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entitled 'OCC Preemption Rules: OCC Should Further Clarify the
Applicability of State Consumer Protection Laws to National Banks'
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Report to the Subcommittee on Oversight and Investigations, Committee
on Financial Services, House of Representatives:
April 2006:
OCC Preemption Rules:
OCC Should Further Clarify the Applicability of State Consumer
Protection Laws to National Banks:
GAO-06-387:
GAO Highlights:
Highlights of GAO-06-387, a report to the Subcommittee on Oversight and
Investigations, Committee on Financial Services, U.S. House of
Representatives.
Why GAO Did This Study:
In January 2004, the Office of the Comptroller of the Currency
(OCC)—the federal supervisor of federally chartered or “national”
banks—issued two final rules referred to jointly as the preemption
rules. The “bank activities” rule addressed the applicability of state
laws to national banking activities, while the “visitorial powers” rule
set forth OCC’s view of its authority to inspect, examine, supervise,
and regulate national banks and their operating subsidiaries. The rules
raised concerns among some state officials and consumer advocates. GAO
examined (1) how the rules clarify the applicability of state laws to
national banks, (2) how the rules have affected state-level consumer
protection efforts, (3) the rules’ potential effects on banks’ choices
of a federal or state charter, and (4) measures that could address
states’ concerns regarding consumer protection.
What GAO Found:
In the bank activities rule, OCC sought to clarify the applicability of
state laws by relating them to certain categories, or subjects, of
activity conducted by national banks and their operating subsidiaries.
However, the rule does not fully resolve uncertainties about the
applicability of state consumer protection laws, particularly those
aimed at preventing unfair and deceptive acts and practices. OCC has
indicated that, even under the standard for preemption set forth in the
rules, state consumer protection laws can apply; for example, OCC has
said that state consumer protection laws, and specifically fair lending
laws, may apply to national banks and their operating subsidiaries.
State officials reacted differently to the rules’ effect on
relationships with national banks. In the views of most officials GAO
contacted, the preemption rules have had the effects of limiting the
actions states can take to resolve consumer issues, as well as
adversely changing the way national banks respond to consumer
complaints and inquiries from state officials. OCC has issued guidance
to national banks and proposed an agreement with the states designed to
facilitate the resolution of, and sharing information about, individual
consumer complaints. Other state officials said that they still have
good working relationships with national banks and their operating
subsidiaries, and some national bank officials stated that they view
cooperation with state attorneys general as good business practice.
Because many factors, including the size and complexity of banking
operations and an institution’s business needs, can affect a bank’s
choice of a federal or state charter, it is difficult to isolate the
effects, if any, of the preemption rules. GAO’s analysis of OCC and
other data shows that, from 1990 to 2004, less than 2 percent of the
nation’s thousands of banks changed between the federal and state
charters. Because OCC and state regulators are funded by fees paid by
entities they supervise, however, the shift of a large bank can affect
their budgets. In response to the perceived disadvantages of the state
charter, some states have reported actions to address potential charter
changes by their state banks.
Measures that could address states’ concerns about protecting consumers
include providing for some state jurisdiction over operating
subsidiaries, establishing a consensus-based national consumer
protection lending standard, and further clarifying the applicability
of state consumer protection laws. The first two measures present
complex legal and policy issues, as well as implementation challenges.
However, an OCC initiative to clarify the rules’ applicability would be
consistent with one of OCC’s strategic goals and could assist both the
states and the OCC in their consumer protection efforts—for example, by
providing a means to systematically share relevant information on local
conditions.
What GAO Recommends:
GAO recommends that the OCC undertake an initiative to clarify the
characteristics of state consumer protection laws that would make them
subject to federal preemption.
OCC generally concurred with the report and agreed with the
recommendation.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-387].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David G. Wood at (202)
512-8678 or woodd@gao.gov.
[End of Section]
Contents:
Letter:
Background:
Results in Brief:
OCC Described Types of State Laws That Would Be Preempted, but
Questions Remain Regarding the Rules' Scope and Effect:
According to Most State Officials We Contacted, the Preemption Rules
Have Diminished State Consumer Protection Efforts:
The Rules' Effect on Charter Choice Is Uncertain, but Some States Are
Addressing Potential Charter Changes:
Suggested Measures for Addressing State Consumer Protection Concerns
Include Shared Regulation, Which Raises Complex Policy Issues, and
Greater Coordination between OCC and States:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Legal Arguments Regarding the Preemption Rules:
Appendix III: Bank Charter Changes from 1990 to 2004:
Appendix IV: How OCC is Funded:
Appendix V: How Selected Federal Financial Industry Regulators Are
Funded:
Appendix VI: Information on Funding of States' Bank Regulators:
Appendix VII: Comments from the Office of the Comptroller of the
Currency:
Appendix VIII: GAO Contact and Staff Acknowledgments:
Tables Tables:
Table 1: OCC's Assessment Formula:
Table 2: Price of Supervision per Million Dollars in Assets:
Table 3: Effect of Mergers and Consolidations:
Table 4: Information on Funding for Selected State Bank Regulators:
Figures Figures:
Figure 1: Structure and Supervision of Banks:
Figure 2: Assets of National and State Banks as a Percentage of Assets
of All Banks, 1992-2004:
Figure 3: Percentage of OCC's Total Assessments from the 20 Largest
National Banks, from June 30, 1999 through December 31, 2004:
Figure 4: Gains and Losses in Assessment Payments to OCC Relative to
Total Assessments OCC Collected, from June 30, 1999 through December
31, 2004:
Figure 5: Total Annual Changes between Federal and State Charters,
1990- 2004:
Figure 6: Annual Changes between Federal and State Charters Resulting
from Conversions, 1990-2004:
Figure 7: Annual Changes between Federal and State Charters Resulting
from Mergers, 1990-2004:
Figure 8: Assets of Banks That Changed between Federal and State
Charters, 1990-2004:
Figure 9: Assets of Banks That Changed between Federal and State
Charters as a Result of Conversions, 1990-2004:
Figure 10: Assets of Banks That Changed between Federal and State
Charters as a Result of Mergers, 1990-2004:
Figure 11: Total Annual Changes between Federal and State Charters, as
a Percentage of All Banks, 1990-2004:
Figure 12: Assets of Banks That Converted between Federal and State
Charters, as a Percentage of All Bank Assets, 1990-2004:
Figure 13: Sources of OCC Revenue, 1999-2004:
Abbreviations:
CAG: Customer Assistance Group:
CSBS: Conference of State Bank Supervisors:
FCA: Farm Credit Administration:
FDIC: Federal Deposit Insurance Corporation:
FHFB: Federal Housing Finance Board:
FRB: Board of Governors of the Federal Reserve System:
FTC: Federal Trade Commission:
GDPIPD: Gross Domestic Product Implicit Price Deflator:
GLBA: Gramm Leach Bliley Act:
HOLA: Home Owners Loan Act:
MOU: Memorandum of Understanding:
NAAG: National Association of Attorneys General:
NCUA: National Credit Union Administration:
OCC: Office of the Comptroller of the Currency:
OFHEO: Office of Federal Housing Enterprise Oversight:
OTS: Office of Thrift Supervision:
SEC: Securities and Exchange Commission:
UDAP: Unfair and Deceptive Acts and Practices:
Letter:
April 28, 2006:
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:
On January 13, 2004, the Treasury Department's Office of the
Comptroller of the Currency (OCC), which supervises federally chartered
"national" banks, issued two sets of final rules: one covering the
preemption of state laws relating to the banking activities of national
banks and their operating subsidiaries ("bank activities rule") and one
concerning OCC's supervisory authority over those institutions
("visitorial powers rule"). Together, these rules are commonly referred
to as the OCC preemption rules.[Footnote 1] The bank activities rule
addresses the applicability of state laws to lending, deposit-taking,
and all other activities of national banks authorized by the National
Bank Act. The visitorial powers rule clarifies OCC's view of its
supervisory authority over national banks and their operating
subsidiaries, which OCC interprets to be its exclusive power to
inspect, examine, supervise, and regulate the business activities of
national banks.
The rules drew strong opposition from a number of state legislators,
attorneys general, consumer group representatives, and Members of
Congress. Some opposed OCC's legal justification for issuing the
proposed rules. Others opposed the rules because of what they viewed as
potentially adverse effects on consumer protection and the dual banking
system.[Footnote 2] More specifically, opponents stated that the scope
of preemption of state law under the rules would weaken consumer
protections and that the rules could undermine the dual banking system
because, for example, state-chartered banks located in states with
regulatory schemes more stringent than that for national banks would
have an incentive to change their charters from state to federal.
Supporters of the rules asserted that providing uniform regulation for
national banks, rather than differing state regulatory regimes, was
necessary to ensure efficient nationwide operation of national banks.
In your letter, you requested that we review OCC's rulemaking process
for promulgating the bank activities and the visitorial powers rules;
examine OCC's process and capacity to handle consumer complaints; and
assess the impact and potential impact of the rules on consumer
protection and the dual banking system. On October 17, 2005, and
February 23, 2006, respectively, we provided you with reports on the
rulemaking process and OCC's consumer complaints process and
capacity.[Footnote 3] This final report focuses on the impact and the
potential impact of the rules on consumer protection and the dual
banking system. Specifically, the report examines (1) how the
preemption rules clarify the applicability of state laws to national
banks; (2) how the rules have affected state-level consumer protection
efforts; (3) the rules' potential effects on banks' decisions to seek
the federal, versus state, charters; and (4) measures that could
address states' concerns regarding consumer protection.[Footnote 4]
Additionally, we provide information on how OCC and other federal
regulators, as well as state bank regulators, are funded. We provide
this additional information in appendixes IV, V, and VI.
To address these objectives, we analyzed the content of comment letters
submitted to OCC during the rulemaking process and reviewed transcripts
of congressional hearings on the rules to identify issues raised. We
conducted site visits or phone interviews with officials and
representatives of state attorneys general offices, state banking
departments, consumer groups, state bankers associations, and national
and state banks in six states (California, Georgia, New York, North
Carolina, Idaho, and Iowa). In addition, we interviewed legal and
academic individuals and conducted our own legal research. We selected
these states, among other reasons, because of their interest in the
preemption issue, as identified by congressional testimony, comment
letters, and referrals from representatives of national organizations.
Therefore, the views expressed by officials in these six states may not
be representative of all state officials. In Washington, D.C., we
interviewed the national associations comprising state attorneys
general and state bank regulators; representatives of national consumer
groups; and officials at OCC and other federal bank regulatory
agencies, including the Board of Governors of the Federal Reserve
System (FRB) and the Federal Deposit Insurance Corporation (FDIC). To
assess trends in chartering decisions and their effects on OCC's and
states' budgets, we obtained and analyzed data on charter conversions,
mergers, assets, and assessment payments from OCC, FRB, and certain
state bank regulators. To describe how the OCC and state banking
departments are funded, we interviewed OCC and state bank regulators,
and reviewed annual reports, past GAO reports, and the Conference of
State Bank Supervisors' (CSBS) Profile of State-Chartered
Banking.[Footnote 5] We conducted our audit work in the previously
mentioned six states and Washington, D.C., from August 2004 through
March 2006 in accordance with generally accepted government auditing
standards. Appendix I provides a detailed description of our
objectives, scope, and methodology.
Background:
Regulation and Structure of Banking Organizations:
The regulatory system for banks in the United States is known as the
"dual banking system" because banks can be either federally or state-
chartered. As of September 30, 2005, there were 1,846 federally
chartered banks and 5,695 state-chartered banks.[Footnote 6] National
banks are federally chartered under the National Bank Act. The act sets
forth the types of activities permissible for national banks and,
together with other federal law, provides OCC with supervisory and
enforcement authority over those institutions. State banks receive
their powers from their chartering states, subject to activities
restrictions and other restrictions and requirements imposed by federal
law. State banks are chartered and supervised by the individual states
but also have a primary federal regulator (see fig. 1). FRB is the
primary federal regulator of state banks that are members of the
Federal Reserve System. FDIC is the primary federal regulator of state
banks that are not members of the Federal Reserve System. OCC and state
regulators collect assessments and other fees from banks to cover the
costs of supervising these entities. OCC does not receive congressional
appropriations.
Figure 1: Structure and Supervision of Banks:
[See PDF for image]
Note: The primary supervisor(s) are shown in parentheses.
[A] As discussed elsewhere in this report, financial subsidiaries of
national banks, which may engage in nonbanking financial activities,
are subject to regulation by OCC, but certain activities are subject to
functional regulation by the Securities and Exchange Commission, the
Commodity Futures Trading Commission, and state insurance regulators.
Nonbank holding company subsidiaries may also be subject to federal
supervision and under the jurisdiction of the Federal Trade Commission.
The Federal Trade Commission is responsible for enforcing federal laws
for lenders that are not depository institutions but it is not a
supervisory agency and does not conduct routine examinations.
[End of figure]
Banks chartered in the United States can exist independently or as part
of a bank holding company. OCC, which administers the National Bank
Act, permits national banks to conduct their activities through
operating subsidiaries, which typically are state-chartered businesses.
OCC has concluded that a national bank's use of an operating subsidiary
is a power permitted by the National Bank Act and that national banks'
exercise of their powers through operating subsidiaries is subject to
the same laws that apply to the national banks directly. Because OCC
supervises national banks, the agency also supervises national bank
operating subsidiaries.[Footnote 7] Further, many federally and state-
chartered banks exist as parts of bank holding companies. Bank holding
companies may also include nonbank financial companies, such as finance
and mortgage companies that are subsidiaries of the holding
companies.[Footnote 8] These holding company subsidiaries are referred
to as affiliates of the banks because of their common ownership or
control by the holding company. Unlike national bank operating
subsidiaries, nonbank subsidiaries of bank holding companies often are
subject to regulation by states and their activities may be subject to
federal supervision as well.
OCC's 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 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.
As of March 2005, the assets of the banks that OCC supervises accounted
for approximately 67 percent--about $5.8 trillion--of assets in the
nation's banks. Among the banks OCC supervises are 14 of the top 20
banks in asset size. OCC also supervises federal branches and agencies
of foreign banks.
As the supervisor of national banks, OCC has regulatory and enforcement
authority to protect national bank consumers. In addition to exercising
its supervisory responsibilities under the National Bank Act, which
include consumer protection, OCC enforces other consumer protection
laws. These include the Federal Trade Commission Act or FTC Act, which
prohibits unfair and deceptive practices, and the Federal Home
Ownership and Equity Protection Act, which addresses predatory
practices in residential mortgage lending. With respect to real estate
lending, other consumer protection laws that national banks and their
operating subsidiaries are subject to include, but are not limited to,
the Truth in Lending Act, the Home Mortgage Disclosure Act, the Fair
Housing Act, and the Equal Credit Opportunity Act.
One of OCC's strategic goals is to ensure that all customers of
national banks have equal access to financial services and are treated
fairly. The agency's strategic plan lists objectives and strategies to
achieve this goal and includes fostering fair treatment through OCC
guidance and supervisory enforcement actions, where appropriate, and
providing an avenue for customers of national banks to resolve
complaints. The main division within OCC tasked with handling consumer
complaints is the Customer Assistance Group (CAG); its mission is to
ensure that bank customers receive fair treatment in resolving their
complaints with national banks. In our recent report on OCC consumer
assistance efforts, we found that, in addition to resolving individual
complaints, OCC uses consumer complaint data collected by CAG (1) to
assess risks and identify potential safety, soundness, or compliance
issues at banks; (2) to provide feedback to banks on complaint trends;
(3) and to inform policy guidance for the banks it supervises. OCC's
bank examiners use consumer complaint information to focus examinations
they are planning or to alter examinations in progress.[Footnote 9]
OCC and Preemption:
Preemption of state law is rooted in the U.S. 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
supervising financial institutions, questions can arise about whether
federal law applicable to a depository institution preempts the
application of a state's law to the institution. Before promulgating
the preemption rules in January 2004, OCC primarily addressed
preemption issues through opinion letters issued in response to
specific inquiries from banks or states. According to OCC, the
preemption rules "codified" judicial decisions and OCC opinions on
preemption of particular state laws by making those determinations
generally applicable to state laws and clarifying certain related
issues.
However, the preemption rules were controversial. In commenting on the
proposed rules, some opponents questioned whether OCC, in issuing the
bank activities rule, interpreted the National Bank Act too broadly,
particularly with respect to the act's effect on the applicability of
state law to national bank operating subsidiaries.[Footnote 10] Others
opposed the rules because of what they viewed as potentially adverse
effects on consumer protection and the dual banking system. For
example, consumer groups and state legislators feared that the
preemption of state law, particularly with respect to predatory lending
practices, would weaken consumer protections. In comments on the
proposed visitorial powers rule, most opponents questioned OCC's
assertion of exclusive visitorial authority with respect to national
bank operating subsidiaries. Opponents expressed concern that the
visitorial powers rule eliminates states' ability to oversee and take
enforcement actions against national bank operating subsidiaries, even
though those entities may be state-licensed businesses.
Supporters of the proposed bank activities rule, a group consisting
largely of national banks, asserted that subjecting national banks to
uniform regulation, rather than differing state regulatory regimes, was
necessary to ensure efficient nationwide operation of national banks.
According to these commenters, national banks operating under varied
state laws would face increased costs, compliance burdens, and exposure
to litigation based on differing, and sometimes conflicting, state
laws. In comments on the proposed visitorial powers rule, most
proponents suggested that OCC make technical clarifications to the
rule, specifically related to the exclusivity of OCC's visitorial
powers with respect to national banks' operating subsidiaries.[Footnote
11]
Results in Brief:
In issuing the preemption rules, OCC sought to clarify the
applicability of state laws by relating them to certain categories, or
subjects, of activity conducted by national banks and their operating
subsidiaries and the nature of its visitorial powers over those
institutions. However, the bank activities rule does not fully resolve
uncertainties about the applicability of state consumer protection laws
to national banks and their operating subsidiaries. This is because OCC
has indicated that, even under the standard for preemption set forth in
the rules, state consumer protection laws can apply; for example, OCC
has said that state consumer protection laws, and specifically fair
lending laws, may apply to national banks and their operating
subsidiaries. Some state officials questioned the extent to which state
consumer protection laws, particularly those aimed at preventing unfair
and deceptive acts and practices, are preempted for national banks and
their operating subsidiaries. Some national bank representatives with
whom we spoke had mixed views about the applicability of state laws
regarding unfair and deceptive acts and practices.
State officials reacted differently to the rules' effect on their
relationships with national banks. In the views of most state officials
we contacted, the preemption rules have had the effect of limiting the
actions states can take to resolve consumer issues, as well as
adversely changing the way national banks respond to consumer
complaints and inquiries from state officials. Those officials said
that since the rules were promulgated, some national banks and
operating subsidiaries have become less inclined to respond to actions
by state officials to resolve consumer complaints. However, OCC has
issued guidance to national banks and proposed an agreement with the
states designed to facilitate the resolution of and information sharing
about individual consumer complaints and to address broader consumer
protection issues that state officials believe warrant attention.
Further, some state officials reported that, prior to the rules, they
examined operating subsidiaries and were not challenged by either those
entities or OCC, yet since the visitorial powers rule was issued some
national bank operating subsidiaries have declined to submit to state
examinations or have relinquished their state licenses. Other state
officials said that they still have good working relationships with
national banks and their operating subsidiaries, and some national bank
officials stated that they view cooperation with state attorneys
general as good business practice. Some state officials also expressed
the view that the preemption rules might prompt holding companies that
have national bank subsidiaries to move lines of business from a
national bank's holding company affiliate into a national bank
operating subsidiary in order to avoid state regulation.
Because the financial services industry has undergone significant
changes--involving interstate banking, globalization, and mergers and
consolidations--it is difficult to determine what effects, if any, the
preemption rules--apart from other aspects of the federal charter--
might have on banks' choices of charter. Factors affecting charter
choice can include the size and complexity of an institution's banking
operations, the institution's business needs, and the extent to which
supervisory and regulatory competence and expertise are tailored to the
scale of the bank's operations. Our analysis of FRB and OCC data shows
that, from 1990 to 2004, less than 2 percent of the nation's thousands
of banks changed between the federal and state charters. However, the
portion of total bank assets under the supervision of state bank
regulators declined substantially in 2004 due to two large formerly
state-chartered banks changing to the federal charter, and such shifts
in assets have budgetary implications for both state regulators and
OCC. Based on our work, no conclusion can be made about the role, if
any, the preemption rules had in those events or will have on future
charter choices. Nevertheless, several state officials expressed the
view that federal charters likely bestow competitive advantages in
light of the preemption rules, and some states reported actions to
address potential charter changes by their state banks.
