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Public Hearing on Preemption Petition

Comments on Petition for Rule-Making to Permit Preemption of State Laws with Respect to the Interstate Activities of State Banks
May 16, 2005

I. Introduction

A. The decision to preempt state laws for state-chartered banks should be left to Congress. [Question G-6]
Our comments begin with the question posed in General Issue Question # 6, for that is the fundamental starting point of this analysis. We believe that both as matter of policy, and of law, the answer is yes, this decision should be left to Congress.1

The Petition seeking this rule-making repeatedly states as fact a Congressional desire for “uniformity.” Yet Congress itself has not made such a determination, and it is upon this unequivocal failure to either adopt or direct a national, uniform banking law that the Petitioners' case stumbles. Petitioners have attempted to piece together aspects of these recent Congressional actions to argue a result that Congress has clearly never suggested – that the FDIC should permit state banks the freedom to operate outside the constraints of any state law that bank chooses to avoid through sweeping preemption of state laws. While it perhaps is understandable that those desirous of such an outcome might, in their impatience, turn to an agency to give them that result, desire is not the source of authority. This is particularly true with respect to the limits of the FDIC's authority to preempt state law as to state-chartered institutions.

There are many indicia of Congress' reluctance to fully preempt state law in the field of banking, some reflecting concerns about agency overreaching as to national banks, and some specifically relevant to state-chartered institutions. It is very clear that Congress has not expressed an intention to fully occupy the field of banking – interstate or otherwise, as we discuss in greater detail below. In the absence of that declaration, and in the presence of contrary express signals of its reluctance to do so, the question becomes, “Does Congress, in speaking ambiguously about the scope of its intent to permit an agency to preempt contrary state law, intend to confer that decision making authority on a federal agency?”2 We contend that it does not, and that the case for that negative answer is even stronger in the case of the FDIC's more limited authority over state-chartered institutions than it is for the OCC and national banks.

In sum, while there may be some argument about where the lines of preemption are, what is abundantly clear is that Congress has not made the decision to effectively deprive states of the right to protect their consumers in the field of banking and consumer financial services. In the absence of that decision by elected, accountable officials, it is improper for federal agencies to arrogate that right unto themselves.

1. Congress has expressed its intent to continue a balance of federal and state control of banking activities.
The following list cites some of the Congressional actions (and inactions) that support the proposition that the elected representatives in this democracy have not yet decided on uniform national standards and complete preemption of banking law. It is worth emphasizing that these expressions are found in the very same enactments that the Petitioners rely upon to make their case. These contrary indicators demonstrate that the Petitioners' argument is based upon selective reading. While federal agencies may fill in the gaps of Congressional enactments, they should not usurp the Congressional authority to set the boundaries themselves.

  • Both Riegle-Neal I and II explicitly express a Congressional intent that consumer protection and fair lending laws of the host state be honored by interstate branches to the maximum extent possible. That is inconsistent with the interpretation sought by Petitioners that would permit all banks to ignore host state law at will. (See § II-C below.)
  • Gramm-Leach-Bliley did not occupy the field or fully displace state authority as to banking activities, nor even as to the non-banking activities that Act authorized. It easily could have done so, but it did not. The fact that it did not is ample evidence that the agency should not extrapolate from that Congressional balancing act an unspoken intent to let the FDIC do what Congress itself would not. (See § II-D below.)
  • Particularly in the field of consumer protection, Congress has generally taken the position that federal law is the floor, not a national uniform standard, and that states are free to enact more protective legislation as appropriate to meet the needs of their citizens.3
  • Congress has voiced a concern that the OCC has overstepped its bounds in upsetting the balance between state and federal law in banking in general, and consumer protection in particular. The FDIC should be especially reluctant to promulgate “me-too” preemption rules based on the actions of another agency that Congress itself has questioned. (See §§ II-C, III-C below.)
  • All of these counter-indicators undermine the Petitioners' case that FDIA § 27, Riegle-Neal II and GLB prove their case that Congress intends sweeping preemption of state law for all banks, national and state. Only by selected readings and taking things out of context can the Petitioners articulate a Congressional directive.

2. The constitutional issues raised by the FDIC's issuing the requested preemption are not resolved by Smiley v. Citibank. Given the constitutional dimension of the issue and the fundamental questions of federalism and comity, the FDIC should leave this decision to accountable, elected officials.

The peculiar nature of “preemption by exportation” under § 27 of FDIA (or under § 85 of the NBA prior to the mid-90s) or even “preemption by interstate branching” under OCC interpretation of Riegle-Neal I is that it is not really federal law preempting state law. That federal law may preempt state law is constitutionally supported by the Supremacy clause. See, e.g. Lorillard Tobacco Co., v. Reilly, 533 U.S. 525, 540 (2001)

In contrast, exportation and interstate banking preemption as sought by Petitioners is functionally “sister-state preemption.” That is a radical concept not recognized in our constitution, and in fact fundamentally contrary to our system. It is certainly not a concept that the FDIC should, as a matter of law or policy, take upon itself to push to the limit.

a. Smiley does not resolve the constitutional issue outside the context of the NBA.
A brief overview of the history of the OCC rule interpreting Section 85 of the National Bank Act demonstrates that the cursory dismissal of the constitutional issues by Justice Scalia in Smiley v. Citibank (South Dakota) , 517 U.S. 735, 747 (1996) should not be taken as leave for the FDIC to assume that the constitutional issues are the same under the NBA as under FDIA § 27 or even Riegle-Neal II.

Section 85 historically granted national banks permission to charge interest rates at the highest rate authorized by their state for any lender making similar loans. Consequently, there was not a federal statute governing rates, definitions, or anything else. Instead, the source was the “borrowed” state law.4 The OCC deferred to state law on definitional issues as to what constituted interest for Section 85 purposes, even in the exportation context.5 There were a series of challenges around the country to exportation of late fees as not traditionally considered “interest.”6 But a 1993 lower-level court decision in Pennsylvania considered a different claim. It directly rejected the constitutionality of letting the South Dakota or Delaware legislatures enact the nation's banking laws.

“Congress cannot delegate to Illinois the power to legislate federal pollution standards for the whole country. Then Congress would be abdicating interstate commerce control to one state to legislate for the nation.”

