[Federal Register Volume 69, Number 8 (Tuesday, January 13, 2004)]
[Rules and Regulations]
[Pages 1904-1917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-586]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 7 and 34
[Docket No. 04-04]
RIN 1557-AC73
Bank Activities and Operations; Real Estate Lending and
Appraisals
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
publishing a final rule amending parts 7 and 34 of our regulations to
add provisions clarifying the applicability of state law to national
banks' operations. The provisions concerning preemption identify types
of state laws that are preempted, as well as the types of state laws
that generally are not preempted, with respect to national banks'
lending, deposit-taking, and other operations. In tandem with these
preemption provisions, we are also adopting supplemental anti-predatory
lending standards governing national banks' lending activities.
EFFECTIVE DATE: February 12, 2004.
FOR FURTHER INFORMATION CONTACT: For questions concerning the final
rule, contact Michele Meyer, Counsel, or Mark Tenhundfeld, Assistant
Director, Legislative and Regulatory Activities Division, (202) 874-
5090.
SUPPLEMENTARY INFORMATION:
I. Introduction
The OCC is adopting this final rule to specify the types of state
laws that do not apply to national banks' lending and deposit taking
activities and the types of state laws that generally do apply to
national banks. Other state laws not specifically listed in this final
rule also would be preempted under principles of preemption developed
by the U.S. Supreme Court, if they obstruct, impair, or condition a
national bank's exercise of its lending, deposit-taking, or other
powers granted to it under Federal law.
This final rule also contains a new provision prohibiting the
making of any type of consumer loan based predominantly on the bank's
realization of the foreclosure value of the borrower's collateral,
without regard to the borrower's ability to repay the loan according to
its terms. (A consumer loan for this purpose is a loan made for
personal, family, or household purposes). This anti-predatory lending
standard applies uniformly to all consumer lending activities conducted
by national banks, wherever located. A second anti-predatory lending
standard in the final rule further specifically prohibits national
banks from engaging in practices that are unfair and deceptive under
the Federal Trade Commission Act (FTC Act) \1\ and regulations issued
thereunder, in connection with all types of lending.
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\1\ 15 U.S.C. 45(a)(1).
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The provisions concerning preemption of state laws are contained in
12 CFR part 34, which governs national banks' real estate lending, and
in three new sections to part 7 added by this final rule: Sec. 7.4007
regarding deposit-taking activities; Sec. 7.4008 regarding non-real
estate lending
[[Page 1905]]
activities; and Sec. 7.4009 regarding the other Federally-authorized
activities of national banks. The first anti-predatory lending standard
appears both in part 34, where it applies with respect to real estate
consumer lending, and in part 7, with respect to other consumer
lending. The provision prohibiting a national bank from engaging in
unfair or deceptive practices within the meaning of section 5 of the
FTC Act and regulations promulgated thereunder \2\ similarly appears in
both parts 34 and 7.
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\2\ 12 CFR part 227.
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II. Description of Proposal
On August 5, 2003, the OCC published a notice of proposed
rulemaking (NPRM or proposal) in the Federal Register (68 FR 46119) to
amend parts 7 and 34 of our regulations to add provisions clarifying
the applicability of state law to national banks. These provisions
identified the types of state laws that are preempted, as well as the
types of state laws that generally are not preempted, in the context of
national bank lending, deposit-taking, and other Federally-authorized
activities.
A. Proposed Revisions to Part 34--Real Estate Lending
Part 34 of our regulations implements 12 U.S.C. 371, which
authorizes national banks to engage in real estate lending subject to
``such restrictions and requirements as the Comptroller of the Currency
may prescribe by regulation or order.'' Prior to the adoption of this
final rule, subpart A of part 34 explicitly preempted state laws
concerning five enumerated areas with respect to national banks and
their operating subsidiaries.\3\ Those are state laws concerning the
loan to value ratio; the schedule for the repayment of principal and
interest; the term to maturity of the loan; the aggregate amount of
funds that may be loaned upon the security of real estate; and the
covenants and restrictions that must be contained in a lease to qualify
the leasehold as acceptable security for a real estate loan. Section
34.4(b) stated that the OCC would apply recognized principles of
Federal preemption in considering whether state laws apply to other
aspects of real estate lending by national banks.
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\3\ Prior 12 CFR 34.1(b) and 34.4(a).
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Pursuant to our authority under 12 U.S.C. 93a and 371, we proposed
to amend Sec. 34.4(a) and (b) to provide a more extensive enumeration
of the types of state law restrictions and requirements that do, and do
not, apply to the real estate lending activities of national banks. To
the five types of state laws already listed in the regulations,
proposed Sec. 34.4(a) added a fuller, but non-exhaustive, list of the
types of state laws that are preempted, many of which have already been
found to be preempted by the Federal courts or OCC opinions. As also
explained in the preamble to the NPRM, consistent with the applicable
Federal judicial precedent, other types of state laws that wholly or
partially obstruct the ability of national banks to fully exercise
their real estate lending powers might be identified and, if so,
preemption of those laws would be addressed by the OCC on a case-by-
case basis.
We also noted in the preamble that the nature and scope of the
statutory authority to set ``requirements and restrictions'' on
national banks' real estate lending may enable the OCC to ``occupy the
field'' of the regulation of those activities. We invited comment on
whether our regulations, like those of the Office of Thrift Supervision
(OTS),\4\ should state explicitly that Federal law occupies the field
of real estate lending. We noted that such an occupation of the field
necessarily would be applied in a manner consistent with other Federal
laws, such as the Truth-in-Lending Act (TILA) \5\ and the Equal Credit
Opportunity Act (ECOA).\6\
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\4\ 12 CFR 560.2.
\5\ 15 U.S.C. 1601 et seq.
\6\ 15 U.S.C. 1691 et seq.
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Under proposed Sec. 34.4(b), certain types of state laws are not
preempted and would apply to national banks to the extent that they do
not significantly affect the real estate lending operations of national
banks or are otherwise consistent with national banks' Federal
authority to engage in real estate lending.\7\ These types of laws
generally pertain to contracts, collection of debts, acquisition and
transfer of property, taxation, zoning, crimes, torts, and homestead
rights. In addition, any other law that the OCC determines to interfere
to only an insignificant extent with national banks' lending authority
or is otherwise consistent with national banks' authority to engage in
real estate lending would not be preempted.
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\7\ Federal law may explicitly resolve the question of whether
state laws apply to the activities of national banks. There are
instances where Federal law specifically incorporates state law
standards, such as the fiduciary powers statute at 12 U.S.C. 92a(a).
The language used in this final rule ``[e]xcept where made
applicable by Federal law'' refers to this type of situation.
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The proposal retained the general rule stated in Sec. 34.3 that
national banks may ``make, arrange, purchase, or sell loans or
extensions of credit, or interests therein, that are secured by liens
on, or interests in, real estate, subject to terms, conditions, and
limitations prescribed by the Comptroller of the Currency by regulation
or order.'' That provision was unchanged, other than by designating it
as paragraph (a).
The proposal added a new paragraph (b), prescribing an explicit,
safety and soundness-based anti-predatory lending standard to the
general statement of authority concerning lending. Proposed Sec.
34.3(b) prohibited a national bank from making a loan subject to 12 CFR
part 34 based predominantly on the foreclosure value of the borrower's
collateral, rather than on the borrower's repayment ability, including
current and expected income, current obligations, employment status,
and other relevant financial resources.
This standard augments the other standards that already apply to
national bank real estate lending under Federal laws. These other
standards include those contained in the OCC's Advisory Letters on
predatory lending; \8\ section 5 of the FTC Act,\9\ which makes
unlawful ``unfair or deceptive acts or practices'' in interstate
commerce; and many other Federal laws that impose standards on lending
practices.\10\ The NPRM invited commenters to suggest other anti-
predatory lending standards that would be appropriate to apply to
national bank real estate lending activities.
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\8\ See OCC Advisory Letter 2003-2, ``Guidelines for National
Banks to Guard Against Predatory and Abusive Lending Practices''
(Feb. 21, 2003) and OCC Advisory Letter 2003-3, ``Avoiding Predatory
and Abusive Lending Practices in Brokered and Purchased Loans''
(Feb. 21, 2003). These documents are available on the OCC's Web site
at http://www.occ.treas.gov/advlst03.htm.
\9\ 15 U.S.C. 45(a)(1).
\10\ There is an existing network of Federal laws applicable to
national banks that protect consumers in a variety of ways. In
addition to TILA and ECOA, national banks are also subject to the
standards contained in the Real Estate Settlement Procedures Act, 12
U.S.C. 2601 et seq., the Fair Housing Act, 42 U.S.C. 3601 et seq.,
the Home Mortgage Disclosure Act, 12 U.S.C. 2801 et seq., the Fair
Credit Reporting Act, 15 U.S.C. 1681 et seq., the Truth in Savings
Act, 12 U.S.C. 4301 et seq., the Consumer Leasing Act, 15 U.S.C.
1667, and the Fair Debt Collection Practices Act, 15 U.S.C. 1692 et
seq.
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As a matter of Federal law, national bank operating subsidiaries
conduct their activities subject to the same terms and conditions as
apply to the parent banks, except where Federal law provides otherwise.
See 12 CFR 5.34(e)(3) and 7.4006. See also 12 CFR 34.1(b) (real estate
lending activities specifically). Thus, by virtue of regulations in
existence prior to the proposal, the proposed changes to part 34,
including the new anti-predatory lending standard, applied to both
national banks and their operating subsidiaries.
[[Page 1906]]
B. Proposed Amendments to Part 7--Deposit-Taking, Other Lending, and
Bank Operations
The proposal also added three new sections to part 7: Sec. 7.4007
regarding deposit-taking activities, Sec. 7.4008 regarding non-real
estate lending activities, and Sec. 7.4009 regarding other national
bank operations. The structure of the proposed amendments was the same
for Sec. Sec. 7.4007 and 7.4008 and was similar for Sec. 7.4009. For
Sec. Sec. 7.4007 and 7.4008, the proposal first set out a statement of
the authority to engage in the activity. Second, the proposal stated
that state laws that obstruct, in whole or in part, a national bank's
exercise of the Federally-authorized power in question are not
applicable, and listed several types of state laws that are preempted.
As with the list of preempted state laws set forth in the proposed
amendments to part 34, this list reflects judicial precedents and OCC
interpretations concerning the types of state laws that can obstruct
the exercise of national banks' deposit-taking and non-real estate
lending powers. Finally, the proposal listed several types of state
laws that, as a general matter, are not preempted.
As with the proposed amendments to part 34, the proposed amendment
to part 7 governing non-real estate lending included a safety and
soundness-based anti-predatory lending standard. As proposed, Sec.
7.4008(b) stated that a national bank shall not make a loan described
in Sec. 7.4008 based predominantly on the foreclosure value of the
borrower's collateral, rather than on the borrower's repayment ability,
including current and expected income, current obligations, employment
status, and other relevant financial resources. The preamble to the
NPRM pointed out that non-real estate lending also is subject to
section 5 of the FTC Act.