State officials and consumer groups identified three general measures
they believed could address their concerns about protecting consumers
of national banks and operating subsidiaries: (1) clarifying the
National Bank Act to provide specifically for some state jurisdiction
over operating subsidiaries; (2) establishing a consensus-based
national consumer protection lending standard; and (3) working more
closely with OCC, in part to clarify the applicability of state
consumer protection laws to national banks and their operating
subsidiaries. In light of OCC regulations and judicial decisions
recognizing operating subsidiaries to be authorized by the National
Bank Act as vehicles through which national banks may operate, the
first measure would likely require amending the National Bank Act to
specify either that the states and OCC share jurisdiction over
operating subsidiaries, or that operating subsidiaries are to be
treated as national bank affiliates. Moreover, providing for state
involvement in the supervision of operating subsidiaries, even if only
for consumer protection purposes, raises both policy and practical
questions--for example, in drawing a line clearly defining states'
authority. Some officials suggested that a national consumer protection
lending standard applicable to lending activities by all state-
chartered and federally chartered financial institutions would avoid
disputes about preemption and serve to satisfy concerns about the
effectiveness of current efforts to protect consumers from lending
abuses. A uniform standard, however, could limit states' abilities to
enact standards of their own. The third measure would involve OCC
initiating efforts to involve the states in addressing their concerns.
This would be consistent with one of OCC's strategic goals and could
assist both the states and the OCC in their consumer protection
efforts--for example, by providing a means to systematically share
relevant information on local conditions.
This report makes a recommendation to the Comptroller of the Currency
that is designed to clarify the applicability of state consumer
protection laws to national banks. We provided a draft of this report
to OCC for review and comment. In a letter (reprinted in app. VII), the
Comptroller of the Currency agreed with our recommendation,
specifically recognizing that OCC should find more opportunities to
work cooperatively with the states to address issues that affect the
institutions it regulates, enhance existing information concerning the
principles that guide its preemption analysis, and look for
opportunities to generally address the preemption status of state laws.
OCC also provided technical comments which we incorporated as
appropriate.
OCC Described Types of State Laws That Would Be Preempted, but
Questions Remain Regarding the Rules' Scope and Effect:
In the bank activities rule, OCC attempted to clarify the types of
state laws that would be preempted by relating them to certain
categories, or subjects, of activity conducted by national banks and
their operating subsidiaries. Specifically, OCC (1) listed subjects of
national bank activity--for example, checking accounts, lending
disclosure, and mortgage origination and mortgage-related activities
such as processing, servicing, purchasing, and selling--to which state
laws do not apply; (2) listed subjects to which state laws generally
apply; and (3) described the federal standard for preemption under the
National Bank Act that it would apply with respect to state laws that
do not relate to the listed subjects.[Footnote 12] Although OCC's
purpose in proposing the regulations was "to add provisions clarifying
the applicability of state law to national banks,"[Footnote 13] we
found that grounds for uncertainty remain regarding the applicability
of state consumer protection laws to national banks, particularly state
statutes that generally prohibit unfair and deceptive practices by
businesses. In addition, because they disagree with OCC's legal
analysis underlying the rules, some state officials we interviewed said
they are unsure of how to proceed with legal measures, such as
proposing, enacting, or enforcing laws or issuing and enforcing
regulations that could relate to activities conducted by national banks
and their operating subsidiaries.
OCC Sought to Clarify the Applicability of State Laws to National Banks
and Their Operating Subsidiaries by Interpreting Preemption and
Visitorial Powers under the National Bank Act:
In the bank activities rulemaking, OCC amended or added rules in parts
of its regulations applicable to four categories of national bank
activity authorized by the National Bank Act: (1) real estate lending;
(2) non-real estate lending; (3) deposit-taking; and (4) the general
business of banking, which includes activities OCC determines to be
incidental to the business of banking. For each of the first three
categories, OCC listed subjects that it concluded are not subject to
state law because state laws concerning those subjects already had been
preempted under OCC interpretations of the National Bank Act, or by
judicial decisions, or were found to be preempted by OTS for federal
thrifts. For state laws relating to any of the three categories but not
to subjects specified in the lists, OCC announced that it would apply
the test for federal preemption established by Supreme Court
precedents. According to OCC, that test calls for a determination of
whether a state law "obstructs, impairs, or conditions" a national
bank's ability to perform a federally authorized activity. For the
fourth category--a "catch all" provision for state laws that do not
specifically relate to any of the other three categories--the rule
states that OCC will apply its articulation of the test for preemption
under the National Bank Act. Finally, for each of the four categories
of banking activity, the rule lists subjects to which state laws
generally apply. These include torts, contracts, the rights to collect
debts, taxation, and zoning. The rules also provide that a state law
applies to a national bank if OCC determines that the law has only "an
incidental effect" on the bank's activity or "is otherwise consistent
with" powers authorized under the National Bank Act.
Although it is referred to as part of the "preemption rules," the
visitorial powers rule does not announce the preemption of state laws
that affect a particular subject or activity. Instead it is OCC's
refinement of how it interprets the federal statute that establishes
OCC's visitorial power over national banks. OCC's view of its
visitorial powers is as follows:
[F]ederal law and OCC regulations vest the OCC with exclusive
"visitorial" powers over national banks and their operating
subsidiaries. (Citation omitted) Those powers include examining
national banks, inspecting their books and records, regulating and
supervising their activities pursuant to federal banking law, and
enforcing compliance with federal or any applicable state law
concerning those activities. (Citation omitted) Federal law thus limits
the extent to which any other governmental entity may exercise
visitorial powers over national banks and their operating
subsidiaries.[Footnote 14]
In the visitorial powers rulemaking, OCC sought to clarify the extent
of its supervisory authority. The agency amended its rule setting forth
OCC's visitorial powers so that the rule: (1) expressly states that OCC
has exclusive visitorial authority with respect to the content and
conduct of activities authorized for national banks under federal law,
unless otherwise provided by federal law; (2) recognizes the
jurisdiction of functional regulators under the Gramm Leach Bliley Act
(GLBA); and (3) clarifies OCC's interpretation of the statute
establishing its visitorial powers, 12 U.S.C. § 484.That provision
makes national banks subject to the visitorial powers vested in courts
of justice, such as a state court's authority to issue orders or writs
compelling the production of information or witnesses, but according to
OCC, does not authorize states or other governmental entities to
exercise visitorial powers over national banks.
Questions Remain Concerning the Applicability of State Consumer
Protection Laws:
Although OCC issued the bank activities rule to clarify the
applicability of state laws to national banks and their operating
subsidiaries, many of the state officials, consumer groups, and law
professionals we interviewed said that the preemption rules did not
resolve questions about the applicability of certain types of state law
to national banks and their operating subsidiaries. One set of
concerns, discussed in appendix II of this report, reflects differences
about how the rules and OCC's authority under the National Bank Act
should be interpreted. In OCC's view, the rules resolved many
uncertainties that had existed before the rules but did not resolve all
issues about the extent of preemption. A second set of concerns
regarding uncertainty over the applicability of state consumer
protection laws, particularly those prohibiting unfair and deceptive
acts and practices (UDAP) exists, at least in part, because of OCC's
statements that under the preemption rules such laws may apply to
national banks.
Statements by OCC Suggest That State Consumer Protection Laws Can Be
Consistent with Federal Law:
In the bank activities rulemaking, OCC specified that a state law
relating to a subject listed as preempted, as well as any other state
law determined to be preempted by OCC or a court, does not apply to
national banks and their operating subsidiaries regardless of how the
law is characterized.[Footnote 15] Accordingly, a state law would not
escape preemption simply because the state describes it as a consumer
protection law. However, OCC has indicated that even under the standard
for preemption set forth in the rules, state consumer protection laws
can apply to national banks and their operating subsidiaries. Moreover,
to the extent that a state's consumer protection law might apply to a
subject on one of the preemption lists, OCC has not specifically
indicated what characteristics of the state law would cause it to be
preempted.
Some state officials and consumer groups we met with were unclear as to
whether or not a state consumer protection law would apply to national
banks because it is "otherwise consistent with" the National Bank Act,
even if the law were to have more than an incidental effect on a
national bank's activity. Some referred to a long-standing decision by
a Federal Court of Appeals, discussed below, holding that a state's law
restricting discriminatory real estate lending practices applied to
national banks. They said that the court's reasoning could justify the
application of other types of state laws, such as consumer protection
laws, to national bank business practices. Moreover, on several
occasions, OCC has made statements that reasonably could be interpreted
to indicate that state consumer protection laws can be consistent with
federal law and, therefore, not preempted, even if they directly affect
a national bank's business activity.
In National State Bank of Elizabeth, N.J. v. Long, the United States
Court of Appeals for the Third Circuit ruled that a provision of a New
Jersey law prohibiting redlining in mortgage lending applied to a
national bank.[Footnote 16] Recognizing that prohibiting redlining was
consistent with federal policy, the court ruled that the bank's
compliance with the New Jersey statute would not frustrate the "aims of
the federal banking system" or "impair a national bank's efficiency" in
conducting activities permitted by federal law.[Footnote 17] This
decision demonstrates that a state law determined to be consistent with
federal policy can govern a national bank's exercise of a federally
granted power, even if the law directly affects the way in which the
bank conducts its activity. According to some of the individuals we
interviewed, the same analysis justifies application of state consumer
protection laws to national bank activities such as real estate
lending.
Some of the individuals we interviewed asserted that the Long court's
analysis justifies the application of state consumer protection laws to
national banks, at least to the extent that the laws are consistent
with federal policy. They pointed out, moreover, that federal consumer
protection laws applicable to banking activities (discussed later in
this report) accommodate state laws that impose standards and
requirements stricter than those contained in the federal laws
themselves, provided the state laws are otherwise consistent with the
federal law. Those federal laws contain savings clauses preserving from
preemption state laws that impose stricter standards than in the
federal laws. However, courts have recognized that those savings
clauses do not necessarily preserve such state laws from preemption by
the National Bank Act.[Footnote 18] Several consumer groups and state
officials also referred to OCC statements as indications of OCC's
recognition that, to some extent, the application of consumer
protection laws to national banks is consistent with federal policy.
For example, since the promulgation of the preemption rules, OCC has
said that state consumer protection laws, and specifically fair lending
laws, may apply to national banks and their operating subsidiaries.
Also, while the bank activities rule specifies that national banks may
engage in real estate lending without regard to state law limitations
concerning the "terms of credit," the Comptroller recently referred to
the agency's responsibility to enforce "applicable state consumer
protection laws" and referred to state fair lending laws as an
example.[Footnote 19]
OCC held this position before it promulgated the preemption rules. In a
2002 Advisory Letter to national banks, their operating subsidiaries,
and others entitled "Guidance on Unfair or Deceptive Acts or
Practices," OCC advised the recipients that "[t]he consequences of
engaging in practices that may be unfair or deceptive under federal or
state law can include litigation, enforcement actions, monetary
judgments, and harm to the institution's reputation." The letter
alerted the recipients to the potential that the activities of national
banks and their operating subsidiaries could be subject to state UDAP
laws, stating as follows:
A number of state laws prohibit unfair or deceptive acts or practices,
and such laws may be applicable to insured depository institutions.
See, e.g., Cal. Bus. Prof. Code 17200 et seq. and 17500 et seq.
Operating subsidiaries, which operate effectively as divisions or
departments of their parent national bank, also may be subject to such
state laws. . . . Pursuant to 12 CFR 7.4006, state laws apply to
national bank operating subsidiaries to the same extent that those laws
apply to the parent national bank, unless otherwise provided by federal
law or OCC regulation.
Although OCC published this guidance before it issued the bank
activities rule, at the time of the guidance OCC had been following the
same preemption standard it applied in the rulemaking.[Footnote 20]
Officials Expressed Differing Views on Applicability of State Consumer
Protection Laws:
We found differing views among state officials with respect to the
applicability of state consumer protection laws, particularly their
UDAP laws, to national banks. Officials from some state attorney
general offices said that their states' UDAP laws probably are
preempted by the bank activities rule, while officials in one state
were unclear. State banking department officials we spoke with also had
mixed views regarding the applicability of state UDAP laws. In one
state, a banking department official said that the state's UDAP statute
would likely be preempted. In another state, an official said that
state's UDAP laws would not be preempted. Two other state banking
department officials were unclear about the status of their states'
UDAP laws.
Representatives of national banks also had mixed views about the
applicability of state UDAP laws. Representatives of one national bank
stated that state UDAP laws were preempted, whereas representatives of
two other national banks stated that state UDAP laws were, in fact,
applicable to national banks and their operating subsidiaries. The
status of state UDAP laws is not clear because, some argued, those laws
generally are consistent with federal laws and policies and, therefore,
might not obstruct, impair, or condition the ability of national banks
and operating subsidiaries to carry out activities authorized by the
National Bank Act.
In addition to uncertainty over the applicability of state consumer
protection laws, state officials, consumer groups, and others asserted
that the effects of the preemption rules will remain unclear until
legal arguments are resolved. The legal disputes pertain to whether OCC
correctly articulated and applied the federal preemption standard,
OCC's reasons for including certain subjects of state law in the
preemption lists, and the application of state laws to national bank
operating subsidiaries. These issues, which essentially concern OCC's
legal authority and rationale for the rules, are summarized in appendix
II.
According to Most State Officials We Contacted, the Preemption Rules
Have Diminished State Consumer Protection Efforts:
According to most state officials we contacted, the preemption rules
have limited the actions states can take to resolve consumer issues and
negatively affected the way national banks respond to consumer
complaints and inquiries from state officials. More specifically, the
state officials asserted that, after the preemption rules went into
effect, some national banks and operating subsidiaries became less
responsive to actions by state officials to resolve consumer
complaints. In addition, some state officials noted that they
previously had been able to examine operating subsidiaries without
challenge, but after the visitorial powers rule was issued some
national bank operating subsidiaries declined to submit to state
examinations or relinquished their state licenses. However, other state
officials reported good working relationships with national banks and
their operating subsidiaries, and some national bank officials said
that cooperation with state attorneys general was good business
practice. While we found some examples of operating subsidiaries that
did not comply with state regulatory requirements after the preemption
rules were issued, we note that others had not complied with state
requirements before the rules were issued. Some state officials also
believed that the preemption rules might prompt holding companies with
national bank subsidiaries to move lines of business from a national
banks' holding company affiliate into an operating subsidiary to avoid
state regulation. No data are available that would allow us to
determine the extent of any such activity, and state officials did not
provide conclusive documentary evidence to support their concerns.
State Officials Expressed Differing Reactions to the Rules' Effect on
Relationships with National Banks:
While all state officials we interviewed agreed that the preemption
rules have changed the environment in which they relate to national
banks and their operating subsidiaries, they have responded differently
to the changes. Officials from some state attorney general offices and
state banking departments told us that the preemption rules have caused
them to approach national banks and their operating subsidiaries about
consumer protection issues differently than they did in the past. For
example, one state banking department official said that, instead of
approaching a national bank operating subsidiary from a regulatory
posture, the department now will try to resolve a consumer complaint
with a national bank operating subsidiary only if the department has a
contact at that particular operating subsidiary, but having a contact
is the exception rather than the rule. Other state officials told us
that the preemption rules have not caused them to change their
practices, either because they continued to attempt resolution at the
local level or because they continued to forward unresolved complaints
to OCC as they had done prior to the issuance of the preemption rules.
Both before and after issuing the preemption rules, OCC issued guidance
that, among other things, addressed how banks should handle contacts
from state officials. Specifically, OCC issued guidance in 2002--prior
to the visitorial powers rule--encouraging national banks to consult
the agency about information requests by state officials to determine
whether the request constituted an attempt to exercise visitorial or
enforcement power over the bank.[Footnote 21] The guidance also advised
national banks that state officials were to contact OCC, rather than
the bank itself, if they had information to indicate that the bank
might be violating federal law or an applicable state law. In February
2004, approximately 1 month after the visitorial powers rule became
effective, OCC updated its 2002 guidance to clarify how national banks
should respond to consumer complaints referred directly to the bank by
state officials.[Footnote 22] While the 2002 guidance was silent on
consumer complaint handling specifically, the 2004 guidance stated that
OCC does not regard referral of complaints by state officials as an
exercise of supervisory powers by the states and that national banks
should deal with the complaining customer directly. The 2004 guidance
advised national banks to contact OCC if (1) the bank considers a
referral to be a state effort to direct the bank's conduct or otherwise
to exercise visitorial authority over the national bank or (2) the
state-referred complaint deals with the applicability of a state law or
issues of preemption. Further, the guidance notifies national banks
that state officials are encouraged to send individual consumer
complaints to OCC's Customer Assistance Group, and as outlined in the
2002 guidance, reiterates that state officials should communicate any
information related to a national bank's involvement in unfair or
deceptive practices to OCC's Office of Chief Counsel.
Further, in July 2003--prior to the visitorial powers rule--OCC
suggested a "Memorandum of Understanding" (MOU) between itself and
state attorneys general and other relevant state officials that could,
in OCC's words, "greatly facilitate" its ability to provide information
on the status and resolution of specific consumer complaints and
broader consumer protection matters state officials might refer to
them. The MOU was sent to all state attorneys general as well as the
National Association of Attorneys General (NAAG) and CSBS. Some of the
officials from banking departments and the offices of attorneys general
that we interviewed, as well as representatives of CSBS, said they
viewed OCC's proposed MOU as unsatisfactory because, in their view, it
essentially favored the OCC. In addition, some of the state officials
with whom we spoke believed that signing the proposed MOU would amount
to a tacit agreement to the principles of the banking activities and
the visitorial powers rules.
According to OCC, states' attorneys general--in informal comments on
the proposed MOU--felt that the proposal was unilateral, imposing
certain conditions upon states that received information from OCC but
not upon OCC when it received information from state officials. Also,
OCC noted that the proposed MOU did not provide for referrals from OCC
to state agencies of consumer complaints OCC received pertaining to
state-regulated entities. Therefore, in 2004, OCC attempted to address
these concerns in a revised MOU, which it provided to CSBS and the
Chairman of the NAAG Consumer Protection Committee. According to OCC,
the revised MOU expressly says that an exchange of information does not
involve any concession of jurisdiction by either the states or by OCC
to the other. Only one state official signed the original 2003 MOU, and
according to OCC, to date, no additional state officials have signed
the 2004 version.
Some State Officials Believe That National Banks and Operating
Subsidiaries Are Less Inclined to Cooperate:
Some state officials asserted that before the preemption rules they
were able to deal with national banks on more than merely a complaint-
referral basis. They said that, through their regular dealings with
national banks and their operating subsidiaries, consumer complaints
typically had been resolved effectively and expeditiously. Among the
anecdotes they provided are the following:
* State officials in two states said that they treated national banks
and their operating subsidiaries just like any other state-regulated
business; they would simply approach the institution about consumer
complaints and jointly work with the institution to resolve them.
* An official in one state attorney general's office referred to an
effort in which the attorney general's office successfully resolved
complaints about a national bank's transmittal of customer account
information to telemarketers.
* Officials from another attorney general's office said that, before
the visitorial powers rule was amended, they often were able to
persuade national banks to change their business practices; for
example, they said they were able to encourage a national bank to
discontinue including solicitations that they viewed as deceptive in
consumers' credit card statements. These officials also stated that, in
the past, they were able to speak informally with national banks to get
them to alter the way certain products were advertised.
As further examples of national banks cooperating with state officials
prior to the preemption rules, state officials in two states cited
voluntary settlements that national banks entered with states
concerning telemarketing to bank credit card holders and the sharing of
bank customer information with third parties. In each of two
settlements, one in March 2002 and the other in January 2003, national
banks entered an agreement with 29 states in connection with judicial
proceedings brought by the states concerning telemarketing practices
and the disclosure of cardholder information to third parties. Also, in
an October 2000 settlement made in connection with judicial proceedings
initiated by a state, a national bank agreed to follow certain
practices concerning the sharing of customer information with third
parties. Although these settlements were made voluntarily and do not
represent a judicial determination that the states had authority to
enforce laws against the national banks, state officials used them to
illustrate that they had some influence over the banks prior to the
preemption rules. In addition, some state officials said that prior to
the visitorial powers rule, many operating subsidiaries submitted to
state requirements regulating the conduct of their business, such as
license requirements for mortgage brokering. Also, according to some
state officials, prior to the issuance of the visitorial powers rule
their states examined and took enforcement actions against operating
subsidiaries because they were state-licensed and regulated, and OCC
did not interfere.[Footnote 23]
Some state authorities maintained, however, that by removing
uncertainties about state jurisdiction and the applicability of state
law that may have served as an incentive for cooperation, the
preemption rules made it opportune for the institutions to be less
cooperative. One official from an attorney general's office,
emphasizing the importance of consumer protection at the local level,
stated that the preemption rules have in effect precluded the state
from obtaining information from national banks that could assist the
state in protecting consumers. The official pointed out that the
state's ability to obtain information from operating subsidiaries
enhanced state consumer protection efforts because the institutions
would refrain from abusive practices to avoid reputation risk
associated with the disclosure of adverse information.[Footnote 24]
Further, many state officials we spoke with expressed a concern that,
because of the preemption rules, national bank operating subsidiaries
that formerly submitted to state supervision no longer do so.
