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Public Hearing on Preemption Petition

Comments of the National Consumer Law Center On behalf of its Low Income Clients Regarding Petition for Rulemaking to Preempt Certain State Laws

Federal Deposit Insurance Corporation

May 16, 2005

These comments are submitted by the National Consumer Law Center1 on behalf of its low income clients. We appreciate the opportunity provided by the FDIC to comment on the Petition for FDIC Rulemaking Providing Interstate Banking Parity for Insured State Banks filed by the Financial Services Roundtable (hereafter "the Roundtable").

Our goal in these comments is to ensure that the FDIC rejects 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, we 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, these comments discuss 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. In this process we will answer many of the questions posed in the FDIC in the Federal Register.2

I. Marketplace Report Card: Overwhelming Consumer Debt and an Explosion of Abuses

    A. Credit Cards

      1. Bank Preemption
      Credit card deregulation, and the concomitant spiraling of credit card debt for Americans, began in 1978, with the Supreme Court’s decision in Marquette National Bank of Minneapolis v. First of Omaha Service Corp.3 This case gave national banks the green light to take the most favored lender status from their home state across state lines, and preempt the law of the borrower’s home state.4 As a result, national banks established their headquarters in states, such as Delaware and South Dakota, that eliminated or raised their usury limits, giving them free rein to charge whatever interest rate they wanted.5 Other depository institutions, including state banks, obtained the same most favored lender status when Congress enacted § 521 of the Depository Institutions Deregulation and Monetary Control Act two years later.6

      From 1978 to 1995, credit card debt increased six-fold to $300 billion.7 In that year, the Supreme Court paved the way for credit card banks to increase their income stream even more dramatically. In Smiley v. Citibank (South Dakota), N.A., the court approved the Office of Comptroller of Currency’s definition of interest that included a number of credit card charges, such as late payment, over-limit, cash advance, returned check, annual, and membership fees.8 As a result, national banks and other depositories can charge fees in any amount to their customers so long as their home state laws permit the fees and so long as the fees are "interest" under the Office of the Comptroller of the Currency’s ("OCC") definition (which makes the fees "exportable"). Uncapping the amount of fees that credit card banks can charge nationwide has resulted in the rapid growth of and reliance on fee income by credit card issuers as well as a proliferation of the types of fees imposed.9

      2. Credit Card Debt, Card Fees, and Related Abuses
      The total consumer debt-load in the United States has grown to a frightening $2.140 trillion10. Household debt as a percentage of disposable income was at a record 108% in 2003.11 Three-quarters of all households have at least one credit card, and over half of cardholders carry credit card debt from month to month.12 There are now almost 1.5 billion cards in circulation – over a dozen credit cards for every household in the country.13 Credit card banks send more than five billion credit card solicitations a year---totaling over $350,000 of credit per family.14 Between 1981 and 2001 credit card debt in America almost tripled from $238 billion to $692 billion. Worse, the savings rate steadily declined and the number of personal bankruptcies filed climbed 125%.15 As of 2004, the total revolving debt in the United States stood at $792.7 billion.16 Of this, commercial banks and savings institutions hold $343.7 billion.17

      The explosion of credit card debt has had a devastating impact on millions of American consumers.18 For example:

      • Credit card debt among older Americans with incomes under $50,000 (70 percent of seniors) has grown. About one in five older families with credit card debt is in debt hardship -- spending over 40 percent of their income on debt payments, including mortgage debt.19
      • The average credit card debt among young adults increased by 55% between 1992 and 2001 to $4,088 dollars, and these households now spend nearly 24% of their income on debt payments. In fact, among these young households with incomes below $50,000, nearly one in five with credit card debt is in debt hardship - spending over 40% of their income servicing debt (including mortgages and student loans).20
      • The average credit card-indebted family between 55 and 64 now spends one third of their income on debt payments, a 10% increase over the decade.21

      The negative consequences of this escalating mountain of debt on individual consumers as well as on the American economy cannot be minimized. Personal bankruptcy rates have increased on an annual basis,22 and families become destabilized due to the financial pressures.23

      Credit card bank earnings have been consistently higher than returns on all commercial bank activities. 24 According to a Federal Reserve Board Report, profitability increased 13.7% in 2003 over the 2002 rate when the credit card banks included in the sample were held constant.25

      After Smiley, banks rushed to increase late charges, over-limit fees, and other charges. The average late payment fee has soared from $14 in 1996 to over $32 in 2004.26 Over-limit fees have similarly jumped from $14 in 1996 to over $30 in 2004.27