For proposed Sec. 7.4009, as with proposed Sec. Sec. 7.4007 and
7.4008, the NPRM first stated that a national bank could exercise all
powers authorized to it under Federal law. To address questions about
the extent to which state law may permissibly govern powers or
activities that have not been addressed by Federal court precedents or
OCC opinions or orders, proposed new Sec. 7.4009(b) provided that
state laws do not apply to national banks if they obstruct, in whole or
in part, a national bank's exercise of powers granted to it under
Federal law. Next, proposed Sec. 7.4009(c) noted that the provisions
of this section apply to any national bank power or aspect of a
national bank's operation that is not otherwise covered by another OCC
regulation that specifically addresses the applicability of state law.
Finally, the proposal listed several types of state laws that, as a
general matter, are not preempted.
As with the proposed changes to part 34, and for the same reasons,
the proposal's changes to part 7 would be applicable to both national
banks and their operating subsidiaries by virtue of an existing OCC
regulation.
III. Overview of Comments
The OCC received approximately 2,600 comments, most of which came
from the following groups:
Realtors. The vast majority--approximately 85%--of the opposing
comments came from realtors and others representing the real estate
industry, who expressed identical concerns about the possibility that
national banks' financial subsidiaries would be permitted to engage in
real estate brokerage activities \11\ and that, if that power were
authorized, the proposal would permit them to do so without complying
with state real estate brokerage licensing laws. This final rule will
not have that result because it does not apply to the activities of
national bank financial subsidiaries. Thus, should the Department of
the Treasury (Treasury) and the Board of Governors of the Federal
Reserve System (Board) proposal to permit financial subsidiaries and
financial holding companies to engage in real estate brokerage
activities go forward, this final rule would not affect the application
of state real estate licensing requirements to national bank financial
subsidiaries.
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\11\ Pursuant to procedures established by the Gramm-Leach-
Bliley Act, Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999), for
determining that an activity is ``financial in nature,'' and thus
permissible for financial holding companies and financial
subsidiaries, the Board and Treasury jointly published a proposal to
determine that real estate brokerage is ``financial in nature.'' See
66 FR 307 (Jan. 3, 2001). No final action has been taken on the
proposal.
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Many realtor comments also raised arguments concerning the impact
of this rulemaking on consumers and market competition and some argued
that preemption of state licensing requirements related to real estate
lending is inappropriate on the basis of field or conflict preemption.
These issues also were raised by other commenters and are addressed in
sections IV and VI of this preamble.
Community and consumer advocates. In addition to the comments from
realtors, the OCC received opposing comments from community and
consumer advocates. These commenters argued that the OCC should not
adopt further regulations preempting state law and, in particular,
should not adopt in the final rule an ``occupation of the field''
preemption standard for national banks' real estate lending activities.
The community and consumer advocates also asserted that the proposed
``obstruct, in whole or in part'' preemption standard is inconsistent
with, and a lowering of, the preemption standards articulated by the
U.S. Supreme Court. Whatever the standard, the community and consumer
advocates expressed concern that preemption would allow national banks
to escape some state tort, contract, debt collection, zoning, property
transfer, and criminal laws, and would expose consumers to wide-spread
predatory and abusive practices by national banks. These commenters
asserted that the OCC's proposed anti-predatory lending standard is
insufficient and urged the OCC to further strengthen consumer
protections in parts 7 and 34, including prohibiting specific practices
characterized as unfair or deceptive. These issues are addressed in
sections IV and VI of this preamble.
State officials and members of Congress. State banking regulators,
the Conference of State Bank Supervisors (CSBS), the National
Conference of State Legislators, individual state legislators, the
National Association of Attorneys General (NAAG), and individual state
attorneys general questioned the legal basis of the proposal and argued
that the OCC lacks authority to adopt it. These commenters, like the
community and consumer advocates, also challenged the OCC's authority
to adopt in the final rule either a ``field occupation'' preemption
standard or the proposed ``obstruct, in whole or in part'' standard.
These commenters raised concerns about the effect of the proposal, if
adopted, on the dual banking system, and its impact on what they assert
is the states' authority to apply and enforce consumer protection laws
against national banks, and particularly against operating
subsidiaries. Several members of Congress submitted comments, or
forwarded letters from constituents and state officials, that echoed
these concerns. The arguments concerning the dual banking system are
addressed in the discussion of Executive Order 13132 later in this
preamble.\12\ The remaining issues raised by the state commenters are
addressed in sections IV and VI of this preamble.\13\
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\12\ See also OCC publication entitled National Banks and the
Dual Banking System (Sept. 2003).
\13\ See also Letter from John D. Hawke, Jr., Comptroller of the
Currency, to Senator Paul S. Sarbanes (Dec. 9, 2003), available on
the OCC's Web site at http://www.occ.treas.gov/foia/SarbanesPreemptionletter.pdf; and identical letters sent to nine
other Senators; and Letters from John D. Hawke, Jr., Comptroller of
the Currency, to Representatives Sue Kelly, Peter King, Carolyn B.
Maloney, and Carolyn McCarthy (Dec. 23, 2003).
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[[Page 1907]]
National banks and banking industry trade groups. National banks,
other financial institutions, and industry groups supported the
proposal. Many of these commenters argued that Congress has occupied
the fields of deposit-taking and lending in the context of national
banks and urged the OCC to adopt a final rule reflecting an extensive
occupation of the field approach. These commenters concluded that
various provisions of the National Bank Act establish broad statutory
authority for the activities and regulation of national banks, and that
these provisions suggest strongly that Congress did in fact intend to
occupy the fields in question. In addition to these express grants of
authority, the commenters noted that national banks may, under 12
U.S.C. 24(Seventh), ``exercise * * * all such incidental powers as
shall be necessary to carry on the business of banking,'' and that this
provision has been broadly construed by the Supreme Court.\14\ These
commenters concluded that this broad grant of Federal powers, coupled
with equally broad grants of rulemaking authority to the OCC,\15\
effectively occupy the field of national bank regulation.
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\14\ See, e.g., Nationsbank of North Carolina, N.A. v. Variable
Annuity Life Ins. Co., 513 U.S. 251, 258 n.2 (1995) (VALIC).
\15\ See, e.g., 12 U.S.C. 93a.
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Many of the supporting commenters also urged the adoption of the
proposal for the reasons set forth in its preamble. These commenters
agreed with the OCC's assertion in the preamble that banks with
customers in more than one state ``face uncertain compliance risks and
substantial additional compliance burdens and expense that, for
practical purposes, materially impact their ability to offer particular
products and services.'' \16\ The commenters stated that, in effect, a
national bank must often craft different products or services (with
associated procedures and policies, and their attendant additional
costs) for each state in which it does business, or elect not to
provide all of its products or services (to the detriment of consumers)
in one or more states. These commenters believe that the proposal, if
adopted, would offer much-needed clarification of when state law does
or does not apply to the activities of a national bank and its
operating subsidiaries. Such clarity, these commenters argued, is
critical to helping national banks maintain and expand provision of
financial services. Without such clarity, these commenters assert, the
burdens and costs, and uncertain liabilities arising under a myriad of
state and local laws, are a significant diversion of the resources that
national banks otherwise can use to provide services to customers
nationwide, and a significant deterrent to their willingness and
ability to offer certain products and services in certain markets.
These issues are addressed in sections IV and VI of this preamble.
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\16\ 68 FR 46119, 46120.
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IV. Reason and Authority for the Regulations
A. The Regulations Are Issued in Furtherance of the OCC's
Responsibility To Ensure That the National Banking System Is Able To
Operate As Authorized by Congress
As the courts have recognized, Federal law authorizes the OCC to
issue rules that preempt state law in furtherance of our responsibility
to ensure that national banks are able to operate to the full extent
authorized under Federal law, notwithstanding inconsistent state
restrictions, and in furtherance of their safe and sound operations.
Federal law is the exclusive source of all of national banks'
powers and authorities. Key to these powers is the clause set forth at
12 U.S.C. 24(Seventh) that permits national banks to exercise ``all
such incidental powers as shall be necessary to carry on the business
of banking.'' This flexible grant of authority furthers Congress's
long-range goals in establishing the national banking system, including
financing commerce, establishing private depositories, and generally
supporting economic growth and development nationwide. \17\ The
achievement of these goals required national banks that are safe and
sound and whose powers are dynamic and capable of evolving so that they
can perform their intended roles. The broad grant of authority provided
by 12 U.S.C. 24(Seventh), as well as the more targeted grants of
authority provided by other statutes,\18\ enable national banks to
evolve their operations in order to meet the changing needs of our
economy and individual consumers.\19\
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\17\ For a more detailed discussion of Congress's purposes in
establishing a national banking system that would operate to achieve
these goals distinctly and separately from the existing system of
state banks, see the preamble to the proposal, 68 FR 46119, 46120,
and National Banks and the Dual Banking System, supra note 12.
\18\ See, e.g., 12 U.S.C. 92a (authorizing national banks to
engage in fiduciary activities) and 371 (authorizing national banks
to engage in real estate lending activities).
\19\ The Supreme Court expressly affirmed the dynamic,
evolutionary character of national bank powers in VALIC, in which it
held that the ``business of banking'' is not limited to the powers
enumerated in 12 U.S.C. 24(Seventh) and that the OCC has the
discretion to authorize activities beyond those specifically
enumerated in the statute. See 513 U.S. at 258 n.2.
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The OCC is charged with the fundamental responsibility of ensuring
that national banks operate on a safe and sound basis, and that they
are able to do so, if they choose, to the full extent of their powers
under Federal law. This responsibility includes enabling the national
banking system to operate as authorized by Congress, consistent with
the essential character of a national banking system and without undue
confinement of their powers. Federal law gives the OCC broad rulemaking
authority in order to fulfill these responsibilities. Under 12 U.S.C.
93a, the OCC is authorized ``to prescribe rules and regulations to
carry out the responsibilities of the office'' \20\ and, under 12
U.S.C. 371, to ``prescribe by regulation or order'' the ``restrictions
and requirements'' on national banks'' real estate lending power
without state-imposed conditions.\21\
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\20\ 12 U.S.C. 93a.
\21\ 12 U.S.C. 371(a).
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In recent years, the financial services marketplace has undergone
profound changes. Markets for credit (both consumer and commercial),
deposits, and many other financial products and services are now
national, if not international, in scope. These changes are the result
of a combination of factors, including technological innovations, the
erosion of legal barriers, and an increasingly mobile society.
Technology has expanded the potential availability of credit and
made possible virtually instantaneous credit decisions. Mortgage
financing that once took weeks, for example, now can take only hours.
Consumer credit can be obtained at the point of sale at retailers and
even when buying a major item such as a car. Consumers can shop for
investment products and deposits on-line. With respect to deposits,
they can compare rates and duration of a variety of deposit products
offered by financial institutions located far from where the consumer
resides.
