to the McFadden and Glass-Steagall 
Acts indicates, the ``impermissible activities'' which the 
Comptroller is not empowered to permit are activities that are 
impermissible under federal, not state, law.\31\
---------------------------------------------------------------------------

    \31\ Id.

The court summarized its rationale for holding that 12 U.S.C. 93a 
---------------------------------------------------------------------------
authorized the OCC to issue the challenged regulations by saying:

    It bears repeating that the entire legislative scheme is one 
that contemplates the operation of state law only in the absence of 
federal law and where such state law does not conflict with the 
policies of the National Banking Act. So long as he does not 
authorize activities that run afoul of federal laws governing the 
activities of the national banks, therefore, the Comptroller has the 
power to preempt inconsistent state laws.\32\
---------------------------------------------------------------------------

    \32\ Id. at 878 (emphasis added).

    The authority under 12 U.S.C. 93a described by the court in CSBS v. 
Conover thus amply supports the adoption of regulations providing that 
specified types of state laws purporting to govern as applied to 
national banks' lending and deposit-taking activities are preempted.
    Under 12 U.S.C. 371, the OCC has the additional and specific 
authority to provide that the specified types of laws relating to 
national banks' real estate lending activities are preempted. As we 
have described and as recognized in CSBS v. Conover,\33\ 12 U.S.C. 371 
grants the OCC unique rulemaking authority with regard to national 
banks' real estate lending activities. That section states:

    [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.\34\
---------------------------------------------------------------------------

    \33\ In CSBS v. Conover, the court also held that the authority 
conferred by 12 U.S.C. 371, as the statute read at the time relevant 
to the court's decision, conferred authority upon the OCC to issue 
the preemptive regulations challenged in that case. The version of 
section 371 considered by the court authorized national banks to 
make real estate loans ``subject to such terms, conditions, and 
limitations'' as prescribed by the Comptroller by order, rule or 
regulations. The court said that the ``restrictions and 
requirements'' language contained in the statute today was ``not 
substantially different'' from the language that it was considering 
in that case. Id. at 884.
    \34\ 12 U.S.C. 371(a).

    The language and history of 12 U.S.C. 371 confirm the real estate 
lending powers of national banks and that only the OCC `` subject to 
other applicable Federal law `` and not the states may impose 
restrictions or requirements on national banks' exercise of those 
powers. The Federal powers conferred by 12 U.S.C. 371 are subject only 
``to section 1828(o) of this title and such restrictions and 
requirements as the Comptroller of the Currency may prescribe by 
regulation or order.'' \35\ Thus, the exercise of the powers granted by 
12 U.S.C. 371 is not conditioned on compliance with any state 
requirement, and state laws that attempt to confine or restrain 
national banks' real estate lending activities are inconsistent with 
national banks' real estate lending powers under 12 U.S.C. 371.
---------------------------------------------------------------------------

    \35\ Id. As noted supra at note 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. 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.
---------------------------------------------------------------------------

    This conclusion is consistent with the fact that national bank real 
estate lending authority has been extensively regulated at the Federal 
level since the power first was codified. Beginning with the enactment 
of the Federal Reserve Act of 1913,\36\ national banks' real estate 
lending authority has been governed by the express terms of 12 U.S.C. 
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.'' \37\ 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, 12 U.S.C. 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.
---------------------------------------------------------------------------

    \36\ Federal Reserve Act, Dec. 23, 1913, ch. 6, 38 Stat. 251, as 
amended.
    \37\ Id. section 24, 38 Stat. 273.
---------------------------------------------------------------------------

    In 1982, Congress removed these ``rigid statutory limitations'' 
\38\ in favor of a broad provision that is very similar to the current 
law and that authorized 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.'' \39\ 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.'' \40\ In 1991, Congress removed the term ``rule'' from this 
phrase and enacted an additional requirement, codified at 12 U.S.C.

[[Page 1910]]

1828(o), that national banks (and other insured depository 
institutions) conduct real estate lending pursuant to uniform standards 
adopted at the Federal level by regulation of the OCC and the other 
Federal banking agencies.\41\
---------------------------------------------------------------------------

    \38\ S. Rep. No. 97-536, at 27 (1982).
    \39\ Garn-St Germain Depository Institutions Act of 1982, Pub. 
L. 97-320, section 403, 96 Stat. 1469, 1510-11 (1982).
    \40\ S. Rep. No. 97-536, at 27 (1982).
    \41\ 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 12 CFR part 34.
---------------------------------------------------------------------------

    Thus, the history of national banks' real estate lending activities 
under 12 U.S.C. 371 is one of extensive Congressional involvement 
gradually giving way to a streamlined approach in which Congress has 
delegated broad rulemaking authority to the Comptroller. The two 
versions of 12 U.S.C. 371--namely, the lengthy and prescriptive 
approach prior to 1982 and the more recent statement of broad authority 
qualified only by reference to Federal law --may be seen as evolving 
articulations of the same idea.

C. The Preemption Standard Applied in This Final Rule Is Entirely 
Consistent With the Standards Articulated by the Supreme Court

    State laws are preempted by Federal law, and thus rendered invalid 
with respect to national banks, by operation of the Supremacy Clause of 
the U.S. Constitution.\42\ The Supreme Court has identified three ways 
in which this may occur. First, Congress can adopt express language 
setting forth the existence and scope of preemption.\43\ Second, 
Congress can adopt a framework for regulation that ``occupies the 
field'' and leaves no room for states to adopt supplemental laws.\44\ 
Third, preemption may be found when state law actually conflicts with 
Federal law. Conflict will be found when either: (i) compliance with 
both laws is a ``physical impossibility;'' \45\ or (ii) when the state 
law stands ``as an obstacle to the accomplishment and execution of the 
full purposes and objectives of Congress.'' \46\
---------------------------------------------------------------------------

    \42\ ``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.
    \43\ See Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977).
    \44\ See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 
(1947).
    \45\ Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 
143 (1963).
    \46\ Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Barnett Bank 
of Marion County, N.A. v. Nelson, 517 U.S. 25, 31 (1996) (quoting 
Hines).
---------------------------------------------------------------------------

    In Barnett Bank of Marion County v. Nelson,\47\ the Supreme Court 
articulated preemption standards used by the Supreme Court in the 
national bank context to determine, under the Supremacy Clause of the 
U.S. Constitution, whether Federal law conflicts with state law such 
that the state law is preempted. As observed by the Supreme Court in 
Barnett, a state law will be preempted if it conflicts with the 
exercise of a national bank's Federally authorized powers.
---------------------------------------------------------------------------