Irvin v. Citibank (South Dakota) , 1993 WL 837921 (Pa. Comm. Pl), quoting Ronald D. Rotunda, John E. Nowak, J. Nelson Young, Treatise on Constitutional Law, § 12.6 (1986). As early as the venerable Gibbons v. Ogden , it has been the case that “‘Congress cannot enable a state to legislate [for the nation]'” Id., citing Gibbons , 22 U.S. (9 Wheat) 1, 208 (1824).

Perhaps not coincidentally, the OCC subsequently reversed its position from a state law-controlled definition of interest for purposes of the NBA § 85 to a federal definition. The OCC finalized that new position as a formal rule shortly before the oral argument in Smiley .7 The OCC switch to a federal definition saved the Supreme Court the trouble of resolving the constitutional issue, 517 U.S. at 747.

Smiley sanctioned the authority of the regulator of nationally-chartered, federally-created institutions to interpret one specific preemption law that both clearly articulates a preemptive purpose and clearly passes muster under the Supremacy clause. It is not so clear that the FDIC has the authority to make the switch to a federal definition in an attempt to authorize sister-state preemption for state-chartered, state-created institutions. Nor is the answer so clear as applied to activities beyond the purview of a specifically preemptive provision such as § 85.

There is no clause in the Constitution giving Delaware or South Dakota supremacy over Arkansas and California . “That one state may speak for the nation, Professor Tribe might say, ‘[is] contrary to the structural assumptions and the tacit postulates of the Constitution as a whole.'” Irvin v. Citibank (South Dakota), 1993 WL 837921 at p. 4, citing Lawrence H. Tribe, American Constitutional Law, § 5-20 & n. 7. Thus it is not so clear that the constitutional question would be avoidable if the FDIC promulgated preemption rules sanctioning sister-state preemption, particularly given the more limited powers of the FDIC.8 (See § II-A below on FDIC powers).

b. Congress has recognized the fundamental distinction between federal preemption and sister state preemption
Congress, too, has clearly recognized the distinction between federal preemption under the supremacy clause and “sister-state preemption.” There is an obvious reason why states were not granted the right to opt-out of the National Bank Act: it was enacted to finance a war that was waged to prevent states themselves from opting-out of the Union.

In contrast, Congress clearly recognizes the Constitutional distinction when it gave states the right to opt-out of FDIA § 27, the source of state banks' exportation authority. These comments will discuss this in more detail, but it is enough to note for the moment the conundrum created by the opt-out right. That Congress grants to states the right to “just say no” to this particular federal preemption itself is fundamentally incompatible with the notion that that same statute on the other hand gives the FDIC implicit authority to make that opt-out right utterly and completely meaningless. (See § II-B 2 below.)

B. The FDIC does not have the legal authority to issue sweeping preemption rules as requested in the petition, nor is it a wise policy choice. [Question G-11]
CRL urges the FDIC to reject the petition as both unsupported by law and contrary to sound public policy. In Section II we outline the legal arguments against the petition. As an initial proposition, the statute from with the FDIC derives its existence, the FDIA, does not provide general authority to the FDIC to issue broad rules preempting state law for state chartered banks.

As presented in the Petition, the FDIA has been amended and supplemented since enactment. Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA) amended the FDIA, adding preemptive authority under Section 27. Section 27 is a limited preemption of interest rates only and does not provide plenary authority to preempt state law for state-chartered banks beyond the specific confines of interest rate preemption. DIDA Section 525 further demonstrates that Section 27 cannot be the basis for determination in favor of a preemptive ruling, as it would render the right of the states to opt-out of § 27 a nullity. Riegle-Neal and Gramm-Leach-Bliley do augment the authority of the FDIC, however the scope and application of the relevant provisions are more limited than postulated by the Petition. These provisions do not confer upon the FDIC the authority necessary to grant Petitioners' request.

II. There is No Legal Authority for the Broad Preemption Sought by the Petition.

A. The FDIA does not provide general authority to the FDIC to issue broad rules preempting state law for state-chartered banks. [Question 5-1]
The FDIC is the fiduciary for the deposit insurance funds, as well as fiduciary in its role as receiver or conservator for most failed banks. The FDIC has a unique responsibility to ensure that depository institutions are operating in a manner that does not improperly jeopardize the insurance funds or the institutions themselves. The FDIC does not have the express or implied statutory authority to be the primary regulator responsible for governing all of the activities of insured state banks and any affiliate or ‘other person' with which the bank decides to associate. Nor does it appear to have the capability, as evidenced by the egregious fair lending and consumer protection issues present in the payday lending operations of certain FDIC-insured state banks. The FDIC is not like the OCC, which was created to oversee the activities of national banks, including all activities incidental thereto.

Federal law sets the maximum interest rate allowable for loans issued by national banks.9 According to an interpretive ruling issued by the OCC and upheld by the Supreme Court,10 national banks may require customers to pay interest, which includes fees on extensions of credit enumerated as numerical periodic rates, late fees, certain not sufficient funds (NSF) fees, overlimit fees, annual fees, cash advance fees, and membership fees11 without regard to usury limits except for those of its ‘home' state. Pursuant to Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA), state banks were apparently given authority to export the interest rate from their home states, the same as national banks.12 This provision, also know as Section 27 of the FDIA, preempts state law governing interest rates, as those laws would apply to “state-chartered depository institutions.”

FDIC has adopted § 7.4001 by agency opinion letter,13 and legal precedent is consistent in applying Section 27 as to state banks similar to Section 85 as to national banks.14 The FDIC's adoption of such a rule as applied to loans made (directly) by state banks could therefore be merely a clarification of current agency interpretation as upheld by the courts. The weight of authority seems to interpret Section 27 to allow state-chartered FDIC banks to impose a laundry list of charges under the heading of ‘interest' in much the same manner as national banks.15 That being said, the promulgation of a rule should not expand the limited preemptive scope of Section 27.16

B. Section 27 does not provide plenary authority to preempt state law for state-chartered banks beyond the specific confines of interest rate preemption.

1. Section 27 is a limited preemption of interest rates only. [Question 2-2]
In a recent opinion letter, the FDIC has opined that state banks under Section 27 may use means that are outside of the bank, such as non-bank agents and affiliates, to carry out federally protected activities in contravention of otherwise applicable state laws.17 This opinion appears based on the notion that because state banks have exportation authority similar to national banks, Section 27 also confers express authority to engage in other activities incidental to banking business that would facilitate exportation, and that these incidental activities should therefore also be governed by federal and not state law. This is an unwarranted expansion of Section 27 for at least two reasons.