Changes in applicable law also have contributed to the expansion of
markets for national banks and their operating subsidiaries. These
changes have affected both the type of products that may be offered and
the geographic region in which banks--large and small--may conduct
business. As a result of these changes, banks may branch across state
lines and offer a broader array of products than ever before. An even
wider range of
[[Page 1908]]
customers can be reached through the use of technology, including the
Internet. Community national banks, as well as the largest national
banks, use new technologies to expand their reach and service to
customers.
Our modern society is also highly mobile. Forty million Americans
move annually, according to a recent Congressional report issued in
connection with enactment of the Fair and Accurate Credit Transactions
Act of 2003.\22\ And when they move, they often have the desire, if not
the expectation, that the financial relationships and status they have
established will be portable and will remain consistent.
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\22\ See S. Rep. No. 108-166, at 10 (2003) (quoting the hearing
testimony of Secretary of the Treasury Snow).
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These developments highlight the significance of being able to
conduct a banking business pursuant to consistent, national standards,
regardless of the location of a customer when he or she first becomes a
bank customer or the location to which the customer may move after
becoming a bank customer. They also accentuate the costs and
interference that diverse and potentially conflicting state and local
laws have on the ability of national banks to operate under the powers
of their Federal charter. For national banks, moreover, the ability to
operate under uniform standards of operation and supervision is
fundamental to the character of their national charter.\23\ When
national banks are unable to operate under national standards, it also
implicates the role and responsibilities of the OCC.
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\23\ As we explained last year in the preamble to our amendments
to part 7 concerning national banks' electronic activities,
``freedom from State control over a national bank's powers protects
national banks from conflicting local laws unrelated to the purpose
of providing the uniform, nationwide banking system that Congress
intended.'' 67 FR 34992, 34997 (May 17, 2002).
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These concerns have been exacerbated recently, by increasing
efforts by states and localities to apply state and local laws to bank
activities. As we have learned from our experience supervising national
banks, from the inquiries received by the OCC's Law Department, by the
extent of litigation in recent years over these state efforts, and by
the comments we received on the proposal, national banks' ability to
conduct operations to the full extent authorized by Federal law has
been curtailed as a result.
Commenters noted that the variety of state and local laws that have
been enacted in recent years--including laws regulating fees,
disclosures, conditions on lending, and licensing--have created higher
costs and increased operational challenges.\24\ Other commenters noted
the proliferation of state and local anti-predatory lending laws and
the impact that those laws are having on lending in the affected
jurisdictions. As a result, national banks must either absorb the
costs, pass the costs on to consumers, or eliminate various products
from jurisdictions where the costs are prohibitive. Commenters noted
that this result is reached even in situations where a bank concludes
that a law is preempted, simply so that the bank may avoid litigation
costs or anticipated reputational injury.
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\24\ Illustrative of comments along these lines were those of
banks who noted that various state laws would result in the
following costs: (a) Approximately $44 million in start-up costs
incurred by 6 banks as a result of a recently-enacted California law
mandating a minimum payment warning; (b) 250 programming days
required to change one of several computer systems that needed to be
changed to comply with anti-predatory lending laws enacted in three
states and the District of Columbia; and (c) $7.1 million in costs a
bank would incur as a result of complying with mandated annual
statements to credit card customers.
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As previously noted, the elimination of legal and other barriers to
interstate banking and interstate financial service operations has led
a number of banking organizations to operate, in multi-state
metropolitan statistical areas, and on a multi-state or nationwide
basis, exacerbating the impact of the overlay of state and local
standards and requirements on top of the Federal standards and OCC
supervisory requirements already applicable to national bank
operations. When these multi-jurisdictional banking organizations are
subject to regulation by each individual state or municipality in which
they conduct operations, the problems noted earlier are compounded.
Even the efforts of a single state to regulate the operations of a
national bank operating only within that state can have a detrimental
effect on that bank's operations and consumers. As we explained in our
recent preemption determination and order responding to National City
Bank's inquiry concerning the Georgia Fair Lending Act (GFLA),\25\ the
GFLA caused secondary market participants to cease purchasing certain
Georgia mortgages and many mortgage lenders to stop making mortgage
loans in Georgia. National banks have also been forced to withdraw from
some products and markets in other states as a result of the impact of
state and local restrictions on their activities.
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\25\ See 68 FR 46264 (Aug. 5, 2003).
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When national banks are unable to operate under uniform,
consistent, and predictable standards, their business suffers, which
negatively affects their safety and soundness. The application of
multiple, often unpredictable, different state or local restrictions
and requirements prevents them from operating in the manner authorized
under Federal law, is costly and burdensome, interferes with their
ability to plan their business and manage their risks, and subjects
them to uncertain liabilities and potential exposure. In some cases,
this deters them from making certain products available in certain
jurisdictions.\26\
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\26\ As was recently observed by Federal Reserve Board Chairman
Alan Greenspan (in the context of amendments to the Fair Credit
Reporting Act), ``[l]imits on the flow of information among
financial market participants, or increased costs resulting from
restrictions that differ based on geography, may lead to an increase
in the price or a reduction in the availability of credit, as well
as a reduction in the optimal sharing of risk and reward.'' Letter
of February 28, 2003, from Alan Greenspan, Chairman, Board of
Governors of the Federal Reserve System, to The Honorable Ruben
Hinojosa (emphasis added).
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The OCC therefore is issuing this final rule in furtherance of its
responsibility to enable national banks to operate to the full extent
of their powers under Federal law, without interference from
inconsistent state laws, consistent with the national character of the
national banking system, and in furtherance of their safe and sound
operations. The final rule does not entail any new powers for national
banks or any expansion of their existing powers. Rather, we intend only
to ensure the soundness and efficiency of national banks' operations by
making clear the standards under which they do business.
B. Pursuant to 12 U.S.C. 93a and 371, the OCC May Adopt Regulations
That Preempt State Law
The OCC has ample authority to provide, by regulation, that types
of state laws are not applicable to national banks. As mentioned
earlier, 12 U.S.C. 93a grants the OCC comprehensive rulemaking
authority to further its responsibilities, stating that--
Except to the extent that authority to issue such rules and
regulations has been expressly and exclusively granted to another
regulatory agency, the Comptroller of the Currency is authorized to
prescribe rules and regulations to carry out the responsibilities of
the office * * *.\27\
---------------------------------------------------------------------------
\27\ 12 U.S.C. 93a.
---------------------------------------------------------------------------
This language is significantly broader than that customarily used
to convey rulemaking authority to an agency, which is typically focused
on a particular statute. This was recognized, some 20 years ago, by the
United States Court of Appeals for the D.C. Circuit in
[[Page 1909]]
its decision confirming that 12 U.S.C. 93a authorizes the OCC to issue
regulations preempting state law. In Conference of State Bank
Supervisors v. Conover,\28\ the Conference of State Bank Supervisors
(CSBS) sought to overturn a district court decision upholding OCC
regulations that provided flexibility regarding the terms on which
national banks may make or purchase adjustable rate mortgages (ARMs)
and that preempted inconsistent state laws. The regulations provided
generally that national banks may make or purchase ARMs without regard
to state law limitations. The district court granted the OCC's motion
for summary judgment on the ground that the regulations were within the
scope of the OCC's rulemaking powers granted by Congress.
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\28\ 710 F.2d 878 (D.C. Cir. 1983).
---------------------------------------------------------------------------
On appeal, the CSBS asserted that 12 U.S.C. 93a grants the OCC
authority to issue only ``housekeeping'' procedural regulations. In
support of this argument, the CSBS cited a remark from the legislative
history of 12 U.S.C. 93a by Senator Proxmire that 12 U.S.C. 93a
``carries with it no new authority to confer on national banks powers
which they do not have under existing law.'' CSBS also cited a
statement in the conference report that 12 U.S.C. 93a ``carries no
authority [enabling the Comptroller] to permit otherwise impermissible
activities of national banks with specific reference to the provisions
of the McFadden Act and the Glass-Steagall Act.'' \29\
---------------------------------------------------------------------------
\29\ Id. at 885 (emphasis in original).
---------------------------------------------------------------------------
The Court of Appeals rejected the CSBS's contentions concerning the
proper interpretation of 12 U.S.C. 93a. The Court of Appeals explained
first that the challenged regulations (like this final rule) did not
confer any new powers on national banks. Moreover,
[t]hat the Comptroller also saw fit to preempt those state laws that
conflict with his responsibility to ensure the safety and soundness
of the national banking system, see 12 U.S.C. Sec. 481, does not
constitute an expansion of the powers of national banks.\30\
---------------------------------------------------------------------------
\30\ Id. (emphasis in original).
Nor did the Court of Appeals find support for the CSBS's position in
---------------------------------------------------------------------------
the conference report:
As the ``specific reference'' to the McFadden and Glass-Steagall
Acts indicates, the ``impermissible activities'' which the
Comptroller is not empowered to permit are activities that are
impermissible under federal, not state, law.\31\
---------------------------------------------------------------------------
\31\ Id.
The court summarized its rationale for holding that 12 U.S.C. 93a
---------------------------------------------------------------------------
authorized the OCC to issue the challenged regulations by saying:
It bears repeating that the entire legislative scheme is one
that contemplates the operation of state law only in the absence of
federal law and where such state law does not conflict with the
policies of the National Banking Act. So long as he does not
authorize activities that run afoul of federal laws governing the
activities of the national banks, therefore, the Comptroller has the
power to preempt inconsistent state laws.\32\
---------------------------------------------------------------------------
\32\ Id. at 878 (emphasis added).
The authority under 12 U.S.C. 93a described by the court in CSBS v.
Conover thus amply supports the adoption of regulations providing that
specified types of state laws purporting to govern as applied to
national banks' lending and deposit-taking activities are preempted.
Under 12 U.S.C. 371, the OCC has the additional and specific
authority to provide that the specified types of laws relating to
national banks' real estate lending activities are preempted. As we
have described and as recognized in CSBS v. Conover,\33\ 12 U.S.C. 371
grants the OCC unique rulemaking authority with regard to national
banks' real estate lending activities. That section states:
[a]ny national banking association may make, arrange, purchase or
sell loans or extensions of credit secured by liens on interests in
real estate, subject to section 1828(o) of this title and such
restrictions and requirements as the Comptroller of the Currency may
prescribe by regulation or order.\34\
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\33\ In CSBS v. Conover, the court also held that the authority
conferred by 12 U.S.C. 371, as the statute read at the time relevant
to the court's decision, conferred authority upon the OCC to issue
the preemptive regulations challenged in that case. The version of
section 371 considered by the court authorized national banks to
make real estate loans ``subject to such terms, conditions, and
limitations'' as prescribed by the Comptroller by order, rule or
regulations. The court said that the ``restrictions and
requirements'' language contained in the statute today was ``not
substantially different'' from the language that it was considering
in that case. Id. at 884.
\34\ 12 U.S.C. 371(a).