      Now banks impose these fees, not as a way to curb undesirable behavior from consumers – which used to be the primary justification for imposing high penalties – but as a significant source of revenue for the bank. Since Smiley, penalty fee revenue has increased nearly nine-fold from $1.7 billion in 1996 to $14.8 billion in 2004.28 The income from just three fees – penalty fees, cash advance fees and annual fees – reached $24.4 billion in 2004.29 Fee income topped $30 billion if balance transfer fees, foreign exchange, and other fees are added to this total.30 Concurrently, card issuer profits, though declining somewhat between 1995 to 1998, have steadily increased between 1999 and 2004. These profits rose from 3.1% in 1999 to 4.5% in 2004.31

      In addition to the disproportionate size of fee income, the practices of credit card banks compound the financial problems of consumers. The following abusive practices have come to light over the last few years: penalty rates and universal default,32 deceptive marketing,33 payment allocation order34, posting cut-offs35, changes to credit limits36, debt collection37, mandatory arbitration clauses38, aggressive solicitation and ability to repay39, and small minimum monthly payments40. These practices are described more fully in the Comments of the National Consumer Law Center, et al. Regarding Advance Notice of Proposed Rulemaking: Review of the Open-End (Revolving) Credit Rules of Regulation Z, Federal Reserve System, Docket No. R-1217 (Mar. 28, 2005).41

    B. The Mortgage Market

      1. Preemption of State Usury and Consumer Protection Laws
      The National Bank Act, passed in 1864, began the federal regulation of interest rates, setting a ceiling on rates charged by federally chartered banks.42 The Home Owners' Loan Act ("HOLA"), a depression-era statute intended to bolster the home loan market during a period of great distress, provides a similar ceiling for federal savings associations.43 State-chartered banks, as discussed in greater detail below, may also charge the rates permitted to their federal cousins. These usury caps provided protections for consumers as long as the states retained their historically strong stance on prohibiting usury.44 However, in 1978 the Supreme Court in Marquette National Bank of Minneapolis v. First of Omaha Service Corp.45 created the exportation doctrine that permits banks to locate in a state with no usury caps and few consumer credit protections and make loan under that legal regime beyond the borders of its home state. Essentially, the effect of the Marquette decision has been to federalize the law of a few states, such as Delaware and South Carolina, willing to completely deregulate.

      Federal deregulation of the mortgage marketplace specifically began with the passage of the Depository Institution Deregulation and Monetary Control Act ("DIDA") in 198046 and the Alternative Mortgage Transaction Parity Act ("AMTPA") in 1982.47 DIDA removed the usury caps on state interest ceilings for loans secured by first mortgages on homes and preempted state limitations on a lender's ability to assess points, finance charges, or other charges related to the annual percentage rate.48 AMTPA removed states' abilities to limit terms on "alternative" mortgages, thus deregulating mortgage terms that had long been seen as dangerous and potentially exploitive of consumers. Negative amortization clauses, variable rate loans (even those that only go up, and never go down), balloon payment provisions, and, until June 2003, prepayment penalties all could be included in mortgages regardless of state law restrictions, even if they were not explicitly bargained for and provided in exchange for lower interest rates.49

      Both of these federal laws were passed at a time of record-high interest rates, when lenders were often unable to make market-rate loans because of state usury laws.50 While the intent of both of DIDA and AMTPA was to ease the effects of state limits on interest rates and loan terms that were temporarily strangling access to the credit necessary to achieve homeownership, their effect were far more pervasive. The direct result of these laws was to preempt state consumer credit protection laws applicable to mortgages, unless states acted within a short time-frame to opt-out. Only a small minority of states acted quickly enough to maintain this prerogative.51 As a result, a panoply of state protection laws was lost.

      The pressure on the states to throw in the towel as far as consumer protections are concerned became more severe when the federal banking agencies ramped up the preemption rights for their constituent depositories. The Offices of the Comptroller of the Currency (OCC) and Thrift Supervision (OTS) have, via administrative fiat, aggressively pushed preemption, especially since 1996. These agencies are in competition with each other for charters. In 2003, there were 2,001 national banks and 928 savings associations.52 Each agency wishes to attract more financial institutions to its fold. Consequently, there is pressure to make the charter more attractive than that of the competition.53

      For example, in 1996, the OTS issued new regulations that claimed the authority to occupy the entire field of lending regulations regarding federal savings associations.54 Over the ensuing years, the OCC positioned itself to follow suit. That agency published its broad preemption regulations in 2004.55 Both agencies extended preemption rights to operating subsidiaries of their constituent depositories56 and, in some circumstances, claim that mere agents or independent contractors may preempt certain state laws.57