First, to read Section 27 so expansively would make it a broader grant of authority than that contained in Section 85. National banks derive their exportation authority from Section 85, but they derive the authority to use non-bank means to export the rates with minimum interference of host state law from the combination of NBA Section 85 and the 'incidental powers' language set forth in Section 24 (Seventh).18 Under the incidental powers doctrine, the OCC has the express authority to issue regulations ensuring that national banks could avail themselves of “all such incidental powers as shall be necessary to carry on the business of banking.”19 There is no comparable grant of authority for state banks. In fact, the purpose behind this language stems from the original creation of the national banks in order to establish a uniform currency and to engender public trust in the banking system.20 The first national banks were forced into dissolution by state interests, and Congress found that the national banks needed protection from anti-competitive state legislation that might frustrate the new federal banking scheme.21 Section 27 alone does not give federally-insured state-chartered banks express federal powers to conduct interstate banking business through or in concert with non-banks, just as NBA Section 85 does not confer that authority on national banks.

More importantly, the DIDA provision that effectuates Section 27 gives States authority to opt out of Section 27 as applicable to loans made within its borders,22 and to interpret Section 27 to include an 'incidental powers' doctrine would render this option meaningless.

2. DIDA Section 525 demonstrates that Section 27 cannot be the basis for a preemption determination which would render the right of the states to opt-out of Section 27 a nullity. [Question 5-3]
As we stated above, at any time a State can withdraw from the purview of Section 27, in which case domestic state usury laws would govern domestic loans. The fact that this possibility exists demonstrates conclusively that Congress intended States to maintain some control over the interest rates that could be imposed by state-chartered lenders.

Petitioners' argument that Section 27 authorizes sweeping federal preemption must stop short at the hurdle created by the DIDA § 525 opt-out right. There is no intellectually honest way to make the argument that preserves the right to opt-out of a federal preemption statute with an agency rule which in practice makes that opt-out right a nullity. Congress granted the opt-out right recognizing two things: a) it was an intrusion onto an area of traditional state prerogative, and b) there is no room in our system for the sister-state preemption that results. While it is the case that all but three jurisdictions which opted-out originally have repealed their opt-outs, it is important to remember that there was no sunset on the §525 opt-out, unlike the DIDA Part A opt-out or the AMTPA opt-out. In fact, the AMTPA experience offers an important object lesson for an agency considering sweeping preemption.

Only six states opted out of AMTPA within the three-year window from 1982 to 1985. However, some 14 years after AMTPA was enacted, a federal agency issued a preemption rule that states felt was beyond the scope of AMTPA, and prompted challenges. Indeed, it is clear from the arguments made in the challenge to the AMTPA prepayment rule that, had the AMTPA opt-out option still been available, some states would have chosen that road.23 Since the Section 27 opt-out road is still open, overreaching preemption rules may prompt re-thinking in the states.

Since Congress has not forced Section 27 preemption down the sovereign states' respective throats, clearly FDIC should not take upon itself the authority to do so.

C. Riegle-Neal II cannot serve as the basis for sweeping preemption, whether or not the state banks establish interstate branches.

1. Riegle-Neal II applies solely to interstate branching, and both Riegle-Neal I and II demonstrate Congress' commitment to respect for the host state's consumer protection and fair lending laws.
The relevant provisions of Riegle-Neal apply solely to interstate branching, and Congress mandated that the host state's consumer protection and fair lending laws were to be observed by branches operating in that state to the maximum extent.24 It clearly explained that the passage of these provisions was not an expanded grant of preemption authority. Congress noted that “Courts generally use a rule of construction that avoids finding a conflict between the Federal and State law where possible. The title does not change these judicially established principles. ” H.R. Conf. Rep. 103-651 at p. 53, reprinted in 1994 U.S.C.C.A.N. 2068, 2074. It further explained that it did not intend that the IBBEA alter the balance of states' interest in “protecting the rights of their consumers, businesses, or communities.” Id. 25

This is hardly a directive to the agencies to push an aggressive preemption agenda as to interstate branches. As to interstate branches of state-chartered banks, Riegle-Neal I did not include the clause recognizing the previously existing preemption authority under the NBA.26 That was not an oversight,27 but undoubtedly reflected the understanding that the concept of sister-state preemption is not a part of our fundamental system, as discussed in Section I, supra . In 1997, Congress did amend that provision to authorize interstate branches of state-chartered banks parity with national banks. Whether this provides a sound legal or policy basis for the FDIC to issue “me-too” preemption of host-state law for interstate branches requires an examination of whether the OCC's preemption rules themselves are within the scope of authority as envisioned by Congress.

2. It would be unsound for the FDIC to issue preemption based on parity with national banks pursuant to OCC regulations when Congress has voiced concerns that OCC preemption is overreaching.
In Riegle-Neal, Congress clearly respected the “strong interest” that states have in the activities and operations of depository institutions doing business within their jurisdictions regardless of the type of charter the institution holds. H.R. Conf. Rep. 103-651, at p.53. That clearly signals that national banks, as well as state banks, are not free to ignore the law of the host state at will.

It was during the consideration of Riegle-Neal I that Congress learned of the preemption activities of federal banking agencies, particularly the OCC, and by no means gave them a stamp of approval.

During the course of consideration of the title, the Conferees have been made aware of certain circumstances in which the Federal banking agencies have applied traditional preemption principles in a manner the Conferees believe is inappropriately aggressive, resulting in preemption of State law in situations where the federal interest did not warrant that result.

H.R. Conf. Rep. 103-651, 1994 U.S.C.C.A.N. 2068, at 2074. For that reason, Congress mandated that all OCC preemption opinions be published for public comment. While that put the burden on Congress to respond when it believes the preemption overreaches, subsequent activities in Congress demonstrate that the OCC has not resolved those concerns. (See Section III-C, below for a more detailed discussion of recent Congressional actions regarding OCC preemption activities.)

