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Report to the Subcommittee on Oversight and Investigations, Committee 
on Financial Services, House of Representatives: 

October 2005: 

OCC Preemption Rulemaking: 

Opportunities Existed to Enhance the Consultative Efforts and Better 
Document the Rulemaking Process: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-8]: 

GAO Highlights: 

Highlights of GAO-06-8, a report to the Subcommittee on Oversight and 
Investigations, Committee on Financial Services, House of 
Representatives. 

Why GAO Did This Study: 

On January 13, 2004, the Office of the Comptroller of the Currency 
(OCC) issued two sets of rules (the preemption rules) on the extent to 
which the National Bank Act preempts the application of state and local 
laws to national banks and their operating subsidiaries. The rules and 
the manner in which OCC promulgated them generated considerable 
controversy. Some state officials, consumer groups, and congressional 
members questioned whether OCC adhered to the statutes and executive 
orders pertaining to rulemaking and whether the process was as 
inclusive as it could have been. GAO (1) assessed OCC’s rulemaking 
process within the framework of applicable laws and executive orders, 
(2) described the issues raised in comment letters and OCC’s responses, 
and (3) identified and discussed stakeholder concerns about how OCC 
promulgated its preemption rules. 

What GAO Found: 

Federal preemption of state law affecting national banks always has 
been controversial and seems to have become more so with consolidation 
in the financial services industry, which has resulted in the presence 
of large national banks in nearly every state. OCC followed the 
statutory framework for rulemaking and appears to have followed 
applicable executive orders, but it was difficult to fully determine 
the basis for some agency actions or assess the extent of its 
consultation with stakeholders because OCC did not always document its 
actions. The agency also lacked its own guidance or procedures for its 
rulemaking process and instead used a rulemaking checklist as a guide 
for completing reviews and routing documents. Federal internal control 
standards call for documenting actions to verify that an agency has 
complied with its policies and applicable law. The standards also call 
for agencies to follow written procedures in making important 
decisions, to provide a framework for ensuring compliance with 
management directives and applicable law and regulations. Without such 
documentation and procedures, evidence to substantiate OCC’s actions 
was limited. 

OCC considered all of the approximately 2,700 comment letters it 
received on its banking activities proposal, but strongly disagreed 
with comments questioning its preemptive authority and the rules’ 
adverse effect on consumers. GAO’s analysis of the letters revealed 
that commenters were concerned that the rule could diminish enforcement 
of state consumer protection laws, questioned the bases for OCC’s legal 
analysis and conclusions, and posited adverse effects on state-
chartered banks. In response, OCC contended that it has a comprehensive 
consumer protection effort for national banks, reiterated its 
preemptive authority, and asserted the rule would preserve the “dual 
banking” system. However, OCC agreed with some issues raised in the 
public comments and made some changes to the final rules. For instance, 
OCC included an explicit reference to a provision of the Federal Trade 
Commission Act that prohibits national banks from engaging in practices 
considered unfair and deceptive. 

Most criticism about how OCC promulgated the rules focused on what some 
believed was a lack of opportunity to discuss and comment on the 
proposed rules. Although OCC briefed several congressional members 
about the proposals before they were published, some criticized OCC for 
issuing the rules while Congress was in recess and not allowing time 
for hearings on the rules. OCC officials told GAO that a lengthy delay 
would have harmed banks’ ability to securitize their loans, left 
consumers with fewer choices, or imposed burdensome costs on banks 
seeking to comply with a multitude of state laws. According to consumer 
groups, OCC could and should have offered additional mechanisms for 
soliciting public input—such as public meetings. Some financial 
institution regulators have used other means besides the comment period 
to solicit input for rulemakings they deemed controversial. GAO 
observed that such efforts, while not required, might have contributed 
to a better understanding about the rules. 

What GAO Recommends: 

GAO is not making recommendations because OCC generally followed laws 
and executive orders. GAO makes observations on how OCC could enhance 
consultation and better document its rulemaking process. In its 
comments, OCC agreed to develop detailed written procedures, disagreed 
with GAO’s observations about the sufficiency of documentation and 
consultation relative to the executive orders, but intends to enhance 
its consultation. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Richard J. Hillman at 
(202) 512-8678 or hillmanr@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

OCC Generally Followed Rulemaking Requirements but Lacked Documentation 
and Written Guidance, Making It Hard to Verify Consultation Efforts: 

OCC Considered All Comments on Its Banking Activities Rule, and 
Strongly Disagreed with Those Challenging Its Authority, but Made Some 
Changes in Response to Others: 

Stakeholders Raised Issues Regarding the Process OCC Used to Promulgate 
Its Preemption Rules: 

Observations: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Office of the Comptroller of the 
Currency: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: OCC Informal Rulemaking Procedures: 

Figure 2: Sample OCC Rulemaking Checklist: 

Figure 3: Composition of Commenters, Based on Our Analysis of 373 
Nonform Letters: 

Figure 4: Frequently Cited Concerns of Selected Commenters Opposed to 
OCC's Banking Activities Proposal: 

Abbreviations: 

APA: Administrative Procedure Act: 

CRA: Congressional Review Act: 

CSBS: Conference of State Bank Supervisors: 

FDIC: Federal Deposit Insurance Corporation: 

Federal Reserve: Board of Governors of the Federal Reserve System: 

LRA: Legislative and Regulatory Activities Division: 

NCUA: National Credit Union Administration: 

OCC: Office of the Comptroller of the Currency: 

OMB: Office of Management and Budget: 

OTS: Office of Thrift Supervision: 

RFA: Regulatory Flexibility Act: 

SEC: Securities and Exchange Commission: 

UMRA: Unfunded Mandates Reform Act: 

Letter October 17, 2005: 

The Honorable Sue W. Kelly:
Chairwoman:
The Honorable Luis V. Gutierrez: 
Ranking Minority Member: 
Subcommittee on Oversight and Investigations:
Committee on Financial Services: 
House of Representatives: 

In the National Bank Act, Congress created the Office of the 
Comptroller of the Currency (OCC) to supervise national banks.[Footnote 
1] In its capacity as the supervisor of national banks, OCC issues 
regulations, policies, and interpretations to establish standards, 
define acceptable practices, provide guidance on risks, and prohibit or 
restrict practices. However, OCC traditionally has issued opinions, 
rather than rules or regulations, on whether the National Bank Act 
preempts state laws that impose standards or restrictions on the 
business of national banks. In contrast, on January 13, 2004, OCC 
issued two final rules (preemption rules) on the extent to which the 
National Bank Act preempts the application of state and local laws to 
national banks and their operating subsidiaries.[Footnote 2] The rules 
and the manner in which OCC promulgated them generated considerable 
controversy and debate, including questions about OCC's authority to 
issue the rules. 

According to OCC, the two sets of rules "codified" judicial decisions 
and OCC opinions on preemption under the National Bank Act by making 
them generally applicable and clarified certain issues. More 
specifically, as stated by OCC, the visitorial powers rule clarifies 
that federal law commits the supervision of national banks' banking 
activities exclusively to OCC (except where federal law provides 
otherwise) and that states may not use judicial actions as an indirect 
means of regulating those activities.[Footnote 3] The second rule, 
which we refer to in this report as the banking activities rule, 
preempts categories of state laws that relate to bank activities and 
operations, describes the test for preemption that OCC will apply to 
state laws that do not fall within the identified categories, and lists 
certain types of state laws that are not preempted.[Footnote 4] In 
proposing the banking activities rule, OCC stated that it needed to 
provide timely and more comprehensive standards about the applicability 
of state laws to lending, deposit taking, and other authorized 
activities of national banks because of the number and significance of 
questions banks were posing about preemption in those areas.[Footnote 
5] 

The proposed rules and OCC's rulemaking process drew strong reactions 
of either support or opposition from the banking industry, state 
legislators, attorneys general, and other officials, consumer group 
representatives, and some Members of Congress. For example, all of the 
state attorneys general questioned whether OCC reasonably analyzed the 
case for preemption. In a comment letter on the banking activities 
proposals, they stated that the National Bank Act was not intended to 
divest all state authority over national banks, and under Supreme Court 
precedent, national banks are subject to state laws that do not 
conflict with the powers of national banks or discriminate against 
national banks. Further, opponents such as consumer groups and state 
legislators feared that the preemption of state law, particularly with 
respect to predatory lending practices, would weaken consumer 
protections. In contrast, proponents contended that replacing differing 
state laws with a consistent standard would increase the health of the 
banking system. However, opponents countered that OCC's actions could 
have far-reaching effects on the banking industry, such as undermining 
the "dual banking system," by conferring undue benefits to federally 
chartered banks at the expense of state-chartered banks.[Footnote 6] 

Finally, Members of Congress held three hearings in 2004, including one 
held by your subcommittee in January of that year, centered on these 
and other issues. In addition to airing differences on the limits of 
federal versus state powers and potential effects on consumers, the 
hearings also featured discussion about such issues as why OCC issued 
the rules when Congress was in recess (after receiving a request from 
some members to delay the issuance of the rules), to what extent OCC 
consulted with state officials and other groups during the rulemaking 
process, and the resources OCC dedicates to consumer complaints. 

The statutory framework applicable to OCC rulemaking includes the 
Administrative Procedure Act (APA), which, among other things, sets 
forth the process for federal agency "informal rulemaking"; the 
Congressional Review Act (CRA), which provides for Congress's review of 
an agency's rules and even disapproval (through a joint resolution); 
the Regulatory Flexibility Act (RFA), which requires agencies to assess 
the economic impact of their proposed rules on "small 
entities";[Footnote 7] and the Unfunded Mandates Reform Act (UMRA), 
which generally requires covered agencies to take certain actions if 
their proposed rules could result in the expenditure of $100 million or 
more in any year by state, local, and tribal governments, or by the 
private sector. In addition, OCC is subject to executive orders in its 
rulemakings. Executive Order 12866, Regulatory Planning and Review 
(E.O. 12866) directs agencies, among other matters, to determine if 
their proposed rules constitute a "significant regulatory action" as 
that phrase is defined in the order, and, if so, to prepare certain 
analyses and provide them to the Office of Management and Budget (OMB), 
which is charged with reviewing agencies' proposed rules under the 
order. A second order, Executive Order 13132, entitled "Federalism" 
(E.O. 13132), sets forth principles, policymaking criteria, and 
requirements for agencies to apply when developing "policies that have 
federalism implications." Federalism in this context means the division 
of government responsibilities between the federal government and the 
states. The APA, other laws, and the two executive orders give agencies 
discretion about how to promulgate regulations. 

You requested that we review the process OCC followed in promulgating 
the preemption rules; assess the potential impact of the rules on the 
dual banking system and consumer protection; and assess OCC's process 
and capacity to handle consumer complaints. As agreed with your staffs, 
we will provide you with separate reports on the potential impact of 
these rules on the dual banking system and OCC's capacity to handle 
consumer complaints at a later date. This report focuses on OCC's 
rulemaking process. Accordingly, the report (1) assesses OCC's 
rulemaking process within the framework of applicable laws and 
executive orders; (2) describes the issues raised in public comment 
letters on the banking activities rule, and describes if and how OCC 
responded to these comments; and (3) identifies issues that 
stakeholders raised about the manner in which OCC promulgated its 
preemption rules and how OCC responded to the stakeholders. 

To assess OCC's rulemaking process, we reviewed applicable laws and 
executive orders related to OCC rulemaking and analyzed the Federal 
Register notices pertaining to both the proposed and final preemption 
rules. In addition, we interviewed OCC officials who participated in 
OCC's promulgation of the rules and analyzed the documents from docket 
files that OCC maintained on the two rules. Using this information, we 
compared OCC's actions with the provisions of the relevant laws and 
executive orders. To determine the issues raised in the comment letters 
on the substance of the banking activities rule, we conducted a content 
analysis of 373 letters received by the OCC on its preemption proposal. 
To describe how OCC responded to the issues raised in the comment 
letters, we analyzed the final rule for any changes OCC attributed to 
the comments and the preamble of the final rule for discussion 
regarding the public comments. To clarify our understanding of how OCC 
considered or addressed certain comments, we interviewed OCC officials. 
To identify issues raised about how OCC promulgated its preemption 
rules, we interviewed officials from consumer groups and state 
organizations to obtain their views and reviewed statements and 
transcripts from congressional hearings and letters that members sent 
to OCC during the public comment period. To identify how OCC responded 
to the criticisms of its rulemaking process, we interviewed OCC 
officials and reviewed their congressional testimony. In addition, we 
interviewed officials from the Board of Governors of the Federal 
Reserve System and the Federal Deposit Insurance Corporation (FDIC) to 
obtain information on how those organizations handle controversial 
rules. We conducted our work in Washington, D.C., from August 2004 
through August 2005 in accordance with generally accepted government 
auditing standards. Appendix I provides a detailed description of our 
scope and methodology. 

Results in Brief: 

OCC followed the statutory framework for rulemaking and appears to have 
acted within its discretion in executing the executive orders, but we 
could not fully determine the basis for some of the other agency 
actions or assess the extent of its consultations with stakeholders, 
because OCC did not always document its actions and lacked written 
guidance and procedures detailing the rulemaking process. OCC followed 
the process for informal rulemaking set forth in the APA by allowing 
for public participation through the "notice and comment process." That 
is, OCC published both the visitorial powers and banking activities 
proposals in the Federal Register, requested and considered public 
comments, and promulgated the final rules as prescribed by the APA. OCC 
also followed requirements and documented some actions it took related 
to the other statutes. However, with regard to the two executive 
orders, OCC did not always document its actions and some stakeholders 
disputed some of OCC's decisions or actions related to both orders. For 
example, in the preamble to the banking activities rule, OCC stated 
that the rule was not "significant" for purposes of E.O. 12866. Staff 
memorandums, in the official rulemaking file, which we reviewed, did 
not articulate the analysis underlying the determination. OCC officials 
told us that because the rules were clarifying matters related to the 
powers of national banks that had been addressed previously by OCC and 
in court decisions, they did not deem the rules to be significant 
regulatory actions as defined in the order. In relation to provisions 
of E.O. 13132 that direct agencies to consult with state and local 
officials early in the process of rulemaking when preemption of state 
law is involved, some state bank supervisors, attorneys general, and 
their representative organizations maintain that OCC's efforts to 
consult with them were not sufficient. OCC disagreed with those views. 
Its official rulemaking file contained little to document its 
consultation efforts. Further, OCC does not have written guidance, 
policies, or procedures detailing the rulemaking process. Instead, OCC 
uses a "rulemaking checklist" that serves as a guide for completing the 
required reviews and the routing of documents. According to internal 
control standards for the federal government, agencies should follow 
written procedures in making important decisions. Without such 
documentation, it may not be clear--to agency management, auditors, or 
oversight committees--that an agency followed applicable requirements. 

