Testimony Before Federal Deposit Insurance Corporation
May 24, 2005
Subject: Petition to FDIC seeking Regulations Preempting State Consumer Protection Laws in a manner similar to those of the OCC.
Personal Background: Commissioner of Financial Regulation for the State of Maryland since 2003. Over 25 years experience as Legal Counsel and as Legislative Counsel to firms within the financial services industry, both depository and non depository.
I and many other experienced banking lawyers do not believe that the FDIC has the statutory authority to preempt state law in the manner requested by the Financial Services Roundtable. Indeed many of us do not believe that the OCC has the statutory authority to do what it has done by regulation. Litigation testing the authority of the OCC to lawfully implement such regulations is now working its way through the federal court system.
Instead of adopting legally questionable regulations preempting state law, the FDIC should urge Congress to address this issue. The FDIC should urge Congress to provide traditional and basic protections concerning extension of consumer credit and level the competitive playing field between large national banking organizations on one hand and state-chartered banks, non depository lenders and most community national banks on the other. At least six other states have filed a letter opposing action by the FDIC.
Favorable federal legislation, court decisions and regulatory action over the last ten years have given a strong competitive advantage to large banking organizations in regard to national consumer credit programs. These large banking organizations are able to locate national bank subsidiaries in “no rules” states that have chosen to eliminate traditional consumer protections, regarding consumer lending practices, in favor of economic development. Banks located in these “no rules” states can offer consumer and mortgage loan products nationwide without complying with the statutory limitations established by other states concerning high interest rates and fees, as well as, other consumer protection statutes.
Maryland-chartered banks, nonbank lenders and national banks located in Maryland cannot lawfully offer consumer and mortgage products on the same terms offered by national banks located in the “no rules” states.
Competitive pressures have caused most credit card programs offered by national banks from “no rules” states to engage in abusive credit practices - especially toward customers who become financially stretched and are unlikely to be in a position to take their business elsewhere. Sophisticated computer systems track consumer conduct and credit scores to identify those customers susceptible to a dramatic increase in interest rates. These increases are applied to existing balances as well as new charges and are in addition to the huge fees charged for delinquency, being “overlimit” and for returned checks. A credit card customer need not even have “defaulted” under the terms of the account, to have a dramatic and punitive increase in interest rates imposed on their account. For those who are late in their payments and over their credit limit, the penalty fees are frequently many times the amount of the missed payment.
It is good public policy for state-chartered banks, nonbank lenders and national banks operating from states with meaningful consumer protection laws to be able to offer competitive and uniform credit products on a nationwide basis.
It is good public policy for all consumers to receive the benefit of reasonable consumer protections and not be subject to predatory credit practices.
It is good public policy for lenders to be able to choose to operate under the law of the state where the customer lives or the proposed federal credit code. An opt out should be available that allows lenders to apply the state laws of the consumers residence or the state where residential real estate collateral is located to the loan, not federal law. This will allow lenders to operate as they are at present and ignore the federal credit code, if it is in their interest to do so. With the ability to apply state law, State legislatures continue to perform a role in determining the credit practices applicable to their constituents.
For all consumers to receive reasonable consumer protection, and for all lenders to have the opportunity to compete fairly in the national credit marketplace, Congress must establish a consumer credit code that will apply to all lenders, including national banks. The Uniform Consumer Credit Code, adopted in 10 states including Colorado, and which has been used successfully for many years can serve as the model for such a federal consumer credit code. The Federal Credit Code should deregulate interest rates as they are well disclosed and can be used as the basis for shopping a loan but severely limit the fees, charges and other credit terms which are so subject to abuse.
Only federal laws that establish national rules applicable to all consumer lenders should be permitted to pre-empt the protection that State laws afford to their citizens.
Both state and federal regulators and enforcement authorities should be able to enforce, on behalf of consumers, the national consumer protections established by Congress against all lenders. This will allow regulators to be responsive to citizens and be able to respond to complaints forwarded by state legislators in a meaningful way.
Charles W. Turnbaugh
Commissioner of Financial Regulation
State of Maryland
May 12, 2005