The language and history of 12 U.S.C. 371 confirm the real estate
lending powers of national banks and that only the OCC `` subject to
other applicable Federal law `` and not the states may impose
restrictions or requirements on national banks' exercise of those
powers. The Federal powers conferred by 12 U.S.C. 371 are subject only
``to section 1828(o) of this title and such restrictions and
requirements as the Comptroller of the Currency may prescribe by
regulation or order.'' \35\ Thus, the exercise of the powers granted by
12 U.S.C. 371 is not conditioned on compliance with any state
requirement, and state laws that attempt to confine or restrain
national banks' real estate lending activities are inconsistent with
national banks' real estate lending powers under 12 U.S.C. 371.
---------------------------------------------------------------------------
\35\ Id. As noted supra at note 7, Federal legislation
occasionally provides that national banks shall conduct certain
activities subject to state law standards. For example, national
banks conduct insurance sales, solicitation, and cross-marketing
activities subject to certain types of state restrictions expressly
set out in the Gramm-Leach-Bliley Act. See 15 U.S.C. 6701(d)(2)(B).
There is no similar Federal legislation subjecting national banks'
real estate lending activities to state law standards.
---------------------------------------------------------------------------
This conclusion is consistent with the fact that national bank real
estate lending authority has been extensively regulated at the Federal
level since the power first was codified. Beginning with the enactment
of the Federal Reserve Act of 1913,\36\ national banks' real estate
lending authority has been governed by the express terms of 12 U.S.C.
371. As originally enacted in 1913, section 371 contained a limited
grant of authority to national banks to lend on the security of
``improved and unencumbered farm land, situated within its Federal
reserve district.'' \37\ In addition to the geographic limits inherent
in this authorization, the Federal Reserve Act also imposed limits on
the term and amount of each loan as well as an aggregate lending limit.
Over the years, 12 U.S.C. 371 was repeatedly amended to broaden the
types of real estate loans national banks were permitted to make, to
expand geographic limits, and to modify loan term limits and per-loan
and aggregate lending limits.
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\36\ Federal Reserve Act, Dec. 23, 1913, ch. 6, 38 Stat. 251, as
amended.
\37\ Id. section 24, 38 Stat. 273.
---------------------------------------------------------------------------
In 1982, Congress removed these ``rigid statutory limitations''
\38\ in favor of a broad provision that is very similar to the current
law and that authorized national banks to ``make, arrange, purchase or
sell loans or extensions of credit secured by liens on interests in
real estate, subject to such terms, conditions, and limitations as may
be prescribed by the Comptroller of the Currency by order, rule, or
regulation.'' \39\ The purpose of the 1982 amendment was ``to provide
national banks with the ability to engage in more creative and flexible
financing, and to become stronger participants in the home financing
market.'' \40\ In 1991, Congress removed the term ``rule'' from this
phrase and enacted an additional requirement, codified at 12 U.S.C.
[[Page 1910]]
1828(o), that national banks (and other insured depository
institutions) conduct real estate lending pursuant to uniform standards
adopted at the Federal level by regulation of the OCC and the other
Federal banking agencies.\41\
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\38\ S. Rep. No. 97-536, at 27 (1982).
\39\ Garn-St Germain Depository Institutions Act of 1982, Pub.
L. 97-320, section 403, 96 Stat. 1469, 1510-11 (1982).
\40\ S. Rep. No. 97-536, at 27 (1982).
\41\ See section 304 of the Federal Deposit Insurance
Corporation Improvement Act, codified at 12 U.S.C. 1828(o). These
standards governing national banks' real estate lending are set
forth in Subpart D of 12 CFR part 34.
---------------------------------------------------------------------------
Thus, the history of national banks' real estate lending activities
under 12 U.S.C. 371 is one of extensive Congressional involvement
gradually giving way to a streamlined approach in which Congress has
delegated broad rulemaking authority to the Comptroller. The two
versions of 12 U.S.C. 371--namely, the lengthy and prescriptive
approach prior to 1982 and the more recent statement of broad authority
qualified only by reference to Federal law --may be seen as evolving
articulations of the same idea.
C. The Preemption Standard Applied in This Final Rule Is Entirely
Consistent With the Standards Articulated by the Supreme Court
State laws are preempted by Federal law, and thus rendered invalid
with respect to national banks, by operation of the Supremacy Clause of
the U.S. Constitution.\42\ The Supreme Court has identified three ways
in which this may occur. First, Congress can adopt express language
setting forth the existence and scope of preemption.\43\ Second,
Congress can adopt a framework for regulation that ``occupies the
field'' and leaves no room for states to adopt supplemental laws.\44\
Third, preemption may be found when state law actually conflicts with
Federal law. Conflict will be found when either: (i) compliance with
both laws is a ``physical impossibility;'' \45\ or (ii) when the state
law stands ``as an obstacle to the accomplishment and execution of the
full purposes and objectives of Congress.'' \46\
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\42\ ``This Constitution, and the Laws of the United States
which shall be made in Pursuance thereof * * * shall be the supreme
Law of the Land; and the Judges in every State shall be bound
thereby, any Thing in the Constitution or Laws of any State to the
Contrary notwithstanding.'' U.S. Const. art. VI, cl. 2.
\43\ See Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977).
\44\ See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230
(1947).
\45\ Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132,
143 (1963).
\46\ Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Barnett Bank
of Marion County, N.A. v. Nelson, 517 U.S. 25, 31 (1996) (quoting
Hines).
---------------------------------------------------------------------------
In Barnett Bank of Marion County v. Nelson,\47\ the Supreme Court
articulated preemption standards used by the Supreme Court in the
national bank context to determine, under the Supremacy Clause of the
U.S. Constitution, whether Federal law conflicts with state law such
that the state law is preempted. As observed by the Supreme Court in
Barnett, a state law will be preempted if it conflicts with the
exercise of a national bank's Federally authorized powers.
---------------------------------------------------------------------------
\47\ 517 U.S. 25 (1996).
---------------------------------------------------------------------------
The Supreme Court noted in Barnett the many formulations of the
conflicts standard. The Court stated:
In defining the pre-emptive scope of statutes and regulations
granting a power to national banks, these cases take the view that
normally Congress would not want States to forbid, or impair
significantly, the exercise of a power that Congress explicitly
granted. To say this is not to deprive States of the power to regulate
national banks, where (unlike here) doing so does not prevent or
significantly interfere with the national bank's exercise of its
powers. See, e.g., Anderson Nat. Bank v. Luckett, 321 U.S. 233, 247-252
(1944) (state statute administering abandoned deposit accounts did not
``unlawful[ly] encroac[h] on the rights and privileges of national
banks''); McClellan v. Chipman, 164 U.S. 347, 358 (1896) (application
to national banks of state statute forbidding certain real estate
transfers by insolvent transferees would not ``destro[y] or hampe[r]''
national banks'' functions); National Bank v. Commonwealth, 76 U.S. (9
Wall.) 353, 362 (1869) (national banks subject to state law that does
not ``interfere with, or impair [national banks'] efficiency in
performing the functions by which they are designed to serve [the
Federal] Government'').\48\
---------------------------------------------------------------------------
\48\ Id. at 33-34. Certain commenters cite Nat'l Bank v.
Commonwealth for the proposition that national banks are subject to
state law. These commenters, however, omit the important caveat,
quoted by the Barnett Court, that state law applies only where it
does not ``interfere with, or impair [national banks'] efficiency in
performing the functions by which they are designed to serve [the
Federal] Government.''
---------------------------------------------------------------------------
The variety of formulations quoted by the Court--``unlawfully
encroach,'' ``hamper,'' ``interfere with or impair national banks'
efficiency''--defeats any suggestion that any one phrase constitutes
the exclusive standard for preemption. As the Supreme Court explained
in Hines v. Davidowitz: \49\
---------------------------------------------------------------------------
\49\ 312 U.S. 52 (1941).
---------------------------------------------------------------------------
There is not--and from the very nature of the problem there cannot
be--any rigid formula or rule which can be used as a universal pattern
to determine the meaning and purpose of every act of Congress. This
Court, in considering the validity of state laws in the light of
treaties or federal laws touching the same subject, has made use of the
following expressions: conflicting; contrary to; occupying the field;
repugnance; difference; irreconcilability; inconsistency; violation;
curtailment; and interference. But none of these expressions provides
an infallible constitutional test or an exclusive constitutional
yardstick. In the final analysis, there can be no one crystal clear
distinctly marked formula. Our primary function is to determine
whether, under the circumstances of this particular case, [the state
law at issue] stands as an obstacle to the accomplishment and execution
of the full purposes and objectives of Congress.\50\
---------------------------------------------------------------------------
\50\ Id. at 67 (emphasis added) (citations omitted).
---------------------------------------------------------------------------
Thus, in Hines, the Court recognized that the Supremacy Clause
principles of preemption can be articulated in a wide variety of
formulations that do not yield substantively different legal results.
The variation among formulations that carry different linguistic
connotations does not produce different legal outcomes.
We have adopted in this final rule a statement of preemption
principles that is consistent with the various formulations noted
earlier. The phrasing used in the final rule--obstruct,\51\ impair,\52\
or condition \53\''--differs somewhat from what we proposed. This
standard conveys the same substantive point as the proposed standard,
however; that is, that state laws do not apply to national banks if
they impermissibly contain a bank's exercise of a federally authorized
power. The words of the final rule, which are drawn directly from
applicable Supreme Court precedents, better convey the range of effects
on national bank powers that the Court has found to be impermissible.
The OCC intends this phrase as the distillation of the various
preemption constructs articulated by the Supreme Court, as recognized
in Hines and Barnett, and not as a replacement construct that is in any
way inconsistent with those standards.
---------------------------------------------------------------------------
\51\ See Hines, 312 U.S. at 76.
\52\ See Nat'l Bank v. Commonwealth, 76 U.S. at 362; Davis v.
Elmira Savings Bank, 161 U.S. 275, 283 (1896); McClellan, 164 U.S.
at 357.
\53\ See Barnett, 517 U.S. at 34; Franklin Nat'l Bank of
Franklin Square v. New York, 347 U.S. 373, 375-79 (1954).
---------------------------------------------------------------------------
In describing the proposal, we invited comment on whether it would
be appropriate to assert occupation of the entire field of real estate
lending. Some commenters strongly urged that we do so, and that we go
beyond real estate lending to cover other lending and deposit-taking
activities as well. Upon further consideration of this issue and
[[Page 1911]]
careful review of comments submitted pertaining to this point, we have
concluded, as the Supreme Court recognized in Hines and reaffirmed in
Barnett, that the effect of labeling of this nature is largely
immaterial in the present circumstances. Thus, we decline to adopt the
suggestion of these commenters that we declare that these regulations
``occupy the field'' of national banks' real estate lending, other
lending, and deposit-taking activities. We rely on our authority under
both 12 U.S.C. 93a and 371, and to the extent that an issue arises
concerning the application of a state law not specifically addressed in
the final regulation, we retain the ability to address those questions
through interpretation of the regulation, issuance of orders pursuant
to our authority under 12 U.S.C. 371, or, if warranted by the
significance of the issue, by rulemaking to amend the regulation.
V. Description of the Final Rule
A. Amendments to Part 34
1. Section 34.3(a). The final rule retains the statement of
national banks' real estate lending authority, now designated as Sec.