According to some state officials, because of the preemption rules,
operating subsidiaries either threatened to relinquish or actually:
relinquished their state licenses, or did not register for or renew
their licenses.[Footnote 25] Specifically:
* State officials in two states provided copies of letters they
received from operating subsidiaries, citing the visitorial powers rule
as the basis for relinquishing their state licenses.
* An official in one state attorney general's office provided a list of
27 national bank operating subsidiaries that notified the office that
they would no longer maintain their state licenses.
* Banking department officials in one state estimated that 50-100
operating subsidiaries had not renewed their licenses.
While the preemption rules may have prompted some national bank
operating subsidiaries to relinquish their state licenses or otherwise
choose not to comply with state licensing laws, we note that others did
so before the preemption rules were issued. For example, in January
2003 an entity licensed by the State of Michigan that engaged in making
first mortgage loans became a national bank operating subsidiary. In
April 2003, the entity advised the state that it was surrendering its
lending registration for Michigan.[Footnote 26]
Some state officials said that because the visitorial powers rule
precludes state banking departments from examining operating
subsidiaries, the potential exists for a "gap" in the supervision of
operating subsidiaries. According to them, without state examination,
consumers may be harmed because unfair and deceptive, or abusive,
activities occurring within operating subsidiaries may not be
identified. Although OCC's procedures state that any risks posed by an
operating subsidiary are considered in the conduct of bank examinations
and other supervisory activities, state officials nonetheless doubted
OCC's willingness to detect compliance with applicable state laws. Some
questioned how examiners would know what state laws, if any, apply to
national banks and how examiners would review compliance with such
laws. While OCC examiners noted that they generally did not have
procedures for examining compliance with state laws, OCC officials
explained that if they identify a state law requirement that is
applicable to national banks and operating subsidiaries, examiners are
advised so that they can take the requirement into account as they
determine the scope of their examinations.
Other State Officials Reported Little Change in Relationships with
National Banks:
The above-described concerns of state officials are not universal. In
one state, officials with whom we spoke acknowledged that they still
have good working relationships with national banks and their operating
subsidiaries. Further, officials of some national banks with whom we
spoke stated that they viewed cooperation with state laws and attorneys
general as good business practice. For example, one national bank
representative stated that knowing about problems that consumers were
having helped to provide better services and reduce the potential for
litigation. The individual added that the bank wants to maintain
relationships with state attorneys general, and if they make an honest
effort to engage the bank, then the bank also would engage the
attorneys general. Another national bank representative stated that the
bank typically tries to focus on resolving the concern rather than
quibble about whose jurisdiction--federal or state--the issue falls
under.
Some State Officials Were Concerned That the Preemption Rules Could
Prompt the Creation of Operating Subsidiaries to Avoid State
Regulation:
Some state officials with whom we spoke expressed concern that the
preemption rules might cause national banks to bring into the bank
lines of business traditionally regulated by states. According to this
view, nonsubsidiary affiliates of national banks, such as a mortgage
broker controlled by a holding company that also controls a national
bank, could be restructured as operating subsidiaries to avoid state
supervision and licensing requirements. According to FRB officials,
movements of bank holding company subsidiaries to national bank
operating subsidiaries have occurred for some time, including before
OCC issued the preemption rules.[Footnote 27] However, FRB does not
collect data specifically on such movements.
Many lines of business that constitute the business of banking under
the National Bank Act, such as mortgage lending and brokering and
various types of consumer lending, are conducted by nonbank entities.
According to some individuals we spoke with, a bank holding company
controlling both a national bank and such a nonbank entity might
perceive some benefit in having the nonbank's business take place
through the bank and, therefore, cause the bank to acquire the nonbank
as an operating subsidiary.
Federal courts considering the status of national bank operating
subsidiaries have upheld OCC's position that operating subsidiaries are
a federally authorized means through which national banks exercise
federally authorized powers, holding that operating subsidiaries are
subject to the same regulatory regime that applies to national banks,
unless a federal law specifically provides for state
regulation.[Footnote 28] Under these precedents, converting a
nonsubsidiary affiliate or unaffiliated entity into a national bank
operating subsidiary would subject the entity to OCC's exclusive
supervision. Moreover, state laws preempted from applying to national
banks would be preempted with respect to the entity once it were to
become an operating subsidiary.[Footnote 29]
FRB individuals with whom we spoke said that a national bank's cost of
conducting a business activity in an operating subsidiary could be less
than the cost of conducting that activity through a holding company
affiliate. Therefore, a bank holding company could have an incentive to
place a state-regulated activity in a national bank operating
subsidiary. However, this would be true both before and after the
preemption rules, all else being equal. As discussed in the following
section, the financial services industry has undergone many
technological, structural, and regulatory changes during the past
decade and longer. Determining how the preemption rules, in comparison
with any number of other factors that might influence how banks or
holding companies are structured, would factor into the national bank's
decision to acquire a nonbank entity was beyond the scope of our
work.[Footnote 30]
The Rules' Effect on Charter Choice Is Uncertain, but Some States Are
Addressing Potential Charter Changes:
Many factors affect charter choice, and we could not isolate the effect
of the preemption rules, if any, on charter changes. According to some
state regulators and participants in the banking industry, federal bank
regulation could be advantageous to banks when compliance with state
laws would be more costly, thereby creating an incentive for banks to
change charters. However, because the financial services industry has
undergone significant changes--involving interstate banking,
globalization, mergers, and consolidations--it is difficult to isolate
the effects of regulation from other factors that could affect choice
of charter. According to our analysis of FRB and OCC data from 1990 to
2004, the number of banks that changed between the federal and state
charters was relatively small compared with all banks. However, total
bank assets under state supervision declined substantially in 2004
because two large state-chartered banks changed to the federal charter;
further, such shifts in assets have budgetary implications for both
state regulators and OCC. Based on our work, no conclusion can be made
about the extent to which OCC's preemption rules had any effect on
those events or will have on future charter choices. Nevertheless,
several state officials expressed the view that federal charters likely
bestow competitive advantages in light of the preemption rules; in
response, some states addressed potential charter changes by their
state banks. For example, one state changed its method of collecting
assessments.
Industry Changes and Other Factors May Affect Charter Choice:
A discussion of any effect or perceptions of the effect of the
preemption rules on charter choices by state-chartered banks has to be
viewed in the broader environment of the evolution of the financial
services industry over the past approximately 20 years--changes that
make it difficult to assess the impact of the preemption rules. Some of
the bank officials and other bank industry participants we interviewed
noted these industry changes when discussing their views on the
preemption rules and acknowledged that many factors may affect banks'
choices between federal and state charters.
Banking Business Has Changed in Many Ways:
Like other parts of the financial services industry, which includes the
securities and insurance sectors, modern banking has undergone
significant changes. Interstate banking and globalization have become
characteristics of modern economic life. On both the national and
international levels, banks have a greater capacity and increased
regulatory freedom to cross borders, creating markets that either
eliminate or substantially reduce the effect of national and state
borders. Deregulation and technological changes have also facilitated
globalization. Consolidation (merging of firms in the same sector) and
conglomeration (merging of firms in other sectors) have increasingly
come to characterize the large players in the financial services
industry. The roles of banks and other financial institutions and the
products and services they offer have converged so that these
institutions often offer customers similar services. As a result, the
financial services industry has become more complex and competition
sharper.
In our October 2004 report on changes in the financial services
industry, we cited technological change and deregulation as important
drivers of consolidation in the banking industry.[Footnote 31] For
example, in the early 1980s, bank holding companies faced limitations
on their ability to own banks located in different states. Some states
did not allow banks to branch at all. With the advent of regional
interstate compacts in the late 1980s, some banks began to merge
regionally. Additionally, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 removed restrictions on bank holding
companies' ability to acquire banks located in different states and
permitted banks in different states to merge, subject to a process that
permitted states to opt out of that authority.[Footnote 32] While the
U.S. banking industry is characterized by a large number of small
banks, the larger banking organizations grew significantly through
mergers after 1995.
Convergence of products and services in the banking industry means that
now many consumers can make deposits, obtain a mortgage or other loan,
and purchase insurance or mutual funds at their bank. Other market
factors have made some banks rely more on fee-based income from, among
other services and products, servicing on loans they sold to other
institutions and fees on deposit and credit card activity (including
account holder fees, late fees, and transactions fees). Thus, consumer
protection issues have become increasingly important to the industry.
Many Factors May Affect Choice of Charters:
Bank and banking industry association officials and state and federal
regulators we interviewed told us that choice of charter is influenced
by many factors. For example, the size and complexity of banking
operations are important factors in determining which charter will
service an institution's business needs. Bank and other officials also
cited the importance of supervisory and regulatory competence and
expertise tailored to the scale of a bank's operations. For example,
officials of some large national banks stated that they valued OCC's
ability to effectively supervise and regulate large scale banks with
complex financial products and services. Officials from one large state
bank said that they valued federal supervision by FDIC and, at the
holding company level, FRB. Some bank and state and federal regulatory
officials said that smaller banks prefer the generally lower
examination fees charged by state regulators and lower regulatory
compliance costs associated with their state charters relative to the
federal charter. For example, officials of one small state bank, which
was previously federally chartered, said that they had to undertake
more administrative tasks under the federal charter, such as greater
reporting requirements needed to demonstrate compliance with federal
laws, and that such tasks were relatively burdensome for a small bank.
Some bank officials and state and federal regulators agreed that
smaller banks with few or no operations in other states value
accessibility to and convenient interaction with state
regulators.[Footnote 33] Additionally, officials of smaller banks said
they value the state regulators' understanding of local market
conditions and participants and the needs of small-scale banking.
Officials of one small state bank said that, when their bank switched
from the federal charter to a state charter, one important
consideration was the state regulators' frequent visits to the bank and
their responsiveness and accessibility. Bank officials, industry
representatives, and regulators also agreed that new banks tend to be
state-chartered because state regulators tend to play an important role
in fostering the development and growth of start-up banks.
Bank and state regulatory officials noted that a pre-existing
relationship between a bank's senior management and a regulator or
management's knowledge about a particular regulator can play an
important role in choosing or maintaining a charter. For example,
officials noted that if management has already established a good, long-
term relationship with a particular regulator, or if they were familiar
with a regulator, they would likely remain with that regulator when
considering charter options. Officials from two large, state- chartered
banks operating in multiple states said that they valued their
relationship with their home state regulators because they were very
responsive and provided quality services. Officials from one of the
banks stated that they knew the staff of their state banking department
very well, and they respected the banking commissioner's "hands-on"
approach to supervision.
Mergers and acquisitions of banking institutions also influence charter
choice. For example, officials from a large banking institution stated
that, because their merger with another large banking institution
combined federally and state-chartered entities, they decided to
convert from a state to the federal charter to maintain only one
charter type in the resulting company. As a result, they believed they
would be able to simplify their operations, reduce inefficiencies, and
lower risks to the financial safety and soundness of the merged company
and have the advantages of the federal charter companywide. The history
of acquisitions in a company also may affect charter choice. For
instance, officials of one bank said they obtained their federal
charter by acquiring a federally chartered bank and then continued to
acquire more federally chartered banks. Similarly, according to
officials of a state bank, they typically integrate banks they acquire
into their existing state charter.
Few Banks Have Changed Charters, but Shifts in Bank Assets Have
Budgetary Implications for State Regulators and OCC:
Our analysis of data on charter changes among federally and state-
chartered banks from 1990 through 2004 showed that few banks overall
changed charters--either switching from federal to state or state to
federal--during that period.[Footnote 34] About 2 percent or less of
all banks in these years changed charters; 60 percent of all changes
were to the federal charter. Most charter changes occurred in
connection with mergers rather than conversions.[Footnote 35] Appendix
III provides details on charter changes.
While the numerical shift in bank charters was not significant from
1990 through 2004, there was a major shift in the distribution of bank
assets in 2004 to the federal charter. As illustrated in figure 2, the
share of assets divided among federally chartered and state-chartered
banks remained relatively steady for a decade; between 1992 and 2003,
national banks held an average of about 56 percent of all bank assets,
and state banks held an average of about 44 percent. However, in 2004,
the share of bank assets of banks with the federal charter increased to
67 percent, and the share of bank assets of banks with state charters
decreased to 33 percent.
Figure 2: Assets of National and State Banks as a Percentage of Assets
of All Banks, 1992-2004:
[See PDF for image]
Note: FDIC data were only available beginning in 1992.
[End of figure]
While part of this increase may be explained by the growth of federally
chartered banks, two charter changes in 2004--JP Morgan Chase Bank and
HSBC Bank--substantially increased the share of all bank assets under
the federal charter.
Changes in bank assets among state and federal regulators have
budgetary implications because of the way the regulators are funded.
Most state regulators are funded by assessments paid by the banks they
oversee. The state banking departments collect assessments, often based
on the supervised bank's asset size. As a result, a department's budget
may be vulnerable when the department collects a significant portion of
its revenue from a few large banks if one or more change to the federal
charter. For instance, when two of the largest banks in one state
changed to the federal charter, the state regulator lost about 30
percent of its revenue.
We analyzed funding information in two states we visited to estimate
how a change to the federal charter by the largest state bank in each
state could affect those state regulators' budgets. In the first state,
if the largest state bank were to change to the federal charter, the
state regulator's assessment revenue would decrease by 43 percent. In
the second state, the charter change of the largest state bank would
decrease assessment revenue by 39 percent. Some state banking
department officials told us that loss of revenue has caused or may
cause them to adjust their assessment formula and find other sources of
revenue. Others suggested that budget volatility also might make hiring
and retaining the expert staff that they needed difficult.
OCC is funded primarily from assessments it charges the banks it
supervises; it does not receive any appropriations from Congress. (See
app. IV for details on OCC's assessment formula and app. V for
information on how some other federal regulators are funded.) Between
1999 and 2004, the assessments collected from national banks funded an
average of 96 percent of OCC's budget. Thus, its budget also could be
affected by charter changes. OCC derives much of its assessments from a
relatively small number of institutions. Although OCC oversees about
1,900 national banks, the 20 largest banks accounted for approximately
57 percent of OCC's assessments in December 2004.[Footnote 36] Since
1999, the percentage of OCC's budget paid by its largest banks has been
increasing (see fig. 3).
Figure 3: Percentage of OCC's Total Assessments from the 20 Largest
National Banks, from June 30, 1999 through December 31, 2004:
[See PDF for image]
[End of figure]
The potential exists for OCC to experience budget repercussions if
large national banks decided to change to a state charter, resulting in
fewer assets under OCC's supervision. However, before December 2004,
conversions generally affected less than 1 percent of OCC's assessment
revenue. Figure 4 shows gains and losses in assessments paid to OCC
relative to the total amount collected in assessment payments. OCC's
assessment revenue from conversions to the federal charter jumped by
about 8 percent, or about $23 million, as of December 31,
2004.[Footnote 37] The increase is largely attributable to the
conversion of one of the two large state banks mentioned previously,
which accounted for about 98 percent of the increase in OCC's
assessment revenue from charter conversions.
Figure 4: Gains and Losses in Assessment Payments to OCC Relative to
Total Assessments OCC Collected, from June 30, 1999 through December
31, 2004:
[See PDF for image]
[End of figure]
According to OCC officials, the agency is in a position to sustain any
serious decrease to its revenue stream. OCC's financial strategy
includes establishing reserves to address unexpected fluctuations in
assessment revenue and an increase in demand on resources.[Footnote 38]
According to OCC, its "contingency reserve" would be used to counter
any adverse budgetary effects of a large national bank changing
charters. OCC's policy is to maintain the contingency reserve at
between 40 and 60 percent of its budget. According to OCC, at the
beginning of fiscal year 2006, the contingency reserve was 49 percent
of OCC's budget. According to OCC, having a reserve allows the agency
to handle any change in revenue in a controlled way and reduce the
impact of budget volatility and any need to suddenly increase
assessments charged to the banks they supervise.
Some Officials Perceive Competitive Advantages in the Federal Charter
and Have Taken Actions to Address Potential Charter Changes by State
Banks:
According to some state officials, because of federal preemption,
national banks do not have to comply with state laws that apply to
banking activities and, to the extent that compliance with federal law
is less costly or burdensome than state regulation, the federal charter
provides for lower regulatory costs and easier access to markets.
Therefore, some state regulators and banking industry officials
expressed concern that the federal charter, and particularly the
preemption of state laws, will result in competitive advantages for
federally chartered banks over state chartered banks. According to some
state officials, state chartered banks that operate in multiple states
could be at the greatest competitive disadvantage. In contrast,
according to OCC and many banking industry participants, from a legal
perspective, the preemption rules did not change anything; state laws
always have been subject to preemption under the National Bank Act and
the Supremacy Clause of the U.S. Constitution and, therefore, state
banks historically have faced the possibility that a federal charter
could be more beneficial than a state charter.
As noted above, many factors may influence banks' choice of a state or
federal charter. Substantiating claims about any competitive advantage
for federally chartered banks would involve, among other things,
comparisons of states' laws and regulations with federal law and
regulations, conclusions about which set of laws and regulations
overall would be less burdensome or costly for a particular bank, and
obtaining and analyzing data and individual opinions about whether
differences in burden and compliance costs, if any, would be
significant enough to limit a state bank's ability to compete with
national banks. A study of this magnitude was beyond the scope of this
report and, during our work, we did not learn of any study
demonstrating that the preemption-related aspects of a national bank
charter generally give national banks a competitive advantage over
state-chartered institutions.
Officials Perceived Some Competitive Advantages for the Federal
Charter:
Many officials that we spoke with said that preemption of state law
could make the federal bank charter attractive for some state banks.
Representatives of a number of federally and state-chartered banking
institutions and industry associations stressed the value of not having
to comply with different state laws and of having more regulatory
uniformity throughout the country under a federal charter. They stated
that large banks and banks with operations in multiple states prefer
the federal charter because it makes it easier and less costly to do
business. Some bank officials stated that OCC preemption also makes the
federal charter attractive because the rules clarify supervisory and
regulatory authority for national banks and their operating
subsidiaries and also encourage more standardized banking practices.
For example, officials from one national bank said that changes in the
banking industry, such as interstate banking, make it more important
for banks with multistate operations to have uniform federal
regulations to operate across states and to achieve economies of scale.
Similarly, an official from another large national bank noted that
having a consistent set of national regulations also facilitates banks
in offering consumers, who are becoming increasingly mobile, financial
products and services across the country.
Officials from one large federally chartered bank said that a state
charter for them would be impractical because it would be expensive to
develop and maintain different operational systems for different state
laws. Officials from one large, state-chartered bank operating in
multiple states said that they need to tailor their products, fees,
forms, disclosures, and staff training to the requirements of each
state and that the requirements could be conflicting. In contrast, they
said, for national banks, there are fewer legal discrepancies when
operating under the federal charter. Officials from one state-chartered
bank with multistate operations also said that they invest significant
resources to keep abreast of and monitor state regulatory matters in
the various states where they operate. Furthermore, some bank officials
noted that mistakes are more likely to occur when business operations
must be tailored to the multiple and different requirements of
different states. Despite these challenges, officials from these state-
chartered banks believed the benefits of being state-chartered
outweighed the challenges.
Some States Have Made Efforts to Address the Potential Impact of
Charter Changes:
State officials noted two efforts to address potential charter changes
by their state banks: strengthening their state parity laws, which
generally confer on state banks the same powers given to national
banks, and changing their funding sources.