      The preemption rights accorded federal depositories by the OTS and the OCC make it very difficult for states to protect their consumers from the abuses described in these comments. Attempts by states to pass anti-predatory lending laws have been trumped by OCC and OTS decisions that these laws can be completely ignored by national banks, federal savings associations, and their operating subsidiaries.58

      2. Abuses in the Mortgage Marketplace
      The mortgage marketplace is a tale of three markets.59 The prime market, by and large, is a competitive market where middle and upper-income Americans are used to receiving reasonable interest rates and paying little in the way of fees to finance the purchase of homes, cars, and other consumer goods. For those whose credit is blemished to any degree and for others who are steered to unconventional lenders, the subprime and predatory markets can be a very different experience.60

      The subprime market is characterized by a sliding scale of interest rates depending on how customers are graded. The rates and fees are invariably higher in the subprime market than in the prime market. Recent research shows that the interest rates are inflationary, rather than strictly related to risk.61 About 80% of all subprime mortgage loans contain prepayment penalties compared with 2% of the loan in the prime market.62 Freddie Mac has opined that up to one half of consumers placed in the subprime market could qualify for lower cost conventional financing.63

      It is also clear that the subprime market is a "push" market where armies of telemarketers, brokers, and loan officers target borrowers and solicit business.64 All credible research supports the observation that subprime mortgages are pushed disproportionately in minority neighborhoods. 65 Further, steering by prime lenders to subprime affiliates or the failure to refer up to a prime cousin may be prevalent.66

      The delinquency and default rates for subprime loans are much higher than for conventional mortgage loans. Between 1998 and 2003, one source reports foreclosure rates on subprime mortgage loans of approximately 4.5 to 11 times higher than the rates for prime loans. 67 Further, subprime loans with prepayment penalty and balloon provisions are much more likely to experience foreclosure than loans without these characteristics.68 After controlling for certain neighborhood demographics and economic conditions, one study found that subprime loans in the Chicago area lead to foreclosure at 20 or more times the rate that prime loans do.69

      The predatory market generally exists as a subset of the subprime market. Until the recent changes in HMDA reporting requirements, there was no publicly reported data showing the number of subprime loans that may be predatory. However, industry and academic studies demonstrate that the percentage of predatory loans in the subprime market could range from at least 12% to 21%.70

      The abuses in the predatory market are legion and have been described extensively in the literature.71 In the marketing and sales of mortgage loans, the abuses include: aggressive solicitations of targeted neighborhoods, steering to high rate lenders, door-to-door solicitation of home improvement or financing arranged by contractor or mobile home dealer, large fees or kickbacks promised to the mortgage broker, making loans to mentally incapacitated homeowners, refinancing lower-rate mortgages, shifting unsecured debt into mortgages, selling high LTV loans, and property flipping.

      In the application process, the abuses include: falsifying loan applications (particularly regarding income level) and forged signatures. The loan itself may contain terms that standing alone or in combination are abusive in light of the consumer's circumstances, include: high interest rate, high fees and closing costs, balloon payment, negative amortization, prepayment penalties, variable rates, inflated closing costs, back-dating of documents, requiring credit insurance, mandatory arbitration clauses, and making an unaffordable loan based on the value of the property. The loan closing may be rushed and the terms at closing frequently differ from what the borrowers thought they would get.

      After closing the abuses continue. The homeowner may be solicited into multiple refinancings, charged excessive late fees, subject to abusive collection practices, faced with incomplete or inadequate home improvement work or shoddy installation of the mobile home.

      Despite protestations to the contrary, banks and their subsidiaries are involved in predatory mortgage lending in a variety of ways, including –

      • making direct loans;
      • buying predatory loans from brokers;
      • investing in loan portfolios that contain predatory loans;
      • providing securitization services for trusts which contain predatory loans.

      In comments filed with the OCC, NCLC provided a list of 23 lawsuits involving national banks or their operating subsidiaries where violations of law and/or predatory practices were alleged.72 This list resulted from a very informal survey and is merely a sample. Further, these Comments included examples of national banks who received income from their roles as trustees of one or more pools of securitized loans for certain notorious lenders.73

    C. Small Loan Market
    Most banks and other financial institutions prefer not to write small loans because, while the return on a $5000 loan is greater than if only $500 is borrowed, the originating and servicing costs are not significantly different. As a result, the availability of small-sum, short-term credit has been curtailed.