    \47\ 517 U.S. 25 (1996).
---------------------------------------------------------------------------

    The Supreme Court noted in Barnett the many formulations of the 
conflicts standard. The Court stated:
    In defining the pre-emptive scope of statutes and regulations 
granting a power to national banks, these cases take the view that 
normally Congress would not want States to forbid, or impair 
significantly, the exercise of a power that Congress explicitly 
granted. To say this is not to deprive States of the power to regulate 
national banks, where (unlike here) doing so does not prevent or 
significantly interfere with the national bank's exercise of its 
powers. See, e.g., Anderson Nat. Bank v. Luckett, 321 U.S. 233, 247-252 
(1944) (state statute administering abandoned deposit accounts did not 
``unlawful[ly] encroac[h] on the rights and privileges of national 
banks''); McClellan v. Chipman, 164 U.S. 347, 358 (1896) (application 
to national banks of state statute forbidding certain real estate 
transfers by insolvent transferees would not ``destro[y] or hampe[r]'' 
national banks'' functions); National Bank v. Commonwealth, 76 U.S. (9 
Wall.) 353, 362 (1869) (national banks subject to state law that does 
not ``interfere with, or impair [national banks'] efficiency in 
performing the functions by which they are designed to serve [the 
Federal] Government'').\48\
---------------------------------------------------------------------------

    \48\ Id. at 33-34. Certain commenters cite Nat'l Bank v. 
Commonwealth for the proposition that national banks are subject to 
state law. These commenters, however, omit the important caveat, 
quoted by the Barnett Court, that state law applies only where it 
does not ``interfere with, or impair [national banks'] efficiency in 
performing the functions by which they are designed to serve [the 
Federal] Government.''
---------------------------------------------------------------------------

    The variety of formulations quoted by the Court--``unlawfully 
encroach,'' ``hamper,'' ``interfere with or impair national banks' 
efficiency''--defeats any suggestion that any one phrase constitutes 
the exclusive standard for preemption. As the Supreme Court explained 
in Hines v. Davidowitz: \49\
---------------------------------------------------------------------------

    \49\ 312 U.S. 52 (1941).
---------------------------------------------------------------------------

    There is not--and from the very nature of the problem there cannot 
be--any rigid formula or rule which can be used as a universal pattern 
to determine the meaning and purpose of every act of Congress. This 
Court, in considering the validity of state laws in the light of 
treaties or federal laws touching the same subject, has made use of the 
following expressions: conflicting; contrary to; occupying the field; 
repugnance; difference; irreconcilability; inconsistency; violation; 
curtailment; and interference. But none of these expressions provides 
an infallible constitutional test or an exclusive constitutional 
yardstick. In the final analysis, there can be no one crystal clear 
distinctly marked formula. Our primary function is to determine 
whether, under the circumstances of this particular case, [the state 
law at issue] stands as an obstacle to the accomplishment and execution 
of the full purposes and objectives of Congress.\50\
---------------------------------------------------------------------------

    \50\ Id. at 67 (emphasis added) (citations omitted).
---------------------------------------------------------------------------

    Thus, in Hines, the Court recognized that the Supremacy Clause 
principles of preemption can be articulated in a wide variety of 
formulations that do not yield substantively different legal results. 
The variation among formulations that carry different linguistic 
connotations does not produce different legal outcomes.
    We have adopted in this final rule a statement of preemption 
principles that is consistent with the various formulations noted 
earlier. The phrasing used in the final rule--obstruct,\51\ impair,\52\ 
or condition \53\''--differs somewhat from what we proposed. This 
standard conveys the same substantive point as the proposed standard, 
however; that is, that state laws do not apply to national banks if 
they impermissibly contain a bank's exercise of a federally authorized 
power. The words of the final rule, which are drawn directly from 
applicable Supreme Court precedents, better convey the range of effects 
on national bank powers that the Court has found to be impermissible. 
The OCC intends this phrase as the distillation of the various 
preemption constructs articulated by the Supreme Court, as recognized 
in Hines and Barnett, and not as a replacement construct that is in any 
way inconsistent with those standards.
---------------------------------------------------------------------------

    \51\ See Hines, 312 U.S. at 76.
    \52\ See Nat'l Bank v. Commonwealth, 76 U.S. at 362; Davis v. 
Elmira Savings Bank, 161 U.S. 275, 283 (1896); McClellan, 164 U.S. 
at 357.
    \53\ See Barnett, 517 U.S. at 34; Franklin Nat'l Bank of 
Franklin Square v. New York, 347 U.S. 373, 375-79 (1954).
---------------------------------------------------------------------------

    In describing the proposal, we invited comment on whether it would 
be appropriate to assert occupation of the entire field of real estate 
lending. Some commenters strongly urged that we do so, and that we go 
beyond real estate lending to cover other lending and deposit-taking 
activities as well. Upon further consideration of this issue and

[[Page 1911]]

careful review of comments submitted pertaining to this point, we have 
concluded, as the Supreme Court recognized in Hines and reaffirmed in 
Barnett, that the effect of labeling of this nature is largely 
immaterial in the present circumstances. Thus, we decline to adopt the 
suggestion of these commenters that we declare that these regulations 
``occupy the field'' of national banks' real estate lending, other 
lending, and deposit-taking activities. We rely on our authority under 
both 12 U.S.C. 93a and 371, and to the extent that an issue arises 
concerning the application of a state law not specifically addressed in 
the final regulation, we retain the ability to address those questions 
through interpretation of the regulation, issuance of orders pursuant 
to our authority under 12 U.S.C. 371, or, if warranted by the 
significance of the issue, by rulemaking to amend the regulation.

V. Description of the Final Rule

A. Amendments to Part 34

    1. Section 34.3(a). The final rule retains the statement of 
national banks' real estate lending authority, now designated as Sec.  
34.3(a), that national banks may ``make, arrange, purchase, or sell 
loans or extensions of credit, or interests therein, that are secured 
by liens on, or interests in, real estate (real estate loans), subject 
to 12 U.S.C. 1828(o) and such restrictions and requirements as the 
Comptroller of the Currency may prescribe by regulation or order.''
    2. Section 34.3(b). New Sec.  34.3(b) adds an explicit safety and 
soundness-derived anti-predatory lending standard to the general 
statement of authority concerning lending. Many bank commenters voiced 
concern that the proposed anti-predatory lending standard, by 
prohibiting a national bank from making a loan based predominantly on 
the foreclosure value of a borrower's collateral without regard to the 
borrower's repayment ability, would also prohibit a national bank from 
engaging in legitimate, non-predatory lending activities. These 
commenters noted that reverse mortgage, small business, and high net 
worth loans are often made based on the value of the collateral.
    We have revised the anti-predatory lending standard in the final 
rule to clarify that it applies to consumer loans only, (i.e., loans 
for personal, family, or household purposes), and to clarify that it is 
intended to prevent borrowers from being unwittingly placed in a 
situation where repayment is unlikely without the lender seizing the 
collateral. Where the bargain agreed to by a borrower and a lender 
involves an understanding by the borrower that it is likely or expected 
that the collateral will be used to repay the debt, such as with a 
reverse mortgage, it clearly is not objectionable that the collateral 
will then be used in such a manner. Moreover, the final rule's anti-
predatory lending standard is not intended to apply to business lending 
or to situations where a borrower's net worth would support the loan 
under customary underwriting standards.
    Thus, we have revised the anti-predatory lending standard so that 
it focuses on consumer loans and permits a national bank to use a 
variety of reasonable methods to determine a borrower's ability to 
repay, including, for example, the borrower's current and expected 
income, current and expected cash flows, net worth, other relevant 
financial resources, current financial obligations, employment status, 
credit history, or other relevant factors.
    Several commenters urged the OCC to expressly affirm that a 
national bank's lending practices must be conducted in conformance with 
section 5 of the FTC Act, which makes unlawful ``unfair or deceptive 
acts or practices'' in interstate commerce,\54\ and regulations 
promulgated thereunder. As discussed in more detail in section VI of 
this preamble, the OCC has taken actions against national banks under 
the FTC Act where the OCC believed they were engaged in unfair or 
deceptive practices. As demonstrated by these actions, the OCC 
recognizes the importance of national banks and their operating 
subsidiaries acting in conformance with the standards contained in 
section 5 of the FTC Act. We therefore agree that an express reference 
to those standards in our regulation would be appropriate and have 
added it to the final rules.\55\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 45(a)(1).
    \55\ It is important to note here that we lack the authority to 
do what some commenters essentially urged, namely, to specify by 
regulation that particular practices, such as loan ``flipping'' or 
``equity stripping,'' are unfair or deceptive. While we have the 
ability to take enforcement actions against national banks if they 
engage in unfair or deceptive practices under section 5 of the FTC 
Act, the OCC does not have rulemaking authority to define specific 
practices as unfair or deceptive under section 5. See 15 U.S.C. 
57a(f).
---------------------------------------------------------------------------