While OCC considered the comments it received in response to its 
banking activities proposal, it disagreed with challenges to its 
preemptive authority. However, OCC did make changes in the final rule 
in response to some commenter concerns. OCC considered all of the 
approximately 2,700 comment letters submitted by a variety of consumer 
groups, public officials, businesspeople, and others in response to its 
banking activities proposal. Our analysis of the 373 nonform comment 
letters revealed that commenters focused on what they believed would be 
the rule's diminishing effect on enforcement of state consumer 
protection laws, questions about OCC's legal analysis and conclusions 
justifying preemption and the rule's effect on the dual banking system. 
Consumer groups commented that because national banks and their 
subsidiaries would no longer be subject to state consumer protection 
laws, some of which have "higher standards" than federal law, consumers 
would be vulnerable to predatory lending. Some consumer groups and 
state officials with whom we met continue to believe that there is a 
"vacuum" in consumer protection under the rule. Opposing comments also 
disputed OCC's legal authority to preempt a state's right to regulate 
entities organized under its law, such as operating subsidiaries of 
national banks. OCC's consideration of comments is reflected in various 
documents, including the preamble to the final rule, and internal 
memorandums. While OCC considered the comments, it disagreed with 
several commenters, particularly those who questioned its ability to 
protect consumers and challenged its authority to promulgate its rule. 
However, OCC agreed with some issues raised in the comments and made 
some changes to the final banking activities rule. For instance, 
several consumer groups urged OCC to state that national bank lending 
practices should conform to the Federal Trade Commission Act's 
prohibition against unfair or deceptive acts or practices. OCC agreed 
and added this language to the final rule. OCC noted that this addition 
augmented standards it set previously in 2003 guidance for banks 
regarding predatory lending.[Footnote 8] In addition, since the rule 
was finalized, OCC has issued guidance to national banks on avoiding 
predatory, abusive, unfair, or deceptive lending practices.[Footnote 9] 

Most criticism of OCC's rulemaking procedures--which came from consumer 
groups, some state officials and their respective organizations, some 
Members of Congress, and others--focused on what some believed was a 
lack of opportunity to discuss and comment on the proposed rules and 
OCC's issuance of the final rules when some Members of Congress had 
asked for a delay. According to OCC, it provided ample opportunity for 
comment, especially since the rules were not "new law," but reflected 
precedents and standards already applied by OCC or courts. Although OCC 
briefed several Members of Congress about the rules before they were 
issued, some criticized OCC for issuing the rules while Congress was 
out of session and not allowing additional time for congressional 
hearings about many issues raised by the proposed rules. From OCC's 
perspective, the length of the delay that some members were requesting 
was unclear and other members did not endorse a delay. According to OCC 
officials, a lengthy delay would have created more uncertainty for 
national banks regarding the applicability of state or local laws and 
could have led some lenders to stop lending in certain markets because 
of variations in state or local laws, challenges in complying with 
them, and difficulties in selling loans made under state and local 
laws. Consumer groups we interviewed also suggested that OCC should 
have offered additional mechanisms for soliciting public input in its 
rulemaking. Other financial institution regulators have used additional 
mechanisms for public comment when they deemed rulemakings 
controversial. For example, some had used "public meeting type" 
hearings. According to OCC officials, they did not take such actions 
because they believed that they fully understood the points of view of 
all stakeholders. Measures such as public meetings might have promoted 
greater understanding of the preemption rules and provided 
opportunities for building more constructive relationships between 
federal and state authorities. 

We provided a draft of this report to OCC for review and comment. In 
written comments, the Comptroller of the Currency (see app. II) 
concurred with our observation that its rulemaking process could 
benefit from detailed written rulemaking procedures and the agency 
intends to develop them by year-end 2005. OCC disagreed with our 
observation that its documentation did not articulate the analysis 
underlying its conclusion that the rules were "not significant" for 
purposes of E.O. 12866. We examined OCC's documentation and found it 
consisted of stating that the rules were not a significant regulatory 
action as defined by the executive order because the annual effect on 
the economy was less than $100 million. However, OCC's documentation 
did not address other criteria set forth in the order, such as whether 
a rule would have an adverse effect in a material way on state, local, 
or tribal governments or communities. Thus, we continue to disagree 
with OCC. Although OCC maintained that its efforts to consult with 
state officials and organizations were appropriate for the preemption 
rulemakings, it intends to enhance those efforts. OCC also provided 
technical comments that we incorporated, as appropriate. 

Background: 

The federal agency rulemaking process is subject to statutory 
requirements and executive orders issued by the President. Summaries or 
brief discussions of OCC's mission and program areas (including 
regulation), the statutes and executive orders pertaining to 
rulemaking, and the legal basis for preemption follow. 

OCC Mission and Regulatory Responsibilities: 

OCC's mission focuses on the chartering and oversight of national banks 
to assure their safety and soundness and on fair access to financial 
services and fair treatment of bank customers. OCC is one of five 
federal regulators of institutions whose deposits are federally 
insured--the other four are the Board of Governors of the Federal 
Reserve System (Federal Reserve), the Federal Deposit Insurance 
Corporation (FDIC), the Office of Thrift Supervision (OTS), and the 
National Credit Union Administration (NCUA). While the Federal Reserve 
and FDIC share supervision of state-chartered banks with the states, 
OCC is the sole supervisor for national banks. OTS oversees thrifts or 
savings and loan institutions and NCUA oversees credit unions and 
insures the member deposits at federally insured credit unions. 

OCC groups its regulatory responsibilities into three program areas: 
chartering, regulation, and supervision. Chartering activities include 
not only review and approval of charters, but also review and approval 
of mergers, acquisitions, and reorganizations. Regulatory activities 
result in the establishment of regulations, policies, operating 
guidance, interpretations, and examination policies and handbooks. 
OCC's supervisory activities encompass bank examinations and 
enforcement activities; dispute resolution; ongoing monitoring of 
banks; and analysis of systemic risk and market trends. Additionally, 
in its most recent strategic plan, OCC identified its regulatory 
approach as one that would ensure that national banks operated in a 
"flexible legal and regulatory framework" that enables them to provide 
a "full competitive array" of financial services. The plan also 
included fair access to financial services and fair treatment of bank 
customers as a strategic goal. The agency also emphasized that it would 
"support continued recognition of the preemptive attributes of the 
national bank charter through appropriate opinions, regulations, and 
participation in litigation where warranted." 

As of March 2005, the assets of the banks that OCC supervises account 
for approximately 67 percent--about $5.8 trillion--of assets in 
commercial banks. Among the more than 1,800 banks OCC supervises are 14 
of the top 20 commercial banks in asset size. OCC also supervises 
federal branches and agencies of foreign banks. 

Statutory Rulemaking Requirements: 

Section 553 of the Administrative Procedure Act (APA) contains 
requirements for the most long-standing and broadly applicable type of 
federal rulemaking, commonly referred to as "informal rulemaking" or 
"notice and comment" rulemaking.[Footnote 10] Most federal rulemaking 
is conducted as informal rulemaking, in which agencies publish a notice 
of proposed rulemaking in the Federal Register and provide "interested 
persons" with an opportunity to comment on the proposed rule.[Footnote 
11] The act does not specify the length of the comment period, but 
agencies commonly provide at least 30 days.The act does not mandate 
that an agency hold oral, or "public meeting type," hearings during the 
comment period for informal rulemaking; instead, it allows an agency to 
decide whether to hold a hearing.[Footnote 12] After giving interested 
persons an opportunity to comment on the proposed rule, and after 
considering the public comments, the agency may then publish the final 
rule, incorporating a general statement of its basis and 
purpose.[Footnote 13] The APA's notice and comment procedures do not 
apply to interpretative rules; general statements of policy; or rules 
that deal with agency organization, procedure, or practice. 

The Congressional Review Act (CRA) allows Congress to review proposed 
federal regulations and also contains provisions by which Congress may 
disapprove agency rules.[Footnote 14] Before any final rule can become 
effective, CRA requires that it be filed with each house of Congress 
and us. The act also requires federal agencies to submit to us and make 
available to each house of Congress a copy of any cost-benefit analysis 
prepared for the rule. If the rule is designated by OMB's Office of 
Information and Regulatory Affairs as "major" (that is, having a $100 
million impact on the economy or having another characteristic 
contained in the act), the agency must delay the rule's effective date 
by 60 days after publication in the Federal Register or submission to 
Congress and us, whichever is later.[Footnote 15] Within 15 days of 
receiving a major rule, we are required to provide Congress with a 
report assessing the agency's compliance with various acts and 
executive orders applicable to the rulemaking process. Finally, under 
CRA, congressional members can introduce a joint resolution of 
disapproval for any rule regardless of whether it is designated as 
major. To date, Congress has issued such a resolution only once--by 
disapproving the Occupational Safety and Health Administration's 
ergonomics standards in 2001.[Footnote 16] 

The Regulatory Flexibility Act of 1980 (RFA) generally requires federal 
agencies to assess the impact of their regulation on "small entities," 
including businesses, governmental jurisdictions, and certain not-for 
profit organizations having characteristics set forth in the 
act.[Footnote 17] Under RFA, Cabinet departments and independent 
agencies generally must prepare a "regulatory flexibility analysis" in 
connection with proposed and certain final rules, unless the head of 
the issuing agency determines that the proposed rule would not have a 
"significant economic impact" upon a substantial number of small 
entities. The analysis must include, among other things, (1) the 
reasons why the regulatory action is being considered; (2) the small 
entities to which the proposed rule will apply and, where feasible, an 
estimate of their numbers; and (3) the projected reporting, record 
keeping, and other compliance requirements of the proposed rule. 

Congress enacted the Unfunded Mandates Reform Act of 1995 (UMRA) to 
reduce the costs associated with federal imposition of 
responsibilities, duties, and regulations upon state, local, and tribal 
governments, and the private sector. Title II of the act generally 
requires covered federal agencies to prepare a written statement 
containing specific information about costs and benefits for any 
published rule that includes a federal mandate that may result in 
expenditures by state, local, and tribal governments (in the aggregate) 
or the private sector of $100 million or more in any year. 

Executive Orders on Rulemaking: 

In addition to statutory requirements, certain agencies, including OCC, 
are subject to Executive Order 12866, "Regulatory Planning and Review" 
(E.O. 12866) and Executive Order 13132, "Federalism" (E.O. 13132). 
Under E.O. 12866, issued in 1993, covered agencies must submit their 
"significant" rules to the Office of Management and Budget (OMB) before 
publishing them in the Federal Register.[Footnote 18] Agencies also are 
required to prepare a detailed economic analysis for any regulatory 
actions that are "economically significant" (that is, have an annual 
effect on the economy of $100 million or more or have a material 
adverse effect as described in the order). The analysis should include 
an assessment of anticipated costs and benefits of the action as well 
as the costs and benefits of "potentially effective and reasonably 
feasible alternatives." In choosing among alternatives, an agency 
should select approaches that maximize benefits, and base its decision 
on the best "reasonably obtainable" information. In 1996, OMB issued 
"best practices" guidance on preparing cost-benefit analyses under the 
order, which gives agencies substantial flexibility on preparing the 
analyses, but also prescribes certain elements and requires that the 
analysis be "transparent"--that is, that an agency disclose how it 
conducted the study, what assumptions it used, and what the 
implications of plausible alternative assumptions are. 

Executive Order 13132 addresses the division of governmental 
responsibilities between the national government and the states as 
envisioned by the framers of the Constitution. The order contains 
principles, policymaking criteria, and requirements for agencies to 
apply and follow when formulating "policies that have federalism 
implications," which are defined to include "regulations . . . and 
other policy statements or actions that have 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." The order includes special 
requirements for agency actions that preempt state law. Also, E.O. 
13132 specifies that rulemaking that has federalism implications be 
conducted through an "accountable process" and ensure "meaningful and 
timely" input by state and local officials. Further, the order directs 
the agency to provide to the Director of OMB a federalism summary 
impact statement, which would include: (1) a description of the extent 
of the agency's prior consultation with state and local officials, (2) 
a summary of the nature of their concerns, (3) the agency's position 
supporting the need to issue the regulation, and (4) a statement of the 
extent to which the concerns of state and local offices have been met. 

Legal Basis for Preemption: 

Preemption of state law is rooted in the Constitution's Supremacy 
Clause, which provides that federal law is the "supreme law of the 
land." Because both the federal and state governments have roles in 
regulating financial institutions, questions can arise about whether 
the governing federal statute preempts particular state laws. Analysis 
of whether federal law preempts state law has turned on whether 
Congress intended that federal law overrides state law. Courts 
traditionally have divided preemption analysis into categories of 
"express" and "implied" preemptions. 

