Federal Deposit
Insurance Corporation

Subject: Interstate Banking; Federal Interest Rate Authority.

December 13, 2005

Robert E. Feldman, Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429

Re: RIN 3064-AC95

Notice of Proposed Rulemaking

Executive Secretary Feldman:

On behalf of the 185,000 members of the California Association of REALTORS® (C.A.R.), I submit the following comments on the Federal Deposit Insurance Corporation’s (FDIC) notice of proposed rulemaking, regarding the preemption of host state laws for interstate branches of state-chartered banks. C.A.R.’s members are engaged in the business of real estate brokerage, sales, management and financing. In addition to these business activities, REALTORS® are active in their communities as homeowners, affordable housing advocates and community activists. This hands-on approach to community involvement and the real estate business has helped the REALTORS® understand the importance of recognizing the unique and individual needs of different communities—needs that are best addressed at the state and local level. Because of the vital role that banks play in the real estate industry, as well as in community development and consumer protection, C.A.R. is asking the FDIC to reconsider the breadth of its proposed rule on preempting host state laws for interstate branches of state-chartered banks.

There Is No Need For This Rule

While C.A.R. supports the FDIC in its attempt to maintain a strong dual-banking system, the proposed rule and petition fail to detail any current hardships and overly burdensome costs that are currently harming the state-chartered banking system. The FDIC and the Financial Services Roundtable (FSR), who submitted the original petition to them, have failed to offer any statistical evidence and/or analysis as to the need for this rule. Finally, the petition and proposed rule offer no evidence of any decline in the applications for state-chartered banks as opposed to national-chartered banks.

C.A.R. believes that if the FDIC is concerned about a lack of parity among interstate branches of state banks and national banks, a study should be commissioned to first determine:

1 Is there an unfair advantage for national banks under the current banking system?

2 If there is, what are the current consequences being suffered by the interstate branches of state banks under the current system?

3 Where specifically do interstate branches of state banks require the most assistance, if any, in acquiring parity with the interstate branches of national banks?

4 Is there a mass exodus of state-chartered banks that are converting to national charters that would require this Draconian rule?

Without answers to these questions, C.A.R. must oppose this broad preemption of state laws and regulations.

Congress Left No “Ambiguity” Or Legislative Gap

When Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the subsequent amendment Riegle-Neal Amendment Act of 1997, Congressional intent was clear and unambiguous in what may be preempted. 12 U.S.C. 1831a(j);

“(j) Activities of branches of out-of-State banks
(1) Application of host State law
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.
(2) Activities of branches An insured State bank that establishes a branch in a host State may conduct any activity at such branch that is permissible under the laws of the home State of such bank, to the extent such activity is permissible either for a bank chartered by the host State (subject to the restrictions in this section) or for a branch in the host State of an out-of-State national bank.
(3) Savings provision No provision of this subsection shall be construed as affecting the applicability of -
(A) any State law of any home State under subsection (b),
(c), or (d) of section 1831u of this title; or
(B) Federal law to State banks and State bank branches in the home State or the host State.
(4) Definitions
The terms "host State", "home State", and "out-of-State bank"
have the same meanings as in section 1831u(f) (1) of this title.” (emphasis added)

Congress’s intent was clear in this section of the legislation that only an “activity at such branch” may be preempted. This fact is underscored by the section’s reference to 12 U.S.C. 1831u (c), which clearly separates “banking operations,” “bank holding companies,” and “branches.”

The FDIC's proposed rule would define "activity conducted at a branch," to mean "an activity of, by, through, in, from, or substantially involving, a branch." Again, Congress has given a clear meaning of branch activity throughout Title 12 of the U.S.C., and the FDIC's proposal to redefine it without Congressional direction is the wrong tack in which to do it. If the FDIC does have questions or believes there is ambiguity in the statute—a position with which C.A.R. disagrees—only Congress has the ability to readdress this issue through legislative means.