Parity Laws:
Some individuals we interviewed suggested that the use of state
"parity" statutes could help even the regulatory playing field between
federal and state regulation. Parity statutes generally grant state-
chartered banks the same powers given to national banks and treat state
banks like national banks in other ways. According to data from CSBS,
prior to the rules, 46 states had parity statutes granting state-
chartered banks parity with national banks.[Footnote 39] Of those, 11
states had parity statutes that were triggered automatically; that is,
when national banks were granted certain powers, state banks in that
state were automatically granted the same powers.[Footnote 40]
According to CSBS, the remaining 35 states' parity laws require the
state bank regulator's permission before a state bank is allowed to
operate under the parity law's provisions. Representatives of one state
bankers association told us in their state--where regulator approval
for parity is required--there are often long delays, with some state
bank's parity applications pending for 2-3 years. Further, according to
state regulators many states' parity laws include other restrictions
that some say may make it difficult for a state bank to be competitive
with national banks. After the preemption rules were promulgated, one
state bank regulator proposed to enhance the state's current parity
statute to include an automatic trigger for state-chartered banks when
national banks are given certain powers by the OCC. Thus, in the view
of many industry participants and observers we spoke with, state parity
laws are not an ideal solution to leveling any competitive advantage
federally chartered banks might have over state-chartered banks.
However, an effective parity law could provide an incentive for
existing state-chartered banks to maintain their state charters.
We note that views about the rationale for parity laws generally did
not address other possible explanations for those laws, such as a
belief that federal regulation is an appropriate model for regulating
and supervising state banks. Regardless of a state's reasons for having
a parity law, many participants and regulators in the banking industry
maintain that without regulatory parity the dual banking system will
suffer because banks will migrate to the regulatory regime they
consider to be most advantageous. In recent testimony before FDIC, some
regulatory officials and banking industry representatives testified
that unless efforts were made to restore parity between federal and
state bank regulation, the dual banking system, which they described as
having encouraged economic development especially at the community
level, would be adversely affected, as would healthy competition,
regulatory innovation, and checks and balances among state and federal
regulators.[Footnote 41]
Budget Concerns:
Some state regulatory officials with whom we spoke recognized the
budgetary consequences associated with state banks changing to the
federal charter. To reduce the impact on their budgets if one of their
largest state-chartered banks changed charters, some state regulators
we spoke with have taken steps to limit the potential for instability.
For example, one state banking department has changed its method of
collecting assessments. Prior to 2005, this state banking department
was not collecting assessments from sources other than approximately
300 depository institutions, a small portion of the approximately 3,400
bank and nonbank institutions such as check cashers and money
transmitters that it oversaw. Now this state regulator collects
assessments from all of its regulated entities. Other officials have
said they were considering alternative methods of determining
assessments to decrease the banking department's reliance on one or a
few banks to sustain their budgets.
Although state banking departments would experience smaller budgets if
assessments were lost, the decrease in assessments would be somewhat
offset by the decreased costs of supervising a smaller group of banks
and other financial entities. There are other factors that could
mitigate the consequences of any loss of revenue to a state regulator;
for example, funding formulas that cushion the impact of charter
conversions. For instance, in one state that we visited, each bank
effectively paid a proportionate amount of the banking department's
expenses as its assessment, with consideration given for asset size. As
a result, assessments varied directly with changes in the department's
spending and with the number of state-chartered banks. Banking
department officials in this state believed that it would take about
100 state-to-federal charter conversions to affect funding
significantly. (See app. VI for information on how state bank
regulators are funded.)
Suggested Measures for Addressing State Consumer Protection Concerns
Include Shared Regulation, Which Raises Complex Policy Issues, and
Greater Coordination between OCC and States:
Some state officials and consumer groups identified three general
measures that they believed could help address their concerns about
protecting consumers of national banks and operating subsidiaries: (1)
providing for some state jurisdiction over operating subsidiaries; (2)
establishing a consensus-based national consumer protection lending
standard; and (3) working more closely with OCC, in part to clarify the
applicability of state consumer protection laws to national banks and
their operating subsidiaries. The first measure would most likely
involve amending the National Bank Act and, along with the second
measure, raises a number of legal and policy issues. The third measure
would involve OCC's clarification of the effect of the bank activities
rule on state consumer protection laws.
Shared Supervisory Authority over Operating Subsidiaries Would Assist
State Officials with Consumer Protection Efforts, but the Concept
Raises Questions about the Supervision of National Bank Activities:
Some state officials we interviewed suggested that states should have a
direct monitoring or supervisory role over operating subsidiaries,
particularly with respect to consumer protection matters, because the
subsidiaries are state chartered. Providing such a role would likely
require amending the National Bank Act to specify either that (1) the
states and OCC share jurisdiction over operating subsidiaries or (2)
operating subsidiaries are to be treated as national bank affiliates.
However, providing for state involvement in the supervision of
operating subsidiaries, even if only for consumer protection purposes,
raises difficult questions. Some individuals we interviewed said that
doing so would significantly interfere with Congress' objectives in
establishing a national banking system. Others maintained that state
and federal supervisory interests could be balanced without undermining
national banks' ability to conduct business.
Some supporters of state supervision maintain that the National Bank
Act currently does not preempt the application of state laws to
operating subsidiaries. Those subscribing to this view maintain that
OCC's interpretation of the act is wrong because the preemption
standards and visitorial powers limitations under the act pertain
specifically to national banks, not to their operating subsidiaries.
According to this position, under the National Bank Act and other
federal banking laws, operating subsidiaries should be treated as
"affiliates" of national banks, and federal law recognizes the
authority of states to regulate affiliates. However, several recent
federal court decisions have held that OCC has reasonably interpreted
the National Bank Act to permit a national bank's use of operating
subsidiaries to conduct its business.[Footnote 42] Some authorities
assert that Congress agrees with OCC's regulatory scheme for operating
subsidiaries, pointing out that Congress has let the interpretation
stand for more than 30 years. They also refer to a provision of GLBA,
in which Congress specifically recognized the existence of operating
subsidiaries by using OCC's interpretation to describe them.[Footnote
43] Further, they maintain that, in GLBA, Congress implicitly
recognized that OCC's authority over operating subsidiaries is
exclusive unless Congress specifically says otherwise.[Footnote 44]
Because operating subsidiaries are, by definition, a part of a national
bank's business activity, amending the National Bank Act to provide
states with authority to regulate them concurrently with OCC would set
the stage for state regulation of a national bank in exercising its
federally granted powers. One possible effect of this approach is that,
even if a state's authority over an operating subsidiary were limited
to consumer protection, it would be difficult to limit state
supervision of the bank. Assuming that a regulatory line could be drawn
to separate the activities of the operating subsidiary from those of
the bank, states would need to monitor, if not supervise, the
activities that trigger consumer protection concerns. To the extent
that these activities reflect business decisions, policies, or
practices by the national bank, an opportunity would exist for state
intrusion into the bank itself. This could lead to, among other things,
regulatory disputes over jurisdiction, differing views about the safety
and soundness of the bank, or other points of contention arising from
regulatory policies and objectives of OCC and the states.
Similarly, amending the National Bank Act to specify that operating
subsidiaries are affiliates of national banks could have unintended
consequences. Assuming that the activities of an operating subsidiary
continued to be limited to activities permissible for its parent bank,
the bank simply could move those activities into the bank, in which
case the efficiencies gained from conducting those activities through a
separate unit, if any, would be lost. Alternatively, those activities
could be shifted to an affiliate of the bank. The potential impact on
the national bank's delivery of products and services, its costs, and
its safety and soundness could be significant.
Some state officials noted that states already work effectively with
other federal regulators to monitor and enforce compliance with
consumer protection laws. They described efforts their offices took
with federal regulators, such as FTC, to identify and take enforcement
actions against unlawful practices. One official said FTC works with
state officials by meeting periodically with state regulators to
discuss issues of mutual concern and, when appropriate, to divide
investigative responsibilities. In one instance, the state attorney
general coordinated efforts with FTC to investigate and reach
settlement with certain entities that had engaged in deceptive
practices. Some state officials said that their relationships with
federal regulators were based on shared regulatory authority over state-
chartered entities and that a similar relationship with OCC should
exist with respect to national bank operating subsidiaries.
We were told of similar federal-state arrangements with respect to
state-chartered depository institutions that are subject to both
federal and state supervision. State officials said that they work with
FDIC and FRB regularly to conduct bank examinations and identify and
stop practices that violate applicable laws. As an example, one
official said that state regulators, FDIC, and FRB have entered into
cooperative regulatory agreements to supervise interstate operations of
state-chartered banks that conduct activities in other (host) states.
Some state officials said that having the same kind of relationship
with OCC concerning national bank operating subsidiaries would enhance
consumer protection in their states.
All of the above examples involve state-chartered entities that are
outside of a national bank and are subject to supervision by both
federal and state authorities. Although those entities are subject to
some federal laws that preempt or can have a preemptive effect on state
laws, state officials generally believed that states have enough
supervisory authority over the institutions to ensure their conformity
with state policies as expressed in state laws. The extent to which
those examples should serve as models for national bank regulation
depends on several considerations, not the least of which would involve
policy judgments about the autonomy, if not the purpose, of the
national bank charter.
A Consensus-Based National Consumer Protection Lending Standard
Applicable to All Lending Institutions Would Provide Uniformity but
Limit State Autonomy:
During our work, we asked state officials and others for their opinions
on whether it is desirable to have a federal lending law ensuring the
same level of consumer protection to customers of all lending
institutions, including banks and regardless of charter. Officials from
state bankers' associations asserted that a national standard may
already exist, for example, in the FTC Act, which among other things
prohibits businesses from engaging in unfair and deceptive acts and
practices.[Footnote 45] In addition, officials referred to other
federal consumer protection laws that apply to national banks and
national bank operating subsidiaries.[Footnote 46] Others stated that
existing consumer protection standards in federal lending laws are weak
and suggested a stricter, consensus-based national consumer protection
standard applicable to lending activities by all state-chartered and
federally chartered financial institutions. Assuming such a standard
could be set, lenders and consumers could rely upon protections that
would not change based upon the lending institution's charter. A
consensus-based national consumer protection lending standard, however,
would appear to limit states' abilities to enact standards of their
own.
The rationale for a consensus-based national consumer protection
lending standard generally is that (1) developing such a standard would
protect consumers more than existing laws do and (2) having the right
type of standard would help reduce concerns about the preemptive effect
of federal laws on state consumer protection programs. However, some of
the individuals we interviewed agreed that adopting a consensus-based
national consumer protection lending standard, even if sound policy,
would be difficult to accomplish. Among other things, defining the
conduct subject to a standard could be difficult. While some
individuals referred to certain antipredatory lending bills pending in
Congress as appropriate models, others stated that it would be
difficult to find a uniform solution to practices that are viewed as
predatory.
We also found mixed views on whether a consensus-based national
consumer protection lending standard should serve as a ceiling (which
would not allow state authorities to impose more stringent standards)
or a floor (which would so allow). Some officials stated they would
prefer a floor so that states could go farther to address the
particular needs of their states. One state attorney general official
stated that the benefits of having a floor would be realized when there
were more specific practices that needed to be addressed, such as
predatory lending. On the other hand, another attorney general official
said that floor-type standards such as those contained in federal laws,
such as the Truth in Lending Act and the FTC Act, do not themselves
impose adequate protections and often have not led to more protective
state laws.
Under either approach, valid regulatory objectives could be
compromised. A federal "ceiling" could deprive states of the ability to
address practices and implement policies unique to local conditions.
State officials and consumer groups maintain that the states serve as
laboratories for regulatory innovation necessary for adequately
policing financial industry products and practices. A uniform national
"ceiling" could deprive states of the ability to act independently.
Conversely, a limitation of the "floor" approach is that states could
impose differing standards that would defeat the objective of
uniformity.
An OCC Initiative to Clarify Preemption With Respect to State Consumer
Protection Laws Could Assist in Achieving Consumer Protection Goals:
As discussed earlier in this report, many state officials and consumer
groups have expressed uncertainty over the extent to which state
consumer protection laws apply to national banks and their operating
subsidiaries. At the same time, OCC stated that the agency would like
to work cooperatively with the states to further the goal of protecting
consumers. Based on our work, it appears that OCC's clarification of
the effect of the preemption rules on state consumer protection laws
would assist states in their consumer protection efforts and could
provide an opportunity for the agency to work with states more broadly
on consumer protection concerns.
OCC informed us of their efforts to work with states on preemption
issues. For example, an OCC representative stated that OCC hoped to
harmonize the OCC's and states' authorities to provide effective and
efficient protections for consumers. Also, in 2004 testimony before the
Senate, the Comptroller described OCC's commitment to protect consumers
and welcomed opportunities to share information and cooperate and
coordinate with states to address customer complaints and consumer
protection issues.[Footnote 47] However, OCC has no formal initiative
specifically addressing the applicability of state consumer protection
laws.
State officials and others suggested that OCC undertake an initiative
to work with the states in clarifying the scope of preemption with
respect to state consumer protection laws and to coordinate OCC and
state consumer protection objectives. Clarifying the applicability of
state consumer protection laws would be consistent with a strategy for
achieving one of OCC's strategic goals, which is to enhance
communication with state officials to facilitate better coordination on
state law issues affecting national banks. Further, unlike the two
measures discussed previously, such an OCC initiative would not involve
statutory amendments.
One state official cited an example of cooperation between OCC and the
state to protect consumers: a case in which OCC and the State of
California coordinated their efforts to initiate proceedings against a
national bank and some of its state-chartered affiliates. The actions
were based on alleged unfair and deceptive practices that violated the
FTC Act, the California Business and Professions Code, the Fair Credit
Reporting Act, and other applicable laws. OCC instituted an enforcement
action against the national bank, while the state filed a civil
judicial action against the national bank's state-chartered parent--a
financial corporation--and two other state-chartered
affiliates.[Footnote 48] In June 2000, both actions were settled. The
defendants did not admit or deny the allegations against them, but in
both proceedings they agreed to payment of a $300 million "restitution
floor" as seed money for a restitution account. Under the settlement,
any payment made by a defendant in one proceeding would discharge any
identical payment obligation by the other defendants in the other
proceedings. Even though OCC and the state initiated separate
proceedings against separately supervised institutions, they worked
together to treat the restitution floor obligation as a joint
settlement.
According to some state officials and others, an OCC initiative to
clarify the applicability of state consumer protection laws could
assist both OCC and the states in their consumer protection efforts. It
could also have the added benefit of facilitating the sharing of
information among the states and OCC on conditions in a state or a
location that might be conducive to predatory lending or other abuses
and could help individual states, as well as OCC. State officials told
us that states have knowledge of local conditions that allow them to
identify abusive practices within their jurisdictions. A means for the
states to systematically share this kind of information with OCC could
help the agency in its supervision of national banks and operating
subsidiaries.
Conclusions:
Although the preemption rules were intended to provide a clear
statement of OCC's standard for preemption and its exclusive visitorial
powers authority, the bank activities rule does not fully resolve
uncertainties about the applicability of state consumer protection laws
to national banks and their operating subsidiaries. Based on OCC's own
statements, the scope and the effects of the rules are not entirely
clear. It is, therefore, not surprising that some state officials said
they are uncertain as to what state consumer protection laws apply to
national banks and their operating subsidiaries.
Many state officials we spoke with maintain that their ability to
protect consumers by directly contacting national banks and their
operating subsidiaries has been diminished by the preemption rules.
However, to date, courts have upheld OCC's view that it has exclusive
authority to supervise national bank operating subsidiaries. State
officials reported that they have maintained cooperative relationships
with national banks and/or operating subsidiaries since OCC issued the
preemption rules. While state officials expressed particular concerns
that the rules could prompt national banks, or their holding companies,
to move activities into operating subsidiaries in order to avoid state
regulation, such movements occurred prior to the rules and can result
from many factors. OCC has issued guidance to national banks designed
to facilitate the resolution of individual consumer complaints and
address broader consumer protection issues that state officials believe
warrant attention.
Changes in charter type--federal or state--are influenced by many
factors including whether or not a bank has operations in multiple
states. Consistent federal laws throughout the country are an
attraction to banks with a presence in more than one state and
especially banks with a national presence. Preemption of state law is
part of that attraction for such banks but cannot be attributed as the
sole reason some banks choose the federal charter. While the number of
charter changes has been relatively small during the period we reviewed
(1990 through 2004), the amount of the corresponding bank assets that
moved from state bank regulators' supervision to that of OCC as a
result of charter changes did increase noticeably in 2004, albeit
largely because of the charter conversion of one large bank. Because
both OCC and state banking departments are funded by the entities they
regulate and their formulas for the assessments charged are based
partially, if not totally, on the assets of the banks and other
entities they regulate, their budgets and workloads can be affected by
changes in bank charters. OCC has a reserve fund to protect itself from
any dramatic shifts away from the federal charter, but some state
banking departments' budgets and workloads could face reductions if
large state banks changed to the federal charter.
Our work identified three general measures that, while not necessarily
exhaustive of all potential measures, could help address state
officials' concerns about protecting consumers of national banks and
operating subsidiaries. Two of these--providing for some state
jurisdiction over operating subsidiaries and establishing a consensus-
based national consumer protection lending standard--raise a number of
complex legal and policy issues of their own and could be difficult to
achieve. The third measure, in contrast to the first two, would not
raise complex issues such as the potential need to amend the National
Bank Act. Rather, it would require OCC to clarify the characteristics
of state consumer protection laws that would make them subject to
federal preemption. We recognize the impracticality of specifying
precisely which provisions of state laws are, or are not, preempted,
and acknowledge that some uncertainty may always exist. Nevertheless,
we believe that an OCC outreach effort to describe in more detail which
characteristics of state consumer protection laws would make them
subject to preemption could help state officials better understand the
effect of the rules and help allay their concerns. OCC has expressed a
willingness to reach out to states regarding consumer protection
issues. Further, such efforts would be consistent with OCC's strategic
goal of enhancing communication with state officials to facilitate
better coordination on state law issues affecting national banks.
Recommendation for Executive Action:
We recommend that the Comptroller of the Currency undertake an
initiative to clarify the characteristics of state consumer protection
laws that would make them subject to federal preemption. Such an
initiative could serve as an opportunity for dialogue between OCC and
the states on consumer protection matters. For example, OCC could hold
forums where consumer protection issues related to federal and state
laws could be discussed with state officials and consumer advocates.
This could improve communication and coordination between OCC and state
officials with respect to the impact of the preemption rules on the
applicability of state consumer protection laws and could also assist
both OCC and the states in their consumer protection efforts.
Agency Comments and Our Evaluation:
We provided a draft of this report to OCC for review and comment. In
written comments (see app. VII), the Comptroller of the Currency
generally concurred with the report and agreed with the recommendation.
Specifically, the Comptroller stated that the report contained a number
of observations that were consistent with OCC's views on the
relationship between the preemption rules and a bank's choice between
the federal and state charters. OCC commented that the preemption rules
provided clarification regarding the types of state laws listed in the
regulations, and noted that recent court decisions reflect a growing
judicial consensus about uniform federal standards that form the core
of the national banking system. OCC agreed with our observation that it
may be impractical to specify precisely which provisions of state laws
are, or are not, preempted. However, OCC recognized that it should find
more opportunities to work cooperatively with the states to address
issues that affect the institutions it regulates, enhance existing
information concerning the principles that guide its preemption
analysis, and look for opportunities to generally address the
preemption status of state laws. Accordingly, OCC described one new
initiative intended to enhance federal and state dialogue and
coordination on consumer issues. OCC stated that the Consumer Financial
Protection Forum, chaired by the U.S. Department of the Treasury, was
established to bring federal and state regulators together to focus
exclusively on consumer protection issues and to provide a permanent
forum for communication on those issues. OCC also provided technical
comments which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send 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 woodd@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 VIII.
Signed by:
David G. Wood:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
On January 13, 2004, the Treasury Department's Office of the
Comptroller of the Currency (OCC), which supervises federally chartered
"national" banks, issued two sets of final rules covering the
preemption of state laws relating to the banking activities of national
banks and their operating subsidiaries ("bank activities rule") and
OCC's exclusive supervisory authority over those institutions
("visitorial powers rule"). The rules drew strong opposition from a
number of state legislators, attorneys general, consumer group
representatives, and Members of Congress, who opposed the rules because
of what they viewed as potentially adverse effects on consumer
protection and the dual banking system. In this report, we examine (1)
how the preemption rules clarify the applicability of state laws to
national banks; (2) how the rules have affected state-level consumer
protection efforts; (3) the rules' potential effects on banks'
decisions to seek the federal, versus state, charters; and (4) measures
that could address states' concerns regarding consumer protection.
Additionally, this report provides information on how OCC and other
federal regulators, as well as state bank regulators, are funded.