It is clear, then, that Congress did not say in Riegle-Neal I that either national or state-chartered banks should be able to ignore state law at will, particularly consumer protection and fair lending laws. Riegle-Neal II did not reflect a change in that position. Further, at the time Riegle-Neal II did pass, with a minimum of consideration and debate,28 Congress could not know of an OCC action that was yet to come that would have the effect of rendering that Congressional directive a nullity. Not published as a preemption determination, a 1998 OCC Interpretive letter gave national banks engaged in interstate banking a recipe for how to construct their business so as to avoid the mandate of Riegle-Neal to comply with the consumer protection and fair lending laws of the host state.29

It defies belief that Congress intended agency preemption activity to become the exception that completely swallows the rule on interstate banking. Indeed, more pertinent than the question of whether the FDIC should jump on the OCC's bandwagon is the question of whether the OCC itself is encouraging an end-run around Riegle-Neal's expressed goal of maximizing the role of consumer protection and fair lending laws of host state branches.

3. Riegle-Neal applies solely to interstate branching. For authority for state-chartered banks to ignore the law of other states in which it does business without branching, the petitioners must look elsewhere.
In searching for some source of authority for preemption in interstate banking without branches, such as Internet lending, there are two questions: does state or federal law apply; and if state law, which state law. It is an extremely important area for consideration as increased electronic and virtual banking lower the barriers for entry into the financial services arena and dramatically extend the service areas of financial institutions.

Courts have already raised concerns as to the wisdom of using applicable federal law to completely preempt state laws in another area of alternative financial services, alternative rate mortgages. In Black v. Financial Freedom Senior Funding Corp.,30 the plaintiffs/appellants brought various state law claims against a state-chartered non-bank mortgagee. The defendants/respondents asserted that the plaintiffs should lose as a matter of law because the Alternative Mortgage Transaction Parity Act (AMTPA) and the Truth in Lending Act (TILA), both federal statutes, governed the transaction and therefore preempted the claims. The trial court granted summary judgment to the mortgagee, but the appellate court disagreed.31

The court's analysis of the possible preemptive aspects of AMTPA is particularly instructive. First, the court concluded that there was no express, implied or conflict preemption of the state law claims under AMTPA. This conclusion was based on the following: AMTPA set forth specific aspects of the transactions to be governed by federal law and unless the state law conflicted with these specific provisions its application should not be preempted; there are significant gaps in federal regulation of the area of alternative mortgages, so that federal preemption of state law would result in a nationwide ‘anything goes' standard; the federally-chartered creditors who enjoyed preemption were also subject to a comprehensive regulatory regime while the non-depository institution state-chartered creditors were not.32

Petitioners apparently hope for an environment where institutions will have every incentive to avoid establishing a regulated bank presence in the states in which they engage in business. Indeed, the outcome sought by Petitioners may result in a rule that will give non-bank corporations leave to offer financial services/create financial obligations with no accountability to the state that incorporates and licenses them or to the consumers of that state, only because they offer the services on behalf of or in concert with an out-of-state bank. Whether that is an outcome which the Financial Roundtable has in mind or not, it is a likely consequence.

In fact, this dynamic is already reflected in the increasing involvement of FDIC-insured state banks in payday lending, an extremely controversial, but highly profitable lending practice. CRL has yet to discover evidence that any of the dozen or so state banks involved in payday lending make these high-cost loans directly out of the bank, or even inside of their own service area. Instead, these banks partner with unaffiliated non-bank corporations, which then make the loans available on terms that are illegal for these corporations in the states in which they operate. These relationships have created a regulatory nightmare for states that are trying to control the abusive practices that drive the profits for this industry. In essence, payday lenders are amenable to being governed by the state in which they are licensed or incorporated UNLESS they want to be more profitable, in which case they flout that same regulation by entering into a simple contract with an FDIC-insured state bank. The argument is that the law is ambiguous or it is clearly in favor of preemption of laws otherwise applicable to these entities. Neither is true, and that is at the heart of the Petitioners request to the FDIC. Unfortunately for Petitioners, Riegle-Neal facilitates branching by banks, not the episodic annexation of non-bank entities for the purpose of extending to them all the rights and privileges of being a bank.

D. Gramm-Leach-Bliley's preemption is far more limited than postulated by the Petition. [Question 4-1]

1. The parity granted by GLB was intended to lower barriers for national banks into non-banking activities already authorized for state banks.
To the extent that there is a parity purpose in the Gramm-Leach-Bliley Act (GLB), it was to extend the authority of national banks to engage in non-banking activities already available to state banks in some states, and to make structural alliances with non-banking affiliates to do so.33 Banks may engage in these associations and insurance and securities activities without interference from state laws generally. But that GLB is not the basis for sweeping preemption authority is shown by the fact that it has over a dozen exceptions that permit the continued applicability of state law even to the to the activities explicitly sanctioned by GLB.

As with Riegle-Neal and DIDA, Petitioners are asking that the FDIC take Congress' inch and give the state banks a mile. GLB is not the source of sweeping preemption authority that Petitioners' claim, either.

2. Section 104(d) is not a general grant of preemption authority. Section 104 preemption is limited to GLB authorized affiliations and activities.

In GLB's preemption provisions, “Congress established a general rule that no state may, by statute, regulation, order, interpretation or other action, prevent or restrict a depository institution or any of its affiliates from engaging directly or indirectly either by itself or with an affiliate or anyone else, in any activity authorized by the 1999 legislation.”

Patricia McCoy, Banking Law Manual, § 4.03-[6] at p. 4-40. (emphasis added.)

Section 104( c)1 has the more expansive language barring states from restricting state bank affiliations permitted under the GLBA or "any other Federal law." The problem here is that Congress has yet to pass other "Federal Law" permitting and governing affiliations between state banks and other persons that do not depend upon concurrent or superior state law authority. There is no statutory authority for the premise that state law should not be fully applicable to the non-bank agents used by state banks. In fact, the FDIA supports the opposite conclusion, for it contains provisions that call for state law enforcement and oversight.34 The RN, RN II and GLBA were passed in the nineties and did not amend or supersede these sections, though they could have easily done so. Therefore, they must be read as consistent with each other.

