NCSL Letter to OCC on Preemption Proposed Rule, October 6, 2003

Regulatory Preemption: The federal banking regulatory -- the Office of the Comptroller of the Currency -- has proposed rule would preempt virtually all state banking and financial services laws for national banks and their diverse range of non-bank, corporate operating subsidiaries. NCSL submitted the following comment letter in opposition to the proposed preemption rule.

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National Conference of State Legislatures

October 6, 2003

The Honorable John D. Hawke, Jr.
Comptroller of the Currency
250 E Street, S.W.
Public Information Room, Mailstop 1-5
Washington, D.C. 21219
VIA EMAIL: regs.comments@occ.treas.gov

Attention: Docket No. 03-16; Notice of Proposed Rulemaking, 68 Fed. Reg. 46119 (2003)

Dear Mr. Hawke:

On behalf of the National Conference of State Legislatures (NCSL), we write to express strong opposition to the current preemption proposal published by the Office of the Comptroller of the Currency (OCC) on August 5, 2003. The proposed rule threatens to seriously undermine the unique American dual banking system; to concentrate power in a centralized, European-style regulatory system; and to shield national banks and their subsidiaries from state consumer protections and enforcement. Moreover, the OCC lacks the authority to implement the sweeping preemption contained in the proposed rule. The proposal should be withdrawn.

The OCC proposed rule would preempt virtually all state banking and financial services laws for national banks and their diverse range of non-bank, corporate operating subsidiaries. Specifically, the proposal would preempt all state laws that apply to the activities of national banks and their operating subsidiaries, unless (i) Congress expressly has enacted state-law standards in federal statute, or (ii) particular state laws only have an "incidental" effect on national banks.

The dual banking system is critical to the strength and vitality of the U.S. economy. Unlike in Canada, Europe and other developed countries, the American system has promoted the development of a decentralized banking market where banks of widely different sizes efficiently distribute credit to all sectors of the U.S. economy to serve the diverse needs of local, regional, and national markets. While banking systems outside the United States are dominated by a handful of national banks, America is home to more than 9,000 banks-the vast majority of which are state chartered. Regulatory decentralization is especially important to the strength of community banking, which helps disperse decision-making vital to small business lending and job creation across American rather than concentrated it in the nation's financial capitals.

By waving the banner of wholesale preemption of state laws and oversight, the OCC proposal threatens to undermine the integrity of the dual banking system and moves toward a centralized, European-style regulatory model. It would materially alter the "policy of equalization" that the Supreme Court has held Congress adopted to preserve a basic parity of competitive opportunities between national and state banks.[1] It also would eviscerate the advantages and accomplishments of the dual banking system, which the 1984 report of President Reagan's Task Group on Regulation of Financial Services called "one of the finest examples of cooperative federalism in the nation's history."[2] The proposal would concentrate tremendous regulatory power in the hands of a single individual-the Comptroller of the Currency-with no direct congressional oversight. This one-size-fits-all approach endangers the states' historic role in serving as laboratories for innovation as well as a safety valve against the imposition of out-dated or rigid regulatory control. It also severely hampers the ability of state officials to promote economic development, respond to local economic needs, direct community reinvestment and protect consumers.

The OCC proposal would sweep away virtually all state consumer protections and leave banking consumers across the country vulnerable to deceptive trade practices. State bank regulators and law enforcement officials have a distinguished history of protecting consumers. State officials are more accessible, accountable and responsive to consumer concerns than their federal counterparts, and consumers increasingly rely on state officials to investigate and pursue misconduct in the financial marketplace. In 2002 alone, state banking agencies returned approximately $500 million to consumers. The OCC can not match the resources of state banking departments, consumer credit divisions, and offices of state attorneys general that currently work to identify fraud and abusive practices. Instead, the OCC has indicated that it will rely on the already fully engaged staff of national bank examiners and the limited number of OCC employees to respond to consumer complaints and inquiries nationwide.

Perhaps most egregious is that the proposed rule goes beyond the preemption of state laws for national banks to federalize state chartered corporations that are subsidiaries of national banks and shield them from state licensing, examination and all other regulatory requirements. These operating subsidiaries include entities like financial companies engaged in subprime lending as well as mortgage, title, leasing, and check cashing companies. In addition to grossly violating sovereign state authority to regulate state chartered entities, it promises to remove any effective oversight for thousands of firms and individuals and expose millions of consumers to deceptive and abusive practices with little or no means of redress.

In addition to the significant policy objections, NCSL strongly believes that the OCC lacks the authority to implement the vast expansion of the federal preemption standard that is included in the proposed rule. On behalf of the nation's state legislatures, we express our grave concern that the OCC is abusing its regulatory mandate to assert a sweeping theory of preemption that is not recognized by the courts, supported in federal statute, or sanctioned by Congress.