Identification of Key Issues and Legal Review of Preemption Standard:
Many of the arguments supporting and opposing OCC's preemption rules
related to legal opinions and policy objectives. Therefore, to identify
key concerns and questions about the preemption rules, we conducted a
content analysis of comment letters that OCC received in response to
its rulemaking.[Footnote 49] In addition to the analysis we conducted
for our previous report on OCC's rulemaking process, we reviewed the 55
comment letters OCC received on its visitorial powers proposal and
conducted a content analysis on 30 of the letters.[Footnote 50] To
analyze the comments, we first separated the 30 letters into two
categories: letters that supported the visitorial powers rule (17) and
letters that opposed the rule (13). We then randomly selected a test
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 the test set of letters and made refinements to
establish the final codes for each category. A pair of trained coders
independently coded the remaining sets of letters and resolved
discrepancies to 100 percent agreement. The coders regularly performed
reliability checks throughout the coding process and recorded results
in an electronic data file, in which the data were verified for
accuracy. Descriptive statistics for the codes were computed by an
analyst using SPSS statistical software and a second, independent
analyst reviewed the data analysis.
To further identify stakeholder concerns, we also reviewed three
congressional hearings on the preemption rules. We grouped statements
from these hearings under the following categories: issue, implication,
or suggestion. The "issue" category included statements that described
the nature of the commenters' concerns. The "implication" category
included statements that explained the perceived effect the rules would
have relative to a specific issue or concern. The "suggestion" category
included statements that described ways certain issues or concerns
could be resolved, as well as measures that could facilitate state and
federal authorities working together to protect consumers. We also
categorized the statements by source and whether the statements were
made in support of or opposition to the rules.
Finally, to obtain more in-depth information on the issues identified
by stakeholders, we conducted site visits or phone interviews with
officials and representatives of state attorneys general offices, state
banking departments, consumer groups, state bankers associations, and
national and state banks in six states (California, Georgia, New York,
North Carolina, Idaho, and Iowa). We judgmentally selected the states
based on the following characteristics: state officials' interest in
the issue; location of noteworthy federally or state-chartered banks
(that is, large banks based on asset size or banks that experienced a
recent charter conversion); notable consumer group presence or consumer
protection laws; and geographic dispersion. We gauged state officials'
interest in the issue and identified state contacts by reviewing
congressional hearings and reviewing comment letters on the proposed
rules. We also solicited appropriate state contacts from officials we
interviewed, such as the National Association of Attorneys General
(NAAG), the Conference of State Bank Supervisors (CSBS), and several
consumer group representatives. In Washington, D.C., we interviewed the
national associations comprising state attorneys general and state bank
regulators; representatives of national consumer groups; and officials
at OCC and other federal bank regulatory agencies, including the Board
of Governors of the Federal Reserve System (FRB) and the Federal
Deposit Insurance Corporation (FDIC).
With the information obtained from the content analysis, review of
congressional hearings, and the site visits and interviews, we
conducted a legal review of the preemption rules, past OCC preemption
determinations, relevant case law, and relevant federal and state
regulations to determine how OCC clarified the applicability of state
laws to national banks.
Effects of Preemption Rules on State Consumer Protection Efforts and
the Dual Banking System:
In the discussions with officials noted above, we solicited their views
on the effects and potential effects of the rules on consumer
protection and asked them how the preemption rules have affected the
dual banking system (for example, charter choice and the distribution
of assets among the national and state banks).
To obtain an industrywide view of how bank assets are divided among
state-chartered and federally chartered banks, we obtained data from
FDIC's online database, Statistics on Depository Institutions, and its
online version of Historical Statistics on Banking. We extracted data
on the number and asset sizes of all banks from 1990 through 2004. To
assess the extent to which banks have changed between the federal
charter and state charters from 1990 through 2004, we collected and
analyzed data from OCC and FRB on the annual number of charter changes
and asset sizes of banks experiencing charter changes during this
period. According to agency officials, OCC data came from its Corporate
Applications Information System and FRB data came from the National
Information Center database. To determine the total number of
conversions to the federal charter each year, we used OCC data to sum
the total number of conversions that occurred in each year from 1990
through 2004 for each type of financial institution as listed in the
data. We also summed the corresponding assets for each type of entity.
In order to find the total number of conversions out of the federal
charter, we separated charter terminations resulting from conversions
from charter terminations listed as occurring for other reasons. We
then summed the total number of all charter terminations due to
conversions out of the federal charter and their total corresponding
assets each year.[Footnote 51]
For charter additions to the federal charter resulting from mergers, we
used OCC data to sum the total number of additions that occurred in
each year from 1990 through 2004 for each type of financial institution
(as listed in the data) involved in the merger. Using FRB data, we
summed the total assets of banks that changed to the federal charter
from state charters as a result of mergers in each year. For deletions
from the federal charter resulting from mergers, we first separated
charter terminations that OCC categorized as resulting from mergers
from charter terminations listed as occurring for other reasons. We
then, using OCC data, summed the total number of all charter
terminations attributed to mergers.[Footnote 52] Using FRB data, we
summed the total assets of banks that changed from the federal charter
to state charters as a result of mergers in each year.
To determine how bank chartering decisions affected OCC's budget, we
summarized data provided by OCC on assessments paid by institutions
that converted charters between 1999 and 2004 to determine how choice
of charter and fees assessed from each type of charter affected OCC's
total revenue. We also collected data from certain states and applied
their respective assessment formulas to analyze the effects of
chartering decisions on the state regulators' budgets. To describe how
the OCC and state banking departments are funded, we interviewed OCC
officials, reviewed agency annual reports, past GAO reports, and CSBS'
Profile of State-Chartered Banking. We also interviewed federal and
state regulators to understand their funding mechanisms.
Measures to Address States' Concerns Regarding Consumer Protection:
As noted previously, we conducted site visits and reviews of
congressional hearings to obtain information on ways state and federal
authorities could work together to protect consumers. During our site
visits, we asked officials and representatives of state attorneys
general offices, state banking departments, consumer groups, and state
bankers associations to identify measures that would facilitate state
and federal authorities working together to protect consumers. When
measures were identified, we asked follow-up questions to determine
perceived advantages and disadvantages of the measure and challenges to
implementing the measure. We then obtained and reviewed relevant
information, such as statutes, judicial opinions, and related
documents.
Overall Data Reliability:
We assessed the reliability of all data used in this report in
conformance with generally accepted government auditing standards. To
assess the reliability of the data on bank charters, assets, and
assessments, we (1) interviewed OCC, FRB, and FDIC agency officials who
are knowledgeable about the data; (2) reviewed information about the
data and the systems that produced them; and (3) for certain data,
reviewed documentation provided by agency officials on the electronic
criteria used to extract data used in this report.
For OCC data on the yearly number and assets of banks experiencing
charter changes between the federal and state charters, we performed
some basic reasonableness checks of the data against FRB data and data
reported in a research study by an economist at OCC. We found that the
data differed among these three data sources. We identified
discrepancies and discussed these with agency officials. We also found
that OCC data on assets of banks that changed charters as a result of
mergers were very different from both FRB data and data in the research
study. Furthermore, according to OCC officials, asset data based on
call report information was considered more reasonable for the purposes
of our report.[Footnote 53] Therefore, we did not use OCC data on
assets of banks that changed charters as a result of mergers. Instead,
we decided to use FRB data because they were more reasonable in
comparison to those in the research study and because they were based
entirely on call report information. Although OCC data on assets of
banks that changed charters as a result of conversions was not based on
call report information, we decided to use that data because it was
reasonable in comparison with those reported in the research study.
After reviewing possible limitations in OCC's Corporate Applications
Information System, we determined that all data provided, with the
exception of OCC assets data noted above, were sufficiently reliable
for the purposes of this report.
We conducted our work in California, Georgia, New York, North Carolina,
Idaho, Iowa, and Washington, D.C., from August 2004 through March 2006
in accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Legal Arguments Regarding the Preemption Rules:
In addition to expressing uncertainty about the applicability of state
consumer protection laws to national banks, some opponents of the
preemption rules disagreed with the Office of the Comptroller of the
Currency's (OCC) legal interpretations of the National Bank Act in
support of the rules. They asserted that the effects of the preemption
rules will remain unclear until these legal arguments are resolved. As
discussed below, legal challenges to the preemption rules consistently
have been rejected by federal courts.
OCC's Interpretation of the Preemption Standard:
Many critics of the bank activities rule disagreed with OCC's
articulation of the standard for federal preemption, asserting that the
agency misinterpreted controlling Supreme Court precedents as well as
the regulatory scheme Congress has established for national banks. The
regulations contained in the bank activities rule provide that, except
where made applicable by federal law, state laws that "obstruct, impair
or condition" a national bank's ability to fully exercise its federally
authorized powers do not apply to national banks.[Footnote 54]
Opponents of the bank activities rule asserted that this standard
misstates the test for preemption under the National Bank Act.
The preemption doctrine is rooted in the Supremacy Clause of the U.S.
Constitution, which states as follows;
This Constitution, and the laws of the United States which shall be
made in pursuance thereof; and all treaties made, or which shall be
made, under the authority of the United States, shall be the supreme
law of the land; and the judges in every state shall be bound thereby,
anything in the Constitution or laws of any State to the contrary
notwithstanding.[Footnote 55]
Under the Supremacy Clause, state law is preempted by federal law when
Congress intends preemption to occur.[Footnote 56] Preemption may be
either express--where Congress specifically states in a statute that
the statute preempts state law--or implied in a statute's structure and
purpose. Implied preemption occurs through either "field preemption" or
"conflict preemption." Field preemption occurs when Congress (1) has
established a scheme of federal regulation so pervasive that there is
no room left for states to supplement it or (2) has enacted a statute
that touches a field in which the federal interest is so dominant that
the federal system will be assumed to preclude enforcement of state
laws on the same subject. In contrast, conflict preemption occurs when
a state law actually conflicts with federal law. To determine whether a
conflict exists, courts consider whether compliance with both federal
and state law is a physical impossibility or whether the state law
stands as an obstacle to the accomplishment and execution of the full
purposes and objectives of Congress.[Footnote 57] Despite these
separate analytical approaches, in practice the differences between the
two are not always exclusive or distinct. Rather, as a practical
matter, there can be a substantial overlap between the categories, with
courts using a similar analysis to address field and conflict
preemption.[Footnote 58]
Even though field preemption and conflict preemption are not mutually
exclusive concepts, the Supreme Court and federal courts traditionally
have applied the conflict analysis to determine preemption questions
arising under the National Bank Act. Supreme Court and other federal
court cases addressing preemption under the act have been decided on
the basis of whether a conflict exists between the federal law and a
state law. It is well settled that with respect to national banks, the
National Bank Act preempts a state law that stands as an obstacle to
the accomplishment and execution of the full purposes and objectives of
Congress. Critics of the bank activities rule asserted that (1) the
controlling Supreme Court precedent for finding this type of conflict
preemption under the National Bank Act is set forth in the Supreme
Court's opinion in Barnett Bank of Marion County v. Nelson and (2) the
Barnett Bank decision sets a standard for preemption that is stricter
than the one applied by OCC, so that under that standard fewer state
laws would be preempted.[Footnote 59]
The decision in Barnett Bank states, in part, as follows:
In defining the pre-emptive scope of statutes and regulations granting
a power to national banks, these [Supreme Court] cases take the view
that normally Congress would not want States to forbid, or to impair
significantly, the exercise of a power that Congress explicitly
granted. To say this is not to deprive States of the power to regulate
national banks, where (unlike here) doing so does not prevent or
significantly interfere with the national bank's exercise of its
powers.[Footnote 60]
Several critics of the bank activities rule interpret this passage to
mean that state law applies to national banks if the law does not
"prevent or significantly interfere with" the banks' ability to engage
in activities authorized by the National Bank Act. They said that, in
the Barnett decision, the Supreme Court clarified its earlier
articulations of conflict preemption under the National Bank Act and
that this standard tolerates state regulation of national banks to a
greater extent than OCC's "obstruct, impair or condition" test.
According to this argument, state law governs a national bank's
exercise of its federally granted powers unless applying the law would
at least significantly interfere with the bank's ability to engage in
banking. OCC interprets the Barnett language to be one of many ways in
which the Supreme Court has articulated the standard for preemption
under the National Bank Act.[Footnote 61] In the preamble accompanying
publication of the final bank activities rule, OCC explained that its
articulation of the standard does not differ in substance from the
language used in Barnett or any other Supreme Court test for preemption
under the National Bank Act, stating that "[t]he variety of
formulations quoted by the Court, . . . defeats any suggestion that any
one phrase constitutes the exclusive standard for preemption."[Footnote
62]
According to some of the sources we consulted, primarily state
regulators and consumer groups, under the Barnett decision the
application of state laws to national bank activities can be consistent
with the National Bank Act. Referring to the rule that state law is
preempted when applying it would create "an obstacle to the
accomplishment of the full purposes and objectives of Congress," one
legal individual asserted that since at least the early twentieth
century it has been an objective of Congress to provide for state
regulation of banking activities regardless of whether a bank has a
federal or state charter. The individual described this objective as a
congressionally established "competitive equilibrium" within the U.S.
banking system. According to this perspective, allowing a state law to
govern a national bank's exercise of its federally granted powers would
be consistent with the purposes and objectives of Congress.
In support of this position, several state officials and consumer
groups we interviewed referred to a provision of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (Interstate
Banking Act). In that legislation, Congress specified that host state
laws regarding community reinvestment, consumer protection, fair
lending, and the establishment of intrastate branches apply to branches
of out-of-state national banks except when, among other things, federal
law preempts their application to a national bank.[Footnote 63] In the
conference report accompanying the legislation, the conferees stated
that preemption determinations made by the federal banking agencies
through opinion letters and interpretive regulations "play an important
role in maintaining the balance of Federal and State law under the dual
banking system."[Footnote 64] The conference report did not discuss how
preemption determinations affect the dual banking system. Instead, the
discussion referred to state interests in protecting individuals,
businesses and communities in their dealings with depository
institutions. However, some parties we interviewed maintained that the
Interstate Banking Act and its legislative history show that Congress
intends states to have a role in regulating national bank activities
and that this relationship is a feature of the dual banking system.
Several individuals and industry participants we interviewed said that,
while Congress may not have prohibited some state regulation of
national banks, Congress consistently has endorsed the concept that
state laws do not apply to national banking when those laws are
inconsistent with federal law. This, they said, is because Congress
established the national bank system to be separate from state banking
systems. According to this view, the concept of a dual banking system
does not contemplate state regulation of national banks, but recognizes
that states have authority to regulate the banks they charter.
Those sharing this perspective, including OCC representatives, referred
to various authorities to demonstrate that Congress established the
national bank system to be independent of state regulation, except to
the extent provided by federal law. They relied primarily on Supreme
Court decisions that referred to the National Bank Act and its
legislative history as an expression of Congress' intent to have a
national charter separate from state regulation.[Footnote 65] For
example, in one of those decisions the Supreme Court indicated that the
National Bank Act does not contemplate state regulation as a component
of the national bank regulatory system. Describing national banks as
"federal instrumentalities," the Supreme Court concluded that a state
law was preempted under the National Bank Act because, among other
things, Congress had not expressed its intent that a federally
authorized national bank activity be subject to local restrictions. In
that decision, the Supreme Court held that the National Bank Act
preempted a state law forbidding national banks from using "saving" or
"savings" in their names or advertising. The Supreme Court said that it
found "no indication that Congress intended to make this phase of
national banking subject to local restrictions, as it has done by
express language in several other instances."[Footnote 66]
Several individuals, including OCC representatives, also said that even
if Congress, in the 1994 Interstate Banking Act, contemplated the
potential application of state laws to national bank activities,
Congress clearly did not intend state laws to apply if they conflict
with federal law. They said that, although the Interstate Banking Act
demonstrates Congress' belief that states have an interest in how
national banks conduct their activities in the four areas specified in
the act, neither the act nor its legislative history suggest that state
laws in those four areas override federal preemption. In their view,
Congress' recognition that state laws are subject to preemption
signifies that Congress did not intend the application of state laws
covering those four areas to be a purpose or objective of national bank
regulation when such state laws conflict with federal law.
In the conference report accompanying the Interstate Banking Act, the
conferees questioned OCC's preemption of a New Jersey law relating to
consumer checking accounts and the agency's preemption of state laws
that prohibit, limit, or restrict deposit account service charges.
However, the conferees recognized that despite the states' interests in
regulating bank activities concerning consumer protection, fair
lending, and the other two areas mentioned previously, state laws in
those areas are subject to preemption under the National Bank Act. In
the legislation, Congress established a process for federal banking
agencies to follow when they preempt state laws concerning those four
areas.[Footnote 67] In describing the process, which includes
publication for public comment of federal banking agency preemption
determinations regarding state laws applicable to any of the four areas
of state interest, the Conferees specified that the legislation was not
intended to change "the substantive theories of preemption as set forth
in existing law."[Footnote 68] At the time, OCC's standard for
preemption was the same as the agency applied in the bank activities
rule. For example, in a 1989 interpretive letter, OCC stated the
federal preemption standard under the National Bank Act as follows:
The general rule governing preemption under the National Bank Act is
that state law applies to national banks unless that law conflicts with
federal law, unduly burdens the operations of national banks, or
interferes with the objectives of the national banking system.
(citations omitted).
In addition to disagreement over the regulatory objectives of the
National Bank Act, we also encountered differences of opinion over the
scope of the preemption rules. Some individuals we interviewed asserted
that, despite OCC's invocation of the conflict preemption standard, in
fact OCC has preempted the field of national bank regulation. That is,
under OCC's test, there is no room for state law in the regulation of
the business activities of national banks because those activities are
solely a matter of federal law. OCC, on the other hand, maintains that
it applies the conflict preemption standard with the objective of
enabling national banks to operate to the full extent of their powers
under federal law "without interference from inconsistent state
laws."[Footnote 69] As discussed previously, courts sometimes apply
field and conflict preemption analyses interchangeably. To date,
however, federal courts have recognized that OCC preemption
determinations are based on an analysis of whether a conflict exists
between federal and state law. Courts addressing the preemption
regulations have not questioned OCC's determination that conflict
between state and federal laws is the predicate for the preemption
rules.
Breadth of the Preemption Lists in the Bank Activities Rule:
In the bank activities rule, OCC explained that state laws concerning
the subjects listed as preempted already had been preempted, either by
OCC administrative determinations, or by federal court decisions or
precedents applicable to federal thrifts.[Footnote 70] However, some of
the subjects listed as preempted have not been specifically addressed
in precedents applying the National Bank Act. Rather, information from
OCC shows that some subjects of state law were included on the
preemption lists because they had been preempted by the Office of
Thrift Supervision (OTS).[Footnote 71] In issuing the bank activities
rule, OCC concluded that with respect to the applicability of state
law, Congress used the same scheme for both national banks and
federally chartered thrifts under the Home Owners Loan Act
(HOLA).[Footnote 72] Opponents of the bank activities rule criticized
this approach. They questioned the applicability of OTS precedents to
preemption under the National Bank Act, asserting that Congress did not
intend HOLA and the National Bank Act to have identical preemptive
effects. In addition, several state officials and consumer groups said
that the terms OCC used to describe preempted subjects of state law are
too broad.
Those questioning OCC's reliance on OTS regulations asserted that
preemption under the National Bank Act is not as expansive as it is
under HOLA, and thus OCC wrongly concluded that state laws preempted
under HOLA also are preempted under the National Bank Act. They
maintained that the Supreme Court's description of OTS' preemptive
authority recognizes the broad preemptive impact of HOLA, which some
federal courts have characterized as field preemption.[Footnote 73]
Critics of the bank activities rule said that, because preemption under
the National Bank Act is conflict-based, it calls for an analysis of
whether a state law covering an OTS-preempted subject conflicts with
the National Bank Act. They maintained that OTS, using a field
preemption analysis, would not have considered whether a conflict
exists. They asserted that the National Bank Act, unlike HOLA,
contemplates that states have a role in regulating activities of
national banks, and particularly those of national bank operating
subsidiaries, which typically are formed under state laws governing the
establishment of business entities. According to OCC, for purposes of
the bank activities rule labeling preemption as either "field
preemption" or "conflict based" is "largely immaterial to whether a
state law is preempted under the National Bank Act.[Footnote 74]
Other Aspects of the Preemption Rulemaking:
State representatives, consumer groups, and others challenged the bank
activities rule with respect to real estate lending. Referring to the
grant of real estate lending powers in the National Bank Act and past
versions of OCC's real estate lending rule, these individuals asserted
that in the bank activities rule OCC broadened the scope of preemption
beyond what Congress intends. One argument was based on the provision
in the National Bank Act that authorizes national banks to make real
estate loans. The provision permits national banks to conduct real
estate lending "subject to section 1828(o) of this title (12 U.S. Code)
and such restrictions and requirements as the Comptroller of the
Currency may prescribe by regulation or order."[Footnote 75] Section
1828(o) requires the federal banking agencies to have uniform
regulations prescribing standards for real estate loans.[Footnote 76]
The standards include a requirement that lenders comply with "all real
estate related laws and regulations." Some individuals we interviewed
said that this standard means that the same real estate lending laws
must apply to all federally insured depository institutions and that,
because state laws apply to one set of institutions--specifically state
banks--those same laws apply to national banks.