    3. State laws that are preempted (Sec.  34.4(a)). Pursuant to 12 
U.S.C. 93a and 371, the final rule amends Sec.  34.4(a) to add to the 
existing regulatory list of types of state law restrictions and 
requirements that are not applicable to national banks. This list, 
promulgated under our authority ``to prescribe rules and regulations to 
carry out the responsibilities of the office'' and to prescribe the 
types of restrictions and requirements to which national banks' real 
estate lending activities shall be subject, reflects our experience 
with types of state laws that can materially affect and confine--and 
thus are inconsistent with--the exercise of national banks' real estate 
lending powers.\56\
---------------------------------------------------------------------------

    \56\ As we noted in our discussion of this list in the preamble 
to the proposal, the ``OCC and Federal courts have thus far 
concluded that a wide variety of state laws are preempted, either 
because the state laws fit within the express preemption provisions 
of an OCC regulation or because the laws conflict with a Federal 
power vested in national banks.'' See 68 FR 46119, 46122-46123. The 
list is also substantially identical to the types of laws specified 
in a comparable regulation of the OTS. See 12 CFR 560.2(b).
---------------------------------------------------------------------------

    The final rule revises slightly the introductory clause used in 
proposed Sec.  34.4(a) in order to conform this section more closely to 
the amended sections of part 7 discussed later in this preamble. Thus, 
the final rule provides: ``Except where made applicable by Federal law, 
state laws that obstruct, impair, or condition a national bank's 
ability to fully exercise its Federally authorized real estate lending 
powers do not apply to national banks.'' The final rule then expands 
the current list of the types of state law restrictions and 
requirements that are not applicable to national banks.
    Many of the supporting commenters requested that the final rule 
clarify the extent to which particular state or local laws that were 
not included in the proposal are preempted. For example, these 
commenters suggested that the final rule address particular state laws 
imposing various limitations on mortgage underwriting and servicing.
    We decline to address most of these suggestions with the level of 
specificity requested by the commenters. Identifying state laws in a 
more generic way avoids the impression that the regulations only cover 
state laws that appear on the list. The list of the types of preempted 
state laws is not intended to be exhaustive, and we retain the ability 
to address other types of state laws by order on a case-by-case basis, 
as appropriate, to make determinations whether they are preempted under 
the applicable standards.\57\
---------------------------------------------------------------------------

    \57\ See, e.g., OCC Determination and Order concerning the 
Georgia Fair Lending Act, supra footnote 25.
---------------------------------------------------------------------------

    4. State laws that are not preempted (Sec.  34.4(b)). Section 
34.4(b) also provides that certain types of state laws are not 
preempted and would apply to national banks to the extent that they are 
consistent with national banks' Federal authority to engage in real 
estate lending because their effect on the real estate

[[Page 1912]]

lending operations of national banks is only incidental. These types of 
laws generally pertain to contracts, rights to collect debts, 
acquisition and transfer of property, taxation, zoning, crimes, 
torts,\58\ and homestead rights. In addition, any other law the effect 
of which is incidental to national banks' lending authority or 
otherwise consistent with national banks' authority to engage in real 
estate lending would not be preempted.\59\ In general, these would be 
laws that do not attempt to regulate the manner or content of national 
banks' real estate lending, but that instead form the legal 
infrastructure that makes it practicable to exercise a permissible 
Federal power.
---------------------------------------------------------------------------

    \58\ See Bank of America v. City & County of San Francisco, 309 
F.3d 551, 559 (9th Cir. 2002).
    \59\ The label a state attaches to its laws will not affect the 
analysis of whether that law is preempted. For instance, laws 
related to the transfer of real property may contain provisions that 
give borrowers the right to ``cure'' a default upon acceleration of 
a loan if the lender has not foreclosed on the property securing the 
loan. Viewed one way, this could be seen as part of the state laws 
governing foreclosure, which historically have been within a state's 
purview. However, as we concluded in the OCC Determination and Order 
concerning the GFLA, to the extent that this type of law limits the 
ability of a national bank to adjust the terms of a particular class 
of loans once there has been a default, it would be a state law 
limitation ``concerning * * * (2) The schedule for the repayment of 
principal and interest; [or] (3) The term to maturity of the loan * 
* *'' 12 CFR 34.4(a). In such a situation, we would be governed by 
the effect of the state statute.
---------------------------------------------------------------------------

    One category of state law included in the proposed list of state 
laws generally not preempted was ``debt collection.'' Consistent with 
Supreme Court precedents addressing this type of state law,\60\ we have 
revised the language of the final rule to refer to national banks' 
``right to collect debts.''
---------------------------------------------------------------------------

    \60\ See, e.g., Nat'l Bank v. Commonwealth, 76 U.S. at 362 
(national banks ``are subject to the laws of the State, and are 
governed in their daily course of business far more by the laws of 
the State than of the nation. All their contracts are governed and 
construed by State laws. Their acquisition and transfer of property, 
their right to collect their debts, and their liability to be sued 
for debts, are all based on State law.'') (emphasis added); see also 
McClellan, 164 U.S. at 356-57 (quoting Nat'l Bank v. Commonwealth).
---------------------------------------------------------------------------