The OCC has sought to rewrite history and court interpretations to diminish traditional state-federal shared authority to regulate banks. In the proposed rule, the OCC alleges that Congress, when it enacted the National Banking Act (NBA) in 1863, expected the national banking system to supplant rather than supplement the state system. In a recent speech, you claimed that the "principle that the states cannot constitutionally restrict the powers of entities created under federal law has been a bedrock precept of federalism for more than 180 years."[3] You cite the Supremacy Clause of the U.S. Constitution and the landmark 1819 Supreme Court decision in McCulloch v. Maryland.

Although these passages may speak to the underlying motivation of the OCC, they assert an interpretation of history and legal precedent that is clearly wrong. In 1870, shortly after the NBA was enacted, the Supreme Court in National Bank v. Commonwealth clarified McCulloch v. Maryland to explain that state regulations are preempted only when they threaten to "destroy" the ability of national banks to exercise their federally-authorized powers. The decision set the precedent of a high standard for federal preemption of state laws and declared that "it certainly cannot be maintained that banks or other corporations or instrumentalities of the [federal] government are to be wholly withdrawn from the operation of State legislation...."[4]

Over the decades, the courts have refined the National Bank decision to consistently apply a preemption standard that only bars state laws that "prevent or significantly interfere with" the operation of a national bank. Most recently in the 1996 decision, Barnett Bank of Marion County, N.A. v. Nelson, the Supreme Court held that a state may not "forbid, or impair significantly, the exercise of a power explicitly granted" by Congress to a national bank. The decision continued to explain that "this is not to deprive States the power to regulate national banks, where... doing so does not prevent or significantly interfere with a national bank's exercise of its powers."[5] Therefore, the sweeping "obstruct, in whole or in part, or condition" preemption standard that the OCC has proposed clearly contradicts the "prevent or significantly interfere with" standard that the Supreme Court reaffirmed in Barnett.

The proposed rule also clearly violates congressional intent to generally apply state laws to national banks unless Congress expressly preempts the law. In 1994, Congress reaffirmed this approach in the Riegle-Neal Interstate Banking and Branching Efficiency Act. The law explicitly applies to national banks the "laws of the host State regarding community reinvestment, consumer protection, fair lending, and the establishment of intrastate branches."[6] The proposed rule simply dismisses this provision by noting that the act excepts when federal law preempts the application of state laws to national banks. In doing so, the OCC completely ignores congressional intent as expressed in the House-Senate conference committee report on the Riegle-Neal Act, which affirmed states' strong interest in the operations of national banks. The report declared the intent of Congress not to alter the balance of state-federal law under the dual banking system and "thereby weaken States' authority to protect the interest of their consumers, businesses and communities."

To further exemplify its support of a high preemption standard, in the Gramm-Leach-Bliley Financial Modernization Act of 1999, Congress cites the Barnett "prevent or significantly interfere with" language as "the legal standards for preemption" established by the Supreme Court. This view is supported by the House-Senate conference committee report. Congress then incorporated the standard into statute to ensure competitive parity between state-licensed insurance companies and depository institutions engaged in the business of insurance.[7] In short, Congress joined the Supreme Court in expressly endorsing the "prevent or significantly interfere with" test for preemption, which the OCC has no authority to override with the "obstruct, in whole or in part, or condition" standard that it asserts in the proposed rule.

In conclusion, NCSL strongly supports the unique American dual banking system that has helped make the U.S. economy the strongest in the world. We believe that it would be a tremendous mistake to implement the OCC proposal to concentrate unchecked power over the nation's banking system in a one-size-fits-all, European-style regulatory regime in Washington, D.C. and shield national banks and their subsidiaries from state consumer protections and enforcement. In addition to clear policy objections, we are gravely concerned about the OCC's willingness to assert a radical expansion of its preemption authority in direct conflict with federal law as enacted by Congress and interpreted by the Supreme Court. Therefore, the proposal should be withdrawn and a thorough review take place to determine the potential far-reaching implications that would result from such a radical change to the nation's banking system.

NCSL is the national bipartisan organization representing the legislatures of all 50 states, the commonwealths, and the territories. For more information on our position, please contact Cheye Calvo in the NCSL Washington Office at (202) 624-8661.

Sincerely,

Donna Stone
State Representative, Delaware
Chair, NCSL Standing Committee on Financial Services

Frank Mautino
State Representative, Illinois
Vice Chair, NCSL Standing Committee on Financial Services

Cc: Members of the U.S. Senate Committee on Banking, Housing and Urban Affairs
Members of the U.S. House Committee on Financial Services

1. First National Bank of Logan v. Walker Bank & Trust Co., 385 U.S. 252, 261 (1966).

2. Blueprint for Reform: The Report of the Task Group on Regulation of Financial Services (1984).

3. Speech delivered by John D. Hawke, Jr. to the Woman in Housing and Finance on September 9, 2003.

4. National Bank v. Commonwealth, 76 U.S. (9 Wall.) 353, 362 (1870).

5. Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996).

6. 12 U.S. Code §36(f).

7. 15 U.S. Code §6701(d)(2)(A).