Opponents also argued that OCC, by broadening the scope of preemption
for real estate lending, acted contrary to its previous determinations
of limited preemption for this activity. Before the bank activities
rule was issued, OCC's regulations specifically preempted state law
with respect to only five aspects of real estate lending.[Footnote 77]
In interpretive letters describing the preemptive effect of the rule,
OCC officials sometimes stated that its purpose was to preempt only
five categories of state law restrictions on national bank real estate
lending, and that "[i]t was not the intention of [OCC], however, to
preempt all state regulation of real estate lending."[Footnote 78] OCC
stated that the rule clarified the "limited scope" of preemption with
respect to real estate lending, thus "any state regulations outside of
the five areas cited continue to apply to national banks, unless
preempted by other regulation."[Footnote 79] OCC maintained this
position while applying the same preemption standard it applied in the
bank activities rule.
Critics of the bank activities rule asserted that OCC's past statements
were correctly based on the conclusion that the National Bank Act has a
limited preemptive effect with respect to real estate lending and that
OCC has not adequately justified its new, contrary interpretation.
According to OCC, the substance of the bank activities rule is not new;
it reiterates preemption determinations that had been made before the
rule was promulgated. Therefore, the rule does not represent a change
in OCC's application of preemption principles with respect to real
estate lending. Moreover, OCC revised the rule in 1995 to say that OCC
would apply principles of federal preemption to state laws concerning
aspects of national bank real estate lending not listed in the
regulation. OCC had been following this approach in its interpretive
letters on preemption since at least 1985.[Footnote 80]
Some critics of the bank activities rule also challenged preemption
with respect to deposit-taking, which is one of the four categories of
bank activity set forth in the bank activities rule. They asserted that
(1) deposits are personal property and deposit accounts are contracts
between the depositor and the bank and (2) Congress did not intend the
National Bank Act to supersede state property and contract laws. The
bank activities rule provides that state laws on the subjects of
contracts and the acquisition and transfer of property are not
inconsistent with national bank powers and apply to national banks "to
the extent that they only incidentally affect the exercise" of the
bank's powers. The disagreement with OCC's preemption concerning
deposit-taking focuses on whether a particular state law that could be
preempted (because it relates to deposit-taking) might not be preempted
(because it is a state contract or property law). We found one case in
which a California state court held that a state law relating to
deposit taking was not preempted because, among other things, the court
concluded it was a law governing contracts having only an incidental
effect on the bank's deposit-taking. However, in that decision, the
court did not question OCC's authority to preempt state laws applicable
to bank deposits.[Footnote 81]
Applicability of Rules to National Bank Operating Subsidiaries:
State officials and their representative groups disputed OCC's
assertion that the preemptive effects of the National Bank Act extend
to national bank operating subsidiaries. They also disagreed with OCC's
assertion of exclusive supervisory and enforcement jurisdiction over
national bank operating subsidiaries. These disagreements arise mainly
from the contention that OCC has improperly interpreted the status of
operating subsidiaries under the National Bank Act.
Although a national bank operating subsidiary typically is formed under
state business association laws, under OCC's interpretation of the
National Bank Act the entity exists only as a means through which
national banks may conduct federally authorized banking activities.
This is because OCC permits national banks to have operating
subsidiaries on the theory that conducting business through an
operating subsidiary is an activity permitted by the National Bank
Act.[Footnote 82] According to OCC, because operating subsidiaries
exist and are utilized as a national bank activity, they may not be
used by national banks to engage in activities not authorized by the
National Bank Act and, correspondingly, are subject to the same laws,
terms, and conditions that govern national banks.[Footnote 83]
In several recent cases, federal courts have upheld OCC's rationale for
permitting national banks to use operating subsidiaries and,
consequently, have held that operating subsidiaries are subject to the
same laws and restrictions that apply to national banks; one of those
decisions is under review by the Supreme Court.[Footnote 84] Opponents
of OCC's position believe that the National Bank Act does not treat
national bank operating subsidiaries the same as national banks,
regardless of OCC's rationale for their existence. They maintain that
national bank operating subsidiaries are legally independent entities,
not banks, and as such they are subject to state laws and supervision
by state agencies. OCC has permitted national bank operating
subsidiaries since at least 1966, during which time Congress has not
enacted legislation to override OCC's position.[Footnote 85]
Disagreement with OCC's Interpretation of Its Visitorial Powers:
In the visitorial powers rulemaking, OCC clarified its position
regarding its supervisory authority over national banks and their
operating subsidiaries.[Footnote 86] As discussed in the body of this
report, the agency amended its visitorial powers rule to clarify the
terms of its exclusive visitorial power over national banks and their
operating subsidiaries with respect to the content and conduct of their
federally authorized activities. OCC also amended the rule to recognize
the jurisdiction of functional regulators and articulate OCC's
interpretation of a part of the visitorial powers provision, 12 U.S.C.
§ 484, that makes national banks subject to the visitorial powers
vested in courts of justice.[Footnote 87]
During our work, we encountered disagreements with OCC's assertion of
exclusive supervisory authority over national bank operating
subsidiaries and the agency's view of the nature of the visitorial
powers vested in courts of justice.[Footnote 88] Those disagreeing with
the rule described it as an attempt by OCC to limit both state
supervision of activities conducted by state-chartered entities and the
ways in which states can rely on their courts to take legal action
against operating subsidiaries. These disagreements raise complicated
legal analyses and policy concerns, but based on our interviews and
research, there does not appear to be significant uncertainty over
OCC's view of its visitorial powers as expressed in the visitorial
powers regulation. As discussed above, in several recent cases, federal
courts have upheld OCC's conclusion that its visitorial powers confer
exclusive supervisory jurisdiction with respect to the banking
activities of national banks and their operating subsidiaries.
[End of section]
Appendix III: Bank Charter Changes from 1990 to 2004:
From 1990 to 2004, More Banks Changed to the Federal Charter, but Most
Changes Resulted from Mergers:
From 1990 to 2004, the number of bank charter changes to the federal
charter outnumbered changes to a state charter. Figure 5 shows the
total annual changes resulting from conversions and mergers between
federal and state bank charters according to data from Office of the
Comptroller of the Currency (OCC). Of 3,163 charter changes for that
period, 1,884 involved moving from state charters to the federal
charter, and 1,279 involved moving from the federal to a state charter,
a net increase of 605 to the federal charter.
Annual changes between the two types of charters tended to be similar
in number, with the exception of 1994-1999, when noticeably more state
banks changed to the federal charter.[Footnote 89] According to
industry observers and academics we interviewed, the greater number of
changes to the federal charter in 1997 could be attributed to the
easing of individual state restrictions on interstate banking and the
passage of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994, which removed remaining state restrictions on interstate
banking.
Figure 5: Total Annual Changes between Federal and State Charters, 1990-
2004:
[See PDF for image]
[End of figure]
The majority of changes between the federal and state charters during
this period resulted from mergers rather than conversions.[Footnote 90]
Of the 3,163 charter changes in that period, 2,353 (or 74 percent)
involved mergers. Further, 1,545 (82 percent) of the 1,884 changes from
a state to the federal charter involved mergers. Changes from the
federal to a state charter involved somewhat fewer mergers: 808 (63
percent) of 1,279 changes.
Focusing only on conversions, we found that, over the entire period,
there was a net increase in state-chartered banks. Figure 6 shows the
number of annual changes resulting from conversions between the two
types of charters from 1990 through 2004. There were a total of 339
conversions to the federal charter and a total of 471 conversions to
state charters. Thus, there were 132 more conversions to state charters
than to the federal charter.
Figure 6: Annual Changes between Federal and State Charters Resulting
from Conversions, 1990-2004:
[See PDF for image]
[End of figure]
Looking only at mergers, we found the opposite--a net increase in
federal charters. Figure 7 shows the number of annual changes resulting
from mergers between the federal and state bank charters from 1990
through 2004. Over the entire period, there were a total of 1,545
mergers into the federal charter and 808 mergers into state charters.
Thus, there were 737 more mergers into the federal charter than into
state charters.
Figure 7: Annual Changes between Federal and State Charters Resulting
from Mergers, 1990-2004:
[See PDF for image]
[End of figure]
Recent Charter Changes Substantially Increased the National Bank Share
of All Bank Assets:
When banks change charters, the share of bank assets under the
supervision of OCC and different state bank regulators also changes.
Figure 8 shows the total assets of banks that changed charters annually
from 1990 through 2004 according to data from OCC and the Board of
Governors of the Federal Reserve System (FRB). In 1990-2003, the total
assets of all banks that changed charters were less than $200 billion
annually. However, in 2004 total assets of all state-chartered banks
that changed to the federal charter increased to about $789 billion,
largely due to the charter changes of JP Morgan Chase Bank and HSBC
Bank. The assets of these banks constituted about 96 percent (about
$759 billion) of the total assets of banks that changed to the federal
charter, or 82 and 14 percent, respectively. Over the entire period,
total assets that shifted to the federal charter amounted to about
$1,574 billion, and total assets that shifted to state charters
amounted to about $687 billion. Thus, about $887 billion more in assets
shifted to the federal charter than to state charters.
Figure 8: Assets of Banks That Changed between Federal and State
Charters, 1990-2004:
[See PDF for image]
Note: For the purpose of describing assets associated with all charter
changes, asset data points were computed by adding OCC data on charter
changes resulting from conversions to FRB data on charter changes
resulting from mergers. However, we discovered that HSBC's charter
change was recorded by OCC as a merger and by FRB as a conversion. To
resolve this discrepancy and ensure that HSBC's assets were included,
we added in HSBC's change from the state to federal charter in 2004
after consulting the FDIC "Statistics on Depository Institutions" for
an approximate asset figure. There may be other such instances of
discrepancies in recording methods, which we were not able to identify.
[End of figure]
We also looked at the movement of assets depending on whether charter
changes resulted from conversions or mergers. Figure 9 shows the assets
of banks that converted annually between the federal and state charters
from 1990 through 2004, according to data from OCC. In 1990-2003, about
$55 billion more in assets shifted to state charters than to the
federal charter. During that period, total assets of banks that
converted charters remained below $100 billion annually. However, when
2004 figures are included, about $590 billion more in assets shifted to
the federal charter than to state charters. This is largely due to the
conversion of one formerly state-chartered bank (JP Morgan Chase Bank),
which alone contributed 99 percent (about $649 billion) of all assets
in 2004 of state banks that converted to the federal charter. The
assets of JP Morgan Chase Bank represented almost 8 percent of all bank
assets in that year.
Figure 9: Assets of Banks That Changed between Federal and State
Charters as a Result of Conversions, 1990-2004:
[See PDF for image]
[End of figure]
Similarly, figure 10 shows the assets of banks that experienced mergers
between the federal and state charters annually in 1990-2004, according
to data from FRB.[Footnote 91] In 1990-2004, about $296 billion more in
assets shifted to the federal charter than to state charters as a
result of mergers.
Figure 10: Assets of Banks That Changed between Federal and State
Charters as a Result of Mergers, 1990-2004:
[See PDF for image]
[End of figure]
Note: For the purpose of describing assets associated with all charter
changes, asset data points were computed by adding OCC data on charter
changes resulting from conversions to FRB data on charter changes
resulting from mergers. However, we discovered that HSBC's charter
change was recorded by OCC as a merger and by FRB as a conversion. To
resolve this discrepancy and ensure that HSBC's assets were included,
we added in HSBC's change from the state to federal charter in 2004
after consulting the FDIC "Statistics on Depository Institutions" for
an approximate asset figure. There may be other such instances of
discrepancies in recording methods, which we were not able to identify.
The Annual Number and Assets of Banks That Changed between Federal and
State Charters Was Small Relative to All Banks and All Bank Assets:
From 1990 through 2004, the annual number and assets of banks that
changed between the federal and state charters constituted a small
percentage of all banks and all bank assets in those years. During that
period, the annual number of changes between the federal and state bank
charters was about 2 percent or less of all banks in those years. For
example, the number of changes to the federal charter as a percentage
of all banks was 2.4 percent in 1997, when there were 223 changes. The
number of changes to the state charter as a percentage of all banks was
1.3 percent in 1993, when there were 139 changes. Figure 11 shows the
total annual changes between the federal and state bank charters as a
percentage of all banks in each year from 1990 through 2004.
Figure 11: Total Annual Changes between Federal and State Charters, as
a Percentage of All Banks, 1990-2004:
[See PDF for image]
[End of figure]
We found that the percentage of assets involved in charter changes was
also small relative to all bank assets. Figure 12 shows the annual
assets of banks from 1990 to 2004 that converted between the federal
and state charters as a percentage of all bank assets. From 1990 to
2004, total assets of banks that converted from the federal charter to
state charters were about 1.5 percent or less of all bank assets
annually. For example, assets were highest in 1994 at about $59.6
billion, which was 1.49 percent of all bank assets that year.
Similarly, from 1990 through 2003, the total annual assets of banks
that converted from state charters to the federal charter were about 1
percent or less of all bank assets each year. For example, during this
period assets were highest in 1997 at about $54 billion, which was
about 1.07 percent of all bank assets that year. In 2004, however,
assets for state to federal conversions reached their highest since
1990 at about $653 billion, which was about 7.8 percent of all bank
assets that year.
Figure 12: Assets of Banks That Converted between Federal and State
Charters, as a Percentage of All Bank Assets, 1990-2004:
[See PDF for image]
[End of figure]
Similarly, the annual charter changes and assets of banks involved in
mergers have also been a small percentage of all banks and all bank
assets for those years. During the period, the number of mergers
between the two types of charters is less than 2 percent of all banks
per year. For example, as shown in figure 7, the highest number of
mergers into state charters from the federal charter was 80 in 1998,
which was 0.91 percent of all banks that year. The highest number of
mergers into the federal charter from state charters was 158 in 1997,
which was 1.73 percent of all banks that year. The annual assets of
banks experiencing mergers between the two types of charters were less
than 3 percent of all bank assets each year.[Footnote 92] For example,
as shown in figure 10, assets for mergers into state charters from the
federal charter were highest in 1996 at about $136.6 billion, which was
about 2.98 percent of all bank assets that year. Assets for mergers
into the federal charter from state charters were highest in 2004 at
about $135.9 billion, which was about 1.62 percent of all bank assets
that year.
[End of section]
Appendix IV: How OCC is Funded:
The Office of the Comptroller of the Currency (OCC) is funded primarily
by the assessments and fees that it collects from the institutions it
oversees. The amounts assessed for OCC oversight are primarily based on
a bank's asset size, but other factors are included in OCC's assessment
formula. Under the formula, bank assessments decrease as asset size
increases. As a result, mergers and consolidations among banks result
in a smaller assessment paid to OCC by the resulting bank.
OCC Is Funded Primarily by the Assessments It Charges National Banks:
As of fiscal year 2004, assessments made up almost all of OCC's revenue
--about 97 percent. As shown in figure 13, since 1999 assessments have
constituted no less than 94 percent of OCC's revenue. OCC also receives
revenue from other sources: corporate fees banks pay primarily for
licensing, investment income from gains on U.S. Treasury securities,
income from the sale of OCC publications, and income from miscellaneous
internal operations such as parking fees paid by OCC employees.
Figure 13: Sources of OCC Revenue, 1999-2004:
[See PDF for image]
[End of figure]
Note: In October 2001, OCC changed its reporting period from a calendar
to a fiscal year basis.
Percentages may not add to 100 percent because of rounding.
OCC's Assessment Formula Is Based on Asset Size but Includes Other
Factors:
The assessment formula, changed in the mid-1970s from a flat rate per
dollar of assets to its current regressive structure, determines how
much each national bank must pay for OCC supervision. The relationships
between bank size (assets) and assessments are shown in table 1. Every
national bank falls into one of the 10 asset-size brackets denoted by
columns A and B. The semiannual assessment is composed of two
parts.[Footnote 93] The first part is the calculation of a base amount
of the assessment, which is computed on the assets of the bank as
reported on the bank's Consolidated Report of Condition (or call
report) up to the lower end point (column A) of the bracket in which it
falls.[Footnote 94] This base amount of the assessment is calculated by
OCC in column C. The second part is the calculation by the bank of
assessments due on the remaining assets of the bank in excess of column
E. The excess is assessed at the marginal rate shown in column D. The
total semiannual assessment is the amount in column C, plus the amount
of the bank's assets in excess of column E multiplied by the marginal
rate in column D: Assessments = C+[(Assets - E) x D].
Table 1: OCC's Assessment Formula:
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: $0;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: $2,000,000;
The semiannual assessment will be:: C: This amount: $5,075;
The semiannual assessment will be:: D: Plus: 0.000000000;
The semiannual assessment will be:: E: Of excess over: $0.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: 2,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: 20,000,000;
The semiannual assessment will be:: C: This amount: 5,075;
The semiannual assessment will be:: D: Plus: 0.000210603;
The semiannual assessment will be:: E: Of excess over: 2,000,000.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: 20,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: 100,000,000;
The semiannual assessment will be:: C: This amount: 8,866;
The semiannual assessment will be:: D: Plus: 0.000168481;
The semiannual assessment will be:: E: Of excess over: 20,000,000.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: 100,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: 200,000,000;
The semiannual assessment will be:: C: This amount: 22,344;
The semiannual assessment will be:: D: Plus: 0.000109512;
The semiannual assessment will be:: E: Of excess over: 100,000,000.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: 200,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: 1,000,000,000;
The semiannual assessment will be:: C: This amount: 33,295;
The semiannual assessment will be:: D: Plus: 0.000092663;
The semiannual assessment will be:: E: Of excess over: 200,000,000.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: 1,000,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: 2,000,000,000;
The semiannual assessment will be:: C: This amount: 107,425;
The semiannual assessment will be:: D: Plus: 0.000075816;
The semiannual assessment will be:: E: Of excess over: 1,000,000,000.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: 2,000,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: 6,000,000,000;
The semiannual assessment will be:: C: This amount: 183,241;
The semiannual assessment will be:: D: Plus: 0.000067393;
The semiannual assessment will be:: E: Of excess over: 2,000,000,000.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: 6,000,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: 20,000,000,000;
The semiannual assessment will be:: C: This amount: 452,813;
The semiannual assessment will be:: D: Plus: 0.000057343;
The semiannual assessment will be:: E: Of excess over: 6,000,000,000.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: 20,000,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: $40,000,000,000;
The semiannual assessment will be:: C: This amount: 1,255,615;
The semiannual assessment will be:: D: Plus: 0.000050403;
The semiannual assessment will be:: E: Of excess over: 20,000,000,000.
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: A: Over: $40,000,000,000;
If the amount of total balance sheet assets (consolidated domestic and
foreign subsidiaries) is:: B: But not over: ;
The semiannual assessment will be:: C: This amount: $2,263,675;
The semiannual assessment will be:: D: Plus: 0.000033005;
The semiannual assessment will be:: E: Of excess over: $40,000,000,000.
Source: OCC 2003-45, Notice of Comptroller of the Currency Fees for
Year 2004.
[End of table]
OCC also levies a surcharge for banks that require increased
supervisory resources as reflected in the bank's last OCC-assigned
CAMELS rating.[Footnote 95] The CAMELS score is a numerical rating
assigned by supervisors to reflect their assessment of the overall
financial condition of a bank. The score takes on integer values
ranging from 1 (best) to 5 (worst). Surcharges are calculated by
multiplying the assessment, based on the institution's reported assets
up to $20 billion, by 50 percent for a CAMELS 3-rated institution and
100 percent for 4-and 5-rated institutions. For example, a national
bank, with a 4 supervisory rating, $15 billion in assets, and no
independent trust or credit card operations would be charged a standard
assessment of $968,900 plus a 100 percent surcharge of $968,900, for a
total assessment of $1,937,800. Since January 1, 2003, OCC special
examinations and investigations have been subject to an additional
charge of $110 per hour.