At times, Congress may declare in express terms its intention to 
preclude or override state regulation in a given area. With an express 
preemption, Congress's intent to preempt state law is clear in the 
statute. In addition to express preemption, preemption may be implied 
from the federal statute's structure and purpose. Courts have 
identified two types of implied preemptions: "field preemptions" and 
"conflict preemptions." In the case of field preemption, a court 
basically finds that the federal government has so "occupied the field" 
in a given area that there is no room for state legislation. Conflict 
preemption occurs when a court concludes that state law is in 
irreconcilable conflict with federal law. In these instances, a court 
finds that while Congress did not intend necessarily to preempt state 
regulation in a given area, state law that conflicts directly with 
federal law or stands as an obstacle to the accomplishment of federal 
objectives is preempted.[Footnote 19] 

Before the promulgation of its preemption rules, OCC primarily 
addressed preemption issues through opinion letters, issued in response 
to a specific inquiry from an institution or state.[Footnote 20] In 
2000, we examined OCC's authority and approaches in preempting state 
laws.[Footnote 21] We reported that OCC, applying conflict preemption 
analysis, issued interpretations of whether federal laws preempt state 
laws in opinions and corporate decisions. In the opinions and decisions 
it issued, prior to January 2004, particularly in the area of making 
loans and taking deposits, the Comptroller maintained consistently that 
state laws that conflict with national bank powers authorized under the 
National Bank Act are preempted. Additionally, OCC's opinions, based on 
regulations, on real estate lending specifically preempted state laws 
in five areas relating to certain loan terms and conditions, and stated 
that OCC would apply "recognized principles of federal preemption" when 
considering whether state laws apply to other aspects of real estate 
lending by national banks.[Footnote 22] 

OCC Generally Followed Rulemaking Requirements but Lacked Documentation 
and Written Guidance, Making It Hard to Verify Consultation Efforts: 

OCC followed the statutory framework in conducting its preemption 
rulemaking, but we found it difficult to assess some of the other 
actions it took in the rulemaking, particularly consultations with the 
states, because OCC did not always document its actions and had no 
written guidance or procedures detailing the rulemaking process. In 
conducting its rulemaking, OCC followed the requirements of the APA, 
CRA, RFA, and UMRA. OCC also is subject to both Executive Orders 12866 
and 13132, and designated both preemption rules as "not significant" 
for purposes of Executive Order 12866, but staff memorandums, in the 
rulemaking files, did not articulate the analysis underlying the 
determination. We also found that the lack of substantive documentation 
about OCC's consultation with stakeholders made it difficult to verify 
whether OCC helped ensure "meaningful and timely input" by state and 
local officials. Further, while OCC staff used a checklist to document 
completion of internal reviews and ensure that documents were routed 
properly, OCC did not have written guidance to follow in conducting the 
rulemaking process. Moreover, OCC did not document the substance of its 
consultation with states or with other OCC offices. In contrast, other 
federal agencies with missions similar to OCC's have developed some 
rulemaking guidance for their staffs to follow. 

OCC Followed the Administrative Procedure Act in Its Rulemaking: 

In promulgating both the visitorial powers and banking activities 
rules, OCC followed the process for informal rulemaking prescribed in 
the APA.[Footnote 23] In the preambles to the visitorial powers and 
banking activities proposals and final rules, OCC described the 
rulemakings as "clarifications" of interpretations of the scope and 
preemptive effect of the pertinent provisions of the National Bank Act 
and not as "new law."[Footnote 24] However, OCC followed APA procedures 
for informal rulemaking by providing notice of the proposed rules and 
an opportunity for public comment, and also doubled the traditional 30-
day comment period to 60 days and satisfied other requirements of the 
act, including consideration and discussion of comments on the rule, as 
we discuss later in this report. The visitorial powers proposal was 
published in the Federal Register on February 7, 2003, and OCC 
requested receipt of comments by April 8, 2003. The banking activities 
proposal was published on August 5, 2003, and OCC requested receipt of 
comments by October 6, 2003. Final drafts of both rules were published 
on January 13, 2004, with an effective date of February 12, 2004. 

OCC Followed Other Laws: 

OCC also followed the provisions of CRA, RFA, and UMRA. Pursuant to the 
CRA, OCC sent copies of the final preemption rules to both houses of 
Congress and to our Office of General Counsel on January 7, 2004, prior 
to their effective date of February 12, 2004. Further, OMB did not make 
a determination that the rules were major rules for purposes of the 
CRA. It based its decision on OCC's determination that neither rule 
would have a significant impact on the economy. 

As described previously, the purposes of CRA include providing Members 
of Congress with an opportunity to disapprove of an agency rulemaking 
by enacting a joint resolution. In the 108TH Congress, one senator and 
one representative introduced such a resolution to disapprove OCC's 
preemption rules. More specifically, House of Representatives bill 4236 
and Senate Joint Resolution 31 provided for congressional disapproval 
of certain regulations issued by OCC. The House resolution with 35 co- 
sponsors, was referred to the Subcommittee on Financial Institutions 
and Consumer Credit of the House Financial Services Committee. The 
Senate resolution, with three co-sponsors, was referred to the Senate 
Committee on Banking, Housing and Urban Affairs. However, neither 
resolution garnered enough support to pass out of the respective 
committees. 

OCC staff determined that the preemption rulemakings were not subject 
to the regulatory flexibility analysis (essentially, potential economic 
impact on small entities) required by RFA. OCC certified that no such 
impact would result from its rulemakings and provided the required 
statement in the preamble to its rules. We reviewed memorandums 
contained in the files that discussed OCC's consideration of RFA 
requirements. In an initial memorandum on each proposal, OCC's Policy 
Analysis Division concluded that the preemption proposals did not 
impose any new requirements or burdens on small entities and that the 
proposal would not have a significant economic impact on a substantial 
number of small entities. In a memorandum prepared on each proposal 
after the public comment period, Policy Analysis Division staff 
concluded that neither individual consumers nor state governments could 
be considered to be small businesses, small organizations, or small 
governmental jurisdictions under RFA and, therefore, OCC need not 
consider the impact of its final rule on consumers or state governments 
under RFA. 

Similarly, OCC determined that, under UMRA, it did not need to prepare 
a written statement during rulemaking, because neither rule would 
result in expenditures by state, local, or tribal governments (in the 
aggregate), or by the private sector, of $100 million or more in any 
year. OCC also stated this position in the preamble of each rule. In a 
memorandum related to the visitorial powers proposal that was written 
before the comment period, an OCC official wrote that the rule "would 
be permissive rather than restrictive and certain provisions permit 
banks to reorganize in more cost-effective ways than is currently the 
case." The memorandum concluded that private-sector costs associated 
with the proposed rule would be below the $100 million threshold in 
UMRA. In a memorandum on the banking activities proposal, drafted both 
before and after the public comment period, OCC staff concluded that 
analyses for purposes of UMRA were not necessary because the rules 
would not result in expenditures totaling $100 million or more. 

OCC Appears to Have Followed Some Provisions of the Executive Orders, 
but Its Consultation with the States, a Provision of the Order on 
Federalism, Appears Limited: 

Two executive orders pertained to OCC's preemption rules. E.O. 12866 
directs federal agencies to determine whether rules would be 
"significant" and thus require OMB review. OCC sent a notice to OMB 
regarding the proposed preemption rules stating that the rules did not 
constitute significant regulatory actions under this executive order. 
OCC officials told us that almost all of OCC's rules are designated as 
nonsignificant. Further, OCC stated that because the preemption rules 
would clarify already existing standards under the National Bank Act, 
the regulations were nonsignificant for purposes of E.O. 12866. While 
we do not necessarily dispute this determination, we found little 
support for the underlying rationale the agency followed in making its 
decision. 

Executive Order 13132, entitled "Federalism," which was issued in 1999, 
establishes principles and criteria for agencies to follow when 
formulating regulatory policies with federalism implications.[Footnote 
25] The order defines these policies as including regulations that have 
"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."[Footnote 
26] Under the order, agencies must have an "accountable process to 
ensure meaningful and timely input by state and local officials in the 
development of [such] regulatory policies."[Footnote 27] The head of 
each agency is to designate an official, who will have primary 
responsibility for ensuring that the agency implements the order, and 
the official is to submit to OMB a description of the agency's 
consultation process.[Footnote 28] 

E.O. 13132 creates special requirements for rules with federalism 
implications that preempt state law. When an agency foresees the 
possibility of a conflict between state law and federally protected 
interests within its area of regulatory responsibility, the agency is 
to "consult, to the extent practicable with appropriate state and local 
officials in an effort to avoid such a conflict."[Footnote 29] If an 
agency proposes to act through rulemaking to preempt state law, the 
agency "shall provide all affected state and local officials notice and 
an opportunity for appropriate participation in the 
proceedings."[Footnote 30] "To the extent practicable and permitted by 
law, no agency shall promulgate any regulation that has federalism 
implications and that preempts state law, unless the agency, prior to 
the formal promulgation of the regulation, . . . consulted with state 
and local officials early in the process of developing the proposed 
regulation."[Footnote 31] The order also requires agencies to submit to 
OMB a federalism summary impact statement in a separately identified 
portion of the preamble to the regulation, as it is to be published in 
the Federal Register. The federalism summary impact statement is to 
include a description of the agency's prior consultation with state and 
local officials, a summary of the nature of their concerns, the 
agency's position supporting the need to issue the regulation, and a 
statement of the extent to which the concerns of state and local 
officials have been met.[Footnote 32] In addition, the agency is to 
make available to OMB any written communications submitted to the 
agency by state and local officials.[Footnote 33] Finally, in 
transmitting any draft regulation to OMB, the agency is to include a 
certification from the designated federalism official stating that the 
requirements of the order have been met in a meaningful and timely 
manner.[Footnote 34] 

General guidance exists to aid agencies in interpretation of the 
requirements of the order, including the consultation requirement and 
the special requirements for preemption. OMB issued guidance for heads 
of agencies in implementing E.O. 13132, describing what agencies should 
do to comply with E.O. 13132 and how they should document that 
compliance for OMB.[Footnote 35] In connection with the consultation 
requirement, the guidance provides that agencies "should seek comment 
on . . . preemption as appropriate to the nature of the rulemaking 
under development. The timing, nature, and detail of the consultation 
should also be appropriate to the nature of the regulation 
involved."[Footnote 36] 

After the issuance of E.O. 13132, OCC sent a letter on September 17, 
1999, to the Conference of State Bank Supervisors (CSBS) proposing a 
process by which it would consult with the state bank 
regulators.[Footnote 37] First, OCC asked that CSBS serve as the 
primary channel for communicating with state banking officials when OCC 
proposed a regulation that had federalism implications. Secondly, it 
proposed to send CSBS the draft of a proposed regulation shortly before 
the document was sent to the Federal Register for publication. 
According to OCC, CSBS would still have sufficient time within a 
rulemaking comment period to distribute the draft to its members and 
receive comments. OCC stated that these comments would receive special 
review in the context of the federalism implications of the proposal in 
question. In response, the CSBS President agreed to act as an 
intermediary between OCC and various state banking departments on 
policy issues that might affect state rulemaking and supervisory 
authority. 

Although OCC did send the drafts of the proposed rules to CSBS, the 
extent to which it consulted with state officials appeared limited. 
Following publication of the proposed rules, OCC indicated it met twice 
with CSBS representatives. OCC officials offered several reasons why, 
in their view, additional consultation with the states was unnecessary 
or impracticable. They told us that OCC maintained a channel of 
informal communication with CSBS during the period leading up to the 
rules and, through this mechanism, was informed about state concerns, 
as contemplated by the order. In attempting to verify OCC's established 
consultation process with CSBS, we found that OCC sent letters to CSBS 
regarding both the visitorial powers and the banking activities rules, 
in which OCC advised CSBS of the publication of the proposals. For both 
proposals, OCC sent the letters a few days before their publication in 
the Federal Register. OCC advised CSBS of the visitorial powers 
proposal on January 31, 2003, and the proposal was published on 
February 7, 2003. For the banking activities proposal, CSBS received 
notification on July 30, 2003, before the proposal was published in the 
Federal Register on August 5, 2003. OCC officials stated that because 
the rules codify preemption precedents, they generally did not impose 
new or different standards and as a result, further consultation with 
the states was not necessary. Finally, OCC officials noted that because 
the rules reflect the agency's understanding of congressional intent 
about the preemptive effect of the National Bank Act, dialogue with the 
states about their role in regulating national banks and their 
subsidiaries would not have raised issues about which OCC was not 
already aware. 

The OMB guidance strongly recommends that, to the extent that an agency 
has carried out intergovernmental consultations prior to publication of 
the Notice of Proposed Rulemaking, the agency help state and local 
governments, and the public as a whole, by including a "federalism 
summary impact statement" in the preamble to the Notice of Proposed 
Rulemaking.[Footnote 38] Although OCC itself has issued no guidance to 
assist in determining whether a proposed regulation has sufficient 
federalism implications to warrant preparation of a federalism summary 
impact statement, OCC drafted and provided to the Director of OMB the 
federalism summary impact statements. The impact statements included 
information on OCC's consultation efforts with the states on both 
rules, the concerns of the states, and the extent to which the concerns 
were addressed. As required by the executive order, OCC included the 
impact statements, as part of the preambles of the preemption rules. 
The content of the two impact statements was similar. In providing 
these materials to OMB, OCC certified its compliance with the order. 
However, we found minimal documentation in OCC files related to the 
federalism summary impact statement provision of E.O. 13132. We could 
determine that OCC sent the federalism summary impact statement to OMB 
because OMB staff provided us with the documentation. 

We note that there are no court decisions or other precedents 
applicable in determining what the executive order requires; 
nevertheless, OCC might have considered additional consultative actions 
to help ensure the meaningful and timely input by state and local 
officials. For example, as discussed more fully later in this report, 
OCC might have considered holding additional meetings with interested 
parties and providing further opportunities for input by entities such 
as trade groups, state attorneys general, and state bank regulators. 
OCC also might have solicited this input by asking for written comments 
on policy proposals and conducting additional outreach to state 
officials. 