Another provision cited by Petitioners, § 104(d)(4), begins by saying that “no State statute, regulation, order, interpretation, or other action shall be preempted under paragraph 1 to the extent that” it does not do one of several enumerated things. Paragraph §104(d)(1), in turn, only preempts state laws which prevent or restrict a depository institution or its affiliate from engaging in “any activity authorized or permitted under [GLB] and the amendments made by [GLB.] The inference is clear that Congress intended for Section 104d to only cover the activities and areas for parity governed by GLB, which are limited to insurance and securities activities rather than general banking activities.

Hence to the extent that Petitioners ask the FDIC to read sweeping preemption authority into GLB, their argument is clearly overbroad. Instead the questions are: what activities are authorized or permitted under GLB, and is the FDIC empowered to issue rules within the confines of the limited preemption specified under FDIC.

III. Even if There Were Legal Authority for the FFDIC to Broadly Preempt State Law for State-Chartered Banks, Policy Reasons Dictate that it Should Not.
We do not believe that the FDIC has legal authority to issue the requested sweeping preemption rules. Congress' intent for federally-insured state-chartered depository institutions to remain subject to state laws, except as specifically provided to the contrary, is apparent from provisions of the FDIA itself. But setting that aside for the moment, we believe that there are compelling reasons for the FDIC to decline to do so.

A. Broad preemption as sought by the petition would cause irreparable harm to the dual banking system. [Questions G-1; G-3]
The question in this context brings to mind a Vietnam-era military explanation: “It became necessary to destroy the village in order to save it.” If “differences in the substance of banking regulation are what make the dual system function, ” then the “opportunities for these differences”35 to arise will become increasingly limited by wide-spread preemption of state laws, and the requested rule-making would essentially make those opportunities fade away.36 In the name of the preservation of the dual banking system, those demanding sweeping preemption of state laws would preserve it in name only, while draining it of meaningful differences.

The OCC's manifest goal is maximum preemption of state law, replacing with it either permissive federal law, or permission to the bank to choose the most lax state laws.37 Should the FDIC grant state-chartered banks full hitch-hiking rights to ride along with OCC rules, those states which try to balance the interest of all their citizens will lose the right to protect their citizens even within their own borders - and that is directly contrary to Congressional intent as expressed in Riegle-Neal and in federal consumer protection laws.38

B. The States have a legitimate interest in the conduct of banking as it affects its citizens. The States' authority would be completely undermined by the promulgation of the preemption rules sought. [Question G-9]
The FDIA assumes the state is the primary regulator for state banks. This is a fundamental and critical distinction between the OCC's authority and the FDIC's authority which argues against the agency usurping the states' authority . The FDIA defines the “State Bank Supervisor” as any party having “primary regulatory authority” over state banks. The Act gives states concurrent visitorial powers over insured state banks, expressly reserving certain aspects of the banking business to state regulation. See 12 U.S.C. § 1820(h)(1)(A). The Act further provides for a state bank supervisor or a state law enforcement officer to exercise enforcement powers if the host state laws governing “fair lending, consumer protection, and permissible activities” are violated. See 12 U.S.C. § 1820(h)(2). In contrast, federal banking law provides a basis for the OCC's assertion of exclusive enforcement and supervisory powers over national banks. See 12 U.S.C. § 484(a) (“No national bank shall be subject to any visitorial powers except as authorized by federal law”); Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Pub.L.103-328, 108 Stat. 2338 (1994) (cited by the OCC as reaffirmation of its exclusive authority over national banks).

Ironically, statutes cited by Petitioners in support of their request all amply articulate the Congressional opinion that states do have a legitimate interest in how banks conduct business within their borders, and further the statutes reflect an effort to strike a balance. Petitioners' arguments attempt to ignore the counterweight in those statutes that give the balance.

Congress itself said it best:

States have a strong interest in the activities and operations of depository institutions doing business within their jurisdictions , regardless of the type of charter an institution holds . In particular, States have a legitimate interest in protecting the rights of their consumers, businesses, and communities…. Congress does not intend that the Interstate Banking and Branching Efficiency Act of 1994 alter this balance and thereby weaken States' authority to protect the interests of their consumers, businesses, or communities (emphasis added).

H. R. Conf. Rep. 103-651, at p 53, reprinted in 1994 U.S.C.C.A.N. 2068, 2074. After articulating standard preemption principles, it reiterates that “Courts generally use a rule of construction that avoids finding a conflict between the Federal and State law where possible. The title does not change these judicially established principles. ” Id. This is hardly a clear, unambiguous statement that Congress intends to let the FDIC issue sweeping preemption rules for state-chartered banks. Indeed, it does not even express an intent to do so for federally-chartered institutions. See also “Federal Preemption of State Consumer Protection Laws as Applied to National Banks and Other Federally Chartered Banking Institutions,” Congressional Research Service, p. 18. (Mar. 12, 1992)(“State regulation of national banks and federally chartered thrifts is well-grounded in judicial and legislative history, particularly as regards the consumer protection field”).

There is ample reason for letting the states retain some control. The effects of payday lending for example, will fall very differently in poorer states than in richer states, as more families redirect more of their smaller incomes to these high-cost lenders. At the other end of the loan market, real estate conditions vary widely, which means mortgage lending issues vary widely. Inflated appraisals will cause crises in fly-over regions where home values are 25 years behind coastal values. We do not believe that the FDIC should expand the federal preemption that denies Ohio, Indiana, and Iowa the right to address those crises now because the West Coast and Northeast corridor are not feeling those effects yet.39 More fundamentally, we do not believe that the FDIC should make it possible for the Delaware legislature to deprive the Iowa legislature the ability to deal with the problems Iowans face as a result of the actions of Delaware banks or its partners or subsidiaries in Iowa . That is indeed a bridge too far.

C. It would be unwise for the FDIC to extend preemptive authority based upon OCC preemption, as Congress has repeatedly signaled its concern with overreaching by that agency.
Petitioners ask for parity based on OCC regulations, but ignore Congressional signals that the OCC has overreached on preemption. In their eagerness to justify parity with national banks, Petitioners omit mention of the fact that Congress itself has signaled that it believes the OCC has overreached on preemption. Less than one-and-one-half years ago, the Chair of the House Financial Services Subcommittee on Oversight and Investigations opened an OCC Oversight hearing with these remarks.