B. Amendments to Part 7--Deposit-Taking, Other Consumer Lending, and 
National Bank Operations

    The final rule adds three new sections to part 7: Sec.  7.4007 
regarding deposit-taking activities, Sec.  7.4008 regarding non-real 
estate lending activities, and Sec.  7.4009 regarding national bank 
operations. The structure of the amendments is the same for Sec. Sec.  
7.4007 and 7.4008 and is similar for Sec.  7.4009.
    For Sec.  7.4007, the final rule first sets out a statement of the 
authority to engage in the activity. Second, the final rule notes that 
state laws that obstruct, impair, or condition a national bank's 
ability to fully exercise the power in question are not applicable, and 
lists several types of state laws that are preempted. Types of state 
laws that are generally preempted under Sec.  7.4007 include state 
requirements concerning abandoned and dormant accounts, checking 
accounts, disclosure requirements, funds availability, savings account 
orders of withdrawal, state licensing or registration requirements, and 
special purpose savings services. Finally, the final rule lists types 
of state laws that, as a general matter, are not preempted. Examples of 
these laws include state laws concerning contract, rights to collect 
debt, tort, zoning, and property transfers. These lists are not 
intended to be exhaustive, and the OCC retains the ability to address 
other types of state laws on a case-by-case basis to make preemption 
determinations under the applicable standards.
    For Sec.  7.4008, the final rule also sets out a statement of the 
authority to engage in the activity (non-real estate lending), notes 
that state laws that obstruct, impair, or condition a national bank's 
ability to fully exercise this power are not applicable, and lists 
several types of state laws that are, or are not, preempted. Section 
7.4008 also includes a safety and soundness-based anti-predatory 
lending standard. Final Sec.  7.4008(b) states that ``[a] national bank 
shall not make a consumer loan subject to this Sec.  7.4008 based 
predominantly on the bank's realization of the foreclosure or 
liquidation value of the borrower's collateral, without regard to the 
borrower's ability to repay the loan according to its terms. A bank may 
use any reasonable method to determine a borrower's ability to repay, 
including, for example, the borrower's current and expected income, 
current and expected cash flows, net worth, other relevant financial 
resources, current financial obligations, employment status, credit 
history, or other relevant factors.'' Separately, Sec.  7.4008(c) also 
includes a statement that a national bank shall not engage in unfair or 
deceptive practices within the meaning of section 5 of the FTC Act and 
regulations promulgated thereunder in connection with making non-real 
estate related loans. The standards set forth in Sec.  7.4008(b) and 
(c), plus an array of Federal consumer protection standards,\61\ ensure 
that national banks are subject to consistent and uniform Federal 
standards, administered and enforced by the OCC, that provide strong 
and extensive customer protections and appropriate safety and 
soundness-based criteria for their lending activities.
---------------------------------------------------------------------------

    \61\ See supra note 10.
---------------------------------------------------------------------------

    In Sec.  7.4009, the final rule first states that national banks 
may exercise all powers authorized to them under Federal law.\62\ 
Second, the final rule states that except as otherwise made applicable 
by Federal law, state laws that obstruct, impair, or condition a 
national bank's ability to fully exercise its authorized powers do not 
apply to the national bank.\63\ Finally, the final rule lists several 
types of state laws that, as a general matter, are not preempted. For 
the reasons outlined earlier in the discussion of the amendments to 12 
CFR part 34, the reference to debt collection laws has been revised to 
refer to state laws concerning national banks' ``rights to collect 
debts.''
---------------------------------------------------------------------------

    \62\ As noted in the proposal, the OTS has issued a regulation 
providing generally that state laws purporting to address the 
operations of Federal savings associations are preempted. See 12 CFR 
545.2. The extent of Federal regulation and supervision of Federal 
savings associations under the Home Owners' Loan Act is 
substantially the same as for national banks under the national 
banking laws, a fact that warrants similar conclusions about the 
applicability of state laws to the conduct of the Federally 
authorized activities of both types of entities. Compare, e.g., 12 
U.S.C. 1464(a) (OTS authorities with respect to the organization, 
incorporation, examination, operation, regulation, and chartering of 
Federal savings associations) with 12 U.S.C. 21 (organization and 
formation of national banking associations), 12 U.S.C. 481 (OCC 
authority to examine national banks and their affiliates), 12 U.S.C. 
484 (OCC's exclusive visitorial authority), and 12 U.S.C. 93a (OCC 
authority to issue regulations).
    \63\ As noted previously, the final rule makes changes to the 
introductory clause concerning the applicability of state law in 12 
CFR 34.4(a), 7.4007(b), 7.4008(d), and 7.4009(b) to make the 
language of these sections more consistent with each other.
---------------------------------------------------------------------------

    The OCC's regulations adopted in this final rule address the 
applicability of state law with respect to a number of specific types 
of activities. The question may persist, however, about the extent to 
which state law may permissibly govern powers or activities that have 
not been addressed by Federal court precedents or OCC opinions or 
orders. Accordingly, as noted earlier, new Sec.  7.4009 provides that 
state laws do not apply to national banks if they obstruct, impair, or 
condition a national bank's ability to fully exercise the powers 
authorized to it under Federal law, including the content of those 
activities and the manner in which and standards whereby they are 
conducted.
    As explained previously, in some circumstances, of course, Federal 
law directs the application of state standards to a national bank. The 
wording of Sec.  7.4009 reflects that a Federal statute may require the 
application of state

[[Page 1913]]

law,\64\ or it may incorporate--or ``Federalize''--state standards.\65\ 
In those circumstances, the state standard obviously applies. State law 
may also apply if it only incidentally affects a national bank's 
Federally authorized powers or if it is otherwise consistent with 
national banks' uniquely Federal status. Like the other provisions of 
this final rule, Sec.  7.4009 recognizes the potential applicability of 
state law in these circumstances. This approach is consistent with the 
Supreme Court's observation that national banks ``are governed in their 
daily course of business far more by the laws of the state than of the 
nation.'' \66\ However, as noted previously, these types of laws 
typically do not regulate the manner or content of the business of 
banking authorized for national banks, but rather establish the legal 
infrastructure that makes practicable the conduct of that business.
---------------------------------------------------------------------------

    \64\ See, e.g., 15 U.S.C. 6711 (insurance activities of national 
banks are ``functionally regulated'' by the states, subject to the 
provisions on the operation of state law contained in section 104 of 
the Gramm-Leach-Bliley Act).
    \65\ See, e.g., 12 U.S.C. 92a (permissible fiduciary activities 
for national banks determined by reference to state law).
    \66\ Nat'l Bank v. Commonwealth, 76 U.S. at 362 (holding that 
shares held by shareholders of a national bank were lawfully subject 
to state taxation).
---------------------------------------------------------------------------

C. Application of Amendments to Operating Subsidiaries

    As a matter of Federal law, national bank operating subsidiaries 
conduct their activities under a Federal license, subject to the same 
terms and conditions as apply to the parent banks, except where Federal 
law provides otherwise. See 12 CFR 5.34 and 7.4006. See also 12 CFR 
34.1(b)(real estate activities specifically).\67\ Thus, by virtue of 
preexisting OCC regulations, the changes to parts 7 and 34, including 
the new anti-predatory lending standards applicable to lending 
activities, apply to both national banks and their operating 
subsidiaries. The final rule makes no change to these existing 
provisions.
---------------------------------------------------------------------------