While We Could Describe the General Process, All of OCC's Actions Were 
Not Fully Documented; Additionally, OCC Lacks Formal Guidance on 
Rulemaking: 

We could not verify all of the actions OCC took to complete its 
preemption rulemaking because OCC did not always document its actions 
and lacked written guidance or procedures detailing the rulemaking 
process. According to Standards for Internal Control in the Federal 
Government, agencies should follow written procedures in making 
important decisions. Absent such documentation, it may not be clear 
that an agency followed applicable requirements and made its decision 
without bias. The agency also needs operating information to determine 
whether it has met requirements under various laws and 
regulations.[Footnote 39] Moreover, the former Administrative 
Conference of the United States noted, "Rulemaking is not just a 
product of external constraints. The agency's own processes for 
developing rules and reviewing them internally affect the rulemaking 
environment. Thus, agency management initiatives can have a significant 
impact on the effectiveness and efficiency of rulemaking."[Footnote 40] 

We were able to ascertain OCC's general process for conducting a 
rulemaking, but had to augment our review of the docket files for the 
preemption rules with interviews of OCC officials. Figure 1 illustrates 
the various stages of approval by OCC management and actions taken by 
OCC staff to promulgate regulations. More specifically, the staff of 
the Legislative and Regulatory Activities Division (LRA) is primarily 
responsible for drafting and managing OCC's rulemaking. The process 
includes various levels of internal review and approval; additionally, 
OCC submits draft proposals to Treasury for informational purposes and 
to OMB to fulfill their responsibility under the executive order. 

Figure 1: OCC Informal Rulemaking Procedures: 

[See PDF for image] 

[A]The Legislative and Regulatory Activities Division's 
responsibilities include developing and drafting OCC's regulations and 
ensuring the agency's compliance with the various federal statutes and 
executive orders that govern the rulemaking process. 

[B]In the case of the preemption rules, OCC sent the Conference of 
State Bank Supervisors the drafts of the banking activities and 
visitorial powers proposals on July 30, 2003, and January 31, 2003, 
respectively. 

[C] The visitorial powers proposal was published in the Federal 
Register on February 7, 2003 (68 Fed. Reg. 6363), and the banking 
activities proposal was published on August 5, 2003 (68 Fed. Reg. 
46119). Both proposals incorporated a 60-day comment period. 

[End of figure] 

However, OCC does not have written guidance, policies, or procedures 
detailing the rulemaking process. As part of its general agency 
Policies and Procedures Manual, OCC includes guidance on its internal 
approval process for its policymaking and rulemaking. Much of the 
guidance focused on administrative and routing actions of OCC staff. 
For example, it included instructions on staff practices, such as 
preparing an initiation memorandum, an issues memorandum that discusses 
the project and summarizes the issues for OCC staff, and staff actions 
required for a gold border review. The guidance for the gold border 
review described how staff should prepare the reviewers' memorandum, 
identify the appropriate reviewers, and secure the required approval 
signatures. During our review of the rulemaking process, OCC revised 
this guidance. The revised guidance, issued on April 26, 2005, provides 
a more in-depth discussion of the gold and red border approval 
processes. However, neither the previous nor revised guidance discussed 
how OCC staff should implement relevant rulemaking laws and executive 
orders when they are conducting a rulemaking. 

OCC did retain some documentation related to the rulemaking in the 
official file, known as a "docket," for each of the rules. In addition, 
the dockets contained what officials called "a rulemaking checklist." 
The checklist served as a guide for completing the required reviews and 
the routing of documents (see fig. 2). However, based on our review, 
the checklist did not record the substance of any decisions made during 
the development and the promulgation of the rules. 

Figure 2: Sample OCC Rulemaking Checklist: 

[See PDF for image] 

[End of figure] 

As discussed previously, E.O. 12866 directs federal agencies to 
determine whether rules would be "significant" and thus require OMB 
review, but staff memorandums in the rulemaking files did not 
articulate the analysis underlying the determination--although the 
agency stated in the preambles to the final regulations that the rules 
did not constitute significant regulatory actions under this executive 
order. Also, with respect to E.O. 13132, "Federalism," OCC stated that 
it "consulted with state and local officials . . . through the 
rulemaking process" and met with representatives of CSBS to clarify 
their understanding of the proposals.[Footnote 41] But we found no 
documents detailing OCC's consultation with CSBS officials or the state 
attorneys general, and without documentation, we could not verify the 
extent or nature of the discussions. According to CSBS officials, they 
met twice with OCC officials regarding the banking activities proposal 
after its publication in the Federal Register; however, in their view, 
nothing of substance was discussed in the meetings. For example, the 
CSBS officials noted that in the second meeting, credit card issues 
were discussed more than anything else. We note that OCC officials 
described the subject matter discussed at these meetings as including 
the banking activities rule. A state attorney general told us that he 
and several other state attorneys general had met with the Comptroller 
and OCC's Chief Counsel prior to the banking activities rule being 
issued, but the OCC docket files did not contain any documentation of 
these meetings.[Footnote 42] Further, we found minimal documentation in 
OCC files related to the federalism summary impact statement provision 
of E.O. 13132. 

In addition to the lack of documentation related to consultation and 
impact statement provisions in the executive order, according to OCC 
officials, OCC does not have any written policies about communications 
with interested parties during a rulemaking. The officials added that 
when OCC staff meets with interested parties on a rule proposal, it 
urges them to draft a comment letter and include the issues discussed 
at the meeting in their letter. 

Finally, OCC officials told us that they conferred with other divisions 
within OCC during the rulemaking. However, we did not find 
documentation on staff coordination or input on issues related to the 
rulemaking in the docket. For example, the officials told us that they 
consulted with OCC's Community and Consumer Law staff about some of the 
consumer protection issues being raised in the comment letters and the 
Customer Assistance Group on whether OCC had sufficient resources to 
handle any increase in consumer complaints. The docket files contained 
no information that reflected this consultation. What information on 
staff coordination the docket files did contain focused on routing 
actions, such as preparing documents for publication in the Federal 
Register. The dockets include memorandums between LRA and OCC's Policy 
Analysis Division staff discussing the Policy Analysis Division staff's 
assessment of RFA's and UMRA's applicability to the proposals. Other 
than these memorandums, the OCC files did not include any additional 
documentation of any analyses that were performed for CRA, RFA, and 
UMRA purposes. For example, OCC officials stated in a memorandum that 
these rules did not meet the criteria under the law without documenting 
the rationale for their decisions. 

FDIC, Treasury, and SEC Have Written Guidance for Conducting a 
Rulemaking: 

FDIC and Treasury have written guidance for their rulemaking and SEC 
staff have also prepared written background materials, which the 
agencies use to assist their respective staffs in the promulgation of 
rules. Although the guidance differed in some cases, generally it 
summarized the relevant laws on rulemaking; identified certain actions 
that staff should take to comply with the laws; and discussed how 
public comments should be handled. In addition, the guidance instructed 
staff on coordinating with other staff members. However, because we did 
not review the rulemaking files or dockets of the other regulators, we 
could not determine how the agencies documented compliance with their 
guidance. 

FDIC's guidance for rulemaking is contained in FDIC Rules and 
Statements of Policy: Development and Review Guide and Handbook, which 
provides information on overall processes for developing and reviewing 
FDIC rules and statements of policy, as well as specific procedures for 
meeting the statutory and other requirements of rules and statements of 
policy. The handbook also includes criteria and instructions on how to 
comply with various laws.[Footnote 43] 

The handbook has instructions that cover promulgation of regulations, 
from project planning to finalizing the rule. For example, it describes 
actions that FDIC staff should follow when preparing a regulatory 
impact analysis, specifying that the analysis should include an 
introduction, an analysis of the proposal, an analysis of an 
alternative, a quantitative analysis, and a conclusion. It goes on to 
provide more detailed guidance on how to prepare discussions of costs, 
benefits, impacts, risks, and quantitative analyses. In addition to 
procedures for complying with rulemaking laws, FDIC guidance outlined 
steps for staff coordination. 

Treasury has developed guidance for the issuance of regulations, review 
of existing regulations, and preparation of regulatory agendas and 
plans that are governed by various statutes, executive orders, and 
other authorities. Treasury issued its guidance, "Preparation and 
Review of Regulations," in the form of a directive, which provides 
offices and bureaus with the guidance necessary to comply with the 
statutory authorities and to obtain timely departmental and 
administration review of regulatory documents. According to a Treasury 
official, its individual offices and bureaus, with the exception of the 
Internal Revenue Service, do not have separate rulemaking guidance. The 
Internal Revenue Service has its own rulemaking guidance, but also 
follows Treasury's guidance. 

According to OCC officials, the procedures specified in the Treasury 
directive do not apply to OCC because OCC's regulations are not subject 
to clearance or approval by the department. The officials referred to a 
provision of the National Bank Act (12 U.S.C. § 1) that describes the 
Comptroller's authority and autonomy over matters within OCC's 
jurisdiction.[Footnote 44] Thus, according to OCC officials, while 
consultation between OCC and Treasury occurs on policy matters, the 
OCC's regulations are not subject to clearance or approval by Treasury. 
However, according to a Treasury official, the Treasury has the 
opportunity to review and comment on each proposed and final regulation 
prior to issuance. 

We do not challenge the OCC officials' assertion about the 
applicability of Treasury's directive, but we note that the directive 
contains guidance useful for assessing the adequacy of opportunities 
for public participation and directs offices and bureaus to allow not 
less than 60 days for public comment on the notice for proposed 
rulemakings that are designated "significant." The directive also 
provides guidance on whether regulatory actions are significant as 
defined in E.O. 12866. Treasury's directive also refers to implementing 
orders on federalism, but refers to E.O. 12612, the predecessor of E.O. 
13132; thus, we did not use it for comparative or illustrative purposes 
in this report. According to a Treasury official, the department is 
currently updating the directive. 

An overview of regulatory requirements is included in the SEC 
Compliance Handbook, which was revised by its Office of the General 
Counsel in October 1999.[Footnote 45] Based on our review, the handbook 
provides an overview of the relevant rulemaking statutes, such as the 
CRA and RFA, and other suggested steps that SEC staff should consider 
using in conducting a rulemaking. For example, staff should consider 
consulting with the General Counsel and the Office of Economic Analysis 
and circulating the draft to other potentially affected divisions as 
early as possible. 

Based on our review, the handbook also describes what type of records 
generally should be kept for a rulemaking. It suggests that SEC staff 
not only include among other things internal memorandums and research, 
but also comment letters, a summary of comments, and Office of Economic 
Analysis data. Finally, SEC's handbook also discusses the regulations 
relevant for determining whether the commission should treat a rule as 
major or "nonmajor" for purposes of CRA. It notes a number of 
documentation and coordination tasks that staff could undertake before 
making the designation. For example, staff members could consider: (1) 
preparing a short memorandum for OMB that briefly describes the rule 
and the reasons why the rule is not major and (2) keeping background 
information supporting the basis for the recommended determination. 

OCC Considered All Comments on Its Banking Activities Rule, and 
Strongly Disagreed with Those Challenging Its Authority, but Made Some 
Changes in Response to Others: 

While OCC considered all public comments, it strongly disagreed with 
those questioning its preemption authority or the rule's negative 
effects on consumers; however, it did make changes to the rule in 
response to some comments. OCC reviewed and considered approximately 
2,700 comment letters submitted by a variety of consumer groups, public 
officials, businesspeople, and others in response to its banking 
activities proposal. Our analysis of the comment letters revealed that 
commenters, among other things, focused on what they believed would be 
the rule's effect to diminish enforcement of state consumer protection 
laws, questions about OCC's legal analysis, and conclusions justifying 
preemption and the rule's effect on the dual banking system. OCC's 
consideration of the comments is reflected in a number of sources, 
including the final rule. While OCC considered the comments, it 
strongly disagreed with those that challenged its ability to protect 
consumers and its authority to promulgate its rule. For example, OCC 
maintained that its banking activities rule does not affect a state's 
ability to protect consumers from institutions that might engage in 
predatory practices but rather upholds its responsibility of ensuring 
the efficient operation of the national banking system as authorized by 
Congress, and preserves the dual banking system. However, OCC agreed 
with some of the comments it received and made changes to its proposed 
rule, including adding some information to clarify parts of the rule, 
such as its anti-predatory lending standard. 

A Variety of Commenters Responded to the Proposed Banking Activities 
Rule: 

OCC received approximately 2,700 comments on the proposal from a 
variety of consumer groups, public officials, businesspeople, and other 
individuals. The majority of comments (83 percent) were form letters 
written in opposition to the proposal and submitted by Realtors and 
other individuals.[Footnote 46] Figure 3, which is based on our 
analysis of 373 nonform comment letters, illustrates the composition of 
commenters by group and position (that is, opponent, proponent, or 
other). Our analysis of the content of the nonform letters indicated 
that 85 percent of these commenters were opposed to the proposal and 
expressed a variety of concerns. We found that 10 percent of the 
commenters favored the proposal. The remaining 5 percent of commenters 
neither opposed nor supported the proposal--rather, in some instances 
these commenters requested additional information to clarify certain 
aspects of the proposal. 