Preemption of any State law is an extremely serious issue, with significant consequences for all Americans. The preemption of state banking regulation is even more serious because it has critical implications for consumer protections and the overall dual banking system which has served our country very well for decades. A decision of this magnitude requires considerable review by Congress to ensure that consumer protections are not being undermined and that the balance of the dual banking system is not disrupted. The OCC is tasked with interpreting congressional intent. In terms of these regulations, the intent of Congress is unclear.

… I am concerned that an agency tasked with interpreting the laws passed by Congress has strayed from its obligation to protect consumers. The OCC is supposed to be an independent agency. Its actions have led many of us to question whether or not they are also independent of the people's best interests. Unfortunately, this is not the first time that Congress has had difficulty working with the OCC, which indicates to me that there may be a larger systemic problem at that agency. Congress must and will take all necessary steps to ensure that the interests of the American people come first, even if it means a culture of change at the OCC.

…. In principle, I also understand that there is need for more uniformity in regulation, and that we need to investigate whether a patchwork of laws may impede progress that is beneficial to consumers. In fact, this committee has held several hearings on reforms in insurance and securities regulation, with the intent that changes could be made by Congress through a legislative process. However, for a regulator to single-handedly preempt a State's ability to both determine and enforce laws without public debate or explicit direction from Congress is not only troublesome, but I believe it is careless. The American people deserve better. The American people deserve a voice in these decisions.

Opening remarks of Chairwoman Sue Kelley.40 Congressman Gutierrez followed in a similar vein:

 Congress never intended the OCC to preempt the field of lending. In response to the OCC's overreaching in the past, the Riegle-Neal interstate banking law sought to clarify the limits of the OCC's authority and establish certain notice and comment procedures to be observed on the rare occasion when State laws impede the ability of national banks to conduct the business assigned to them by Congress. The OCC's standard of ''obstruct, impair or condition,'' articulated in this rule is a major departure from congressional intent and established precedent, inconsistent with some of the OCC's previously articulated preemption positions and at the very least of fair-weather Federalism.

…  State legislatures have long functioned as incubators of innovation because they have been able to act quickly and creatively to respond to changes locally in the marketplace. Frequently, their excellent product proves its merit beyond its borders and becomes the basis for a change in Federal law. I am deeply troubled that the OCC's action could stifle this innovation. In other instances, State law improves upon Federal laws. In fact, a number of laws written by this committee indicate that State laws are not inconsistent with Federal laws if they provide greater protection to consumers. If the consumer does better at a State level, this committee and this Congress on many occasions, as many of us have articulated in many times past, that those are the laws [sic].41

The FDIC should be very cautious about hitch-hiking a ride on what Congress has signaled that it thinks may be a runaway horse.

D. The preemption rules would have a negative impact on consumers, and would create perverse incentives in the marketplace. [Questions G-2; G-8]

1. The impact on consumers would be a costly one if a preemptive rule were issued in these areas.
The impact on consumers is negative, as the driving force is a race to the bottom. The fall-out from first Marquette and Smiley provides a case study in that phenomenon. Congress never made a conscious decision to preempt state laws regulating non-mortgage credit.42 Initially, only South Dakota and Delaware – two states representing only about 1.5 million of the nation's 281.4 million citizens – made that decision. The “preemption by exportation” phenomenon put the “consumer-friendly” states at a disadvantage to the “bank-friendly” states, and the credit card industry essentially became a deregulated one through sister-state preemption.

An FDIC economist noted recently at least one negative long-term impact – the correlation between Marquette and rising consumer bankruptcy trends.43 Smiley and the OCC's preemption rule § 7.4001 gave credit card fee inflation a significant boost. Late fees doubled (from $13 to $27 from 1996 to 2001), and late fee revenues to the industry quadrupled during that same period, ($1.7 to $7.3 billion). Comments submitted to the Federal Reserve Board in connection with its recent ANPRM on open-end disclosures highlighted some of the other negative consequences of the deregulated credit card market – to consumers, to honest competitors, and to the integrity of the marketplace.44

“Needless to say, the lawmakers in bank-friendly states have never been politically accountable to their out-of-state victims.” Irvin v. Citibank ( South Dakota ) , 1993 WL 837921, at p. 4 ( Pa. Com. Pl. ) To the extent that Congress makes the decisions, of course, they may be held politically accountable, but that is all the more reason that further preemption comes by an explicit and direct Congressional decision.

2. The requested preemptive rules would create perverse incentives and less accountability for state bank partnering.
While there is an argument for increased efficiencies for banks, efficiencies can be accomplished without creating an incentive for service providers to pour products into a market through unregulated entities, such as non-bank storefronts, unmanned outlets and Internet connections without being required to establish responsive relationships, or to be accountable or accessible to consumers.

Significantly, the most important recent decisions expanding preemptive authority for national banks through affiliations and relationships with "other persons" have been situations where the national bank was clearly the financial service provider, and the non-bank was clearly not in the business of banking.45 Therefore while state law governing the activities of the non-bank was preempted to the extent it interfered with the national bank's financial activity, the state was still in control of the entity in its ordinary course of business. Moreover in such situations there was less opportunity for confusion among consumers as to the identity of the financial service provider, though intentional obfuscation does still occur.

State banks, on the other hand, have chosen in recent years to engage with non-banks that also provide financial services on a standalone basis and engage exclusively in the business of banking in some markets. These non-banks provide products such as payday loans that have been found to be problematic by state regulatory agencies as well as the FDIC itself.46 There is constant innovation at the street-level as these lenders seek to maximize profits through creating new versions of products and new subterfuges in order to circumvent applicable restrictions. The FDIC has already contributed to this regulatory problem by failing to clarify that Section 27 exportation privileges are limited. This lack of clarity is a prime factor in the passage of non-comprehensive state laws regarding payday lending as well as confusion and lack of enforcement will among state regulatory agencies. Granting Petitioners' request could completely eliminate a state supervisor's ability to play any role in the supervision of non-bank providers of financial services such as these simply by virtue of its relationship with an insured state bank, regardless of the scope, type or purpose of the relationship. Given the growing public concerns regarding these and similar products, the FDIC should enlist the help of the state supervisors rather than eliminate it.

IV. Conclusion
Petitioners would have the FDIC enter into uncharted territory for itself and the banks that it helps to supervise in the name of uniformity. We would remind the FDIC that uniformity is but one factor of many which must be considered. FDIC has a unique role as guardian of the health and sustainability of the banking system at both the federal and state levels. This role is based in history, and in statute, and would not be served by the grant of Petitioners request for rulemaking.