    \67\ For a detailed discussion of this issue, see the OCC's 
visitorial powers rulemaking also published today in the Federal 
Register.
---------------------------------------------------------------------------

VI. The OCC's Commitment to Fair Treatment of National Bank Customers 
and High Standards of National Bank Operations

    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. We will not 
tolerate such practices by national banks and their operating 
subsidiaries. Our Advisory Letters on predatory lending,\68\ our 
pioneering enforcement positions resulting in substantial restitution 
to affected consumers, and the anti-predatory lending standards adopted 
in this final rule reflect our commitment that national banks operate 
pursuant to high standards of integrity in all respects. The provisions 
of this final rule, clarifying that certain state laws are not 
applicable to national banks' operations, do not undermine the 
application of these standards to all national banks, for the 
protection of all national bank customers--wherever they are located.
---------------------------------------------------------------------------

    \68\ See supra note 8.
---------------------------------------------------------------------------

    Advisory Letters 2003-2, which addresses loan originations, and 
2003-3, which addresses loan purchases and the use of third party loan 
brokers, 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 the Homeowners Equity Protection Act of 1994 
(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 or deceptive practices that violate the FTC Act.
    Moreover, our enforcement record, including the OCC's pioneering 
actions using the FTC Act to address consumer abuses that were not 
specifically prohibited by regulation, demonstrates our commitment to 
keeping abusive practices out of the national banking system. For 
example, In the Matter of Providian Nat'l Bank, Tilton, New 
Hampshire,\69\ pursuant to the FTC Act, the OCC required payment by a 
national bank to consumers in excess of $300 million and imposed 
numerous conditions on the conduct of future business. Since the 
Providian settlement in 2000, the OCC has taken action under the FTC 
Act to address unfair or deceptive practices and consumer harm 
involving five other national banks.\70\
---------------------------------------------------------------------------

    \69\ Enforcement Action 2000-53 (June 28, 2000), available at 
the OCC's Web site in the ``Popular FOIA Requests'' section at 
http://www.occ.treas.gov/foia/foiadocs.htm.
    \70\ See In the Matter of First Consumers National Bank, 
Beaverton, Oregon, Enforcement Action 2003-100 (required restitution 
of annual fees and overlimit fees for credit cards); In the Matter 
of Household Bank (SB), N.A., Las Vegas, Nevada, Enforcement Action 
2003-17 (required restitution regarding private label credit cards); 
In the Matter of First National Bank in Brookings, Brookings, South 
Dakota, Enforcement Action 2003-1 (required restitution regarding 
credit cards); In the Matter of First National Bank of Marin, Las 
Vegas, Nevada, Enforcement Action 2001-97 (restitution regarding 
credit cards); and In the Matter of Direct Merchants Credit Card 
Bank, N.A., Scottsdale, Arizona, Enforcement Action 2001-24 
(restitution regarding credit cards). These orders can be found on 
the OCC's Web site within the ``Popular FOIA Requests'' section at 
http://www.occ.treas.gov/foia/foiadocs.htm.
---------------------------------------------------------------------------

    Most recently, on November 7, 2003, the OCC entered into a consent 
order with Clear Lake National Bank that requires the bank to reimburse 
fees and interest charged to consumers in a series of abusive home 
equity loans. More than $100,000 will be paid to 30 or more borrowers. 
This is the first case brought by a Federal regulator under the FTC Act 
that cites the unfair nature of the terms of the loan. The OCC also 
found that the loans violated HOEPA, the Truth in Lending Act, and Real 
Estate Settlement Procedures Act.\71\
---------------------------------------------------------------------------

    \71\ See In the Matter of Clear Lake National Bank, San Antonio, 
Texas, Enforcement Action 2003-135 (Nov. 7, 2003), available at 
http://www.occ.treas.gov/FTP/EAs/ea2003-135.pdf. We believe these 
enforcement actions, which have generated hundreds of millions of 
dollars for consumers in restitution, also demonstrate that the OCC 
has the resources to enforce applicable laws. Indeed, as recently 
observed by the Superior Court of Arizona, Maricopa County, in an 
action brought by Arizona against a national bank, among others, the 
restitution and remedial action ordered by the OCC in that matter 
against the bank was ``comprehensive and significantly broader in 
scope that that available through [the] state court proceedings.'' 
State of Arizona v. Hispanic Air Conditioning and Heating, Inc., CV 
2000-003625, Ruling at 27, Conclusions of Law, paragraph 50 (Aug. 
25, 2003).
---------------------------------------------------------------------------

    The OCC also has moved aggressively against national banks engaged 
in payday lending programs that involved consumer abuses. Specifically, 
we concluded four enforcement actions against national banks that had 
entered into contracts with payday lenders for loan originations, and 
in each case ordered the bank to terminate the relationship with the 
payday lender.\72\
---------------------------------------------------------------------------

    \72\ See In the Matter of Peoples National Bank, Paris, Texas, 
Enforcement Action 2003-2; In the Matter of First National Bank in 
Brookings, Brookings, South Dakota, Enforcement Action 2003-1; In 
the Matter of Goleta National Bank, Goleta, California, Enforcement 
Action 2002-93; and In the Matter of Eagle National Bank, Upper 
Darby, Pennsylvania, Enforcement Action 2001-104. These orders can 
also be found on the OCC's Web site within the ``Popular FOIA 
Requests'' section at http://www.occ.treas.gov/foia/foiadocs.htm.

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

[[Page 1914]]

    Other than these isolated incidences of abusive practices that have 
triggered the OCC's aggressive supervisory response, evidence that 
national banks are engaged in predatory lending practices is scant. 
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 such practices are occurring in the national 
banking system to any significant degree. Although several of the 
commenters suggested this conclusion is implausible given the 
significant share of the lending market occupied by national banks, 
this observation is consistent with an extensive study of predatory 
lending conducted by the Department of Housing and Urban Development 
(HUD) and the Treasury Department,\73\ and even with comments submitted 
in connection with an OTS rulemaking concerning preemption of state 
lending standards by 46 State Attorneys General.
---------------------------------------------------------------------------

    \73\ 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), 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.
---------------------------------------------------------------------------

    Less than one year ago, nearly two dozen State Attorneys General 
signed a brief in litigation that reached the same conclusion. That 
case involved a revised regulation issued by the Office of Thrift 
Supervision 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 retain preemption of state laws for supervised depository 
institutions and their subsidiaries but not for unsupervised housing 
creditors, 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.\74\
---------------------------------------------------------------------------

    \74\ Brief for Amicus Curiae State Attorneys General, Nat'l Home 
Equity Mortgage Ass'n v. OTS, Civil Action No. 02-2506 (GK) (D.D.C.) 
at 10-11 (emphasis added).
---------------------------------------------------------------------------