34.3(a), that national banks may ``make, arrange, purchase, or sell
loans or extensions of credit, or interests therein, that are secured
by liens on, or interests in, real estate (real estate loans), subject
to 12 U.S.C. 1828(o) and such restrictions and requirements as the
Comptroller of the Currency may prescribe by regulation or order.''
2. Section 34.3(b). New Sec. 34.3(b) adds an explicit safety and
soundness-derived anti-predatory lending standard to the general
statement of authority concerning lending. Many bank commenters voiced
concern that the proposed anti-predatory lending standard, by
prohibiting a national bank from making a loan based predominantly on
the foreclosure value of a borrower's collateral without regard to the
borrower's repayment ability, would also prohibit a national bank from
engaging in legitimate, non-predatory lending activities. These
commenters noted that reverse mortgage, small business, and high net
worth loans are often made based on the value of the collateral.
We have revised the anti-predatory lending standard in the final
rule to clarify that it applies to consumer loans only, (i.e., loans
for personal, family, or household purposes), and to clarify that it is
intended to prevent borrowers from being unwittingly placed in a
situation where repayment is unlikely without the lender seizing the
collateral. Where the bargain agreed to by a borrower and a lender
involves an understanding by the borrower that it is likely or expected
that the collateral will be used to repay the debt, such as with a
reverse mortgage, it clearly is not objectionable that the collateral
will then be used in such a manner. Moreover, the final rule's anti-
predatory lending standard is not intended to apply to business lending
or to situations where a borrower's net worth would support the loan
under customary underwriting standards.
Thus, we have revised the anti-predatory lending standard so that
it focuses on consumer loans and permits a national bank to use a
variety of reasonable methods to determine a borrower's ability to
repay, including, for example, the borrower's current and expected
income, current and expected cash flows, net worth, other relevant
financial resources, current financial obligations, employment status,
credit history, or other relevant factors.
Several commenters urged the OCC to expressly affirm that a
national bank's lending practices must be conducted in conformance with
section 5 of the FTC Act, which makes unlawful ``unfair or deceptive
acts or practices'' in interstate commerce,\54\ and regulations
promulgated thereunder. As discussed in more detail in section VI of
this preamble, the OCC has taken actions against national banks under
the FTC Act where the OCC believed they were engaged in unfair or
deceptive practices. As demonstrated by these actions, the OCC
recognizes the importance of national banks and their operating
subsidiaries acting in conformance with the standards contained in
section 5 of the FTC Act. We therefore agree that an express reference
to those standards in our regulation would be appropriate and have
added it to the final rules.\55\
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\54\ 15 U.S.C. 45(a)(1).
\55\ It is important to note here that we lack the authority to
do what some commenters essentially urged, namely, to specify by
regulation that particular practices, such as loan ``flipping'' or
``equity stripping,'' are unfair or deceptive. While we have the
ability to take enforcement actions against national banks if they
engage in unfair or deceptive practices under section 5 of the FTC
Act, the OCC does not have rulemaking authority to define specific
practices as unfair or deceptive under section 5. See 15 U.S.C.
57a(f).
---------------------------------------------------------------------------
3. State laws that are preempted (Sec. 34.4(a)). Pursuant to 12
U.S.C. 93a and 371, the final rule amends Sec. 34.4(a) to add to the
existing regulatory list of types of state law restrictions and
requirements that are not applicable to national banks. This list,
promulgated under our authority ``to prescribe rules and regulations to
carry out the responsibilities of the office'' and to prescribe the
types of restrictions and requirements to which national banks' real
estate lending activities shall be subject, reflects our experience
with types of state laws that can materially affect and confine--and
thus are inconsistent with--the exercise of national banks' real estate
lending powers.\56\
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\56\ As we noted in our discussion of this list in the preamble
to the proposal, the ``OCC and Federal courts have thus far
concluded that a wide variety of state laws are preempted, either
because the state laws fit within the express preemption provisions
of an OCC regulation or because the laws conflict with a Federal
power vested in national banks.'' See 68 FR 46119, 46122-46123. The
list is also substantially identical to the types of laws specified
in a comparable regulation of the OTS. See 12 CFR 560.2(b).
---------------------------------------------------------------------------
The final rule revises slightly the introductory clause used in
proposed Sec. 34.4(a) in order to conform this section more closely to
the amended sections of part 7 discussed later in this preamble. Thus,
the final rule provides: ``Except where made applicable by Federal law,
state laws that obstruct, impair, or condition a national bank's
ability to fully exercise its Federally authorized real estate lending
powers do not apply to national banks.'' The final rule then expands
the current list of the types of state law restrictions and
requirements that are not applicable to national banks.
Many of the supporting commenters requested that the final rule
clarify the extent to which particular state or local laws that were
not included in the proposal are preempted. For example, these
commenters suggested that the final rule address particular state laws
imposing various limitations on mortgage underwriting and servicing.
We decline to address most of these suggestions with the level of
specificity requested by the commenters. Identifying state laws in a
more generic way avoids the impression that the regulations only cover
state laws that appear on the list. The list of the types of preempted
state laws is not intended to be exhaustive, and we retain the ability
to address other types of state laws by order on a case-by-case basis,
as appropriate, to make determinations whether they are preempted under
the applicable standards.\57\
---------------------------------------------------------------------------
\57\ See, e.g., OCC Determination and Order concerning the
Georgia Fair Lending Act, supra footnote 25.
---------------------------------------------------------------------------
4. State laws that are not preempted (Sec. 34.4(b)). Section
34.4(b) also provides that certain types of state laws are not
preempted and would apply to national banks to the extent that they are
consistent with national banks' Federal authority to engage in real
estate lending because their effect on the real estate
[[Page 1912]]
lending operations of national banks is only incidental. These types of
laws generally pertain to contracts, rights to collect debts,
acquisition and transfer of property, taxation, zoning, crimes,
torts,\58\ and homestead rights. In addition, any other law the effect
of which is incidental to national banks' lending authority or
otherwise consistent with national banks' authority to engage in real
estate lending would not be preempted.\59\ In general, these would be
laws that do not attempt to regulate the manner or content of national
banks' real estate lending, but that instead form the legal
infrastructure that makes it practicable to exercise a permissible
Federal power.
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\58\ See Bank of America v. City & County of San Francisco, 309
F.3d 551, 559 (9th Cir. 2002).
\59\ The label a state attaches to its laws will not affect the
analysis of whether that law is preempted. For instance, laws
related to the transfer of real property may contain provisions that
give borrowers the right to ``cure'' a default upon acceleration of
a loan if the lender has not foreclosed on the property securing the
loan. Viewed one way, this could be seen as part of the state laws
governing foreclosure, which historically have been within a state's
purview. However, as we concluded in the OCC Determination and Order
concerning the GFLA, to the extent that this type of law limits the
ability of a national bank to adjust the terms of a particular class
of loans once there has been a default, it would be a state law
limitation ``concerning * * * (2) The schedule for the repayment of
principal and interest; [or] (3) The term to maturity of the loan *
* *'' 12 CFR 34.4(a). In such a situation, we would be governed by
the effect of the state statute.
---------------------------------------------------------------------------
One category of state law included in the proposed list of state
laws generally not preempted was ``debt collection.'' Consistent with
Supreme Court precedents addressing this type of state law,\60\ we have
revised the language of the final rule to refer to national banks'
``right to collect debts.''
---------------------------------------------------------------------------
\60\ See, e.g., Nat'l Bank v. Commonwealth, 76 U.S. at 362
(national banks ``are subject to the laws of the State, and are
governed in their daily course of business far more by the laws of
the State than of the nation. All their contracts are governed and
construed by State laws. Their acquisition and transfer of property,
their right to collect their debts, and their liability to be sued
for debts, are all based on State law.'') (emphasis added); see also
McClellan, 164 U.S. at 356-57 (quoting Nat'l Bank v. Commonwealth).
---------------------------------------------------------------------------
B. Amendments to Part 7--Deposit-Taking, Other Consumer Lending, and
National Bank Operations
The final rule adds three new sections to part 7: Sec. 7.4007
regarding deposit-taking activities, Sec. 7.4008 regarding non-real
estate lending activities, and Sec. 7.4009 regarding national bank
operations. The structure of the amendments is the same for Sec. Sec.
7.4007 and 7.4008 and is similar for Sec. 7.4009.
For Sec. 7.4007, the final rule first sets out a statement of the
authority to engage in the activity. Second, the final rule notes that
state laws that obstruct, impair, or condition a national bank's
ability to fully exercise the power in question are not applicable, and
lists several types of state laws that are preempted. Types of state
laws that are generally preempted under Sec. 7.4007 include state
requirements concerning abandoned and dormant accounts, checking
accounts, disclosure requirements, funds availability, savings account
orders of withdrawal, state licensing or registration requirements, and
special purpose savings services. Finally, the final rule lists types
of state laws that, as a general matter, are not preempted. Examples of
these laws include state laws concerning contract, rights to collect
debt, tort, zoning, and property transfers. These lists are not
intended to be exhaustive, and the OCC retains the ability to address
other types of state laws on a case-by-case basis to make preemption
determinations under the applicable standards.
For Sec. 7.4008, the final rule also sets out a statement of the
authority to engage in the activity (non-real estate lending), notes
that state laws that obstruct, impair, or condition a national bank's
ability to fully exercise this power are not applicable, and lists
several types of state laws that are, or are not, preempted. Section
7.4008 also includes a safety and soundness-based anti-predatory
lending standard. Final Sec. 7.4008(b) states that ``[a] national bank
shall not make a consumer loan subject to this Sec. 7.4008 based
predominantly on the bank's realization of the foreclosure or
liquidation value of the borrower's collateral, without regard to the
borrower's ability to repay the loan according to its terms. A bank may
use any reasonable method to determine a borrower's ability to repay,
including, for example, the borrower's current and expected income,
current and expected cash flows, net worth, other relevant financial
resources, current financial obligations, employment status, credit
history, or other relevant factors.'' Separately, Sec. 7.4008(c) also
includes a statement that a national bank shall not engage in unfair or
deceptive practices within the meaning of section 5 of the FTC Act and
regulations promulgated thereunder in connection with making non-real
estate related loans. The standards set forth in Sec. 7.4008(b) and
(c), plus an array of Federal consumer protection standards,\61\ ensure
that national banks are subject to consistent and uniform Federal
standards, administered and enforced by the OCC, that provide strong
and extensive customer protections and appropriate safety and
soundness-based criteria for their lending activities.
---------------------------------------------------------------------------
\61\ See supra note 10.
---------------------------------------------------------------------------
In Sec. 7.4009, the final rule first states that national banks
may exercise all powers authorized to them under Federal law.\62\
Second, the final rule states that except as otherwise made applicable
by Federal law, state laws that obstruct, impair, or condition a
national bank's ability to fully exercise its authorized powers do not
apply to the national bank.\63\ Finally, the final rule lists several
types of state laws that, as a general matter, are not preempted. For
the reasons outlined earlier in the discussion of the amendments to 12
CFR part 34, the reference to debt collection laws has been revised to
refer to state laws concerning national banks' ``rights to collect
debts.''
