Federal Deposit
Insurance Corporation

Mr. Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429

SUBJECT: Comments of Alabama Banking Department on Proposed Rule – Interstate Banking; Federal Interest Rate Authority

Dear Mr. Feldman:

Thank you for allowing me, on behalf of our department, the opportunity to comment on the proposed rule. We very much appreciate the FDIC Board proceeding with the notice of proposed rulemaking. The proposed rule is, in our view, an important step in the process of restoring certainty for state-chartered banks doing an interstate business and for preserving the dual banking system as we proceed toward a truly nationwide banking system.

On balance, the proposed rule attempts to take several positive steps which are needed by state-chartered banks. However, while we are generally in favor of the proposed rule, we suggest certain modifications to the rule to be sure that it accomplishes its purpose. First, let me discuss what we view as the most positive parts of the proposed rule:

• Proposed Part 331 – Federal Interest Rate Authority

We support this Part in its entirety, and we see no modifications needed to this Part. We strongly believe that the proposed rule supports the Congressional objective in Section 27 of the Federal Deposit Insurance Act (“FDI Act”) of providing insured state banks interest rate parity with national banks. We also believe that the rule’s self-executing language provides clarity and is consistent with the courts’ and the FDIC’s established practice of construing Section 27 in pari materia with Section 85 of the National Bank Act.

• Proposed Part 362 – Activities of Insured Banks and Insured Saving Associations

While we believe that changes are needed to certain paragraphs of this Part, we consider the definition of “activity conducted at a branch” in paragraph (a)(4) to be a critically important definition which is needed to provide clarity for state-chartered banks. We also believe that the definition, as written, supports the Congressional intent of Section 24(j) of the FDI Act by clarifying that state banks have full parity with national banks which benefit from preemption whether or not the entire activity is performed within the national bank’s branch. Based on our experience of our banks maintaining branches in 19 states, we have found it extremely rare that an activity is solely confined within “a” branch. In a modern, nationwide banking system with myriad delivery channels for bank products and services, it would be simplistic and an impediment to business to narrowly define a branch’s activity as one which is solely confined within its walls.

As to the paragraphs in the proposed Part 362 which, we believe, should be changed, let me state that the paragraphs discussed below are the only paragraphs in the proposed rule with which we take issue. The paragraphs in proposed Part 362 to which we strongly suggest changes are:

• Proposed Part 362 – Paragraphs (b) and (c)

While paragraphs (d) and (e) of the proposed Part 362 essentially constitute a restatement of the law and are identical to their corresponding provisions in Section 24(j), we are perplexed that paragraphs (b) and (c) appear to represent a rewriting of the law in a manner that limits and conditions the language of the statute. We suggest that paragraphs (b) and (c) be replaced with the following language:

“The laws of a host State, including laws regarding community reinvestment, consumer protection, fair lending, and establishment of intrastate branches, 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. To the extent host State law is inapplicable to a branch of an out-of-State State bank in such host State pursuant to the preceding sentence, home State law shall apply to such branch.”

The suggested language above is the exact language of the statute. In our opinion, it is vastly different than the following proposed language (with emphasis added) of paragraphs (b) and (c):

“(b) Except as provided in paragraph (c) of this section, the laws of a host State apply to an activity conducted at a branch in the host State by an out-of-State, State bank.”

“(c) A host State law does not apply to an activity conducted at a branch in the host State of an out-of-State, State bank to the same extent that a Federal court or the Office of the Comptroller of the Currency has determined in writing that the particular host State law does not apply to an activity conducted at a branch in the host State of an out-of-State, national bank. If a particular host State law does not apply to such activity of an out-of-State, State bank because of the preceding sentence, the home State law of the out-of-State, State bank applies.”

Taken together, the tenor of paragraphs (b) and (c) and the perspective from which they are written appear to be the reverse of the language of the statute. While the law leaves open the means by which a host State law may be inapplicable to a national bank and consequently to an out-of-State, State bank; paragraphs (b) and (c) seek to limit the circumstances under which a State bank may achieve parity with a national bank.

Paragraphs (b) and (c) appear to recognize national bank preemption as the only means by which a host State law would not apply to a national bank. From our experience, there are many means by which host State laws are inapplicable to out-of-State, State banks because they do not apply to national banks. We have encountered a number of cases where officials of a host State determined that its laws did not apply to national banks. In numerous cases, the host State laws are written to apply only to State banks. Under paragraphs (b) and (c), these laws would still apply to out-of-State, State banks because there would be no Federal court ruling or written OCC opinion preempting them for national banks.

We also believe that, instead of allowing States and State banks to go to the FDIC for clarity on the applicability of host State laws, the proposed language sets up a system where States and State banks must go directly to Federal court or the OCC. We believe that this system will have unanticipated, negative consequences leading to increased litigation for the States as well as the OCC.

Most troubling in paragraph (c) is the inclusion of the word “particular.” The language seems to say that, even if two States’ laws are identical, a State bank could not rely on a United States Supreme Court ruling that preempted a law of one host State if the “particular” law of the second host State had not been ruled upon.

As noted above, our suggested change to paragraphs (b) and (c) of Part 362 are the only changes which we believe are needed to the proposed rule. As to the FDIC request for comments on the proposed rule’s overall impact on the industry, it would, with the suggested change, be very helpful in providing the certainty needed by State banks in conducting an interstate business. While the proposed rule does not provide all that is needed to redress the competitive inequity between State and national banks, it is a positive step. Ultimately, however, we believe that the health of the dual banking system will require that all of the original requests in the petition be addressed.

As to the overall impact of the proposed rule on consumers, there would be minimal, incremental impact. The proposed rule merely clarifies the laws under which interstate banks operate. For those concerned with a “race to the bottom” for consumer protections in a nationwide banking system, federal law is the bottom. The proposed rule does nothing that goes beyond the intent of federal law. We believe that the intent, of the laws addressed by this rule, is to provide parity and preserve a dual banking system which has served this nation well.

Sincerely,

Hobart F. (Trabo) Reed, Jr.
Deputy Superintendent of Banks