Each year OCC issues a notice with updates on changes and adjustments,
if any, to the assessment formula. It may adjust the marginal rates in
column D and the amounts in column C; most adjustments are made based
on the percentage change in the level of prices, as measured by changes
in the Gross Domestic Products Implicit Price Deflator (GDPIPD). GDPIPD
is sensitive to changes in inflation, and OCC has discretion to adjust
marginal rates by amounts less than the percentage change in GDPIPD for
that time period. For example, the GDPIPD adjustment was 1.5 percent in
2004 and 1.1 percent in 2003.
OCC also has the authority to reduce the semiannual assessment for
banks other than the largest national bank controlled by a company;
these nonlead banks may receive a lesser assessment.[Footnote 96] For
example, in the 2004 Notice of Comptroller of the Currency Fees, OCC
reduced the assessment of nonlead national banks by 12 percent.
The Price of OCC Supervision Decreases with Asset Size:
Because the multipliers used to compute assessments beyond the base
assessment decrease as asset size increases, (see column D in table 1),
the price of supervision is less per million dollars in assets for
larger banks than for smaller banks.[Footnote 97] To illustrate this
point, we calculated the price per million dollars in assets for the
largest possible total asset size within each assessment range (see
table 2).
Table 2: Price of Supervision per Million Dollars in Assets:
Bank asset size: $2,000,000;
Bank assessment amount: $5,075;
Price per $1 million of supervision: $2,537.50.
Bank asset size: 20,000,000;
Bank assessment amount: 8,866;
Price per $1 million of supervision: 443.29.
Bank asset size: 100,000,000;
Bank assessment amount: 22,344;
Price per $1 million of supervision: 223.44.
Bank asset size: 200,000,000;
Bank assessment amount: 33,295;
Price per $1 million of supervision: 166.48.
Bank asset size: 1,000,000,000;
Bank assessment amount: 107,425;
Price per $1 million of supervision: 107.43.
Bank asset size: 2,000,000,000;
Bank assessment amount: 183,241;
Price per $1 million of supervision: 91.62.
Bank asset size: 6,000,000,000;
Bank assessment amount: 452,813;
Price per $1 million of supervision: 75.47.
Bank asset size: 20,000,000,000;
Bank assessment amount: 1,255,615;
Price per $1 million of supervision: 62.78.
Bank asset size: $40,000,000,000;
Bank assessment amount: $2,263,675;
Price per $1 million of supervision: $56.59.
Source: GAO analysis based on OCC 2003-45, Notice of Comptroller of the
Currency Fees for Year 2004.
[End of table]
For example, table 2 shows that a national bank with about $2 million
in total assets would pay about $2,500 per million dollars of assets
for supervision, while the price of supervision for a national bank of
about $2 billion is less than $100 per million dollars of assets.
Mergers and Consolidations Result in Less Revenue for OCC:
OCC's assessment formula prices supervision for merged national banks
at a rate less than that of individual national banks with equivalent
total assets. In cases where there is a merger between two national
banks, for example, bank A is a national bank and bank B is a national
bank, the merged bank C may have total assets equal to bank A plus
those of bank B, but the assessment for bank C could be less than the
assessment of bank A plus the assessment of bank C.
To illustrate this point, we selected 10 merger transactions and
applied OCC's assessment formula. In all cases, OCC received less
revenue in assessments after the merger occurred, compared with
individual assessments prior to the merger. Table 3 shows the asset
amounts of the banks in one of our examples and the effect of OCC's
formula. In this example, the impact is a change in OCC's budget that
decreases assessment revenue by about $76,500.
Table 3: Effect of Mergers and Consolidations:
A (Acquiring bank);
Assets: $14,304,670,000;
Individual assessments: $929,028;
Bank A assessments + Bank B assessments: $1,165,819;
(Bank A+ Bank B) - Bank C = decrease in OCC budget: [Empty].
B (Target bank;
Assets: 2,794,586,000;
Individual assessments: 236,791;
Bank A assessments + Bank B assessments: $1,165,819;
(Bank A+ Bank B) - Bank C = decrease in OCC budget: [Empty] .
C (Combined bank);
Assets: $17,099,256,000;
Individual assessments: $1,089,278;
Bank A assessments + Bank B assessments: [Empty];
(Bank A+ Bank B) - Bank C = decrease in OCC budget: $76,541.
Sources: OCC and GAO.
[End of table]
An OCC official acknowledged that the regressive nature of its
assessment formula could reduce the assessment paid by merged banks
compared with individual bank assessments prior to a merger. However,
the official stated that costs associated with supervising merged banks
were dependent on specific characteristics of the merged bank. For
example, if a national bank located in California merged with a
national bank located in New York, OCC may need to continue to maintain
bicoastal bank examination teams. In this case, assessments would
decrease, but costs would remain the same. In most cases however, over
time, mergers of roughly equal-sized banks would realize savings and
other synergies that do not require extra resources. For example,
certain fixed costs could be spread across the merged banks; thus, as
the bank's assets grow larger, average costs generally decrease.
[End of section]
Appendix V: How Selected Federal Financial Industry Regulators Are
Funded:
Regulator: Federal Deposit Insurance Corporation (FDIC);
Mission and regulatory role: FDIC is to contribute to the stability of
and public confidence in the nation's financial system by insuring
deposits, examining and supervising financial institutions, and
managing receiverships. In cooperation with state bank regulators, FDIC
regulates federally insured, state-chartered banks that are not members
of the Federal Reserve and federally insured state savings banks;
Funding: FDIC funds its operations by premiums that banks and thrifts
pay for deposit insurance and earnings on its investments in U.S.
Treasury securities. FDIC has permanent budget authority and,
therefore, is not subject to the congressional appropriations process.
Regulator: Board of Governors of the Federal Reserve System;
(FRB);
Mission and regulatory role: As the nation's independent, decentralized
central bank, the FRB is responsible for conducting monetary policy,
maintaining the stability of the financial markets, and supporting a
stable economy. The FRB supervises and regulates bank holding companies
and, in cooperation with state bank regulators, examines and supervises
state-chartered banks that are FRB members;
Funding: FRB funds its operations primarily from the earnings on its
investments in Treasury securities. FRB has permanent budget authority
and, therefore, is not subject to the congressional appropriations
process.
Regulator: Office of Thrift Supervision (OTS);
Mission and regulatory role: OTS's mission is to effectively and
efficiently supervise thrift institutions to maintain their safety and
soundness in a manner that encourages a competitive industry. OTS
examines and supervises all federally chartered and insured thrifts and
thrift holding companies. In cooperation with state regulators, OTS
examines and supervises all state-chartered, federally insured thrifts;
Funding: OTS funds its operations primarily from assessments on the
federal financial institutions it regulates. It has permanent budget
authority and, therefore, is not subject to the congressional
appropriations process.
Regulator: National Credit Union Administration (NCUA);
Mission and regulatory role: NCUA's mission is to foster the safety and
soundness of federally insured credit unions and to better enable the
credit union community to extend credit. It charters, regulates, and
insures federally chartered credit unions. It also insures the majority
of state-chartered credit unions. In cooperation with state regulators,
it supervises federally insured, state-chartered credit unions;
Funding: NCUA funds its operations primarily from assessments on the
federal credit unions it regulates. It has permanent budget authority
and, therefore, is not subject to the congressional appropriations
process.
Regulator: Securities and Exchange Commission (SEC);
Mission and regulatory role: SEC's mission is to (1) promote full and
fair disclosure;
(2) prevent and suppress fraud;
(3) supervise and regulate the securities markets;
and (4) regulate and oversee investment companies, investment advisers,
and public utility holding companies;
Funding: SEC is funded by the fees it collects from the entities it
regulates subject to limits set by the congressional authorizations and
appropriations processes. Excess fees are put into an offset fund and
may be administered by Congress for other purposes. SEC is subject to
the Office of Management and Budget process.
Regulator: Office of Federal Housing Enterprise Oversight (OFHEO);
Mission and regulatory role: OFHEO is to ensure the capital adequacy
and financial safety and soundness of Fannie Mae and Freddie Mac, two
government-sponsored enterprises, privately owned and operated
corporations established by Congress to enhance the availability of
mortgage credit. OFHEO examines and regulates the two enterprises;
Funding: OFHEO is funded through assessments paid by Fannie Mae and
Freddie Mac and subject to limits set by the congressional
authorizations and appropriations process. OFHEO must deposit collected
assessments into the Oversight Fund, an account held in the Treasury.
Regulator: Federal Housing Finance Board;
(FHFB);
Mission and regulatory role: FHFB is to ensure the safety and soundness
of the Federal Home Loan Bank System, a government-sponsored enterprise
whose mission is to support housing finance, and ensure that the system
carries out its housing finance mission. FHFB examines and regulates
the 12 Federal Home Loan Banks;
Funding: FHFB is supported by assessments from the 12 Federal Home Loan
Banks. No tax dollars or other appropriations support the operations of
the FHFB or the Federal Home Loan Bank System.
Regulator: Farm Credit Administration;
(FCA);
Mission and regulatory role: FCA is an independent federal regulatory
agency responsible for supervising, regulating, and examining
institutions operating under the Farm Credit Act of 1971;
the institutions that it regulates make up a system that is designed to
provide a dependable and affordable source of credit and related
services to the agriculture industry;
Funding: FCA's expenses are paid through assessments on the
institutions it examines and regulates. No federally appropriated funds
are involved.
Source: GAO.
[End of table]
[End of section]
Appendix VI: Information on Funding of States' Bank Regulators:
Information gathered by the Conference of State Bank Supervisors (CSBS)
indicates that most state bank regulators levy assessments to fund
their operations. Forty-three states used some type of asset-based
assessment formula to collect funds from banks and/or other entities
they regulated, according to the CSBS data for 2004-2005.[Footnote 98]
Of the other seven states, two based their assessments on department
costs, and two levied assessments only for shortfalls in the
departments' budgets. The remaining three states did not report
information. Most state bank regulators (40 of 49 that reported such
information) indicated that their legislatures determined how those
funds would be allocated, appropriated, or spent. Table 4 provides more
detailed information on the funding arrangements for six state bank
regulators that we interviewed.
Table 4: Information on Funding for Selected State Bank Regulators:
State: California.
The California Department of Financial Institutions levies assessments
on the bank and nonbank entities it regulates using a formula set by
the commissioner. The assessment formula is based on assets and the
department's costs (using past budgets) and projected expenses.
Assessments are deposited into a special account for the department and
a reserve can be, and is now, maintained. The department does not have
authority to rebate assessed fees. The assessment (minimum of $5,000
and a maximum of $2.20 per $1,000 of assets on a sliding scale)
reflects a statutory limit applicable to banks;
Formula: California: Flat rate;
Who determines how funds are spent: California: The legislature must
approve the department's appropriation each fiscal year. The department
has general autonomy within the appropriated amounts of the budget
categories.
State: Georgia.
The Georgia Department of Banking and Finance is funded primarily
through assessments based on asset size, as provided by statute and set
via agency regulations. Some specialty banks, such as credit card
banks, pay an hourly rate. The department also collects fees for
examinations of other financial entities, for licenses, and for certain
transactions;
Formula: California: Regressive schedule;
Who determines how funds are spent: California: Authority is controlled
by the legislature and statute, with requests made by the commissioner
during the budget process.
State: Idaho;
The Idaho Department of Finance is funded by assessments of regulated
financial institutions set by the director within a statutory limit.
The assessment structure includes a graduated base fee and excess fee
based on total assets and $100 per branch office. The department also
collects licensing fees from other financial entities it regulates. It
does not have authority to rebate assessments;
it maintains a reserve account;
Formula: California: Regressive schedule;
Who determines how funds are spent: California: The department's budget
must be approved by the Governor, and funds must be appropriated by the
legislature.
State: Iowa;
Iowa's Division of Banking, within the Department of Commerce, is
funded primarily by assessments and fees paid by the banks it
supervises. In addition, the division supervises nonbank entities that
pay fees for licenses, examinations, and investigations. The division
determines its budget and establishes a formula that includes a bank's
assets and other factors, such as increases for CAMELS ratings over 2,
to calculate the assessment. The assessed amounts are collected
quarterly and may fluctuate since they are based on the actual
operating expenses of the division. The "break even" approach does not
provide the state's general fund with excess revenue from the division.
However, the division may rebate excess assessments. The actual cost of
the division's operations is the statutory limit to the assessments;
Formula: California: Regressive schedule;
Who determines how funds are spent: California: The division's budget
must be approved by the Governor and the Department of Management.
Funds paid to the division go into the state's general fund and are
appropriated by the legislature.
State: New York;
The New York State Banking Department levies assessments on the banks
and nonbank entities it supervises based on the cost to supervise them
plus a regulatory assessment. Each company reports a measure of the
business size, called the financial basis in the calculation. The
supervisory cost is calculated on the average number of hours needed to
supervise like size and type institutions, times the hourly rate for
employees responsible for all institutions in the billing group. The
amount to be collected through the regulatory calculation is determined
by subtracting the supervisory amount from the total budget allocated
to the group. The rate is established by dividing the total to be
collected by the financial basis for the group. That rate is then
multiplied by the financial basis for each company to determine the
regulatory portion of the assessment. The sum of the regulatory and
supervisory amounts is the total annual assessment;
Formula: California: N/A;
Who determines how funds are spent: California: The legislature
establishes a maximum budget annually.
State: North Carolina;
The North Carolina Commission on Banking levies an annual assessment
based on year-end assets of the banks and certain nonbank entities it
supervises. The regressive assessment formula for banks and a flat rate
assessment for consumer finance licensees are set by statute. All
entities pay application fees at entrance while most nonbank entities
pay annual and other specific fees for continued operations within the
State. Nonbank entities include check cashers, mortgage brokers and
bankers, money transmitters, and others. The commissioner may recommend
to the commission discounts and premiums to apply to the statutory
assessment rate;
Formula: California: Regressive schedule;
(for banks).
Flat rate;
(for consumer finance companies);
Who determines how funds are spent: California: Funds are directed into
a special account for the commission and are available without
legislative action. A reserve can be maintained.
Sources: Respective state bank regulators and the Conference of State
Bank Supervisors.
[End of table]
[End of section]
Appendix VII: Comments from the Office of the Comptroller of the
Currency:
Comptroller of the Currency Administrator of National Banks:
Washington, DC 20219:
April 12, 2006:
Mr. David G. Wood:
Director, Financial Markets and Community Investment:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Wood:
Thank you for the opportunity to review the draft report prepared by
the United States Government Accountability Office (GAO) concerning the
effect on consumer protection and the dual banking system of the
preemption and visitorial powers rules that we issued in January,
2004.[Footnote 99] The draft report contains a number of observations
that are consistent with the OCC's views about the relationship between
those rules and a depository institution's choice of charter. For
example, the report indicates that an institution's charter choice
usually is based not on one single factor but on a variety of
considerations, including the size and complexity of the bank's
operations, the quality of the bank's relationship with its federal or
state regulator, and the charter type of institutions that the bank has
acquired or with which it has merged. We draw the same conclusion based
on the supervisory experience we have had with banks that have both
entered and departed the national banking system.
The report recounts that state officials continue to express both
uncertainty about the scope of preemption under the National Bank Act
and concern about the OCC protecting the interests of national bank
customers. Some state officials interviewed by the GAO also believed
that the preemption and visitorial powers rules did not fully resolve
questions about the applicability of state consumer protection laws and
believed that protections for the customers of national banks and
national bank operating subsidiaries would be diminished. The GAO
recommends that the OCC undertake initiatives to enhance coordination
with the states and to clarify the applicability of state consumer
protection law to national banks.
We believe the preemption rules themselves provided clarification
regarding the types of laws listed in the regulations. Under the rules,
a state law relating to a subject listed as preempted does not apply to
a national bank or its operating subsidiary. Moreover, recent court
decisions have been remarkably consistent in finding that particular
types of state laws aimed at national banking activities are preempted.
These court decisions reflect a growing judicial consensus about the
uniform federal standards that form the core of the national banking
system. By reconfirming the principles underlying the preemption and
visitorial powers rules, the decisions also should help dispel
uncertainties about the scope of applicability of state law to national
banks.
At the same time, we fully recognize that the preemption of state law
imposes on the OCC a significant responsibility to implement a federal
regulatory regime that is applied credibly and uniformly. We also
recognize that we can, and should, find more opportunities to work
cooperatively with the states to address issues that affect all of the
institutions we regulate. We therefore welcome the GAO's recommendation
to enhance outreach to the states on the interplay of state laws and
federal preemption and on our respective consumer protection efforts.
The draft report observes that it is impractical for the OCC to specify
precisely the particular provisions of each state's laws that are, or
are not, preempted. We agree. Nevertheless, we will look for ways to
enhance the information that is available concerning the preemption
precedents that guide our analysis and for opportunities where it may
be fruitful to address the preemption status of types of state laws on
a generic basis.
One important new forum for this type of exchange, and for enhanced
federal and state dialogue and coordination on consumer issues, is the
new Consumer Financial Protection Forum (CFPF) recently initiated by
the Department of the Treasury. The CFPF was established to bring
federal and state regulators together to focus exclusively on consumer
protection issues in the financial services sector and to provide a
permanent forum for communication on these issues. It is chaired by the
Treasury Department and participants include the OCC, other federal
banking and credit union regulators, the Federal Trade Commission, and
representatives from state supervisory organizations. The CFPF
supplements existing OCC efforts to coordinate with the states on a
variety of issues related to consumer protections in several areas,
including formal and informal information sharing with state banking
supervisors, consumer complaint referrals, and coordination with state
insurance regulators. We are optimistic that the CFPF will help to
encourage the type of expanded dialogue and coordination on consumer
protection issues that the report recommends.
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:
[End of section]
Appendix VIII: GAO Contact and Staff Acknowledgments:
GAO Contact:
David G. Wood (202) 512-8678 or woodd@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Katie Harris, Assistant
Director; Nancy Eibeck; Nicole Gore; Jamila Jones; Landis Lindsey;
Alison Martin; James McDermott; Kristeen McLain; Suen-Yi Meng; Marc
Molino; Barbara Roesmann; Paul Thompson; James Vitarello; and Mijo
Vodopic made key contributions to this report.
(250212):
FOOTNOTES
[1] 69 Fed. Reg. 1895 (Jan. 13, 2004) (visitorial powers); 69 Fed. Reg.
1904 (Jan. 13, 2004) (national bank activities).
[2] Because the nation's banking system includes both federally and
state-chartered banks, it is generally referred to as the "dual banking
system."
[3] See GAO, OCC Preemption Rulemaking: Opportunities Existed to
Enhance the Consultative Efforts and Better Document the Rulemaking
Process, GAO-06-8 (Washington, D.C.: Oct. 17, 2005); and GAO, OCC
Consumer Assistance: Process Is Similar to That of Other Regulators but
Could Be Improved by Enhanced Outreach, GAO-06-293 (Washington, D.C.:
Feb. 23, 2006).
[4] Unless otherwise noted, throughout this report, the term "bank"
includes state-chartered and federally chartered commercial banks and
does not include credit unions, thrifts, and savings and loan
institutions.
[5] The Conference of State Bank Supervisors was founded in 1902 as a
clearinghouse for ideas to solve common problems of state bank
regulators. One of the goals of the organization is to represent the
interests of the state banking system to federal and state legislative
and regulatory agencies.
[6] These data on the numbers of federally and state-chartered banks
were obtained from FDIC's Statistics on Depository Institutions.
[7] An operating subsidiary of a national bank is defined to be under
control or majority ownership by the bank. Federal regulations contain
additional criteria for qualification as a national bank operating
subsidiary. See 12 C.F.R. § 5.34(2005). Under the Gramm Leach Bliley
Act, qualifying national banks may own or control "financial
subsidiaries," through which the banks may conduct certain nonbanking
financial activities. By definition, financial subsidiaries are not
operating subsidiaries. Pub. L. No. 106-102 §121 (Nov. 12, 1999), 12
U.S.C. § 24a(g)(3).
[8] For the purposes of this report, the term "holding company" refers
to both (traditional) bank holding companies and bank holding companies
that qualify as financial holding companies as defined by FRB. Under
the Gramm Leach Bliley Act, bank holding companies that satisfy
standards contained in the Bank Holding Company Act of 1956, as
amended, 12 U.S.C. §§ 1841-1850, can qualify as financial holding
companies and in that capacity may own or control entities engaged in a
wider variety of financial services than those permitted for
traditional bank holding companies and their subsidiaries.
[9] GAO-06-293.
