Robert E. Feldman, Executive Secretary
Attention: Comments/Legal ESS
Room 3060
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC
Re: Petition of the Financial Services
Roundtable for Rulemaking to Preempt Certain State Laws
Dear Sir:
Comerica Bank, Detroit, Michigan, a bank
organized under the laws of the State of Michigan, hereby submits
this written statement in support of the above-referenced petition
to be considered at the hearing on the petition scheduled for May
24, 2005.
Comerica Bank’s parent company, Comerica
Incorporated, is a member of the Financial Services Roundtable
which filed the above-referenced petition, and the petition was
filed with the knowledge and full support of Comerica
Incorporated.
Comerica Bank operates nationwide with full
service branch offices in five states (Michigan, California,
Texas, Florida, and Arizona) and loan production offices, trust
offices, and trust representative offices in many other states.
Comerica Bank also maintains a relationship with a number of major
securities brokerage firms under which the bank offers and
provides personal trust and loan services to customers of such
firms nationwide. As a state-chartered bank doing business on an
interstate basis, Comerica Bank thus has considerable experience
with the issues that it is the intent of the above-referenced
petition to help resolve and a strong interest in their favorable
resolution.
BACKGROUND
The petition requests that the Corporation adopt
rules providing greater parity for interstate activities of
state-chartered banks and national banks.
More than a year ago (January 13, 2004), the
Office of the Comptroller of the Currency (the “OCC”) adopted a
rule (12 C.F.R. 7. 4007-7.4009) to the effect that the National
Bank Act preempts many state laws governing deposits, lending, and
bank operations, and, thus, national banks and their operating
subsidiaries are not subject to such laws. The basis for that rule
is not that the National Bank Act preempts state law because the
National Bank Act has occupied the field in those areas, but
rather that such laws are preempted where they obstruct, impair,
or condition the full exercise of powers conferred by the National
Bank Act. While adoption of that regulation was not without
considerable controversy and notoriety, it has not been overturned
by either judicial or legislative action.
State-chartered banks enjoy no such preemption.
It appears that there generally is no such legal basis for such
broad preemption for state-chartered banks. However, as the
Financial Services Roundtable has asserted, there do exist federal
statutory bases for at least limiting the application of state law
to interstate activities of state-chartered banks to home state
law.
One of those federal statutory bases is Section
24(j) of the Federal Deposit Insurance Act, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 as amended
in 1997 (12 U.S.C. 1831a(j)(1)) (Of course, the Corporation has
considerable rulemaking authority under the Federal Deposit
Insurance Act.) That statute provides that home state law is to
apply to host state branches of interstate state-chartered banks
where host state law does not apply and that the only host state
laws that are to apply are those that apply to out-of-state
national banks. In light of the aforementioned OCC regulation
preempting state laws, many host state laws do not apply to
out-of-state (or in-state) national banks, and, thus, Section
24(j) would seem to require the application of home state law to
the host state branches of interstate state-chartered banks in
such case.
The other federal statutory base is Section
104(d) of the Gramm-Leach-Bliley Act which expressly provides that
no state, by statute or other action, may prevent or restrict a
depository institution or its affiliate from engaging in any
activity authorized or permitted under that Act, other than
certain insurance activities.
The petition does little more than ask the
Corporation to adopt rules implementing Section 24(j) and 104(d).
SIGNIFICANCE OF APPLICABILITY OF A SINGLE LAW
Obviously, in offering services to banking
customers, being subject to a single set of laws is considerably
less costly and burdensome to a bank than being subject to the
laws of many states. Different state laws applying to the same
service often are different and in some cases inconsistent and
even contradictory. In order to minimize cost and burden a bank
may choose to follow the most restrictive state law in order to
minimize the variations in state laws that affect its business,
which means that the law of the most restrictive state often has
extra-territorial effect. In other cases, bank counsel may devise
convoluted inefficient ways of offering a service in order to
avoid the application of a single particularly burdensome state
law. In all such cases, in our increasingly litigious age, the
bank is exposed to the risk and costs of lawsuits over obscure and
ill-defined areas of multiple laws. A bank’s willingness to create
and innovate is constrained by these risks. The bottom line is
that doing business in an environment in which a firm is subject
to multiple state laws has an economic cost to the bank, its
customers, and the economy.
Again obviously, that cost is substantially
reduced if the firm may look to a familiar body of a single
state’s laws that govern its activities. It can operate under a
much simpler business model and can reliably make decisions
confident as to the consequences of those decisions, something
that is much more difficult in a multi-state law environment.
COMPETITIVE DISADVANTAGE
National Bank Preemption Constitutes
Exemption
As discussed above, national banks have, in
recent years, come to enjoy a status in which many state laws do
not apply to them because such laws are preempted by the National
Bank Act. Since the National Bank Act does not occupy the field in
these cases, the preemption of state law in these cases would
appear to exempt national banks entirely from preempted state
legal requirements with the substitution of no other legal
requirement being imposed on such banks.