    It is relevant for purposes of this final rule that the preemption 
regulations adopted by the OCC are substantially identical to the 
preemption regulations of the OTS that have been applicable to Federal 
thrifts for a number of years. It does not appear from public 
commentary--nor have the state officials indicated--that OTS preemption 
regulations have undermined the protection of customers of Federal 
thrifts. In their brief in the OTS litigation described above, the 
State Attorneys General referenced ``the burdens of federal 
supervision,'' in concluding that there ``clearly is a substantial 
basis for OTS's distinction'' \75\ between its supervised institutions 
and state housing creditors.
---------------------------------------------------------------------------

    \75\ Id. at 10.
---------------------------------------------------------------------------

    These considerations are equally applicable in the context of 
national banks, and were recognized, again, by all 50 State Attorneys 
General, in their comment letter to the OCC on this very regulation, 
which stated:
    It is true that most complaints and state enforcement actions 
involving mortgage lending practices have not been directed at banks. 
However, most major subprime mortgage lenders are now subsidiaries of 
bank holding companies, (although not direct bank operating 
subsidiaries).\76\
---------------------------------------------------------------------------

    \76\ National Association of Attorneys General comment letter on 
the proposal at 10 (Oct. 6, 2003) (emphasis added).
---------------------------------------------------------------------------

    The OCC is firmly committed to assuring that abusive practices--
whether in connection with mortgage lending or other national bank 
activities--continue to have no place in the national banking system.

VII. Regulatory Analysis

CDRI Act Delayed Effective Date

    This final rule takes effect 30 days after the date of its 
publication in the Federal Register, consistent with the delayed 
effective date requirement of the Administrative Procedure Act. See 5. 
U.S.C. 553(d). Section 302 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (CDRI Act), 12 U.S.C. 4802(b), 
provides that regulations that impose additional reporting, disclosure, 
or other requirements on insured depository institutions may not take 
effect before the first day of the quarter following publication unless 
the agency finds that there is good cause to make the rule effective at 
an earlier date. The regulations in this final rule require national 
banks to adhere to explicit safety and soundness-based anti-predatory 
lending standards. These standards prohibit national banks from 
engaging in certain harmful lending practices, thereby benefiting 
consumers. The final rule imposes no additional reporting, disclosure, 
or other requirements on national banks. Accordingly, in order for the 
benefits to become available as soon as possible, the OCC finds that 
there is good cause to dispense with the requirements of the CDRI Act.

Regulatory Flexibility Act

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

Executive Order 12866

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

Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (2 U.S.C. 1532) (Unfunded Mandates Act), requires that an agency 
prepare a budgetary impact statement

[[Page 1915]]

before promulgating any rule likely to result in a Federal mandate that 
may result in the expenditure by State, local, and tribal governments, 
in the aggregate, or by the private sector of $100 million or more in 
any one year. If a budgetary impact statement is required, section 205 
of the Unfunded Mandates Act also requires an agency to identify and 
consider a reasonable number of regulatory alternatives before 
promulgating a rule. The OCC has determined that this final rule will 
not result in expenditures by State, local, and tribal governments, or 
by the private sector, of $100 million or more in any one year. 
Accordingly, this rulemaking is not subject to section 202 of the 
Unfunded Mandates Act.

Executive Order 13132

    Executive Order 13132, entitled ``Federalism'' (Order), requires 
Federal agencies, including the OCC, to certify their compliance with 
that Order when they transmit to the Office of Management and Budget 
any draft final regulation that has Federalism implications. Under the 
Order, a regulation has Federalism implications if it has ``substantial 
direct effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government.'' In the case 
of a regulation that has Federalism implications and that preempts 
state law, the Order imposes certain consultation requirements with 
state and local officials; requires publication in the preamble of a 
Federalism summary impact statement; and requires the OCC to make 
available to the Director of the Office of Management and Budget any 
written communications submitted by state and local officials. By the 
terms of the Order, these requirements apply to the extent that they 
are practicable and permitted by law and, to that extent, must be 
satisfied before the OCC promulgates a final regulation.
    In the proposal, we noted that the regulation may have Federalism 
implications. Therefore, in formulating the proposal and the final 
rule, the OCC has adhered to the fundamental Federalism principles and 
the Federalism policymaking criteria. Moreover, the OCC has satisfied 
the requirements set forth in the Order for regulations that have 
Federalism implications and preempt state law. The steps taken to 
comply with these requirements are set forth below.
    Consultation. The Order requires that, to the extent practicable 
and permitted by law, no agency shall promulgate any regulation that 
has Federalism implications and that preempts state law unless, prior 
to the formal promulgation of the regulation, the agency consults with 
state and local officials early in the process of developing the 
proposal. We have consulted with state and local officials on the 
issues addressed herein through the rulemaking process. Following the 
publication of the proposal, representatives from the Conference of 
State Bank Supervisors (CSBS) met with the OCC to clarify their 
understanding of the proposal and, subsequently, the CSBS submitted a 
detailed comment letter regarding the proposal. As mentioned 
previously, additional comments were also submitted on the proposal by 
other state and local officials and state banking regulators. Pursuant 
to the Order, we will make these comments available to the Director of 
the OMB. Subsequent, public statements by representatives of the CSBS 
have restated their concerns, and CSBS representatives have further 
discussed these concerns with the OCC on several additional occasions.
    In addition to consultation, the Order requires a Federalism 
summary impact statement that addresses the following:
    Nature of concerns expressed. The Order requires a summary of the 
nature of the concerns of the state and local officials and the 
agency's position supporting the need to issue the regulation. The 
nature of the state and local official commenters' concerns and the 
OCC's position supporting the need to issue the regulation are set 
forth in the preamble, but may be summarized as follows. Broadly 
speaking, the states disagree with our interpretation of the applicable 
law, they are concerned about the impact the rule will have on the dual 
banking system, and they are concerned about the ability of the OCC to 
protect consumers adequately.
    Extent to which the concerns have been addressed. The Order 
requires a statement of the extent to which the concerns of state and 
local officials have been met.
    a. There is fundamental disagreement between state and local 
officials and the OCC regarding preemption in the national bank 
context. For the reasons set forth in the materials that precede this 
Federalism impact statement, we believe that this final rule is 
necessary to enable national banks to operate to the full extent of 
their powers under Federal law, and without interference from 
inconsistent state laws; consistent with the national character of the 
national banks; and in furtherance of their safe and sound operations. 
We also believe that this final rule has ample support in statute and 
judicial precedent. The concerns of the state and local officials could 
only be fully met if the OCC were to take a position that is contrary 
to Federal law and judicial precedent. Nevertheless, to respond to some 
of the issues raised, the language in this final regulation has been 
refined, and this preamble further explains the standards used to 
determine when preemption occurs and the criteria for when state laws 
generally would not be preempted.
    b. Similarly, we fundamentally disagree with the state and local 
officials about whether this final rule will undermine the dual banking 
system. As discussed in the OCC's visitorial powers rulemaking also 
published today in the Federal Register, differences in national and 
state bank powers and in the supervision and regulation of national and 
state banks are not inconsistent with the dual banking system; rather, 
they are the defining characteristics of it. The dual banking system is 
universally understood to refer to the chartering and supervision of 
state-chartered banks by state authorities and the chartering and 
supervision of national banks by Federal authority, the OCC. Thus, we 
believe that the final rule preserves, rather than undermines, the dual 
banking system.
    c. Finally, we stand ready to work with the states in the 
enforcement of applicable laws. The OCC has extended invitations to 
state Attorneys General and state banking departments to enter into 
discussions that would lead to a memorandum of understanding about the 
handling of consumer complaints and the pursuit of remedies, and we 
remain eager to do so. Moreover, as discussed in the preamble, we 
believe the OCC has the resources to enforce applicable laws, as is 
evidenced by the enforcement actions that have generated hundreds of 
millions of dollars for consumers in restitution, that have required 
national banks to disassociate themselves from payday lenders, and that 
have ordered national banks to stop abusive practices. Thus, the OCC 
has ample legal authority and resources to ensure that consumers are 
adequately protected.