Figure 3: Composition of Commenters, Based on Our Analysis of 373 
Nonform Letters: 

[See PDF for image] 

[End of figure] 

The Majority of the Commenters Raised Concerns about Potentially 
Weakening of Consumer Protections: 

Based on our analysis of the comment letters, we found that most 
commenters opposed to the proposed rule cited concerns about weakened 
consumer protections. These and other concerns raised in comment 
letters in opposition to OCC's banking activities proposal are 
summarized in figure 4. They also contended that because national 
banks, with their considerable presence in the lending market, would no 
longer be subject to certain state consumer protection laws, consumers 
would be vulnerable to various forms of predatory lending. Comments 
from state officials argued that a lack of state regulation would 
create "an enormous vacuum of consumer protection without adequate 
federal regulation to fill the gap." Many of these commenters suggested 
that OCC needed to do more, not less, to protect consumers. They 
believed that some state-enacted fair lending legislation addressed 
certain predatory lending practices and cited as an example legislative 
efforts that mirrored the federal Home Ownership Equity Protection Act, 
yet provided stronger consumer protections. According to these 
commenters, these state laws defined and restricted high-cost loans 
that were more likely to be abusive or predatory and characteristic of 
trade practices, such as loan flipping, fee packing, and equity 
stripping. However, they maintained that the banking activities rule 
would eliminate the protections afforded by these state laws. They 
concluded that OCC should have refrained from preempting these state 
laws or, at the very least, incorporated principles from its 2003 
guidance on predatory lending and abusive practices, which they argued 
cites some of the same fraudulent trade practices defined by these 
state laws and were determined by OCC to be unfair, deceptive, and 
likely violate the Federal Trade Commission Act. Commenters also urged 
OCC to affirmatively articulate that a national bank's lending 
practices must be conducted in conformance with section 5 of the 
Federal Trade Commission Act, which makes unlawful "unfair or 
deceptive acts or practices.": 

Figure 4: Frequently Cited Concerns of Selected Commenters Opposed to 
OCC's Banking Activities Proposal: 

[See PDF for image] 

Note: We based our analysis on 373 comment letters (nonform letters) 
submitted to OCC during the public comment period for the banking 
activities proposal. 

[End of figure] 

Consumer groups and state officials commented that OCC's rule would 
cripple states' ability to regulate national banks and their operating 
subsidiaries, and in the process potentially increase the number of 
consumer complaints sent to OCC regarding national banks and their 
operating subsidiaries. They asserted that OCC did not have the 
capacity to adequately handle an increased volume of complaints, and 
argued that "with an already fully engaged staff of national bank 
examiners and OCC employees, the Comptroller cannot match the resources 
of state banking departments, consumer credit divisions, and offices of 
state attorneys general that currently work to identify fraudulent and 
abusive practices." 

The issues cited next most frequently (by commenters opposed to the 
rule) dealt with the legal basis for preempting state regulation of 
national banks' operating subsidiaries. The commenters questioned OCC's 
legal authority to promulgate the rule, asserting that OCC did not 
properly apply the legal standard for preemption and did not have a 
legal basis for preempting state laws with respect to national bank 
operating subsidiaries. These commenters stated that preempting the 
application of state laws to operating subsidiaries would infringe on 
states' rights to regulate entities that they license. They asserted 
that OCC's preemption proposal would "federalize" national bank 
operating subsidiaries, many of which are state-licensed.[Footnote 47] 
Additionally, commenters noted that if finalized, OCC's preemption rule 
would prevent states from regulating these entities and would diminish 
the states' ability to protect their citizens. State officials 
contended that federal banking statutes and state corporate laws 
establish a clear separation between national banks and their 
"affiliates," including their operating subsidiaries. Accordingly, 
these commenters believed that OCC did not have the power to bar states 
from licensing, examining, and otherwise regulating state-licensed 
corporations, including those affiliated with national banks. This 
issue was of particular concern to commenters who believed that certain 
national bank operating subsidiaries engaged in predatory and abusive 
practices. Another commenter suggested that OCC's rule would encourage 
lenders to "restructure as operating subsidiaries of national banks to 
avoid certain consumer protection restrictions." 

Commenters also expressed concerns about the effect of the rule on the 
dual banking system and contended that OCC's rule would promote a "race 
to the bottom" in consumer protection. Consumer groups and state 
officials held that the banking activities rule could put national 
banks at an advantage over other financial institutions and blur the 
well-established competitive marketplaces of each state. They argued 
that the result would be a reduction in regulatory oversight in the 
banking industry because other bank regulators would be encouraged to 
reduce their regulatory efforts to match what some considered "subpar" 
standards being set for national banks. State officials believed that 
this result would be inevitable because regulatory control of the 
banking industry would be concentrated in OCC. 

State officials and consumer group commenters asserted that OCC took a 
sweeping approach to preemption in its proposal. They noted that a 
state law generally would apply to a national bank only if the state 
law fit into one of a few limited categories or if OCC decided that the 
particular state law has "only incidentally affected" the exercise of 
national bank powers or is otherwise consistent with the rule itself. 
Commenters contended that absent specific consent from OCC, the only 
types of state laws that would ordinarily apply to national banks are 
those enumerated in the proposal (such as those pertaining to 
contracts, torts, and criminal law). They stated that national banks 
could even be exempted from these types of laws if OCC decided that one 
of these types of state law marginally affected the exercise of 
national bank power. These commenters concluded that the national bank 
charter could become a "get out of jail free" card. 

Generally, proponents of OCC's preemption proposal, largely national 
banks and others representing the banking industry, stated that the 
rule promoted a uniform national regulatory standard, which they viewed 
as a significant benefit to national banks and argued that field 
preemption would allow national banks to provide services on a 
multistate basis without being subject to a patchwork of conflicting 
and inconsistent state laws. According to these groups, without a 
national standard, national banks operating under varied state laws 
faced increased costs, compliance burdens, and possible litigation 
because of not being able to comply with each and every requirement. 
Further, they contended that some national banks could be forced to 
limit certain products and services in jurisdictions where state and 
local laws imposed different standards, thus harming consumers. They 
suggested that these state laws would ultimately harm the national bank 
system and therefore urged OCC to adopt an "occupation of the field" 
preemption standard concerning national bank real estate lending. 

National bank industry commenters also expressed concern that the 
proposed anti-predatory lending standard prevented national banks from 
making loans based predominantly on the foreclosure value of a 
borrower's collateral--that is, without regard to the borrower's 
repayment ability. These commenters contended that this new standard 
would prevent national banks from making legitimate loans, for example, 
to high net worth individuals whose ongoing cash flow could be 
sufficient to repay the loan. These commenters noted that reverse 
mortgage, small business, and high net worth loans are often made based 
on the value of the collateral. 

Supporting commenters also asked OCC to clarify particular parts of its 
proposal. For example, several commenters noted that section 34.4(a) of 
the banking activities preemption proposal lists "categories" of state 
laws that are preempted, but did not specifically enumerate which state 
laws would be preempted. A number of these commenters asked OCC to list 
in its final rule specific state laws imposing various limitations on 
mortgage underwriting and servicing and those state laws pertaining to 
debt collection, which were not determined to be preempted in the 
proposal. 

In Response to Comments, OCC Reasserted Its Preemption Authority but 
Made Some Changes in the Final Rule: 

We analyzed a variety of sources and determined that while OCC 
considered all of the comments it received during the banking 
activities rulemaking, they strongly disagreed with commenters that 
doubted their ability to protect consumers as well as those that 
questioned their preemption authority. OCC stated in the preamble to 
the final rule that national banks and their operating subsidiaries 
would be regulated by strong federal standards and any abusive 
practices would not be tolerated. Moreover, OCC maintained that 
national banks were not the source of predatory and abusive lending 
practices. The Comptroller also suggested that the banking activities 
rule did not affect a state's ability to protect vulnerable consumers 
from other types of lending institutions that might engage in predatory 
practices. The Comptroller emphatically suggested that the banking 
activities preemption standards "are comprehensive and apply 
nationwide, to all national banks. The rules apply strong protections 
for national bank customers in every state--including the majority of 
states that do not have their own anti-predatory lending standards." 

According to OCC officials, the agency has a comprehensive consumer 
protection effort focused on national banks and operating subsidiaries 
(consisting of its supervisory and enforcement functions, the Customer 
Assistance Group, and the Community and Consumer Law and Enforcement 
and Compliance divisions of the Law Department). According to OCC, this 
effort includes enforcement of applicable state laws and a 
comprehensive array of federal consumer protection laws. This consumer 
protection effort will be the focus of one of our forthcoming reports. 
OCC also maintained that states increasingly face budget constraints, 
and their insistence on adding national bank supervision to an ever- 
increasing list of responsibilities would likely detract from "the 
availability of state resources to protect consumers in other areas-- 
other areas where there is evidence of abusive lending--other areas 
that are not as highly regulated as the banking business." 

OCC restated its authority to promulgate its banking activities rule 
throughout the preamble to the final banking activities rule, 
maintaining that it is charged with the primary responsibility of 
making certain that national banks operate efficiently and to the full 
extent of their powers under federal law.[Footnote 48] Moreover, OCC 
contended that its regulation codifies existing determinations and 
prior Supreme Court decisions regarding national bank operations and 
had no effect on regulations previously established to govern the 
activities of national bank operating subsidiaries. Pursuant to OCC 
regulation, national bank operating subsidiaries conduct their 
activities subject to the same terms and conditions that apply to the 
parent banks, except where federal law provides otherwise.[Footnote 49] 

OCC noted in the preamble to the final banking activities rule that 
differences between state-chartered banks and federally chartered banks 
and the supervision of each were the "defining characteristics" of the 
dual banking system and that its final rule would preserve, not 
undermine, this system. The preamble concluded that OCC fundamentally 
disagreed with state and local officials on this issue and asserted 
that the rule was a necessary component 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."[Footnote 50] However, OCC acknowledged the 
concerns of both opponents and supporters of the proposal and made some 
changes based on their comments. For instance, OCC added an express 
reference to section 5 of the Federal Trade Commission Act, which makes 
unlawful "unfair or deceptive acts or practices," in response to 
commenters who urged OCC to declare that this federal standard indeed 
applied to national banks. OCC viewed this as a fitting addition to its 
rule. OCC also stated that its anti-predatory lending standard augments 
prior standards such as those contained in OCC's Advisory Letters on 
predatory lending. According to the Comptroller, OCC pioneered the use 
of section 5 as a basis for enforcement actions against banks that have 
engaged in such conduct. In contrast, in response to commenters who 
suggested that OCC specifically articulate what activities constitute 
unfair and deceptive practices, OCC noted in the preamble to the final 
banking activities rule that it does not have authority to specify by 
regulation specific practices as unfair or deceptive under the Federal 
Trade Commission Act. In February 2005, OCC issued new guidance 
pursuant to the enforcement scheme of section 39 of the Federal Deposit 
Insurance Act, "as a further step to protect against national bank 
involvement in predatory, abusive, unfair, or deceptive residential 
mortgage lending practices."[Footnote 51] This guidance describes 
practices that OCC deems inconsistent with sound residential mortgage 
lending practices. It also describes other terms and practices that may 
be conducive to predatory, abusive, unfair, or deceptive lending 
practices, depending on the circumstances. OCC noted in the guidance 
that it has the discretion to take action to enforce the guidelines. 

In response to comments arguing that the banking activities rule would 
at some point preempt categories of state law that the proposal 
declared would not be preempted, OCC stated that it "refined" some 
language in the final rule and further explained in the preamble the 
standards to be used in determining when preemption would occur and the 
criteria for when state laws would not be preempted. OCC further 
explained that (1) state statutes and standards that federal law makes 
applicable or incorporates and (2) state laws that relate to the daily 
course of business of national banks and their operating subsidiaries, 
but only incidentally affect the bank's exercise of its federally 
authorized powers or otherwise are consistent with federal law, would 
not be preempted.[Footnote 52] The latter category includes laws 
pertaining to contracts, rights to collect debts, the acquisition and 
transfer of property, taxation, zoning, crimes, and torts. 
Additionally, in response to comments that OCC solicited on whether it 
should "occupy the field" of real estate lending, OCC determined that 
it would not do so based on comments it received pertaining to this 
issue and prior judicial decisions.[Footnote 53] 

With respect to its new anti-predatory lending standard, OCC agreed 
with comments that suggested that there are instances where loans are 
legitimately underwritten on the basis of the value of the borrower's 
collateral and revised the anti-predatory lending standard to clarify 
that it would apply only to consumer loans secured by real estate. OCC 
characterized consumer loans as loans for personal, family, or 
household purposes and stressed that this standard was intended to 
prevent borrowers from being unwittingly placed in a situation where 
repayment would be unlikely without the lender seizing the collateral 
and that it would permit national banks to use a variety of methods to 
determine a borrower's ability to repay. 

OCC acknowledged supporting comments requesting that it specifically 
list additional categories of state law that these commenters believed 
should be preempted, but chose not to do so. Instead, OCC included 
language in the rule's preamble asserting that the list of the types of 
preempted state laws enumerated in the rule were not intended to be 
exhaustive, that it would retain the ability to address other types of 
state laws on a case-by-case basis, and make determinations on 
preemption under applicable standards. Further, in a clarification 
concerning debt collection activities, OCC officials explained that it 
was difficult to establish a standard that would capture all of the 
concerns raised regarding national bank debt collection activities. As 
a result, OCC changed the description of this type of non-preempted 
state law from laws concerning "debt collection" to laws affecting a 
national bank's "rights to collect debts" (making all phrasing 
consistent with that used in a Supreme Court decision). OCC officials 
told us that they ultimately decided to leave the interpretation of 
this term open to the possibilities of subsequent OCC action or 
interpretation by the courts. 

Stakeholders Raised Issues Regarding the Process OCC Used to Promulgate 
Its Preemption Rules: 

Some Members of Congress, state officials, and consumer groups 
criticized how OCC promulgated the banking activities rules. For 
example, some members requested a delay in the finalization of the 
rules so that they could hold additional hearings to discuss the rules' 
potential impacts on consumer protection. According to OCC officials, 
they could not determine the length of the delay that some members were 
requesting, and a lengthy delay would have created more uncertainty for 
national banks regarding the applicability of state or local laws and 
could have led some lenders to leave certain markets. Moreover, 
according to OCC, while some members sought a delay, other members did 
not endorse a delay. Additionally, some representatives of consumer 
groups and state organizations criticized OCC for not employing 
additional mechanisms for soliciting public input in the rulemaking. 
Other regulators told us they have used additional mechanisms for 
public comment during rulemakings they deemed controversial. 