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\62\ As noted in the proposal, the OTS has issued a regulation
providing generally that state laws purporting to address the
operations of Federal savings associations are preempted. See 12 CFR
545.2. The extent of Federal regulation and supervision of Federal
savings associations under the Home Owners' Loan Act is
substantially the same as for national banks under the national
banking laws, a fact that warrants similar conclusions about the
applicability of state laws to the conduct of the Federally
authorized activities of both types of entities. Compare, e.g., 12
U.S.C. 1464(a) (OTS authorities with respect to the organization,
incorporation, examination, operation, regulation, and chartering of
Federal savings associations) with 12 U.S.C. 21 (organization and
formation of national banking associations), 12 U.S.C. 481 (OCC
authority to examine national banks and their affiliates), 12 U.S.C.
484 (OCC's exclusive visitorial authority), and 12 U.S.C. 93a (OCC
authority to issue regulations).
\63\ As noted previously, the final rule makes changes to the
introductory clause concerning the applicability of state law in 12
CFR 34.4(a), 7.4007(b), 7.4008(d), and 7.4009(b) to make the
language of these sections more consistent with each other.
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The OCC's regulations adopted in this final rule address the
applicability of state law with respect to a number of specific types
of activities. The question may persist, however, about the extent to
which state law may permissibly govern powers or activities that have
not been addressed by Federal court precedents or OCC opinions or
orders. Accordingly, as noted earlier, new Sec. 7.4009 provides that
state laws do not apply to national banks if they obstruct, impair, or
condition a national bank's ability to fully exercise the powers
authorized to it under Federal law, including the content of those
activities and the manner in which and standards whereby they are
conducted.
As explained previously, in some circumstances, of course, Federal
law directs the application of state standards to a national bank. The
wording of Sec. 7.4009 reflects that a Federal statute may require the
application of state
[[Page 1913]]
law,\64\ or it may incorporate--or ``Federalize''--state standards.\65\
In those circumstances, the state standard obviously applies. State law
may also apply if it only incidentally affects a national bank's
Federally authorized powers or if it is otherwise consistent with
national banks' uniquely Federal status. Like the other provisions of
this final rule, Sec. 7.4009 recognizes the potential applicability of
state law in these circumstances. This approach is consistent with the
Supreme Court's observation that national banks ``are governed in their
daily course of business far more by the laws of the state than of the
nation.'' \66\ However, as noted previously, these types of laws
typically do not regulate the manner or content of the business of
banking authorized for national banks, but rather establish the legal
infrastructure that makes practicable the conduct of that business.
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\64\ See, e.g., 15 U.S.C. 6711 (insurance activities of national
banks are ``functionally regulated'' by the states, subject to the
provisions on the operation of state law contained in section 104 of
the Gramm-Leach-Bliley Act).
\65\ See, e.g., 12 U.S.C. 92a (permissible fiduciary activities
for national banks determined by reference to state law).
\66\ Nat'l Bank v. Commonwealth, 76 U.S. at 362 (holding that
shares held by shareholders of a national bank were lawfully subject
to state taxation).
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C. Application of Amendments to Operating Subsidiaries
As a matter of Federal law, national bank operating subsidiaries
conduct their activities under a Federal license, subject to the same
terms and conditions as apply to the parent banks, except where Federal
law provides otherwise. See 12 CFR 5.34 and 7.4006. See also 12 CFR
34.1(b)(real estate activities specifically).\67\ Thus, by virtue of
preexisting OCC regulations, the changes to parts 7 and 34, including
the new anti-predatory lending standards applicable to lending
activities, apply to both national banks and their operating
subsidiaries. The final rule makes no change to these existing
provisions.
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\67\ For a detailed discussion of this issue, see the OCC's
visitorial powers rulemaking also published today in the Federal
Register.
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VI. The OCC's Commitment to Fair Treatment of National Bank Customers
and High Standards of National Bank Operations
The OCC shares the view of the commenters that predatory and
abusive lending practices are inconsistent with national objectives of
encouraging home ownership and community revitalization, and can be
devastating to individuals, families, and communities. We will not
tolerate such practices by national banks and their operating
subsidiaries. Our Advisory Letters on predatory lending,\68\ our
pioneering enforcement positions resulting in substantial restitution
to affected consumers, and the anti-predatory lending standards adopted
in this final rule reflect our commitment that national banks operate
pursuant to high standards of integrity in all respects. The provisions
of this final rule, clarifying that certain state laws are not
applicable to national banks' operations, do not undermine the
application of these standards to all national banks, for the
protection of all national bank customers--wherever they are located.
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\68\ See supra note 8.
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Advisory Letters 2003-2, which addresses loan originations, and
2003-3, which addresses loan purchases and the use of third party loan
brokers, contain the most comprehensive supervisory standards ever
published by any Federal financial regulatory agency to address
predatory and abusive lending practices and detail steps for national
banks to take to ensure that they do not engage in such practices. As
explained in the Advisory Letters, if the OCC has evidence that a
national bank has engaged in abusive lending practices, we will review
those practices not only to determine whether they violate specific
provisions of law such as the Homeowners Equity Protection Act of 1994
(HOEPA), the Fair Housing Act, or the Equal Credit Opportunity Act, but
also to determine whether they involve unfair or deceptive practices
that violate the FTC Act. Indeed, several practices that we identify as
abusive in our Advisory Letters--such as equity stripping, loan
flipping, and the refinancing of special subsidized mortgage loans that
originally contained terms favorable to the borrower--generally can be
found to be unfair or deceptive practices that violate the FTC Act.
Moreover, our enforcement record, including the OCC's pioneering
actions using the FTC Act to address consumer abuses that were not
specifically prohibited by regulation, demonstrates our commitment to
keeping abusive practices out of the national banking system. For
example, In the Matter of Providian Nat'l Bank, Tilton, New
Hampshire,\69\ pursuant to the FTC Act, the OCC required payment by a
national bank to consumers in excess of $300 million and imposed
numerous conditions on the conduct of future business. Since the
Providian settlement in 2000, the OCC has taken action under the FTC
Act to address unfair or deceptive practices and consumer harm
involving five other national banks.\70\
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\69\ Enforcement Action 2000-53 (June 28, 2000), available at
the OCC's Web site in the ``Popular FOIA Requests'' section at
http://www.occ.treas.gov/foia/foiadocs.htm.
\70\ See In the Matter of First Consumers National Bank,
Beaverton, Oregon, Enforcement Action 2003-100 (required restitution
of annual fees and overlimit fees for credit cards); In the Matter
of Household Bank (SB), N.A., Las Vegas, Nevada, Enforcement Action
2003-17 (required restitution regarding private label credit cards);
In the Matter of First National Bank in Brookings, Brookings, South
Dakota, Enforcement Action 2003-1 (required restitution regarding
credit cards); In the Matter of First National Bank of Marin, Las
Vegas, Nevada, Enforcement Action 2001-97 (restitution regarding
credit cards); and In the Matter of Direct Merchants Credit Card
Bank, N.A., Scottsdale, Arizona, Enforcement Action 2001-24
(restitution regarding credit cards). These orders can be found on
the OCC's Web site within the ``Popular FOIA Requests'' section at
http://www.occ.treas.gov/foia/foiadocs.htm.
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Most recently, on November 7, 2003, the OCC entered into a consent
order with Clear Lake National Bank that requires the bank to reimburse
fees and interest charged to consumers in a series of abusive home
equity loans. More than $100,000 will be paid to 30 or more borrowers.
This is the first case brought by a Federal regulator under the FTC Act
that cites the unfair nature of the terms of the loan. The OCC also
found that the loans violated HOEPA, the Truth in Lending Act, and Real
Estate Settlement Procedures Act.\71\
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\71\ See In the Matter of Clear Lake National Bank, San Antonio,
Texas, Enforcement Action 2003-135 (Nov. 7, 2003), available at
http://www.occ.treas.gov/FTP/EAs/ea2003-135.pdf. We believe these
enforcement actions, which have generated hundreds of millions of
dollars for consumers in restitution, also demonstrate that the OCC
has the resources to enforce applicable laws. Indeed, as recently
observed by the Superior Court of Arizona, Maricopa County, in an
action brought by Arizona against a national bank, among others, the
restitution and remedial action ordered by the OCC in that matter
against the bank was ``comprehensive and significantly broader in
scope that that available through [the] state court proceedings.''
State of Arizona v. Hispanic Air Conditioning and Heating, Inc., CV
2000-003625, Ruling at 27, Conclusions of Law, paragraph 50 (Aug.
25, 2003).
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The OCC also has moved aggressively against national banks engaged
in payday lending programs that involved consumer abuses. Specifically,
we concluded four enforcement actions against national banks that had
entered into contracts with payday lenders for loan originations, and
in each case ordered the bank to terminate the relationship with the
payday lender.\72\
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\72\ See In the Matter of Peoples National Bank, Paris, Texas,
Enforcement Action 2003-2; In the Matter of First National Bank in
Brookings, Brookings, South Dakota, Enforcement Action 2003-1; In
the Matter of Goleta National Bank, Goleta, California, Enforcement
Action 2002-93; and In the Matter of Eagle National Bank, Upper
Darby, Pennsylvania, Enforcement Action 2001-104. These orders can
also be found on the OCC's Web site within the ``Popular FOIA
Requests'' section at http://www.occ.treas.gov/foia/foiadocs.htm.
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[[Page 1914]]
Other than these isolated incidences of abusive practices that have
triggered the OCC's aggressive supervisory response, evidence that
national banks are engaged in predatory lending practices is scant.
Based on the absence of such information--from third parties, our
consumer complaint database, and our supervisory process--we have no
reason to believe that such practices are occurring in the national
banking system to any significant degree. Although several of the
commenters suggested this conclusion is implausible given the
significant share of the lending market occupied by national banks,
this observation is consistent with an extensive study of predatory
lending conducted by the Department of Housing and Urban Development
(HUD) and the Treasury Department,\73\ and even with comments submitted
in connection with an OTS rulemaking concerning preemption of state
lending standards by 46 State Attorneys General.
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\73\ A Treasury-HUD joint report issued in 2000 found that
predatory lending practices in the subprime market are less likely
to occur in lending by--
banks, thrifts, and credit unions that are subject to extensive
oversight and regulation * * *. The subprime mortgage and finance
companies that dominate mortgage lending in many low-income and
minority communities, while subject to the same consumer protection
laws, are not subject to as much federal oversight as their prime
market counterparts--who are largely federally-supervised banks,
thrifts, and credit unions. The absence of such accountability may
create an environment where predatory practices flourish because
they are unlikely to be detected.
Departments of Housing and Urban Development and the Treasury,
``Curbing Predatory Home Mortgage Lending: A Joint Report'' 17-18
(June 2000), available at http://www.treas.gov/press/releases/report3076.htm.
In addition, the report found that a significant source of
abusive lending practices is non-regulated mortgage brokers and
similar intermediaries who, because they ``do not actually take on
the credit risk of making the loan, * * * may be less concerned
about the loan's ultimate repayment, and more concerned with the fee
income they earn from the transaction.'' Id. at 40.