National Bank Exemption from Both Host State
Law and Home State Law
Indeed, national banks are not only exempt from
host state laws governing deposits, loans, and operations, but are
also exempt from home state laws on those subjects.
National Bank Exemption Not Limited to
Interstate Activities
That exemption is not just limited to national
banks operating interstate, but is applicable to all national
banks.
National Bank Enforcement Authority Limited
In addition, the enforcement of those limited
state laws to which national banks may be subject is limited to
the Office of the Controller of the Currency and withheld from
local state enforcement authorities. It has been asserted that
even criminal conduct by a national bank may not be challenged by
a state attorney-general and that enforcement action against a
national bank may not be heard in a state court.
Competitive Effect
Obviously, state-chartered banks compete every
day in virtually every geographic and product market with national
banks. Those national banks, to the extent they are exempt from
state laws, enjoy a substantial cost advantage over state bank
competitors in that the national banks not only do not need to
hire compliance professionals to advise them on how to comply, or
otherwise ensure compliance, with myriads of state laws, but also
need not conform their activities to every one of the considerable
number of requirements of those laws.
A FAIRLY MODEST PROPOSAL
The Financial Services Roundtable petition, in
contrast to the current state of exemption from state law enjoyed
by national banks, is quite a modest proposal.
No Exemption Requested from Home State Law
The petition does not ask that state-chartered
banks be exempted from the applicability of home state laws as
national banks are, but rather merely asks that such laws apply in
host states. That is what federal statute expressly provides in
the case of banks with interstate offices. Most state law regimes
generally cover the same subjects and, thus, as a practical
matter, this would not leave host state citizens without state law
protections, as might be the case with national banks, but gives
the protections of the home state law, and also simplifies the
compliance burden imposed on state banks operating in multiple
sates.
Limited Class of Beneficiaries, i.e.
Interstate State Banks, Not All State Banks
Whereas all national banks are exempt from
obstructive, impairing, or conditioning state laws governing
deposits, lending, and operations, the Financial Services
Roundtable petition merely asks that a limited number of
state-chartered banks, those with interstate activities, receive
the benefit of the petition. Some may suggest that this is a large
bank issue only and that the number of banks affected by this
therefore would be quite limited, and that it does not benefit
community banks. That is not the case. Many state-chartered
community banks are located near state borders and compete in
geographic markets that cross state lines. They are today subject
to multiple state laws and the same qualitative burden to which
larger banks are subject. The Financial Service Roundtable’s
petition would not only apply home state law where a state bank
has interstate offices as required by federal statute, but would
go beyond that and permit the application of home state law to any
interstate activity of a state bank. Thus, small independent
community banks with customers in interstate markets would benefit
from your affirmative response to the petition even if they do not
operate offices in more than one state.
No Limit on Enforcement Authority
Whereas national banks are only subject to the
visitorial powers of the Office of the Comptroller of the Currency
and not to enforcement actions by state law enforcement
authorities (and some have even suggested state courts), the
Financial Services Roundtable proposal makes no request for
exemption from such enforcement authority.
Some Competitive Disadvantage Would Remain
Thus, were the Financial Services Roundtable
modest proposal to be adopted, state-chartered banks would remain
subject to a competitive disadvantage to national banks.
Nonetheless, the Corporation would have gone a long way toward
relieving the compliance burden that interstate state banks bear.
FDIC’S SPECIFIC QUESTIONS
The Corporation’s Notice proffers a number of
specific questions about the effect of adoption of the Financial
Services Roundtable’s proposal.
The Dual Banking System
The Corporation’s Notice of Public Hearing
expressly requests public views on whether adoption of a rule in
these areas is necessary to preserve the dual banking system.
Since the OCC’s adoption of its preemption rule in January, 2004,
major state-chartered banks (J.P. Morgan Chase, HSBC) have
converted to national charters. That would not appear to be
coincidental, and this would suggest that applicable state law is
an important consideration to some banks in charter selection.
Impact On Consumers
The Corporation’s Notice also asks what the
impact would be on consumers if a rule were issued by the
Corporation. We believe that the impact on consumers would not be
negative. Most states have consumer protection laws. The problem
is that they are not consistent with one another. Permitting an
interstate state-chartered bank only to look to its home state law
would not normally deprive consumers of protection.
Some speculate that states, in order to attract
bank home offices will weaken their existing consumer protection
laws in “a race to the bottom”. That speculation is
extraordinarily ill-founded. It assumes base motivations on the
part of not just a single state official which might be possible,
but on the part of a majority of state legislators in given
states, which, as a practical matter, is quite unlikely. It also
assumes that state legislatures will disregard the interests of
well-organized voting consumers which recent history has shown has
not been the case as a matter of fact. Finally, it also disregards
the intangible historical ties and allegiances that many state
banks feel to their home states and chartering authorities.