Congressional Members Requested a Delay in the Finalization of the OCC 
Rules: 

Some Members of Congress requested that OCC delay finalization of its 
rules so that they could further study its potential impact. However, 
congressional members and staff did receive information on the rules 
prior to this request. According to a chronology provided to us by OCC 
staff, OCC officials briefed a number of congressional members and 
their staff starting in October 2002 and ending in October 2003. In 
several of these briefings, the then-Comptroller of the Currency and 
OCC's Chief Counsel briefed majority and minority staff from the 
Committee on Financial Services, House of Representatives, and the 
Senate Committee on Banking, Housing, and Urban Affairs. 

Some Members of Congress wanted OCC to delay the finalization of the 
rules so that they could hold hearings on the proposed rules. According 
to a letter from members of the House Financial Services Committee from 
the state of New York to OCC, the focus of the hearings would be the 
potential impact of the rules on consumer protection and the dual 
banking system. The Acting Comptroller of the Currency described that 
OCC staff received mixed views from within Congress and that some 
members of the House Financial Services Committee wanted a hearing 
while others did not endorse a delay or hearing. Since the OCC staff 
did not receive any information on a specific date for the hearing, 
they were uncertain about the length of the delay that the members were 
requesting. 

In congressional testimony (in late January 2004), the Acting 
Comptroller provided reasons for why the agency finalized the rules 
when it did.[Footnote 54] First, the rules were not creating any "new 
law" because the rules were entirely consistent with existing laws, 
such as the National Bank Act. Second, the continuing uncertainty about 
the applicability of state laws had affected national banks' ability to 
lend in certain markets and access the secondary market. Third, the 
Acting Comptroller asserted that state and local governments were 
accelerating enactment of anti-predatory lending legislation. 

The Acting Comptroller provided us with a similar explanation, saying 
that OCC was receiving inquiries at the time from national banks 
requesting a clarification on whether state laws on anti-predatory 
lending would be applicable to them and advising OCC that these state 
laws were creating market impacts. A lengthy delay would have resulted 
in more uncertainty for the banks because more states would have 
continued enacting anti-predatory lending laws, which would have 
adversely affected the U.S. mortgage market. Moreover, she noted that a 
number of state anti-predatory lending laws were to come into effect 
during 2004, and OCC anticipated that additional states were planning 
to enact such laws. OCC officials also noted that the former 
Comptroller of the Currency became ill during the final stages of the 
banking activities and visitorial powers rulemaking. Because OCC did 
not have a date for the potential congressional hearing and the 
Comptroller wanted to take part in the finalization of the rules, OCC 
staff worked to be in a position to complete the rulemaking process by 
late January 2004. 

Some Groups Criticized OCC's Efforts to Solicit Public Input: 

Consumer and state groups wanted OCC to provide additional mechanisms 
beyond written comments for soliciting public input. Some consumer 
groups told us that OCC should have held "public meeting type" hearings 
and extended the length of the 60-day comment period to obtain public 
comments on the banking activities rule. In their view, the banking 
activities rule was a controversial proposal that required OCC to 
obtain sufficient input from groups across the country. According to 
these groups, it has been a standard practice at other federal agencies 
to hold these types of meetings when the agencies deem that proposed 
rules would be controversial. Some consumer groups considered that 
public meetings were an important part of an educational, democratic 
process. 

According to OCC officials, it was not OCC's standard procedure to hold 
"public meeting type" hearings on proposed rulemakings. The Acting 
Comptroller of the Currency told us that she personally conducts 
outreach to consumer groups and the banking industry on a variety of 
issues, including preemption; also, she did not foresee that she would 
have heard anything different in a public hearing than in her outreach 
sessions. OCC also has staff in the Community Affairs Department and a 
Banking Relations Senior Advisor, who, according to OCC staff, host 
outreach efforts with consumer and banking groups, respectively, on a 
frequent basis. These efforts provide these groups with an opportunity 
to comment on issues. 

Some Federal Regulators Have Used Additional Mechanisms for Obtaining 
Public Comments on Controversial Rulemakings: 

Based on our interviews with FDIC, Federal Reserve, OTS, and SEC, staff 
employ additional mechanisms for soliciting public input for 
rulemakings. According to its Deputy General Counsel, FDIC will take 
steps in addition to accepting written comments to alleviate some of 
the controversy associated with certain rulemakings. For example, from 
the mid-1980s to 2005, FDIC held approximately seven "public meeting 
type" hearings on its rulemakings. The most recent concerned a request 
from a bank industry group that FDIC issue rules that would allow a 
state bank's home state laws to govern the interstate activities of 
state banks and their subsidiaries to the same extent that the National 
Bank Act governs a national bank's interstate activities. In announcing 
the public hearing on March 21, 2005, FDIC stated that if it agreed to 
conduct a rulemaking on preemption, the rulemaking proposal would be 
published in the Federal Register and an opportunity for public comment 
would be provided. On May 24, 2005, FDIC held the hearing on the 
preemption request; participants were an attorney representing the 
Financial Services Roundtable, the CSBS Chairman, five state banking 
regulators, an organization representing community bankers, the 
National Association of Realtors, and representatives from the three 
community groups and four banks. After each panel presented its views, 
FDIC staff asked questions of the panelists regarding the merits of the 
request and discussed issues with them. Additional parties chose not to 
appear at the hearing, but submitted written views on the petition. On 
July 19, 2005, in a meeting open to the public, the FDIC Board voted to 
table the preemption request from the bank industry trade group but 
directed its staff to develop a more thorough notice of proposed 
rulemaking on the issue. 

OTS has rarely held "public meeting type" hearings on proposed 
rulemaking proceedings, but according to OTS officials, OTS has held 
what the officials called "town meetings" on a regular basis at its 
field offices and has used them as an opportunity to identify emerging 
issues. Similar to OCC, OTS will forward advance copies of rulemaking 
proposals that may have federalism implications under E.O. 13132 to 
CSBS officials about 1 week before the proposal is published in the 
Federal Register. But, on occasion, OTS will contact other 
organizations representing state officials and regulators, including 
the National Association of Attorneys General and the American 
Association of Residential Mortgage Regulators, for input on OTS's 
rulemaking proposals. OTS officials told us that they may meet 
occasionally with groups during the public comment stage of a 
rulemaking, but if they did, then staff would include a transcript of 
the discussion in the rulemaking file. 

Federal Reserve policy provides that the usual method for the public to 
provide input on a rulemaking is through written comments. According to 
Federal Reserve staff, the Federal Reserve has not held a formal 
"public meeting type" hearing for a rulemaking in the last 5 years. 
However, according to Federal Reserve staff, the agency often conducts 
a substantial amount of outreach activity with interested parties 
before the rulemaking process starts or a proposal is published in the 
Federal Register. Even after a rulemaking has commenced, Federal 
Reserve officials or staff may hold meetings with interested parties. 
According to Federal Reserve staff, written summaries of these meetings 
typically are prepared and placed on the Federal Reserve Web site and 
in the public comment file for the particular rulemaking. Although OCC 
officials told us that they held outreach meetings, they did not 
document the meetings and submit summaries to the public comment file 
or document outreach meetings with consumer groups. In addition, the 
Federal Reserve has considered ideas for consumer regulations from 
participants who have made presentations to the Consumer Advisory 
Council and have brought the topics of possible or ongoing rulemakings 
before the Consumer Advisory Council to obtain the views of council 
members.[Footnote 55] 

SEC has held special public meetings, such as roundtables, to solicit 
additional input from outside parties. According to SEC staff, the 
agency uses the meetings to allow commenters to elaborate on their 
comments and discuss their comments with others. SEC staff told us that 
special public meetings have been held for rule proposals that raise 
particular public interest or are technically complex. 

Finally, in contrast to OCC, all of the regulators place the comments 
they receive on their proposed rulemaking on their Web sites. Posting 
the comments on the Internet allows organizations and individuals who 
are planning to submit comments to read the comments already received 
by the agencies. The objective of the governmentwide E-Gov rulemaking 
initiative pilot is to require federal agencies to place public 
comments on a centralized Web site to make them easily accessible to 
the public, and OCC concluded that it would be inefficient to devote 
resources to establish a public comment posting system that would 
quickly be rendered obsolete by the E-Gov centralized system. 

Observations: 

The preemption of state law relating to the business of banking has 
long been a controversial issue. It seems to have become more so with 
consolidation in the financial services industry, which has resulted in 
large national banks' presence in virtually every state in the country. 
As the regulator of national banks--including some of the nation's 
largest--OCC's decisions can be far reaching. OCC can help mitigate 
some of the controversy that inevitably will ensue from its preemption 
decisions by ensuring that its proposals are thoroughly aired with all 
relevant stakeholders. 

In OCC's recent preemption rulemakings, controversy focused both on the 
agency's legal analysis justifying preemption and on the possible 
effects of its rules on state-chartered banks and consumers. Federal 
law and executive orders requiring agency accountability and 
stakeholder involvement drove public input on these matters. Following 
requirements in the APA and 12 U.S.C. § 43, OCC provided public notice 
of the proposed rules and sought public comment. The agency extended 
the opportunity for public comment to 60 days rather than the more 
typical 30 days, and it considered all of the comments and made changes 
it deemed appropriate. With respect to agency rulemakings that preempt 
state law, the "Federalism" executive order calls for an "accountable 
process to ensure meaningful and timely input by state and local 
officials" and, because of the possibility of a conflict between state 
law and federal interests, requires agencies to "consult, to the extent 
practicable and permitted by law, with appropriate state and local 
officials in an effort to avoid such a conflict." Beyond the 
consideration of comments required by statute, OCC arranged for formal 
meetings with CSBS and followed the consultative process set forth in 
the letters exchanged by OCC and CSBS in 1999. In the face of an 
executive order specifically calling for state and local consultation 
on preemption rules, OCC's limited additional effort may have 
contributed to an impression that it did not genuinely seek or consider 
input from this community. Stakeholders representing such diverse 
interests as consumer protection advocates, state bank regulators, 
state attorneys general, and some Members of Congress continue to 
maintain that the agency did not genuinely seek their input. 

Executive Order 13132, entitled "Federalism," affords agencies 
flexibility in determining precisely how much input is appropriate in 
any given circumstance, and we do not assert that OCC did not follow 
these requirements. As a practical matter, however, the agency's own 
interests in developing workable regulations and in reaching acceptable 
resolutions might have been better served in this case by providing 
more opportunity for discussion by those most directly affected. We 
note that even where preemption was not an issue, other federal 
financial institution regulators took additional actions, such as 
holding public meetings, to ensure wider involvement in the public 
review and comment on proposed regulations they deemed controversial. 

Finally, OCC's rulemaking process would benefit from better 
documentation--both written guidance for the process itself and more 
thorough documentation that the process is followed in specific 
rulemakings. Other financial institution regulators use written 
procedures that provide a framework for ensuring their compliance with 
applicable requirements. Such procedures can help agency officials 
ensure that appropriate criteria for rulemaking--whether in the APA, 
other laws, or executive orders--are followed and documented. We were 
able to determine the process OCC followed for the preemption 
rulemakings only by pulling together information from multiple sources, 
including the rulemaking dockets, other OCC documents, and officials 
and stakeholders we interviewed. OCC's rulemaking files alone did not 
contain much of this information--the files omitted details on both the 
fact and substance of OCC communications with key stakeholders. Given 
the controversial circumstances surrounding these rulemakings, it might 
have been in the agency's best interest to have created better 
documentation of its actions and decisions. Moreover, federal internal 
control standards stress the importance of such documentation for 
verifying that management directives and guidance have been carried out 
and that the agency has complied with applicable laws and regulations. 
Without documentation about matters such as how decisions were reached, 
who was consulted, and what their views were, we were not able to 
present information in this report that might have contributed to a 
better understanding of OCC's process. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to OCC for review and comment. In 
written comments, the Comptroller of the Currency (see app. II) 
concurred with our observation that its rulemaking process could 
benefit from more detailed written rulemaking procedures. OCC has begun 
a project to develop such procedures and expects to complete them by 
the end of 2005. OCC expressed concerns about the draft report's 
observation that staff memorandums in OCC's rulemaking files did not 
articulate the analysis underlying OCC's conclusion that the rules were 
not "significant" for purposes of E.O. 12866. OCC commented that the 
files contained seven memorandums prepared by OCC's legal and economic 
policy staff describing their analysis and conclusions under E.O. 
12866. OCC believes the agency satisfied the requirements of the 
executive order. During our review, we examined the staff memorandums 
for both the visitorial powers and the banking activities rules. 
However, the analyses in the memorandums consisted of stating that the 
rule was not a "significant regulatory action," as defined by E.O. 
12866 because the annual effect on the economy was less than $100 
million and did not address the other criteria set forth in the order 
for determining whether an action is significant.[Footnote 56] The 
memorandums did not include or refer to any analysis to support the 
conclusion stated. Thus, we continue to maintain that OCC's 
documentation did not articulate the analysis underlying its conclusion 
that the rules were not "significant" for purposes of E.O. 12866. 

Finally, although OCC disagreed with the draft report's observation 
that the extent of OCC's consultation with state officials appeared 
limited, it intends to make improvements in this area. In OCC's view, 
its consultation with state officials complied with the "Federalism" 
executive order and was appropriate in view of the nature of the 
preemption rulemakings. However, OCC stated that it is committed to 
enhancing its efforts in "continuous, open and candid dialogue" with 
state and federal regulators on issues such as assuring consumer 
protection. The Comptroller stated that he had already had several 
meetings to further this goal. OCC also provided technical comments 
that we incorporated, as appropriate. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of this report 
until 30 days from the report date. At that time, we will provide 
copies of this report to the Comptroller of the Currency and interested 
congressional committees. We also will make copies available to others 
upon request. In addition, the report will be available at no charge on 
the GAO Web site at [Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-8678 or [Hyperlink, hillmanr@gao.gov]. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. Key contributors are 
acknowledged in appendix III. 