---------------------------------------------------------------------------
Less than one year ago, nearly two dozen State Attorneys General
signed a brief in litigation that reached the same conclusion. That
case involved a revised regulation issued by the Office of Thrift
Supervision to implement the Alternative Mortgage Transaction Parity
Act (AMTPA). The revised regulation seeks to distinguish between
Federally supervised thrift institutions and non-bank mortgage lenders
and makes non-bank mortgage lenders subject to state law restrictions
on prepayment penalties and late fees. In supporting the OTS's decision
to retain preemption of state laws for supervised depository
institutions and their subsidiaries but not for unsupervised housing
creditors, the State Attorneys General stated:
Based on consumer complaints received, as well as investigations
and enforcement actions undertaken by the Attorneys General, predatory
lending abuses are largely confined to the subprime mortgage lending
market and to non-depository institutions. Almost all of the leading
subprime lenders are mortgage companies and finance companies, not
banks or direct bank subsidiaries.\74\
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\74\ Brief for Amicus Curiae State Attorneys General, Nat'l Home
Equity Mortgage Ass'n v. OTS, Civil Action No. 02-2506 (GK) (D.D.C.)
at 10-11 (emphasis added).
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It is relevant for purposes of this final rule that the preemption
regulations adopted by the OCC are substantially identical to the
preemption regulations of the OTS that have been applicable to Federal
thrifts for a number of years. It does not appear from public
commentary--nor have the state officials indicated--that OTS preemption
regulations have undermined the protection of customers of Federal
thrifts. In their brief in the OTS litigation described above, the
State Attorneys General referenced ``the burdens of federal
supervision,'' in concluding that there ``clearly is a substantial
basis for OTS's distinction'' \75\ between its supervised institutions
and state housing creditors.
---------------------------------------------------------------------------
\75\ Id. at 10.
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These considerations are equally applicable in the context of
national banks, and were recognized, again, by all 50 State Attorneys
General, in their comment letter to the OCC on this very regulation,
which stated:
It is true that most complaints and state enforcement actions
involving mortgage lending practices have not been directed at banks.
However, most major subprime mortgage lenders are now subsidiaries of
bank holding companies, (although not direct bank operating
subsidiaries).\76\
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\76\ National Association of Attorneys General comment letter on
the proposal at 10 (Oct. 6, 2003) (emphasis added).
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The OCC is firmly committed to assuring that abusive practices--
whether in connection with mortgage lending or other national bank
activities--continue to have no place in the national banking system.
VII. Regulatory Analysis
CDRI Act Delayed Effective Date
This final rule takes effect 30 days after the date of its
publication in the Federal Register, consistent with the delayed
effective date requirement of the Administrative Procedure Act. See 5.
U.S.C. 553(d). Section 302 of the Riegle Community Development and
Regulatory Improvement Act of 1994 (CDRI Act), 12 U.S.C. 4802(b),
provides that regulations that impose additional reporting, disclosure,
or other requirements on insured depository institutions may not take
effect before the first day of the quarter following publication unless
the agency finds that there is good cause to make the rule effective at
an earlier date. The regulations in this final rule require national
banks to adhere to explicit safety and soundness-based anti-predatory
lending standards. These standards prohibit national banks from
engaging in certain harmful lending practices, thereby benefiting
consumers. The final rule imposes no additional reporting, disclosure,
or other requirements on national banks. Accordingly, in order for the
benefits to become available as soon as possible, the OCC finds that
there is good cause to dispense with the requirements of the CDRI Act.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise
required under section 604 of the RFA is not required if the agency
certifies that the rule will not have a significant economic impact on
a substantial number of small entities and publishes its certification
and a short, explanatory statement in the Federal Register along with
its rule.
Pursuant to section 605(b) of the RFA, the OCC hereby certifies
that this final rule will not have a significant economic impact on a
substantial number of small entities. Accordingly, a regulatory
flexibility analysis is not needed. The amendments to the regulations
identify the types of state laws that are preempted, as well as the
types of state laws that generally are not preempted, in the context of
national bank lending, deposit-taking, and other activities. These
amendments simply provide the OCC's analysis and do not impose any new
requirements or burdens. As such, they will not result in any adverse
economic impact.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (2 U.S.C. 1532) (Unfunded Mandates Act), requires that an agency
prepare a budgetary impact statement
[[Page 1915]]
before promulgating any rule likely to result in a Federal mandate that
may result in the expenditure by State, local, and tribal governments,
in the aggregate, or by the private sector of $100 million or more in
any one year. If a budgetary impact statement is required, section 205
of the Unfunded Mandates Act also requires an agency to identify and
consider a reasonable number of regulatory alternatives before
promulgating a rule. The OCC has determined that this final rule will
not result in expenditures by State, local, and tribal governments, or
by the private sector, of $100 million or more in any one year.
Accordingly, this rulemaking is not subject to section 202 of the
Unfunded Mandates Act.
Executive Order 13132
Executive Order 13132, entitled ``Federalism'' (Order), requires
Federal agencies, including the OCC, to certify their compliance with
that Order when they transmit to the Office of Management and Budget
any draft final regulation that has Federalism implications. Under the
Order, a regulation has Federalism implications if it has ``substantial
direct effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government.'' In the case
of a regulation that has Federalism implications and that preempts
state law, the Order imposes certain consultation requirements with
state and local officials; requires publication in the preamble of a
Federalism summary impact statement; and requires the OCC to make
available to the Director of the Office of Management and Budget any
written communications submitted by state and local officials. By the
terms of the Order, these requirements apply to the extent that they
are practicable and permitted by law and, to that extent, must be
satisfied before the OCC promulgates a final regulation.
In the proposal, we noted that the regulation may have Federalism
implications. Therefore, in formulating the proposal and the final
rule, the OCC has adhered to the fundamental Federalism principles and
the Federalism policymaking criteria. Moreover, the OCC has satisfied
the requirements set forth in the Order for regulations that have
Federalism implications and preempt state law. The steps taken to
comply with these requirements are set forth below.
Consultation. The Order requires that, to the extent practicable
and permitted by law, no agency shall promulgate any regulation that
has Federalism implications and that preempts state law unless, prior
to the formal promulgation of the regulation, the agency consults with
state and local officials early in the process of developing the
proposal. We have consulted with state and local officials on the
issues addressed herein through the rulemaking process. Following the
publication of the proposal, representatives from the Conference of
State Bank Supervisors (CSBS) met with the OCC to clarify their
understanding of the proposal and, subsequently, the CSBS submitted a
detailed comment letter regarding the proposal. As mentioned
previously, additional comments were also submitted on the proposal by
other state and local officials and state banking regulators. Pursuant
to the Order, we will make these comments available to the Director of
the OMB. Subsequent, public statements by representatives of the CSBS
have restated their concerns, and CSBS representatives have further
discussed these concerns with the OCC on several additional occasions.
In addition to consultation, the Order requires a Federalism
summary impact statement that addresses the following:
Nature of concerns expressed. The Order requires a summary of the
nature of the concerns of the state and local officials and the
agency's position supporting the need to issue the regulation. The
nature of the state and local official commenters' concerns and the
OCC's position supporting the need to issue the regulation are set
forth in the preamble, but may be summarized as follows. Broadly
speaking, the states disagree with our interpretation of the applicable
law, they are concerned about the impact the rule will have on the dual
banking system, and they are concerned about the ability of the OCC to
protect consumers adequately.
Extent to which the concerns have been addressed. The Order
requires a statement of the extent to which the concerns of state and
local officials have been met.
a. There is fundamental disagreement between state and local
officials and the OCC regarding preemption in the national bank
context. For the reasons set forth in the materials that precede this
Federalism impact statement, we believe that this final rule is
necessary to enable national banks to operate to the full extent of
their powers under Federal law, and without interference from
inconsistent state laws; consistent with the national character of the
national banks; and in furtherance of their safe and sound operations.
We also believe that this final rule has ample support in statute and
judicial precedent. The concerns of the state and local officials could
only be fully met if the OCC were to take a position that is contrary
to Federal law and judicial precedent. Nevertheless, to respond to some
of the issues raised, the language in this final regulation has been
refined, and this preamble further explains the standards used to
determine when preemption occurs and the criteria for when state laws
generally would not be preempted.
b. Similarly, we fundamentally disagree with the state and local
officials about whether this final rule will undermine the dual banking
system. As discussed in the OCC's visitorial powers rulemaking also
published today in the Federal Register, differences in national and
state bank powers and in the supervision and regulation of national and
state banks are not inconsistent with the dual banking system; rather,
they are the defining characteristics of it. The dual banking system is
universally understood to refer to the chartering and supervision of
state-chartered banks by state authorities and the chartering and
supervision of national banks by Federal authority, the OCC. Thus, we
believe that the final rule preserves, rather than undermines, the dual
banking system.
c. Finally, we stand ready to work with the states in the
enforcement of applicable laws. The OCC has extended invitations to
state Attorneys General and state banking departments to enter into
discussions that would lead to a memorandum of understanding about the
handling of consumer complaints and the pursuit of remedies, and we
remain eager to do so. Moreover, as discussed in the preamble, we
believe the OCC has the resources to enforce applicable laws, as is
evidenced by the enforcement actions that have generated hundreds of
millions of dollars for consumers in restitution, that have required
national banks to disassociate themselves from payday lenders, and that
have ordered national banks to stop abusive practices. Thus, the OCC
has ample legal authority and resources to ensure that consumers are
adequately protected.
List of Subjects
12 CFR Part 7
Credit, Insurance, Investments, National banks, Reporting and
recordkeeping requirements, Securities, Surety bonds.
12 CFR Part 34
Mortgages, National banks, Real estate appraisals, Real estate
lending
[[Page 1916]]
standards, Reporting and recordkeeping requirements.
Authority and Issuance
0
For the reasons set forth in the preamble, parts 7 and 34 of chapter I
of title 12 of the Code of Federal Regulations are amended as follows:
PART 7--BANK ACTIVITIES AND OPERATIONS
0
1. The authority citation for part 7 is revised to read as follows:
Authority: 12 U.S.C. 1 et seq., 71, 71a, 92, 92a, 93, 93a, 481,
484, and 1818.
Subpart D--Preemption
0
2. A new Sec. 7.4007 is added to read as follows:
Sec. 7.4007 Deposit-taking.
(a) Authority of national banks. A national bank may receive
deposits and engage in any activity incidental to receiving deposits,
including issuing evidence of accounts, subject to such terms,
conditions, and limitations prescribed by the Comptroller of the
Currency and any other applicable Federal law.
(b) Applicability of state law. (1) Except where made applicable by
Federal law, state laws that obstruct, impair, or condition a national
bank's ability to fully exercise its Federally authorized deposit-
taking powers are not applicable to national banks.