List of Subjects

12 CFR Part 7

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

12 CFR Part 34

    Mortgages, National banks, Real estate appraisals, Real estate 
lending

[[Page 1916]]

standards, Reporting and recordkeeping requirements.

Authority and Issuance

0
For the reasons set forth in the preamble, parts 7 and 34 of chapter I 
of title 12 of the Code of Federal Regulations are amended as follows:

PART 7--BANK ACTIVITIES AND OPERATIONS

0
1. The authority citation for part 7 is revised to read as follows:

    Authority: 12 U.S.C. 1 et seq., 71, 71a, 92, 92a, 93, 93a, 481, 
484, and 1818.

Subpart D--Preemption

0
2. A new Sec.  7.4007 is added to read as follows:


Sec.  7.4007  Deposit-taking.

    (a) Authority of national banks. A national bank may receive 
deposits and engage in any activity incidental to receiving deposits, 
including issuing evidence of accounts, subject to such terms, 
conditions, and limitations prescribed by the Comptroller of the 
Currency and any other applicable Federal law.
    (b) Applicability of state law. (1) Except where made applicable by 
Federal law, state laws that obstruct, impair, or condition a national 
bank's ability to fully exercise its Federally authorized deposit-
taking powers are not applicable to national banks.
    (2) A national bank may exercise its deposit-taking powers without 
regard to state law limitations concerning:
    (i) Abandoned and dormant accounts;\3\
---------------------------------------------------------------------------

    \3\ This does not apply to state laws of the type upheld by the 
United States Supreme Court in Anderson Nat'l Bank v. Luckett, 321 
U.S. 233 (1944), which obligate a national bank to ``pay [deposits] 
to the persons entitled to demand payment according to the law of 
the state where it does business.'' Id. at 248-249.
---------------------------------------------------------------------------

    (ii) Checking accounts;
    (iii) Disclosure requirements;
    (iv) Funds availability;
    (v) Savings account orders of withdrawal;
    (vi) State licensing or registration requirements (except for 
purposes of service of process); and
    (vii) Special purpose savings services; \4\
---------------------------------------------------------------------------

    \4\ State laws purporting to regulate national bank fees and 
charges are addressed in 12 CFR 7.4002.
---------------------------------------------------------------------------

    (c) State laws that are not preempted. State laws on the following 
subjects are not inconsistent with the deposit-taking powers of 
national banks and apply to national banks to the extent that they only 
incidentally affect the exercise of national banks' deposit-taking 
powers:
    (1) Contracts;
    (2) Torts;
    (3) Criminal law; \5\
---------------------------------------------------------------------------

    \5\ But see the distinction drawn by the Supreme Court in Easton 
v. Iowa, 188 U.S. 220, 238 (1903) between ``crimes defined and 
punishable at common law or by the general statutes of a state and 
crimes and offences cognizable under the authority of the United 
States.'' The Court stated that ``[u]ndoubtedly a state has the 
legitimate power to define and punish crimes by general laws 
applicable to all persons within its jurisdiction * * *. But it is 
without lawful power to make such special laws applicable to banks 
organized and operating under the laws of the United States.'' Id. 
at 239 (holding that Federal law governing the operations of 
national banks preempted a state criminal law prohibiting insolvent 
banks from accepting deposits).
---------------------------------------------------------------------------

    (4) Rights to collect debts;
    (5) Acquisition and transfer of property;
    (6) Taxation;
    (7) Zoning; and
    (8) Any other law the effect of which the OCC determines to be 
incidental to the deposit-taking operations of national banks or 
otherwise consistent with the powers set out in paragraph (a) of this 
section.

0
3. A new Sec.  7.4008 is added to read as follows:


Sec.  7.4008  Lending.

    (a) Authority of national banks. A national bank may make, sell, 
purchase, participate in, or otherwise deal in loans and interests in 
loans that are not secured by liens on, or interests in, real estate, 
subject to such terms, conditions, and limitations prescribed by the 
Comptroller of the Currency and any other applicable Federal law.
    (b) Standards for loans. A national bank shall not make a consumer 
loan subject to this Sec.  7.4008 based predominantly on the bank's 
realization of the foreclosure or liquidation value of the borrower's 
collateral, without regard to the borrower's ability to repay the loan 
according to its terms. A bank may use any reasonable method to 
determine a borrower's ability to repay, including, for example, the 
borrower's current and expected income, current and expected cash 
flows, net worth, other relevant financial resources, current financial 
obligations, employment status, credit history, or other relevant 
factors.
    (c) Unfair and deceptive practices. A national bank shall not 
engage in unfair or deceptive practices within the meaning of section 5 
of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1), and 
regulations promulgated thereunder in connection with loans made under 
this Sec.  7.4008.
    (d) Applicability of state law. (1) Except where made applicable by 
Federal law, state laws that obstruct, impair, or condition a national 
bank's ability to fully exercise its Federally authorized non-real 
estate lending powers are not applicable to national banks.
    (2) A national bank may make non-real estate loans without regard 
to state law limitations concerning:
    (i) Licensing, registration (except for purposes of service of 
process), filings, or reports by creditors;
    (ii) The ability of a creditor to require or obtain insurance for 
collateral or other credit enhancements or risk mitigants, in 
furtherance of safe and sound banking practices;
    (iii) Loan-to-value ratios;
    (iv) The terms of credit, including the schedule for repayment of 
principal and interest, amortization of loans, balance, payments due, 
minimum payments, or term to maturity of the loan, including the 
circumstances under which a loan may be called due and payable upon the 
passage of time or a specified event external to the loan;
    (v) Escrow accounts, impound accounts, and similar accounts;
    (vi) Security property, including leaseholds;
    (vii) Access to, and use of, credit reports;
    (viii) Disclosure and advertising, including laws requiring 
specific statements, information, or other content to be included in 
credit application forms, credit solicitations, billing statements, 
credit contracts, or other credit-related documents;
    (ix) Disbursements and repayments; and
    (x) Rates of interest on loans.\6\
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    \6\ The limitations on charges that comprise rates of interest 
on loans by national banks are determined under Federal law. See 12 
U.S.C. 85; 12 CFR 7.4001. State laws purporting to regulate national 
bank fees and charges that do not constitute interest are addressed 
in 12 CFR 7.4002.
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    (e) State laws that are not preempted. State laws on the following 
subjects are not inconsistent with the non-real estate lending powers 
of national banks and apply to national banks to the extent that they 
only incidentally affect the exercise of national banks' non-real 
estate lending powers:
    (1) Contracts;
    (2) Torts;
    (3) Criminal law;\7\
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    \7\ See supra note 5 regarding the distinction drawn by the 
Supreme Court in Easton v. Iowa, 188 U.S. 220, 238 (1903) between 
``crimes defined and punishable at common law or by the general 
statutes of a state and crimes and offences cognizable under the 
authority of the United States.''
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    (4) Rights to collect debts;
    (5) Acquisition and transfer of property;
    (6) Taxation;
    (7) Zoning; and

[[Page 1917]]

    (8) Any other law the effect of which the OCC determines to be 
incidental to the non-real estate lending operations of national banks 
or otherwise consistent with the powers set out in paragraph (a) of 
this section.