[10] As OCC stated in the preamble to the bank activities rule, OCC
regulations in effect before promulgation of the preemption rules
provided that national bank operating subsidiaries are subject to the
same terms and conditions as apply to national banks, unless federal
law provides otherwise. 69 Fed. Reg. 1905, 1906, 1913.
[11] We conducted a content analysis of comment letters that OCC
received in response to its proposed rulemaking to obtain these views.
See appendix I.
[12] For each of the categories, OCC specified that preemption does not
occur if a federal law makes state law applicable to national banks.
[13] 69 Fed. Reg. 1905 (Jan. 13, 2004).
[14] OCC Interpretive Letter No. 971 (Jan. 16, 2003). OCC's visitorial
powers are set forth at 12 U.S.C. § 484 and OCC's implementing
regulation, 12 C.F.R. § 7.4000.
[15] 69 Fed. Reg. 1912 n. 59 (stating, in pertinent part, as follows:
"The label a state attaches to its laws will not affect the analysis of
whether that law is preempted.").
[16] 630 F.2d 981 (3RD Cir. 1980). In general terms, redlining can be
described as the practice of denying or increasing the cost of credit
or other financial products to residents of certain areas based on
prohibited factors such as race, religion, or gender.
[17] Id. at 987. Although the court found the New Jersey law applicable
to a national bank's lending activity, the court also held that OCC has
exclusive jurisdiction to enforce the law with respect to national
banks.
[18] Bank One v. Guttau, 190 F.3d 844 (8TH Cir. 1999); see also, Bank
of America v. City and County of San Francisco, 309 F.3d 551, 565 (9TH
Cir. 2002).
[19] Letter to the Honorable Barney Frank from Comptroller of the
Currency John Dugan, Nov. 21, 2005.
[20] In a 1997 interpretive letter, an OCC official made the following
point about Supreme Court decisions concerning preemption under the
National Bank Act:
In reviewing these decisions, a recurrent theme is apparent. The Court
has repeatedly used words and phrases such as "impair," "interfere
with," "conflict with," "frustrate," "infringe," and "burden" to
describe the effect of state laws that it has found to be preempted
with respect to national banks. The lesson to be derived is that state
laws apply to national banks only if they do not conflict with federal
law, which includes impairing or interfering with the powers granted to
national banks by federal law. . . .
OCC Interpretive Letter No. 789 (June 27, 1997). Also, in 2003, OCC
stated that, with respect to requests for a preemption opinion, "[w]e
will continue to review these requests on a case-by-case basis and, in
so doing, we will continue to apply the preemption standards
articulated by the United States Supreme Court in Barnett Bank of
Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) and other applicable
Federal judicial precedents." OCC Advisory Letter 2002--3 (Mar. 22,
2002).
[21] OCC Advisory Letter 2002-9 (Nov. 25, 2002).
[22] OCC Advisory Letter 2004-2 (Feb. 26, 2004).
[23] One example of state regulation of a national bank operating
subsidiary can be found in Wells Fargo Bank, N.A. v. Boutris, 419 F.3d
949 (9th Cir. 2005). The case involved a national bank operating
subsidiary engaged in the business of mortgage lending, which became
licensed by California in 1997 and underwent an examination by the
state in 2002 for compliance with state laws. In 2003, the state agency
demanded that the subsidiary conduct an audit of its residential
mortgage loans made in California during a certain time period. The
subsidiary refused, asserting that in connection with its mortgage
lending it was subject to OCC's exclusive jurisdiction even though the
entity had submitted to the state examination. The court held in favor
of the operating subsidiary, permanently enjoining the state from
exercising visitorial powers over the subsidiary. See also, National
City Bank of Indiana v. Boutris, 2003 U.S. Dist. LEXIS 25852 (E.D. Cal.
July 2, 2003).
[24] A federal court has ruled that this type of policy concern does
not undermine the exclusiveness of OCC's supervisory authority. In OCC
v. Spitzer, 396 F. Supp. 2d 383 (S.D. N.Y. 2005), the court held that
the Attorney General for the State of New York is permanently enjoined
from issuing subpoenas or demanding inspection of the books and records
of any national bank in connection with an investigation into
residential lending practices; from instituting any enforcement actions
to compel compliance with informational demands; and from instituting
actions in the courts of justice against national banks to enforce
state fair lending laws.
[25] In the bank activities rule, OCC listed as preempted state
licensing or registration requirements (except for purposes of service
of process) with respect to deposit-taking, non-real estate lending,
and real estate lending. 69 Fed. Reg. at 1916-1917.
[26] See Wachovia Bank, N.A. v. Watters, 334 F. Supp. 2d 957 (D. Mich.
2004) (upholding OCC rule declaring that state laws apply to national
bank operating subsidiaries to the same extent that they apply to their
parent national banks); aff'd, Wachovia Bank, N.A. v. Watters, 431 F.3d
556 (6TH Cir. 2005).
[27] FRB supervises bank holding companies and their nonbank
subsidiaries.
[28] See, e.g., Wells Fargo Bank, N.A. v. Boutris, 419 F.3d 949 (9TH
Cir. 2005); Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005);
Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6TH Cir. 2005).
[29] See, e.g., Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6TH Cir.
2005).
[30] According to OCC, many other factors drive the decision about
where an entity is placed--whether it will be a subsidiary or affiliate
of the bank--including, among others, statutory and regulatory
restrictions on transactions with affiliates, regulatory capital
requirements, and accounting considerations.
[31] GAO, Financial Regulation: Industry Changes Prompt Need to
Reconsider U.S. Regulatory Structure, GAO-05-61 (Washington, D.C.: Oct.
6, 2004).
[32] Pub. L. No. 103-328, 108 Stat. 2238 (1994).
[33] OCC officials, in commenting on a draft of this report, noted that
OCC, too, has a local presence with four district offices and numerous
field offices throughout the United States.
[34] Data on charter changes for 2005 were not available at the time of
our study. The category "state-chartered bank" includes state member
banks, state nonmember banks, and state savings banks. According to an
FRB official, both FRB and FDIC data for state banks include state-
chartered savings banks that are regulated by FDIC. Therefore, we
included state-chartered savings banks in the category "state-chartered
bank" to make the data we used from OCC, FRB, and FDIC as comparable as
possible.
[35] According to OCC and FRB officials, a charter change resulting
from a conversion is a business decision involving one entity changing
to another charter whereas a charter change resulting from a merger is
a business transaction involving the consolidation of two or more
entities into one entity under a state or federal charter.
[36] According to OCC's Fiscal Year 2005 Annual Report, OCC was
responsible for regulating and supervising 1,933 national banks.
[37] Assessments are due January 31 and July 31 of each year based on
asset balances as reported in call reports dated December 31 and June
30, respectively. Reports of Condition (call reports) provide details
on assets, liabilities, and capital accounts.
[38] OCC has three reserves that can be used at the discretion of the
Comptroller. According to OCC officials, the "contingency reserve"
supports OCC's ability to fund generally foreseeable, but rare, events
that may interfere with OCC's ability to accomplish its mission. The
"special reserve" supplements revenue from assessments and other
sources to fund OCC's annual budget authority. The "asset replacement
reserve" was established to fund leasehold improvements and replacement
of furniture and equipment scheduled for future years.
[39] Data taken from the "CSBS 2002 Profile of State-Chartered
Banking," a compendium of information on the structure and condition of
the state bank regulatory system developed through a survey. New
Hampshire and South Carolina did not respond to survey questions about
wildcard authority; the District of Columbia and Puerto Rico were not
included because they are not states; Iowa and North Carolina responded
"no" to having a parity statute for commercial banks.
[40] According to the CSBS information, Kentucky grants automatic
parity to those banks that receive the highest examination ratings.
[41] FDIC Public Hearing on the Financial Services Roundtable's
Petition for Rulemaking to Preempt Certain State Laws, May 24, 2005,
Washington, D.C.
[42] See, e.g., Wells Fargo Bank, N.A. v. Boutris, 419 F.3d 949 (9TH
Cir. 2005); Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005);
Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6TH Cir. 2005); National
City Bank of Indiana v. Turnbaugh, 367 F. Supp. 2d 805 (D. MD 2005).
[43] Pub. L. No. 106-102 § 121, codified at 12 U.S.C. 24A(g)(3).
[44] See Id. § 133(a), codified at 15 U.S.C. § 41 note.
[45] 15 U.S.C. § 45(a)(1).
[46] Other federal laws include: Truth in Lending Act; Fair Housing
Act; Equal Credit Opportunity Act; Real Estate Settlement Procedures
Act; Community Reinvestment Act; Truth in Savings Act; Electronic Fund
Transfer Act; Expedited Funds Availability Act; Flood Disaster
Protection Act; Home Mortgage Disclosure Act; Fair Housing Home Loan
Data System; Fair Credit Reporting Act; Federal Privacy Laws; and the
Fair Debt Collection Practices Act.
[47] Senate, John D. Hawke, Jr., Comptroller of the Currency, speaking
to Committee on Banking, Housing and Urban Affairs, Congressional
Record (7 April 2004).
[48] See In the Matter of Providian National Bank, Tilton, NH, OCC EA
No. 2000-53 (June 28, 2000).
[49] See GAO-06-8 for a detailed description of the content analysis we
conducted on the comments for the bank activities rule.
[50] Of the 55 letters, we identified 25 as concurring letters; that
is, the letter writers expressed agreement with their national trade or
consumer group organization, which also had submitted a comment letter.
[51] OCC's data did not identify the type of institution involved in
terminations from the federal charter resulting from conversions.
[52] OCC data for terminations from the federal bank charter resulting
from mergers were listed under the category "Transaction Form," which
did not have specific information on institution type; rather, it
classified the termination as "National Bank to State."
[53] Reports of Condition and Income collect basic financial data from
commercial banks in the form of a balance sheet, an income statement,
and supporting schedules. These reports are required by statute and
collected by the FDIC under the provision of Section 1817(a)(1) of the
Federal Deposit Insurance Act. The Report of Condition (call report)
schedules provide details on assets, liabilities, and capital accounts.
[54] 69 Fed. Reg. at 1916-1917.
[55] U.S. Constitution Article VI.
[56] Chicago & N. W. Transp. Co. v. Kalo Brick & Tile Co., 450 U.S. 311
(1981) (Supremacy Clause invalidates state laws that interfere with or
are contrary to the laws of Congress); see also, Bank of America v.
City & County of San Francisco, 309 F.3d 551, 558 (9TH Cir. 2002)
(determining preemptive effect of federal law requires ascertaining
intent of Congress).
[57] Bank of America v. San Francisco, 309 F.3d at 558.
[58] See GAO letter, Role of the Office of Thrift Supervision and
Office of the Comptroller of the Currency in the Preemption of State
Law (Feb. 7, 2000), GAO-B-284372.
[59] Barnett Bank of Marion County v. Nelson, 517 U.S. 25 (1996).
[60] Id. at 33 (citations omitted).
[61] 69 Fed. Reg. at 1910 (stating that "(t)he words of the (OCC
preemption standard) are drawn directly from applicable Supreme Court
precedents . . . .").
[62] Id. OCC's recognition and use of various terms invoked by the
Supreme Court to apply the preemption test was not a new position
announced in the preemption rulemaking but reflects the agency's
standing interpretation of Supreme Court precedents. See OCC
Interpretive Letter No. 789 (June 27, 1997) (preempting portions of a
Colorado banking law that would have caused a national bank to remove
its name and logo from an off-site ATM owned by the bank and operated
in Colorado). In that letter, OCC's Chief Counsel reviewed several
Supreme Court decisions addressing preemption under the National Bank
Act, observing that the decisions used various words to state the
general principle of conflict preemption, which, according to the Chief
Counsel, is that "state laws apply to national banks only if they do
not conflict with federal law, which includes impairing or interfering
with the powers granted to national banks by federal law."
[63] Pub. L. No. 103-328 § 102(b)(1)(B), codified at 12 U.S.C. § 36(f).
[64] H.R. Conf. Rep. No. 103-651 at 53-54.
[65] Supreme Court decisions addressing this subject include: Easton v.
Iowa, 188 U.S. 220, 229, 232 (1903). (the National Bank Act "has in
view the erection of a system extending throughout the country, and
independent, so far as powers conferred are concerned, of state
legislation which, if permitted to be applicable, might impose
limitations and restrictions as various and as numerous as the states.
. . . If [the states] had such power it would have to be exercised and
limited by their own discretion, and confusion would necessarily result
from control possessed and exercised by two independent authorities.");
see also, Marquette Nat'l Bank v. First of Omaha Serv. Corp., 439 U.S.
299, 314-315 (1978) ("Close examination of the National Bank Act of
1864, its legislative history, and its historical context makes clear
that, . . .Congress intended to facilitate . . . a 'national banking
system.'" (citation omitted)); Franklin Nat'l Bank of Franklin Square
v. New York, 347 U.S. 373, 375 (1954) ("The United States has set up a
system of national banks as federal instrumentalities to perform
various functions such as providing circulating medium and government
credit, as well as financing commerce and acting as private
depositories."); Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896)
("National banks are instrumentalities of the Federal government,
created for a public purpose, and as such necessarily are subject to
the paramount authority of the United States."). In Farmers' &
Mechanics' Bank v. Dearing, 91 U.S. 29, 34 (1875), the Court similarly
found that "(s)tates can exercise no control over [national banks] nor
in anywise affect their operation, except in so far as Congress may see
proper to permit. Anything beyond this is 'an abuse, because it is the
usurpation of power which a single State cannot give.'"
[66] Franklin National Bank v. New York, 347 U.S. at 378.
[67] Pub. L. No. 103-328 § 114, codified at 12 U.S.C. § 43.
[68] H. R. Conf. Rep. No. 103-651 at 55.
[69] 69 Fed. Reg. at 1908. In the bank activities rule, OCC
specifically declined to occupy the fields of national banks' real
estate lending, other lending, and deposit-taking activities because it
concluded that labeling its preemption rules in those areas as "field
preemption" is immaterial to the objectives of the regulations. 69 Fed.
Reg. at 1911.
[70] OCC stated that the lists of preempted state laws "reflect
judicial precedents and OCC interpretations" concerning the types of
state laws subject to preemption because they conflict with national
banks' exercise of powers granted in the National Bank Act. 69 Fed.
Reg. 1906.
[71] These subjects include: (1) escrow, impound, and similar accounts;
(2) access to, and use of, credit reports; and (3) processing,
originating, servicing, sale or purchase of mortgages and investment or
participation in mortgages.
[72] See OCC Interpretive Letter No. 999 (August 2004) (stating that
some of the types of laws listed in the preemption regulation "have
been determined to be preempted with respect to Federal thrifts by the
Federal thrift supervisor, the OTS.") In the bank activities rule, OCC
stated as follows: "The extent of Federal regulation and supervision of
Federal savings associations under the Home Owners' Loan Act is
substantially the same as for national banks under the national banking
laws, a fact that warrants similar conclusions about the applicability
of state laws to the conduct of the Federally authorized activities of
both types of entities." 69 Fed. Reg. 1912, n. 62.
[73] See Fidelity Savings and Loan Ass'n v. de la Cuesta, 45 U.S. 141,
160-162 (1982) (concluding that HOLA gave OTS' predecessor agency, the
Federal Home Loan Bank Board, "plenary authority to issue regulations
governing federal savings and loans" that contemplates the [agency's]
promulgation of regulations superseding state law); see also, Bank of
America v. City and County of San Francisco, 309 F.3d 551, 558-559 (9TH
Cir., 2002), (stating that field preemption applies under HOLA
because"the regulation of federal savings associations by the OTS has
been so pervasive as to leave no room for state regulatory control,"
(citations omitted), but the National Bank Act provides for conflict
preemption).
[74] 69 Fed. Reg. at 1911.
[75] 12 U.S.C. § 371(a).
[76] 12 U.S.C. § 1828(o). See 12 C.F.R. § 34.62 (OCC Real Estate
Lending Standards).
[77] These were: loan-to-value ratios, amortization requirements,
maturity requirements, aggregate limits, and certain terms of loans
secured by leaseholds.
[78] See OCC Unpublished Interpretive Letter (Dec. 5, 1985).
[79] Id; see also, OCC Interpretive Letter No. 354 (Nov. 18, 1985).
[80] See OCC Unpublished Interpretive Letter, Dec. 5, 1985, stating:
"It has long been recognized that national banks are federal
instrumentalities governed by a comprehensive set of federal laws and
regulations, As such, they are subject to only those state laws that
are not inconsistent with the federal provisions and that do not unduly
burden the operations of national banks or interfere with the purposes
of their creation." (Supreme Court citations omitted).
[81] Smith v. Wells Fargo Bank, N.A., 135 Cal. App. 4TH 1463 (Cal. Ct.
App. 2006).
[82] See 12 C.F.R. § 5.34.
[83] 69 Fed. Reg. at 1905.
[84] Wachovia Bank, N.A. v. Burke, 414 F.3D305 (2d Cir. 2005); Wells
Fargo Bank, N.A. v. Boutris, 419 F.3d. 949 (9tTHCir., 2005); Wachovia
Bank v. Watters, 432 F.3d. 556 (6tTHCir. 2005); OCC v. Spitzer, 396
F.Supp. 2d. 383 (S.D. N.Y. 2005); National City Bank v. Turnbaugh, 367
F.Supp.2d 805 (D. MD 2005).
[85] See Acquisition of Controlling Sock Interest in Subsidiary
Operations Corporation, 31 Fed. Reg. 11,459 (Aug. 31, 1966).
[86] The OCC's Visitorial Powers regulation defines visitorial powers
to include: (1) examination of a bank; (2) inspection of a bank's books
and records; (3) regulation and supervision of activities authorized or
permitted pursuant to federal law; and (4) enforcing compliance with
any applicable federal or state laws concerning those activities. 12
C.F.R. § 7.4000(a)(2).
[87] The pertinent portion of 12 U.S.C. § 484 provides as follows:
(a) No national bank shall be subject to any visitorial powers except
as authorized by Federal law, vested in the courts of justice or such
as shall be, or have been exercised or directed by Congress or by
either House thereof or by any committee of Congress or of either House
duly authorized.
[88] Those disagreeing with the rule generally did not assert that
states have supervisory authority over national banks themselves. The
concern over visitorial powers was limited to state jurisdiction over
operating subsidiaries.
[89] In addition to state-chartered banks, nonbank depositories such as
thrifts and federal savings banks, also converted to the federal bank
charter in 1990-2004.
[90] According to OCC and the Board of Governors of the Federal Reserve
System officials, a charter change resulting from a conversion is a
business decision involving one entity changing to another charter
whereas a charter change resulting from a merger is a business
transaction involving the consolidation of two or more entities into
one entity under a state or federal charter.
[91] These annual assets do not correspond to the annual number of
charter changes resulting from mergers as reported earlier because
these assets are data from FRB, while the number of charter changes is
data from OCC. We decided to use these two different sources of data as
we understand these data to be most reliable for the purposes of this
study.
[92] These asset figures do not correspond to the number of charter
changes resulting from mergers as reported earlier because these
figures are based on data from FRB, while the number of charter changes
is based on data from OCC. We decided to use these two different
sources of data as we understand these data to be most reliable for the
purposes of this study.
[93] Per federal regulation, each national bank and each District of
Columbia bank shall pay to the Comptroller of the Currency a semiannual
assessment fee, due by January 31 and July 31 of each year, for the 6-
month period beginning 30 days before each payment date, 12 C.F.R.
8.2(a).
[94] Reports of Condition and Income are required by statute and
collected by the Federal Deposit Insurance Corporation under the
provision of Section 1817(a)(1) of the Federal Deposit Insurance Act.
This report collects basic financial data from commercial banks in the
form of a balance sheet, an income statement, and supporting schedules.
The Report of Condition schedules provide details on assets,
liabilities, and capital accounts.
[95] OCC also collects fines and civil monetary penalties, primarily
from lawsuits against corporations, corporate officers, and directors
for impropriety. These funds are collected on behalf of the U.S.
Treasury and have no effect on OCC's income or annual budget.
[96] This determination is based on a comparison of the total assets
held by each national bank controlled by one company as reported in
each bank's call report filed for the quarter immediately preceding the
payment of a semiannual assessment.
[97] This is true of those national banks, federal branches and
agencies of foreign banks and District of Columbia banks with a
satisfactory supervisory rating. However, banks with less than
satisfactory performance are required to pay an additional surcharge
that may result in a direct relationship between the price of
supervision and asset size.
[98] 2004-2005 CSBS "Profile of State-Chartered Banking," available for
purchase from CSBS.
[99] 69 Fed. Reg. 1904 (January 13, 2004) (the "preemption rules")
(rules 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).
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