(2) A national bank may exercise its deposit-taking powers without
regard to state law limitations concerning:
(i) Abandoned and dormant accounts;\3\
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\3\ This does not apply to state laws of the type upheld by the
United States Supreme Court in Anderson Nat'l Bank v. Luckett, 321
U.S. 233 (1944), which obligate a national bank to ``pay [deposits]
to the persons entitled to demand payment according to the law of
the state where it does business.'' Id. at 248-249.
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(ii) Checking accounts;
(iii) Disclosure requirements;
(iv) Funds availability;
(v) Savings account orders of withdrawal;
(vi) State licensing or registration requirements (except for
purposes of service of process); and
(vii) Special purpose savings services; \4\
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\4\ State laws purporting to regulate national bank fees and
charges are addressed in 12 CFR 7.4002.
---------------------------------------------------------------------------
(c) State laws that are not preempted. State laws on the following
subjects are not inconsistent with the deposit-taking powers of
national banks and apply to national banks to the extent that they only
incidentally affect the exercise of national banks' deposit-taking
powers:
(1) Contracts;
(2) Torts;
(3) Criminal law; \5\
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\5\ But see the distinction drawn by the Supreme Court in Easton
v. Iowa, 188 U.S. 220, 238 (1903) between ``crimes defined and
punishable at common law or by the general statutes of a state and
crimes and offences cognizable under the authority of the United
States.'' The Court stated that ``[u]ndoubtedly a state has the
legitimate power to define and punish crimes by general laws
applicable to all persons within its jurisdiction * * *. But it is
without lawful power to make such special laws applicable to banks
organized and operating under the laws of the United States.'' Id.
at 239 (holding that Federal law governing the operations of
national banks preempted a state criminal law prohibiting insolvent
banks from accepting deposits).
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(4) Rights to collect debts;
(5) Acquisition and transfer of property;
(6) Taxation;
(7) Zoning; and
(8) Any other law the effect of which the OCC determines to be
incidental to the deposit-taking operations of national banks or
otherwise consistent with the powers set out in paragraph (a) of this
section.
0
3. A new Sec. 7.4008 is added to read as follows:
Sec. 7.4008 Lending.
(a) Authority of national banks. A national bank may make, sell,
purchase, participate in, or otherwise deal in loans and interests in
loans that are not secured by liens on, or interests in, real estate,
subject to such terms, conditions, and limitations prescribed by the
Comptroller of the Currency and any other applicable Federal law.
(b) Standards for loans. A national bank shall not make a consumer
loan subject to this Sec. 7.4008 based predominantly on the bank's
realization of the foreclosure or liquidation value of the borrower's
collateral, without regard to the borrower's ability to repay the loan
according to its terms. A bank may use any reasonable method to
determine a borrower's ability to repay, including, for example, the
borrower's current and expected income, current and expected cash
flows, net worth, other relevant financial resources, current financial
obligations, employment status, credit history, or other relevant
factors.
(c) Unfair and deceptive practices. A national bank shall not
engage in unfair or deceptive practices within the meaning of section 5
of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1), and
regulations promulgated thereunder in connection with loans made under
this Sec. 7.4008.
(d) Applicability of state law. (1) Except where made applicable by
Federal law, state laws that obstruct, impair, or condition a national
bank's ability to fully exercise its Federally authorized non-real
estate lending powers are not applicable to national banks.
(2) A national bank may make non-real estate loans without regard
to state law limitations concerning:
(i) Licensing, registration (except for purposes of service of
process), filings, or reports by creditors;
(ii) The ability of a creditor to require or obtain insurance for
collateral or other credit enhancements or risk mitigants, in
furtherance of safe and sound banking practices;
(iii) Loan-to-value ratios;
(iv) The terms of credit, including the schedule for repayment of
principal and interest, amortization of loans, balance, payments due,
minimum payments, or term to maturity of the loan, including the
circumstances under which a loan may be called due and payable upon the
passage of time or a specified event external to the loan;
(v) Escrow accounts, impound accounts, and similar accounts;
(vi) Security property, including leaseholds;
(vii) Access to, and use of, credit reports;
(viii) Disclosure and advertising, including laws requiring
specific statements, information, or other content to be included in
credit application forms, credit solicitations, billing statements,
credit contracts, or other credit-related documents;
(ix) Disbursements and repayments; and
(x) Rates of interest on loans.\6\
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\6\ The limitations on charges that comprise rates of interest
on loans by national banks are determined under Federal law. See 12
U.S.C. 85; 12 CFR 7.4001. State laws purporting to regulate national
bank fees and charges that do not constitute interest are addressed
in 12 CFR 7.4002.
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(e) State laws that are not preempted. State laws on the following
subjects are not inconsistent with the non-real estate lending powers
of national banks and apply to national banks to the extent that they
only incidentally affect the exercise of national banks' non-real
estate lending powers:
(1) Contracts;
(2) Torts;
(3) Criminal law;\7\
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\7\ See supra note 5 regarding the distinction drawn by the
Supreme Court in Easton v. Iowa, 188 U.S. 220, 238 (1903) between
``crimes defined and punishable at common law or by the general
statutes of a state and crimes and offences cognizable under the
authority of the United States.''
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(4) Rights to collect debts;
(5) Acquisition and transfer of property;
(6) Taxation;
(7) Zoning; and
[[Page 1917]]
(8) Any other law the effect of which the OCC determines to be
incidental to the non-real estate lending operations of national banks
or otherwise consistent with the powers set out in paragraph (a) of
this section.
0
4. A new Sec. 7.4009 is added to read as follows:
Sec. 7.4009 Applicability of state law to national bank operations.
(a) Authority of national banks. A national bank may exercise all
powers authorized to it under Federal law, including conducting any
activity that is part of, or incidental to, the business of banking,
subject to such terms, conditions, and limitations prescribed by the
Comptroller of the Currency and any applicable Federal law.
(b) Applicability of state law. Except where made applicable by
Federal law, state laws that obstruct, impair, or condition a national
bank's ability to fully exercise its powers to conduct activities
authorized under Federal law do not apply to national banks.
(c) Applicability of state law to particular national bank
activities. (1) The provisions of this section govern with respect to
any national bank power or aspect of a national bank's operations that
is not covered by another OCC regulation specifically addressing the
applicability of state law.
(2) State laws on the following subjects are not inconsistent with
the powers of national banks and apply to national banks to the extent
that they only incidentally affect the exercise of national bank
powers:
(i) Contracts;
(ii) Torts;
(iii) Criminal law \8\
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\8\ 8 Id.
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(iv) Rights to collect debts;
(v) Acquisition and transfer of property;
(vi) Taxation;
(vii) Zoning; and
(viii) Any other law the effect of which the OCC determines to be
incidental to the exercise of national bank powers or otherwise
consistent with the powers set out in paragraph (a) of this section.
PART 34--REAL ESTATE LENDING AND APPRAISALS
Subpart A--General
0
5. The authority citation for part 34 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 29, 93a, 371, 1701j-3, 1828(o),
and 3331 et seq.
0
6. In Sec. 34.3, the existing text is designated as paragraph (a), and
new paragraphs (b) and (c) are added to read as follows:
Sec. 34.3 General rule.
* * * * *
(b) A national bank shall not make a consumer loan subject to this
subpart based predominantly on the bank's realization of the
foreclosure or liquidation value of the borrower's collateral, without
regard to the borrower's ability to repay the loan according to its
terms. A bank may use any reasonable method to determine a borrower's
ability to repay, including, for example, the borrower's current and
expected income, current and expected cash flows, net worth, other
relevant financial resources, current financial obligations, employment
status, credit history, or other relevant factors.
(c) A national bank shall not engage in unfair or deceptive
practices within the meaning of section 5 of the Federal Trade
Commission Act, 15 U.S.C. 45(a)(1), and regulations promulgated
thereunder in connection with loans made under this part.
0
7. Section 34.4 is revised to read as follows:
Sec. 34.4 Applicability of state law.
(a) Except where made applicable by Federal law, state laws that
obstruct, impair, or condition a national bank's ability to fully
exercise its Federally authorized real estate lending powers do not
apply to national banks. Specifically, a national bank may make real
estate loans under 12 U.S.C. 371 and Sec. 34.3, without regard to
state law limitations concerning:
(1) Licensing, registration (except for purposes of service of
process), filings, or reports by creditors;
(2) The ability of a creditor to require or obtain private mortgage
insurance, insurance for other collateral, or other credit enhancements
or risk mitigants, in furtherance of safe and sound banking practices;
(3) Loan-to-value ratios;
(4) The terms of credit, including schedule for repayment of
principal and interest, amortization of loans, balance, payments due,
minimum payments, or term to maturity of the loan, including the
circumstances under which a loan may be called due and payable upon the
passage of time or a specified event external to the loan;
(5) The aggregate amount of funds that may be loaned upon the
security of real estate;
(6) Escrow accounts, impound accounts, and similar accounts;
(7) Security property, including leaseholds;
(8) Access to, and use of, credit reports;
(9) Disclosure and advertising, including laws requiring specific
statements, information, or other content to be included in credit
application forms, credit solicitations, billing statements, credit
contracts, or other credit-related documents;
(10) Processing, origination, servicing, sale or purchase of, or
investment or participation in, mortgages;
(11) Disbursements and repayments;
(12) Rates of interest on loans;\1\
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\1\ The limitations on charges that comprise rates of interest
on loans by national banks are determined under Federal law. See 12
U.S.C. 85 and 1735f-7a; 12 CFR 7.4001. State laws purporting to
regulate national bank fees and charges that do not constitute
interest are addressed in 12 CFR 7.4002.
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(13) Due-on-sale clauses except to the extent provided in 12 U.S.C.
1701j-3 and 12 CFR part 591; and
(14) Covenants and restrictions that must be contained in a lease
to qualify the leasehold as acceptable security for a real estate loan.
(b) State laws on the following subjects are not inconsistent with
the real estate lending powers of national banks and apply to national
banks to the extent that they only incidentally affect the exercise of
national banks' real estate lending powers:
(1) Contracts;
(2) Torts;
(3) Criminal law; \2\
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\2\ But see the distinction drawn by the Supreme Court in Easton
v. Iowa, 188 U.S. 220, 238 (1903) between ``crimes defined and
punishable at common law or by the general statutes of a state and
crimes and offences cognizable under the authority of the United
States.'' The Court stated that ``[u]ndoubtedly a state has the
legitimate power to define and punish crimes by general laws
applicable to all persons within its jurisdiction * * *. But it is
without lawful power to make such special laws applicable to banks
organized and operating under the laws of the United States.'' Id.
at 239 (holding that Federal law governing the operations of
national banks preempted a state criminal law prohibiting insolvent
banks from accepting deposits).
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(4) Homestead laws specified in 12 U.S.C. 1462a(f);
(5) Rights to collect debts;
(6) Acquisition and transfer of real property;
(7) Taxation;
(8) Zoning; and
(9) Any other law the effect of which the OCC determines to be
incidental to the real estate lending operations of national banks or
otherwise consistent with the powers and purposes set out in Sec.
34.3(a).
Dated: January 6, 2004.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 04-586 Filed 1-12-04; 8:45 am]
BILLING CODE 4810-33-P