Some might suggest that there is something
improper about depriving consumers in a host ate of the benefits
of laws enacted by their legislature and subjecting them to laws
enacted by legislatures from other states. However, that “bridge
was crossed” long ago when Congress adopted laws permitting banks
to export the usury ceilings of their home states, and there has
not been any noticeable decline in consumer protection.
We understand that some opponents of the
proposal are concerned about predatory lending and are concerned
that a home state might not have a predatory lending law, while a
host state might have such a statute and, thus, such opponents
believe that adoption of the proposal would deprive host state
consumers of the protection of predatory lending laws. We do not
believe that most states have predatory lending laws (our home
state, Michigan, does have such a statute), and, thus, by its
terms, this concern would be limited to those few cases where a
state bank from a home state without a predatory lending law has
interstate operations in the few states with such a law. Most
states have unfair and deceptive practices laws, and such laws can
and should be used against predatory lenders, and, thus, in the
limited cases where a banks’ home state has no predatory lending
law, but a host state does, the home state’s unfair and deceptive
practices statute would protect consumers in the host state, were
the proposal to be adopted. No discussion of predatory lending
would be complete without the usual disclaimer that banks are not
the culprits in predatory lending abuse; non-bank lenders are.
We, like many, believe that the answer to
predatory lending is a national standard. However, while there is
no logical or legal basis for such an exception and while such an
exception would be unfortunate and poor precedent that we would
nit support, we would have no objection to the Corporation’s
adopting the proposal, but making an exception for host state
predatory lending laws such that they would apply to interstate
operations of state banks.
Implications For State Banking Regulation
The Corporation has also asked specifically what
the implications the proposed rule might have for state banking
regulation. Currently, most state banking regulators, working
through the Conference of State Bank Supervisors, have entered
into cooperative agreements governing regulation of interstate
state-chartered banks. These agreements govern such things as the
sharing of information, allocation of costs, and even delegation
of enforcement authority. We would expect that, were the
Corporation to adopt the proposed rule, state banking supervisors
would increase the cooperation they have already demonstrated.
Competitive Balance
The Corporation also expressly asks whether the
measures urged by the Petitioner, Financial Services Roundtable,
would achieve competitive balance. We regret that they would not.
As explained above, national banks would remain totally exempt
form certain state laws while their state-chartered counterparts
would remain subject to home state laws. Also, no state authority
would be able to enforce any law against a national bank as
visitorial authority is exclusively in the OCC while state banks
would remain subject to the enforcement of home state laws by both
host and home state authorities. However, while competitive
balance would not be achieved, the balance would be considerably
more equitable than it is today.
Alternative Mechanisms
The Corporation also asks whether there are
alternative mechanisms to achieve the policy goals urged by the
Petition. There would appear to be no alternative mechanism that
would provide the same geographic scope, certainty, low cost, and
timeliness as action by the Corporation. Litigation would be of
limited geographic effect, uncertain, costly, and time-consuming.
Additional Congressional action, while providing national scope,
would suffer from the latter three disabilities.
Role of Congress
The Corporation’s Notice also specifically asks
whether the issue of competitive parity in interstate operations
should be left to Congress. That is not necessary as Congress has
already acted on that issue. It was Congress, of course, that
enacted the 1997 amendment to the Riegle-Neal Interstate Banking
and Branching Efficiency Act. By doing so, Congress recognized the
need for competitive parity and expressly provided that “the laws
of a host State ... shall apply to any branch in the host State of
an out-of-State State bank to the same extent as such State laws
apply to a branch in the host State of an out-of-State national
bank”. Recognizing that host State laws might not apply to a
national bank, Congress in that amendment further expressly
provided that in such case, “home State law shall apply to such
branch”. It is difficult to imagine how Congress could have more
clearly expressed its intent here. The petition filed by the
Financial Services Roundtable does not ask that the Corporation go
very far beyond that expression of Congressional intent.
States’ Legitimate Interests Not Undermined
The Corporation has also expressly asked for
comment on whether states have a legitimate interest in how banks
conduct business within their borders that would be undermined by
the Petitioner’s request. Of course, every state has a legitimate
interest in how a bank conducts its business within that state’s
borders. However, there is no way that state interest would be
undermined by the Petition. That legitimate interest is in the
safety and soundness of the banks operating within their borders
so that none of its citizens loses deposited funds. No home state
banking commissioner has a different interest in safety and
soundness than any host state banking commissioner, and Congress,
in permitting interstate banking implicitly acknowledged that. The
legitimate interests of every host state bank commissioner in how
out-of-state state banks conduct themselves within that host
state’s borders today are dependent on the skills and
attentiveness of the home state supervisor, and that is codified
in the cooperative agreements that most state bank supervisors
have signed with one another.
CONCLUSION
We very much appreciate the Corporation’s
serious consideration of the petition and this opportunity to
support it. Adopting the proposal would be a modest, but
meaningful, step toward remedying the disparity between national
banks and state-chartered banks conducting interstate operations.