0
4. A new Sec.  7.4009 is added to read as follows:


Sec.  7.4009  Applicability of state law to national bank operations.

    (a) Authority of national banks. A national bank may exercise all 
powers authorized to it under Federal law, including conducting any 
activity that is part of, or incidental to, the business of banking, 
subject to such terms, conditions, and limitations prescribed by the 
Comptroller of the Currency and any applicable Federal law.
    (b) Applicability of state law. Except where made applicable by 
Federal law, state laws that obstruct, impair, or condition a national 
bank's ability to fully exercise its powers to conduct activities 
authorized under Federal law do not apply to national banks.
    (c) Applicability of state law to particular national bank 
activities. (1) The provisions of this section govern with respect to 
any national bank power or aspect of a national bank's operations that 
is not covered by another OCC regulation specifically addressing the 
applicability of state law.
    (2) State laws on the following subjects are not inconsistent with 
the powers of national banks and apply to national banks to the extent 
that they only incidentally affect the exercise of national bank 
powers:
    (i) Contracts;
    (ii) Torts;
    (iii) Criminal law \8\
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    \8\ 8 Id.
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    (iv) Rights to collect debts;
    (v) Acquisition and transfer of property;
    (vi) Taxation;
    (vii) Zoning; and
    (viii) Any other law the effect of which the OCC determines to be 
incidental to the exercise of national bank powers or otherwise 
consistent with the powers set out in paragraph (a) of this section.

PART 34--REAL ESTATE LENDING AND APPRAISALS

Subpart A--General

0
5. The authority citation for part 34 continues to read as follows:

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

0
6. In Sec.  34.3, the existing text is designated as paragraph (a), and 
new paragraphs (b) and (c) are added to read as follows:


Sec.  34.3  General rule.

* * * * *
    (b) A national bank shall not make a consumer loan subject to this 
subpart based predominantly on the bank's realization of the 
foreclosure or liquidation value of the borrower's collateral, without 
regard to the borrower's ability to repay the loan according to its 
terms. A bank may use any reasonable method to determine a borrower's 
ability to repay, including, for example, the borrower's current and 
expected income, current and expected cash flows, net worth, other 
relevant financial resources, current financial obligations, employment 
status, credit history, or other relevant factors.
    (c) A national bank shall not engage in unfair or deceptive 
practices within the meaning of section 5 of the Federal Trade 
Commission Act, 15 U.S.C. 45(a)(1), and regulations promulgated 
thereunder in connection with loans made under this part.

0
7. Section 34.4 is revised to read as follows:


Sec.  34.4  Applicability of state law.

    (a) Except where made applicable by Federal law, state laws that 
obstruct, impair, or condition a national bank's ability to fully 
exercise its Federally authorized real estate lending powers do not 
apply to national banks. Specifically, a national bank may make real 
estate loans under 12 U.S.C. 371 and Sec.  34.3, without regard to 
state law limitations concerning:
    (1) Licensing, registration (except for purposes of service of 
process), filings, or reports by creditors;
    (2) The ability of a creditor to require or obtain private mortgage 
insurance, insurance for other collateral, or other credit enhancements 
or risk mitigants, in furtherance of safe and sound banking practices;
    (3) Loan-to-value ratios;
    (4) The terms of credit, including schedule for repayment of 
principal and interest, amortization of loans, balance, payments due, 
minimum payments, or term to maturity of the loan, including the 
circumstances under which a loan may be called due and payable upon the 
passage of time or a specified event external to the loan;
    (5) The aggregate amount of funds that may be loaned upon the 
security of real estate;
    (6) Escrow accounts, impound accounts, and similar accounts;
    (7) Security property, including leaseholds;
    (8) Access to, and use of, credit reports;
    (9) Disclosure and advertising, including laws requiring specific 
statements, information, or other content to be included in credit 
application forms, credit solicitations, billing statements, credit 
contracts, or other credit-related documents;
    (10) Processing, origination, servicing, sale or purchase of, or 
investment or participation in, mortgages;
    (11) Disbursements and repayments;
    (12) Rates of interest on loans;\1\
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    \1\ The limitations on charges that comprise rates of interest 
on loans by national banks are determined under Federal law. See 12 
U.S.C. 85 and 1735f-7a; 12 CFR 7.4001. State laws purporting to 
regulate national bank fees and charges that do not constitute 
interest are addressed in 12 CFR 7.4002.
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    (13) Due-on-sale clauses except to the extent provided in 12 U.S.C. 
1701j-3 and 12 CFR part 591; and
    (14) Covenants and restrictions that must be contained in a lease 
to qualify the leasehold as acceptable security for a real estate loan.
    (b) State laws on the following subjects are not inconsistent with 
the real estate lending powers of national banks and apply to national 
banks to the extent that they only incidentally affect the exercise of 
national banks' real estate lending powers:
    (1) Contracts;
    (2) Torts;
    (3) Criminal law; \2\
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    \2\ But see the distinction drawn by the Supreme Court in Easton 
v. Iowa, 188 U.S. 220, 238 (1903) between ``crimes defined and 
punishable at common law or by the general statutes of a state and 
crimes and offences cognizable under the authority of the United 
States.'' The Court stated that ``[u]ndoubtedly a state has the 
legitimate power to define and punish crimes by general laws 
applicable to all persons within its jurisdiction * * *. But it is 
without lawful power to make such special laws applicable to banks 
organized and operating under the laws of the United States.'' Id. 
at 239 (holding that Federal law governing the operations of 
national banks preempted a state criminal law prohibiting insolvent 
banks from accepting deposits).
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    (4) Homestead laws specified in 12 U.S.C. 1462a(f);
    (5) Rights to collect debts;
    (6) Acquisition and transfer of real property;
    (7) Taxation;
    (8) Zoning; and
    (9) Any other law the effect of which the OCC determines to be 
incidental to the real estate lending operations of national banks or 
otherwise consistent with the powers and purposes set out in Sec.  
34.3(a).

    Dated: January 6, 2004.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 04-586 Filed 1-12-04; 8:45 am]
BILLING CODE 4810-33-P