Signed by: 

Richard J. Hillman:
Managing: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

The Office of the Comptroller of the Currency (OCC) recently issued two 
final rules to clarify the applicability of state law to certain 
national bank operations, commonly known as the bank activities or 
"preemption" rule and OCC's authority to examine, supervise, and 
regulate activities authorized for federally chartered or national 
banks under federal law, known as the "visitorial powers" rule. The 
proposed rules and OCC's rulemaking process drew strong reactions of 
either support or opposition from the banking industry, state 
officials, consumer group representatives, and some Members of 
Congress. In our report, we (1) assess OCC's rulemaking process within 
the framework of applicable laws and executive orders, (2) determine 
the issues raised in the comment letters on the substance of the 
preemption rule and describe if and how the OCC responded to these 
issues, and (3) identify issues stakeholders raised about the process 
OCC used to promulgate both the banking activities and the visitorial 
powers rules and determine OCC's response. 

To assess OCC's rulemaking process within the framework of applicable 
laws and executive orders, we focused on the process OCC used to 
promulgate its rules on banking activities and visitorial powers. We 
reviewed the laws and executive orders relevant to the two rules: 
section 553 of the Administrative Procedure Act, the Regulatory 
Flexibility Act, the Congressional Review Act, Executive Order 12866 on 
Regulatory Review, and Executive Order 13132, "Federalism." To 
determine OCC actions in conducting its rulemaking, we interviewed 
officials from OCC's Legislative and Regulatory Activities Division who 
were responsible for the initial drafting of the banking activities and 
visitorial powers proposals and final rules. In addition, we reviewed 
OCC's internal files for both rulemakings, including materials from the 
dockets.[Footnote 57] The documents we reviewed included correspondence 
between OCC officials discussing the status of the rules, staff 
memorandums sent to the Chief Counsel and the Comptroller of the 
Currency, OCC's written communications to staff from the Office of 
Management and Budget (OMB) and the Department of Treasury (Treasury), 
and a list of the public commenters for both rulemakings. Using 
information from OCC files and the proposed rule in the Federal 
Register, we compared OCC's actions related to the rulemakings with the 
provisions we identified in relevant laws and executive orders. We 
interviewed officials from OMB's Office of Information and Regulatory 
Affairs and Treasury's Office of General Counsel. In addition, we 
interviewed staff from other federal financial regulatory organizations 
(the Federal Deposit Insurance Corporation, the Board of Governors of 
the Federal Reserve System, the Office of Thrift Supervision, and the 
Securities and Exchange Commission) to obtain information on their 
rulemaking processes. 

To identify the issues raised in comment letters concerning the banking 
activities rule, we conducted a content analysis of 373 comment letters 
received by OCC on its bank activities preemption proposal.[Footnote 
58] While OCC received 2,706 comment letters, we identified 2,250 as 
form letters, most of which expressed identical concerns about 
financial subsidiaries of national banks possibly conducting real 
estate brokerage activities without complying with state real estate 
brokerage licensing laws.[Footnote 59] However, financial subsidiaries 
currently are not allowed to conduct real estate brokerage activities, 
and OCC concluded that these letters were not relevant to its review of 
the public comments because the bank activities preemption proposal did 
not apply to financial subsidiaries of national banks.[Footnote 60] 
Therefore, we decided it was not appropriate to include these form 
letters in our content analysis for identifying issues related to the 
banking activities rulemaking. Additionally, we identified 83 duplicate 
letters (more specifically, copies of letters received in more than one 
medium, such as fax, mail and e-mail), which we also excluded from our 
content analysis. 

To analyze the comments, we first separating the letters into three 
categories: letters that supported the banking activities ruling (37), 
letters that opposed the ruling (316), and letters that neither 
supported nor opposed the ruling (20)--that is, the commenters 
requested clarification of certain parts of the proposal. We then 
randomly selected and reviewed a "developmental" set of letters from 
each category and established an initial set of codes that would 
further characterize comments within each category. We applied these 
codes to a test set of letters and made refinements. We then applied 
the refined codes to a second test set of letters, made more 
adjustments, and established the final codes for each category of 
letter. We distributed letters from each category among three pairs of 
trained coders, who independently coded their set of letters and 
resolved discrepancies to 100 percent agreement. The coders regularly 
performed reliability checks throughout the coding process. To further 
ensure consistency across coding pairs, one reporting team member met 
regularly with each coding pair while they performed their reliability 
checks to help resolve any conflicts across the pairs. The coders 
recorded their results on a standardized data collection instrument, 
and one coder from each pair entered the results into an electronic 
data file, and 100 percent of the entered data was verified for 
accuracy. Descriptive statistics for the codes were computed using SAS 
statistical software. A second independent analyst reviewed the data 
analysis. 

To determine the extent to which OCC considered and addressed the 
comments, we identified any changes between OCC's proposed and final 
version of the rule. We analyzed the preamble to the final rule in 
which OCC acknowledged the public comments it received and discussed 
its responses. We then identified the rule changes that OCC attributed 
to public comments and the public comments OCC acknowledged it did not 
address. We verified our analysis with OCC officials from the Division 
of Legislative and Regulatory Activities. In addition, we reviewed 
OCC's internal memorandums on the banking activities rule to identify 
OCC's views on the issues arising from the public comments and its 
assessment of the comments. 

To identify issues stakeholders raised about the process OCC used to 
promulgate the banking activities rule and the visitorial powers rule, 
we identified and interviewed interested parties that may be impacted 
by the banking activities and visitorial powers rules. We interviewed 
representatives of organizations of state officials (Conference of 
State Bank Supervisors, National Association of Attorneys General, 
National Governors Association, and National Conference of State 
Legislatures). In addition, we interviewed officials from consumer 
organizations (Center for Responsible Lending, Consumer Federation of 
America, National Community Reinvestment Coalition, and National 
Consumer Law Center). We also analyzed correspondence from 
congressional members to OCC that questioned OCC's rulemaking process 
and congressional hearing transcripts and testimonies. To obtain 
information on OCC's response to the criticisms regarding its 
rulemaking process, we interviewed the Acting Comptroller of the 
Currency and officials from OCC's Division of Legislative and 
Regulatory Activities. Finally, we interviewed staff from the Board of 
Governors of the Federal Reserve System, Federal Deposit Insurance 
Corporation, Office of Thrift Supervision, and Securities and Exchange 
Commission on additional mechanisms that they used to solicit public 
comments in connection with informal rulemakings they considered 
controversial. 

[End of section] 

Appendix II: Comments from the Office of the Comptroller of the 
Currency: 

Comptroller of the Currency: 
Administrator of National Banks:
Washington, DC 20219: 

September 23, 2005: 

Mr. Richard J. Hillman:
Managing Director, Financial Markets and Community Investment: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Hillman: 

Thank you for the opportunity to review the draft report prepared by 
the United States Government Accountability Office (GAO) concerning the 
OCC's rulemaking processes with respect to the preemption and 
visitorial powers rules that we issued in January, 2004. [NOTE 1] We 
are gratified by the GAO's finding that the OCC "followed the statutory 
framework for rulemaking" in issuing these rules. The integrity of our 
rulemaking process is critically important to the public, to the banks 
we supervise, and to us. Your conclusion that the OCC followed the law 
confirms our view that our process for issuing the rulemakings that you 
reviewed was both open and thorough, in conformity with the applicable 
legal requirements. 

Although the OCC has issued internal guidance describing the procedures 
we use for developing positions and reaching decisions on matters 
addressed through a rulemaking, [NOTE 2] the draft report observes that 
our process would benefit from more detailed written rulemaking 
procedures. We concur. Accordingly, we have initiated a project to 
augment our current Polices and Procedures Manual with more detailed 
written rulemaking procedures. I have directed that this work be 
completed by year-end 2005. 

We have concerns, however, regarding observations in the draft report 
about certain aspects of the OCC's documentation of its compliance with 
executive orders that pertain to rulemaking by executive agencies. 
Briefly, our concerns are the following: 

Documentation of OCC Analysis under, executive Order 12866. The draft 
report indicates that staff memoranda in the OCC's rulemaking files do 
not articulate the analysis underlying the OCC's conclusion that the 
rules were not "significant" for purposes of Executive Order 12866. The 
rulemaking files for the visitorial and preemption rulemakings reviewed 
by GAO staff contain seven memoranda, prepared by OCC legal and 
economic policy staff, describing our analyses and conclusions under 
Executive Order 12866, as well as the Regulatory Flexibility Act (RFA) 
and the Unfunded Mandates Reform Act (UMRA). These seven memoranda 
document our analyses and compliance with the applicable rulemaking 
requirements, and, we believe, satisfy those requirements. 

Compliance with Executive Order 13132 (Federalism). The draft report 
acknowledges that the OCC has discretion and flexibility in determining 
how to comply with executive orders pertaining to rulemaking, including 
the Federalism executive order. It nevertheless contains the 
observation that the extent of the OCC's consultation with state 
officials appeared limited. We believe the consultation with state 
officials carried out by the OCC in connection with the preemption and 
visitorial powers rules complied with the Federalism executive order 
and also was appropriate in view of the nature of the rulemakings. 
However, we also agree that communication among state and Federal 
regulators on issues such as these, with jurisdictional implications, 
where both sides are committed to assuring consumer protection is not 
compromised, benefit from continuous, open and candid dialogue among 
the regulators. We are committed to enhancing our efforts in this area, 
and I already have had several meetings to further that goal. 

With respect to the rulemaking process itself, we received extensive, 
thoughtful comments from a number of state officials and organizations, 
including the Conference of State Bank Supervisors (CSBS), the National 
Governors Association, the National Association of Attorneys General, 
and the National Conference of State Legislators. As noted in the draft 
report, our consideration of, and response to, those comments was 
described in detail in the preambles to the final regulations. In this 
regard, the OCC followed the consultation process to which the OCC and 
CSBS had agreed in 1999, a process that, in essence, ensured that the 
CSBS could alert state officials to rulemakings that might raise issues 
under the Federalism executive order so that those officials could 
prepare any comments accordingly. [NOTE 3] 

Consultation that relied principally on written input was a form of 
consultation particularly appropriate to the nature of these 
rulemakings, which presented issues predominantly legal in nature. 
Nevertheless, the OCC and the CSBS met twice during the rulemaking 
process. And, as indicated in correspondence between then-Comptroller 
Hawke and Thomas J. Miller, the Attorney General for the State of Iowa, 
the OCC met with a number of attorneys general during the time frame 
when the rules were under consideration. [NOTE 4] In sum, we believe 
our reliance on the Administrative Procedure Act comment process, 
supplemented by the informal discussions in which we participated, was 
appropriate to the circumstances of these, rulemakings, [NOTE 5] and 
the preambles to the final preemption and visitorial powers rules, 
which are contained in our rulemaking files, included Federalism 
summary impact statements (as prescribed by the Federalism executive 
order) as well as detailed, substantive discussion of the Federalism 
points raised by commenters. 

I appreciate this opportunity to provide the OCC's comments on the 
draft report, and I extend my thanks for the professionalism with which 
you and your staff have conducted this review. 

Sincerely, 

Signed by: 

John C. Dugan:
Comptroller of the Currency: 

[1] 69 Fed. Reg. 1904 (January 13, 2004) (the preemption rule) (rule 
clarifying the applicability of certain types of state law to national 
bank operations) (codified at 12 C.F.R. §§ 7.4007, 7.4008, 7.4009, 
34.3, and 34.4); 69 Fed. Reg. 1895) (January 13, 2004) (the visitorial 
powers rule) (clarifying the scope of the exclusivity of the OCC's 
visitorial powers) (codified at 12 C.F.R. § 7.4000). 

[2] See OCC Policy and Procedures Manual PPM No. 1000-10 (Rev), 
Internal OCC Review Processes or Policymaking, Rulemaking and Other 
Significant Documents (April 26 2005). The OCC also uses a checklist to 
ensure that key steps in the rulemaking process are completed. We have 
provided these documents previously. While we agree, as described in 
the text that our procedures should be improved, the PPM and checklist 
do comprise written rulemaking procedures. 

[3] As the report notes, after the issuance of Executive Order 13132, 
the OCC and the CSBS agreed that: (1) CSBS would serve as the primary 
channel for communicating with state banking officials when OCC 
proposed a regulation that had Federalism implications; and (2) the OCC 
would send CSBS the draft of such a regulation shortly before the 
document was sent to the Federal Register for publication. 

[4] See Letter from Thomas J. Miller to John D. Hawke, Jr. (October 7, 
2003). We have provided this document previously. 

[5] Legal issues substantially similar to those raised in the 
preemption and visitorial powers rulemakings had been raised and 
extensively commented upon by the states and the public in various 
preemption matters in the months and years prior to the issuance of the 
final rules. For example, the OCC received comments from state 
officials and organizations prior to issuing our order and 
determination regarding the applicability to national banks and their 
operating subsidiaries of the Georgia Fair Lending Act. See 68 Fed. 
Reg. 46264 (August 5, 2003). 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Richard J. Hillman, (202) 512-8678: 

Staff Acknowledgments: 

In addition to the individual named above, Katie Harris (Assistant 
Director), Julianne Stephens Dieterich, Nancy Eibeck, Jamila Jones, 
Landis Lindsey, Alison Martin, Kristeen McLain, Marc Molino, Barbara 
Roesmann, Paul Thompson, and Mijo Vodopic made key contributions to 
this report. 

(250211): 

FOOTNOTES 

[1] In the 1830s, state banks became the primary source of paper 
currency, issuing notes against their reserves. Congress enacted the 
National Currency Act in 1863, which limited the power of state banks 
to issue notes, established a national bank charter, and created OCC, 
among other things. OCC is a bureau of the U.S. Department of the 
Treasury. 12 Stat. 665 (1863). In 1864, Congress revised the National 
Currency Act (renamed the National Bank Act) to provide for 
comprehensive OCC regulation of national banks. Although OCC is a 
bureau of the Treasury, it is an independent office within Treasury. In 
1994, Congress amended the National Bank Act to describe OCC's autonomy 
with respect to rulemaking. Pub. L. No. 103-325 § 331(b). 