Respectfully submitted,

The Center for Responsible Lending

Yolanda D. McGill 919.313.8522
Kathleen E. Keest 919.313.8548

1 This same issue was discussed by witnesses at House hearings on “Congressional Review of OCC Preemption,” Before the Subcommittee on Oversight and Investigations, House Committee on Financial Services, January 28, 2004, see, e.g. Testimony of Thomas J. Miller, Attorney General of Iowa, available at - PDF 107k (PDF Help).

2 Nicholas Bagley, “The Unwarranted Regulatory Preemption of Predatory Lending Laws,” 79 N.Y.U. L. Rev. 2274, 2288 (2004). The author argues against judicial deference to agency preemption determinations for a number of reasons, including that agencies are less well-equipped than courts – or Congress – to strike an appropriate federal-state balance. “Agencies may moreover be plagued by either or both of two well-documented institutional pathologies: regulatory capture or self-aggrandizing administrators. These pathologies could manifest themselves in particularly permicious ways if agencies were given an effective carte blanche to override the laws of duly elected state legislatures.” Id. at 2295.

See also Wells Fargo v. James , 321 F3d 488, 494 (5 th Cir. 2003) (noting serious public policy question as to whether Congress is better at balancing competing interests “than by a solitary institution whose focus is a single industry.”); Amy Bizar, Fred H. Miller, and Alvin C. Harrell, “Introduction to the 2000 Annual Survey of Consumer Financial Services Law,” 55 Bus. Lawyer 1255, 1259 (May, 2000) (discussing reasons for absence of discussion about revisiting the Uniform Consumer Credit Code as an alternative to federalizing the law, “unlike federal agencies that may view preemption of state laws as an integral part of an empire-building strategy to expand their clout and jurisdiction, there is no centralized regulatory constituency at the state level that inherently benefits from legal reform.”). (Emphasis added).

3See, e.g. 15 U.S.C. § 1610; Reg. Z, 12 C.F.R. § 226.18, Official Staff Commentary § 226.28(a)-2,3 (Truth in Lending); 15 U.S.C. § 1691d(f) (Equal Credit Opportunity Act); 15 U.S.C. § 1693q (Electronic Funds Transfer Act); 15 U.S.C. § 1692n (Fair Debt Collection Practices Act); 15 U.S.C. § 1677 (Restrictions on Garnishment). See also text accompanying note 40, infra.

4E.g. Attorney General v. Equitable Trust Co., 450 A.2d 1273 ( Md. 1982). See generally National Consumer Law Center , The Cost of Credit: Regulation and Legal Challenges , § 3.4.3 (2d Ed. 2000 and Supp.)

5See OCC Letter No. 452, R. Serino, Deputy Chief Counsel (Aug. 11, 1988), reprinted [1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH) Para . 85, 676.

6See generally, National Consumer Law Center , The Cost of Credit: Regulation and Legal Challenges , § (2d ed 2000 and supp.)

7OCC Letter No. 676 (J Williams, Chief Counsel) (February 17, 1995), formalized as rule 12 C.F.R. § 7.4001, 61 F.R. 4869 (February 9, 1996).

8Indeed, though it has not been litigated, the question of unconstitutional delegation of authority is lurking even in state parity statutes. See John J. Schroeder, “'Duel' Banking System? State Bank Parity Laws: An Examination of Regulatory Practice, Constitutional Issues, and Philosophical Questions,” 36 Ind. L. Rev. 197, 209 – 218 (2003).

During the single hearing on Riegle-Neal II, Congressman Vento alluded to the anomaly of sister-state preemption: “National banks, at least in theory, are under the control of the federal government with administration regulators and Congressional input. The same is not true for out-of-state state-chartered institutions.” Congressman Bruce F. Vento, Opening Statement on H.R. 1306, 1997 WL 216381 (F.D.C.H.)

912 U.S.C. § 85. Neither 12 U.S.C. § 85 (the NBA) nor 12 U.S.C. § 1831d (the FDIA) define what charges are included in the term “interest,” though since 1995 the OCC has established the definition. See text accompanying notes 4-8, supra..

10Smiley v. Citibank, N.A., 517 U.S. 735 (1996).

11The OCC's interpretation of ‘interest' gives the banks express authority to include these charges as “interest” for purposes of the statute, despite how interest might be defined under state law for transactions unrelated to sections 85 and 86.

1212 U.S.C. § 1831(d)(a).

13The FDIC adopted the OCC's Interpretive Ruling for defining charges that constitute interest under section 27 of the FDIA. See FDIC General Counsel's Opinion No. 10, 63 Fed. Reg. 19258 (Apr. 17, 1998); Gen. Counsel's Opinion No. 11, 63 Fed. Reg. 27,282 (May 18, 1998) (discussing impact of Riegle-Neal Act and Riegle Neal Amendments Act on Section 27 interest rate exportation). Neither opinion, however, discusses whether Section 27 also extends to non-banks who enter arrangements with insured state banks.

14 Because the language of Section 27 of the FDIA tracks that of Section 85 of the NBA, the two provisions regarding exportation of interest rates have been construed in pari materia. See Greenwood Trust Co. v. Massachusetts, 971 F.2d 818, 827 (1 st Cir. 1992). In Greenwood Trust, the court held that the express authority of federally-insured state-banks under Section 27 to use alternative interest rate ceilings must govern what fees are to be included in the term ‘interest.' Greenwood Trust, at 827-829. In Greenwood Trust the agent in the case was a wholly-owned subsidiary of the bank.

15 Hunter v. Greenwood Trust Co., 640 A.2d 855 (N.J.App. 1994), reversed, 668 A.2d. 1067 (N.J. 1995), reinstated on remand, 679 A.2d 653 (N.J. 1996) (federal case law supports defining certain flat fees as interest; DIDA expressly preempts state law inhibiting bank's choice of interest term under 27); But see Cross-Country Bank, et al. v. Klussman, 2002 WL 1000184, *4 (N.D. Cal.) (remand to state court, in holding that section 27 of FDIA does not completely preempt state claims noted that Supreme Court had to date found complete preemption for only LMRA and ERISA, statutory schemes with “extraordinary preemptive power”).

