Our testimony urges the FDIC to reject the Roundtable’s preemption request. There is no basis in federal law for allowing broad preemption of state law for state-chartered banks. Moreover, even if there were room for discretionary action on this question by the FDIC – which there is not – allowing this petition would be terrible public policy, with devastating consequences for American consumers. In the current environment, federal preemption in the consumer credit context is a legal mirage designed to allow depository institutions to decide which state laws ought to apply to all Americans. The state laws invariably selected are those that contain little or no protections for consumers. The result is that the remaining states are powerless to impose reasonable restraints on the greed of financial institutions.
The twin considerations that must be weighed by the FDIC in evaluating the Roundtable’s request are the strictures of the applicable federal law, and the public policies which provide the backdrop for analyzing the Petition. Because the public policy issues should frame the examination of the issue, our written comments first provide a report card on the state of the credit marketplace for many consumers and show that a major cause of the current abuses is the ever-expanding preemption of state consumer protection laws and the related race to the bottom. Next, these comments describe the limited nature of preemption rights accorded state-chartered banks, highlight the FDIC’s role as the secondary regulator of state banks, and show why the FDIC does not have the authority to grant the Roundtable’s Petition. We then demonstrate why the Roundtable’s reliance on certain federal laws in support of its arguments is misplaced.
Finally, we conclude with a discussion of the policy reasons which dictate that the FDIC take no action on this Petition as well as the effects on consumers and the marketplace if the FDIC were to take the bait waved by the Roundtable. As we see it, the ultimate practical question boils down to this: Should the FDIC perpetuate the ability of lenders to engage in the abusive practices that have arisen since the expansion of federal preemption and the pressure on the states to deregulate? As described in the comments, the credit marketplace is in a state of disrepair. Instead of cleaning it up, the FDIC will enable state banks to join in the abuses with more impunity.
Presently, states do retain authority over their own state banks and make the legislative and regulatory decisions that balance the important need to facilitate state banking with the equally important goal of protecting its citizens. The exportation of home state law currently does not apply beyond the usury or the interstate branching context. States can also choose to grant parity to their state banks and put them on the same footing as national banks, at least within their borders.
The major threat to the dual banking system arises from the imbalances created by the actions of the OTS and OCC over the last ten years. Only Congress can address these imbalances, not the FDIC. However, if Congress tackles the issue of bank preemption, it must not do so in a vacuum. Congress cannot displace state laws without also creating a strong federal consumer protection code. These two issues are intricately tied together.
National Consumer Law Center