[2] 69 Fed. Reg. 1895 (visitorial powers); 69 Fed. Reg. 1904 (national 
bank activities). 

[3] 12 C.F.R. § 7.4000 (2005). 

[4] 12 C.F.R. §§ 7.4007, 7.4008, 7.4009, 34.3, 34.4 (2005). These 
regulations also contain an anti-predatory lending standard and discuss 
OCC enforcement of section 5 of the Federal Trade Commission Act for 
consumer protection purposes. 

[5] 68 Fed. Reg. 46119, 46120 (Aug. 5, 2003). 

[6] The complex system of federally and state-chartered banks is 
generally referred to as the "dual banking system." 

[7] "Small entities" includes small businesses, small governmental 
jurisdictions, and certain not-for-profit organizations. 5 U.S.C. § 601-
612. 

[8] 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). 

[9] 70 Fed. Reg. 6329 (Feb. 7, 2005). 

[10] The APA also contains requirements for formal rulemaking, which is 
used in rate-making proceedings and in other cases where statute 
requires that rules be made "on the record." Formal rulemaking 
incorporates evidentiary (or "trial type") hearings, in which 
interested parties may present evidence, conduct cross-examinations of 
other witnesses, and submit rebuttal evidence. However, few statutes 
require such on-the-record hearings. 

[11] 5 U.S.C. § 553 (2000). The notice is to contain (1) a statement of 
the time, place, and nature of public rulemaking proceedings; (2) 
reference to the legal authority under which the rule is proposed; and 
(3) either the terms or substance of the proposed rule or a description 
of the subjects and issues involved. 

[12] 5 U.S.C. § 553 (c). As noted later in this report, by following 
APA procedures and allowing for a comment period of more than 30 days, 
OCC also followed the procedures for preemptive interpretative rules 
contained in 12 U.S.C. § 43. 

[13] The act states that the rule cannot become effective until at 
least 30 days after its publication unless (1) the rule grants or 
recognizes an exemption or relieves a restriction, (2) the rule is an 
interpretative rule or a statement of federal rulemaking policy, or (3) 
the agency determines that the rule should take effect sooner for good 
cause and publish that determination with the rule. 

[14] 5 U.S.C. §§ 801-808. 

[15] A major rule is defined as a rule that will likely have an annual 
effect on the economy of $100 million or more; increase costs or prices 
for consumers, industries, or state and local governments; or have 
significant adverse effects on the economy. 

[16] On November 14, 2000, the Occupational and Safety Health 
Administration promulgated an ergonomics standard. It would have 
required employers to set up control programs for job categories where 
"work-related musculoskeletal disorders" are reported. In the debate 
over ergonomics, large monetary estimates have been cited for both the 
benefits of a national standard and the costs thereof. After the final 
standard was released in November 2000, opponents of the Occupational 
Safety and Health Administration's approach introduced and quickly 
passed a congressional resolution of disapproval that revoked the rule. 

[17] 5 U.S.C. §§ 601-612. 

[18] GAO, Rulemaking: OMB's Role in Reviews of Agencies' Draft Rules 
and the Transparency of Those Reviews, GAO-03-929 (Washington, D.C.: 
Sept. 22, 2003), 24. Before the issuance of E.O. 12866, OMB reviewed 
all proposed federal rules. Subsequently, OMB reviewed only significant 
rules and the number of regulations reviewed annually declined from 
2,000-3,000 to 500-700. 

[19] Jones v. Rath Packing Co., 430 U.S. 519, 525-526 (1977). 

[20] See, e.g., 1978 OCC Letter No. 61 (Sept. 11, 1978), Ref. No. L31, 
1978 OCC Ltr. Lexis 57 (preemption under the National Bank Act involves 
conflict analysis necessitating separate and individual review of all 
provisions of state redlining law; provisions of state law spelling out 
certain requirements with respect to national bank's credit terms and 
policies not preempted, but related reporting and investigation 
provisions preempted based on OCC visitorial powers authority); 1985 
OCC Unpublished Interpretive Letter 122 (July 19, 1985) (because 
national banks have specific and independent authority under federal 
law to make real estate loans, licensing requirements of state law 
governing secondary mortgage loans were preempted with respect to 
national bank); 1993 OCC Ltr. No. 616 (February 26, 1993), 1993 OCC 
Lexis 10 (state statute requiring credit card issuers to provide 
information to state supervisor is a form of visitation preempted by 
OCC visitorial powers authority). 

[21] GAO, Role of the Office of Thrift Supervision and Office of the 
Comptroller of the Currency in the Preemption of State Law, GAO/GGD/OGC-
00-51R (Washington, D.C.: Feb. 7, 2000). 

[22] See, e.g., 12 C.F.R. § 34.4 (2003). The five areas of state law 
specifically subjected to preemption related to: (1) the amount of a 
loan in relation to the appraised value of the real estate, (2) the 
schedule for the repayment of principal and interest, (3) the term to 
maturity of the loan, (4) the aggregate amount of funds that may be 
loaned upon the security of real estate, and (5) the covenants and 
restrictions that must be contained in a lease to qualify the leasehold 
as acceptable security for a real estate loan. 

[23] The preemptive aspects of the rules express OCC's interpretation 
of the National Bank Act. APA informal rulemaking requirements do not 
apply to interpretative rules. Because OCC used APA rulemaking 
procedures, we did not analyze whether those rules were interpretative 
for purposes of the APA. OCC, by following APA procedures and allowing 
a comment period of more than 30 days, also followed the requirements 
for preemptive interpretive rules under 12 U.S.C. §43. 

[24] 68 Fed. Reg. 6363, 6366-67 (Feb. 7, 2003) (Proposed visitorial 
powers rules "interpret and implement 12 U.S.C. § 484. . . . This 
rulemaking contains amendments to (OCC Regulation) § 7.400 to clarify 
the application of section 484 to" questions about the scope of OCC's 
visitorial powers in two broad categories.); 69 Fed. Reg. at 1895 - 96 
(Jan. 13, 2004) (Final visitorial powers rule changes "serve to clarify 
that Federal law commits the supervision of national banks' Federally 
authorized banking business exclusively to OCC. . . . The regulatory 
proposal and the final regulation would not have the effect of 
preempting substantive state laws, but rather would clarify the 
appropriate agency for enforcing those state laws that are applicable 
to national banks. . . . The proposal and this final rule interpret the 
text of a Federal statute, 12 U.S.C. § 484. . . ."); 68 Fed. Reg. 46119 
(Jan. 13, 2004) (Final banking activities preemption rules "add 
provisions clarifying the applicability of state law to national banks' 
operations."). 

[25] This executive order is the successor to E.O. 12612, issued in 
1987. The Reagan administration's executive order was the first to 
establish the policy of the Executive Branch on federalism. Former 
President Clinton issued a new executive order on federalism in May 
1998, but withdrew the order after it received criticism from state and 
local interests. The 1999 order was issued after negotiations between 
state leaders and the Clinton administration. See Jennie H. Blake, 
Presidential Power Grab or Pure State Might? A Modern Debate Over 
Executive Interpretations On Federalism, 2000 B.Y.U. L. Rev. 293 
(2000). 

[26] Exec. Order No. 13132. 

[27] Id. at section 6(a). 

[28] Id. at section 6(a). 

[29] Id. at section 4(d). 

[30] Id. at section 4(e). 

[31] Id. at section 6(c)(1). 

[32] Id. at section 6(c)(2). 

[33] Id. at section 6(c)(3). 

[34] Id. at section 8(a). 

[35] See OMB, Memorandum for Heads of Executive Departments and 
Agencies, and Independent Regulatory Agencies: Guidance for 
Implementing E.O. 13132, from John T. Spotila, Administrator, Office of 
Information and Regulatory Affairs (Washington, D.C., Oct. 28, 1999). 

[36] Id. at section 8. 

[37] The Conference of State Bank Supervisors is an umbrella 
organization that represents the state bank regulators. 

[38] See OMB's Guidance for Implementing E.O. 13132, 6. 

[39] GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 (Washington, D.C: November 1999), which was prepared 
to fulfill our statutory requirement under the Federal Managers' 
Financial Integrity Act of 1982, provides an overall framework for 
establishing and maintaining internal control and for identifying and 
addressing major performance and management challenges and areas at 
greatest risk of fraud, waste, abuse, and mismanagement. 

[40] Jeffrey Lubbers, "Administrative Conference of the United States 
Recommendation 93-4: Improving the Environment for Agency Rulemaking," 
A Guide to Federal Agency Rulemaking (Chicago: American Bar 
Association, 1999), 423. 

[41] 69 Fed. Reg. 1903 (visitorial powers); 69 Fed. Reg. 1915 (bank 
activities). 

[42] After reviewing our draft, OCC staff provided us with 
correspondence between OCC officials and the state attorneys general 
that referred to the meeting. 

[43] Executive Orders 12866 and 13132 apply to agencies defined under 
44 U.S.C. § 3502(1), but not to those considered independent regulatory 
agencies as defined in section 3502. Since FDIC is an independent 
regulatory agency under section 3502 and is not subject to Executive 
Orders 12866 and 13132, its handbook does not have any procedures on 
carrying out these executive orders. 

[44] See 12 U.S.C. § 1462a(b)(3). Among other things, the section 
provides that the Secretary of the Treasury may not delay or prevent 
the issuance of any rule or the promulgation of any regulation by the 
Comptroller. It also gives to the Comptroller the same authority over 
matters within OCC's jurisdiction as the OTS director has over matters 
within OTS's jurisdiction. The same authority means that the Secretary 
of the Treasury may not intervene in any matter or proceeding before 
the Comptroller (including agency enforcement actions) unless otherwise 
specifically provided by law. 

[45] Like FDIC, SEC is an independent regulatory agency under 44 U.S.C. 
§ 3502 and, therefore, is not subject to Executive Orders 12866 and 
13132. 

[46] We found that 2,250 comment letters submitted to OCC were form 
letters from Realtors and other individuals. The Realtor form letters 
expressed identical concerns: that national banks' financial 
subsidiaries would be permitted to engage in real estate brokerage 
activities without complying with state real estate brokerage licensing 
laws if the Board of Governors of the Federal Reserve were to determine 
that real estate brokerage is an activity permissible for qualified 
bank holding companies. Some individual commenters who also submitted 
essentially the same form letter expressed concerns about the effect of 
the preemption regulation on state consumer protection laws. 

[47] National banks are not subject to state chartering requirements or 
laws governing the formation and conduct of business entities. National 
bank operating subsidiaries, however, typically are formed under the 
laws of a particular state. 

[48] This responsibility includes helping to ensure that national banks 
operate as authorized by Congress, in alignment with the essential 
character of a national banking system and without undue constraint of 
their powers. OCC also explained that federal law gives it broad 
rulemaking authority to fulfill its regulatory responsibilities and 
cited 12 U.S.C. 93a, which explains how OCC is authorized ''to 
prescribe rules and regulations to carry out the responsibilities of 
the office,'' and 12 U.S.C. 371, which authorizes OCC to ''prescribe by 
regulation or order'' the ''restrictions and requirements'' on national 
banks' real estate lending power. 

[49] See 12 C.F.R. §§ 5.34 and 7.4006. See also 69 Fed. Reg. 1905, 
1906. 

[50] 69 Fed. Reg. 1915 (2004). 

[51] 70 Fed. Reg. 6329 (2005). 

[52] 69 Fed. Reg. 1911-12, 1913. 

[53] OCC states in the final version of its banking activities rule 
that upon further consideration (including careful review of comments 
submitted pertaining to this point) of whether it should "occupy the 
field" of real estate lending, it 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. As a result, OCC declined to adopt the suggestion of 
certain commenters that it declare that the regulations ''occupy the 
field'' of national banks' real estate lending, other lending, and 
deposit-taking activities and chose to rely on its authority under both 
12 U.S.C. 93a and 371. To the extent that an issue arises concerning 
the application of a state law not specifically addressed in the final 
regulation, it would retain the ability to address those questions 
through interpretation of the regulation, through issuance of orders 
pursuant to its authority under 12 U.S.C. 371, or, if warranted by the 
significance of the issue, by rulemaking to amend the regulation. 

[54] See testimony of Julie L. Williams, First Senior Deputy 
Comptroller and Chief Counsel, Office of the Comptroller of the 
Currency, Subcommittee on Oversight and Investigations of the Committee 
on Financial Services, U.S. House of Representatives, January 28, 2004. 
Also see testimony of John Hawke Jr., Comptroller of the Currency, 
Office of the Comptroller of the Currency, Committee on Banking, 
Housing and Urban Affairs, U.S. Senate, April 7, 2004. 

[55] The Federal Reserve's Consumer Advisory Council comprises 
academics, state and local government officials, representatives of the 
financial industry, and representatives of consumer and community 
interests. It was established pursuant to the 1976 amendment to the 
Equal Credit Opportunity Act to advise the Federal Reserve on consumer 
financial services. 

[56] In addition to the $100 million measure, the order sets forth 
other criteria for determining whether a rule is significant. These 
include whether a rule would have an adverse affect in a material way 
on state, local, and tribal governments or communities. 

[57] Public comments as well as other supporting materials (e.g., 
hearing records or agency regulatory studies but generally not internal 
memorandums) are placed in a rulemaking "docket," which must be 
available for public inspection. 

[58] Our analysis focused on comments submitted in response to OCC's 
bank activities proposal. 

[59] Most of the public comments were from Realtors. 

[60] The Board of Governors of the Federal Reserve System and the 
Department of the Treasury are considering a proposal to permit 
financial subsidiaries to do this activity, but have not finalized any 
proposal as of the date of this report. 

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