This Rule Will Hurt Consumers

States have always been and will continue to be the most efficient regulators of their own citizens. State legislators and regulatory bodies have and will always be able to respond quicker and with more focused solutions for their citizen's problems than the federal government has been able to do. However, the one positive aspect of federal preemption is that the federal government is still beholden to the constituents of a state. In this manner, federal oversight still falls within the founding father's vision of a government that must answer to the will of the people. The proposed rule would strip constituents of their ability to seek legislative and regulatory remedies from their own representatives. The FDIC must address the inevitable scenario of how a consumer in California will seek redress and change from the South Dakota legislature, or Delaware legislature, or another of the 47 other state legislatures.

Under the current system, consumers of a state understand and know that they have two banking choices: federal banks or state banks. This choice is simple and clear for the everyday consumer. Many consumers understand that state banks are forced to adhere to the laws and regulations enacted by a legislature that answers directly to the constituents of that state. If the consumer has a problem with a state bank, they know they may seek remedy with their State Attorney General’s Office, who is an expert on and is charged with enforcement of the state laws and regulations. The proposed rule is unclear on enforcement oversight and will leave consumers vulnerable, while requiring long and costly judicial remedies to clarify the ambiguity from the rule.

Recently, California amended their subprime lending laws. The constituents of California saw a need for a change in California's lending laws, and their democratically elected representatives responded. This law is how the citizens of California want to protect consumers from predatory lenders while allowing legitimate lenders to still supply capital for borrowers unable to obtain conventional financing. Should the FDIC’s proposed rule become final, how will borrowers in California know if they are taking a loan from a lender that must adhere to this law? If it is disclosed that the lender only has to conform to the laws of another state, will the burden be upon the borrowers to educate themselves on the lending laws of that state? Is the FDIC suggesting that consumers educate themselves on the lending laws of all 50 states to determine which one they prefer, and then search for a state-chartered bank from there? The sad reality is that, under the proposed rule, many consumers will not know that the institution they are banking at or receiving loans from only has to follow the state laws of its home state until the consumer is faced with a legal situation.

There Will Be A Race To The Bottom

While the FDIC may take the position that there will not be a race to the bottom by states who relax their lending, banking, and disclosure laws in order to entice new banks to charter within their state, history has shown that, in fact, it is inevitable. Consumers will pay a price, and congressional time and energy will be exhausted to correct it. The FDIC need look no farther then their own wallets to see the impact of importing home-state laws across state lines that preempt the host-state’s laws . Since Congress passed the Depository Institutions Deregulation and Monetary Control Act in 1980, nearly every credit card company has moved their facilities to Delaware or South Dakota. With an eye to only increase tax revenue for the state and create new jobs, Delaware and South Dakota created laws that benefited the credit card companies. It goes without question that should the FDIC implement its proposed rule, states will rush to pass lax lending and banking laws to attract new businesses at the expense of other states' consumers.

Today, Congress is forced to address high interest rates and fees due to the fallout over states that are unable to protect their constituents from imported banking laws. Congress is looking at the credit card companies for excessive fees, excessive interest rates, their marketing methods, collection methods, and other areas that could easily be addressed by the individual states.

In Conclusion

States have always been the primary regulators for not only state-chartered banks, but all entities transacting business within their boarders. Because of this, the dual-banking system has not only thrived, but helped play a vital role in supplying capital to the greatest real estate market in the nation's history. Under the current bank regulations financial institutions are experiencing record profits and sizable growth. This is not an environment that requires drastic change, especially a change that would strip states of their rights to oversee banking transacted within their borders and that would so drastically harm consumers and borrowers. The only sure outcome of this rule is the peeling of another layer of states’ right and sovereignty, while creating mass confusion for consumers, state legislators, and state agencies charged with the enforcement of state laws and regulations.

It is because of this that C.A.R. asks the FDIC to not finalize their proposed rule.

Thank you for your consideration of our views. If we may provide you with any additional information, please do not hesitate to contact Matt Roberts, Federal Governmental Affairs Manager, by phone 213-739-8284, fax 213-739-7255 or e-mail matthewr@car.org.

Sincerely,

Vince Malta
President
California Association of REALTORS®