16 “FDIC-insured state chartered banks must comply with state licensing and other loan related restrictions as well as general state laws and consumer protection laws in each state in which they do business.” Darrell L. Dreher and Elizabeth L. Anstaett, “Common Misconceptions in Bank Interstate Credit Transactions,” Consumer Finance Law Quarterly Report Vol 56 No.3-4, Summer and Fall 2002 at 282.

17Does Section 27 of the Federal Deposit Act Preempt the Michigan Motor Vehicle Sales Finance Act , FDIC-02-06 (Dec. 19, 2002) 2002 WL 32361502 at *7. The FDIC did warn that the opinion letter was non-binding . Id.

18 “To exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money ….” 12 U.S.C. § 24 (Seventh).

19 See NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Corp., 513 U.S. 251, 258 n.2 (1995) (“We expressly hold that the ‘business of banking' is not limited to the enumerated powers in section 24 Seventh and that the Comptroller therefore has discretion to authorize activities beyond those specifically enumerated.”)

20Patricia McCoy, Banking Law Manual § 3.02[1] (2d. ed. 2004).


22DIDA Section 525; 12 U.S.C. § 1730g

23See NHEMA v. Face, 239 F.3d 633 (4 th Cir. 2001); Brief of Appellants Face, et al., 1999 WL 336133826, at pp. 14-15.

24P.L. 103-328, § 102(b)(3)(B).

25See also discussion at Section III-B, below.

26P.L. 103-328, § 102(b)(3)(B).

27Statement of Congressman Bruce Vento, H.R. 1306, 1997 WL 216381 (April 30, 1997).

28 One witness at hearings on GLB referred to “the recent passage of the ‘Riegle-Neal Clarification At), pushed through Congress last year with little consideration and debate.” Statement of Mary Griffin, Insurance Counsel, Consumers Union on behalf of Consumers Union and Consumer Federation of America, testimony on the Financial Services Act of 1998 (H.R.10), before the Senate Banking,, Housing and Urban Affairs Committee (June 24, 1998), 1998 WL 337145, at p. 5 (F.D.C.H.)

29OCC Letter # 822 (February 17, 1998), issued in response to a request from a client national bank. (Rosenbaum to Julie Williams, December 23, 1997).

30 Black v. Financial Freedom Senior Funding Corp., et al., 92 Cal.App.4 th 917 (Cal. Ct App. 2002).

31 “[C]ourts are reluctant to infer preemption in ambiguous cases. … Particularly in an area of law traditionally occupied by the states, such as the exercise of a state's police powers, ‘Congress' intent to preempt must be “clear and manifest” to preempt state law' … . Laws concerning consumer protection, including laws prohibiting false advertising and unfair business practices, are included within the states' police power, and thus subject to this heightened presumption against preemption.” Black, 92 Cal.App.4 th at 926.

32Black, 92 Cal.App.4 th at 929-933.

33Patricia McCoy, Banking Law Manual §§ 4.03[4] - 4.03 [6] (2d. ed. 2004).

34 E.g., FDIA Section 24 (12 U.S.C. § 1831a), discussed infra.

35In 1977, Professor Scott said “differences in the substances of banking regulation are what make the dual system function, and the system is richly endowed with opportunities for these differences to arise.” Kenneth E. Scott, The Dual Banking System: A Model of Competition in Regulation, 30 Stan. L. Rev. 1, 13 (1977), quoted in Patricia A. McCoy, Banking Law Manual §3.02[3] (LexisNexis 2d ed. 2004)

36Even the parity granted solely to interstate branching under Riegle-Neal II undermines the dual banking system.

The overarching theme within the Amendments Act is the establishment of competitive equality between all banks in order to preserve the dual banking system. Yet, as each individual provision of the Amendments Act illustrates, the structure through which Congress achieved this goal conflicts with retaining the meaningful benefits of the dual banking system.

Hayley M. Brady and Mark V. Purpura, “The Riegle-Neal Amendments Act of 1997: The Impact of Interstate Branching on the Dual Banking System,.” 2 N.C. Banking Inst. 230, 250-251 (April, 1998).

37The choice of the most permissive state law comes into play both for exportation and for interstate branching purposes.

38That position was expressed by Congress in Riegle-Neal I as to both national and state charters, so there is no inference in the parity amendment of Riegle-Neal II that it was impliedly reversing itself on the importance of state control.

39Commentators and Congress itself have expressed the view that the OCC's preemption in these areas is overbroad. See, e.g. Nicholas Bagley, The Unwarranted Regulatory Preemption of Predatory Lending Laws, N.Y.U.L.R. 2274 (2004). See next section for the discussion of Congressional views.

40Transcript available at


42As CRL noted in its comments to the FRB's recent ANPRM regarding open-end credit disclosures, at the time DIDA § 27 was passed, the full implications of Marquette for the credit card industry had not yet registered to law-makers or the public. It was not until the mid- 1980s that the sub rosa, _ripple-effect deregulatory impact began to become apparent. See, e.g. the court's discussion in Greenwood Trust Co. v. Commonwealth of Mass., 776 F. Supp. 21 (D. Mass.1991), rev'd 971 F.2d 818 (1 st Cir. 1992); Robert A. Burgess and Monica A. Ciolfi, Exportation or Exploitation A State Regulators' View of Interstate Credit Card Transactions, 42 Bus. law. 929 (1987).

43Richard A. Brown, Chief Economist, FDIC, conference presentation, Economics of the Consumer Lending Revolution, “Consequences of the Consumer Lending Revolution,” St. Louis Univ. School of Law, St. Louis, Mo., December 8, 2004.

44See, e.g. Comments of CRL and NCLC, FRB Docket No. R-1217 (March 28, 2005).

45 Beneficial v. Anderson , 539 U.S. 1 (2003) (national bank and tax preparer); Preemption Determination, 66 Fed. Reg. 28,593 (May 23, 2001) (national bank and car dealer); Krispin v. May Dep't Stores Co., 218 F.3d 919 (8 th Cir. 2000) (bank and department store).

46 The FDIC was forced to revise its Guidelines for Payday Lending after examinations turned up numerous violations of the Guidelines issued twenty-one months previous.

Last Updated 05/24/2005

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