    Much of the market for small, unsecured loans today had been replaced by the use of checking account overdraft lines of credit and credit cards. This still left a large number of consumers without sufficient credit card limits or access to overdraft lines of credit to meet their needs for relatively small unsecured loans. Consequently, the payday loan and auto title loan industries were born in the early 1990s.74

      1. Payday Loans
      Nationally, about 15,000 payday storefronts are now open.75 The "mature" market is estimated to be 25,000 offices generating $6.75 billion annually in fees alone.76 The high fees (equating to triple digit APRs) coupled with continuous rollovers, the short terms, and the failure to assess ability to repay make this product abusive.77 It is now documented that payday lenders target the military78 and African Americans.79

      Payday lending in about 15 states is prohibited or severely limited. In these states, payday lending occurs through arrangements between state-chartered banks that partner with payday storefronts.80 One of the state-chartered banks (County Bank, Rehobeth Delaware) partnering with payday lenders in 2003 experienced a 2.69% return on average assets (excellent for a bank since a good return is 1% or more) and a 32.10% return on average equity. 81

      2. Car Title Loans
      A typical car title loan has a triple-digit annual interest rate, requires repayment within one month, and is over-secured by the consumer's car (because the loan amount is usually no more than one third the value of the car). Title loans are typically made without regard to borrowers' ability to repay. Because the loans are structured to be repaid as a single balloon payment after a very short term, borrowers frequently cannot pay the full amount due on the maturity date and instead find themselves extending or "rolling over" the loan repeatedly.82 Newspapers across the country have recounted borrowers' wrenching experiences with these high-cost loans.83 The title lending industry has grown tremendously in recent years in several states.84

      3. Bounce Loans
      Not to be left out of the revenue stream provided by usurious loans, a growing number of banks and other financial institutions jumped on the payday loan bandwagon…only they call these loans "bounce protection programs." These banks have adopted software and marketing programs to boost their overdraft fee profits by encouraging consumers to overdraw their bank accounts by covering checks when the funds in the account are insufficient, by allowing overdrafts at ATMs for cash withdrawals, and by authorizing purchases using debit cards. Banks charge high penalty fees for each overdraft, ranging from $20 to $35 per overdraft regardless of the amount of the overdraft, plus a per day fee of $2 to $5 at some banks until the account is brought to a positive balance. Banks pay themselves back the amount of the overdraft and fees out of the next deposit. Bounce loans are astronomically expensive. Like payday loans, the bank does not evaluate the customer's ability to repay at the time the funds are extended. A $100 overdraft with a $20 fee has an APR of 520% if the overdraft lasts two weeks.85 Overdraft fees can trap borrowers in a cycle of high cost debt. A Washington state study found that about a quarter of bounce borrowers are charged loan fees under these programs at least twice a month.86

      For many consumers, overdraft charges on their ATM or debit accounts come as a complete surprise. A recent public opinion poll of 1,000 representative adults conducted for Consumer Federation of America by Opinion Research Corporation International reveals that 82% of consumers believe overdrafts without notice at the ATM are unfair, with 63% saying it was "very unfair." Twice as many consumers thought that banks permitting overdrafts without getting their consent was unfair (68%) rather than fair (29%).87

      Bounce loan program unquestionably are a large source of revenue for those banks involved and a large income drain for the consumers affected. For example, Washington Mutual alone generated income of $1 billion in one year from its bounce loan program.88

    D. Car Financing Abuses
    Abuses in the sales and financing of new and used cars are well known. They include: odometer tampering, lemon car laundering, sale of wrecked or stolen cars; misrepresentations regarding prior ownership and condition of the cars; yo yo sales techniques; and burying credit costs in inflated sales prices.89 Car dealers are the main culprits involved in these types of scams.

    However, bank preemption aids and abets shady dealer practices when the dealers sell their loans to banks. The OCC determined that the car dealers are exempt from certain state laws when they are acting as agents of national banks in the financing of car purchases.90

    In a second situation, banks directly participate in interest rate mark-up practices that violate the Equal Credit Opportunity Act, according to several lawsuits filed by consumers against both the car manufacture financing arms and against banks.91 These cases contend that the defendants maintain policies that permit car dealers to "mark-up" the finance rates on loans based on subjective criteria unrelated to creditworthiness. These policies have a disparate impact on African-American and Hispanic customers so that they pay more for credit than similarly situated White consumers, according to expert testimony presented.92 One court recently agreed with the consumers after a full trial.93 The cases against Bank of America, Bank One, Firstar, and U.S. Bancorp are in the process of being settled.94
II. The Current Landscape of State-Chartered Bank Preemption and the Limits of FDIC Authority
State banks are created by and operate primarily under the laws of their home state, with some exceptions. These banking powers are enumerated in state law and most state banking codes also include some type of "incidental" power provision.95 An incidental power provision expands upon the enumerated powers by permitting banks to engage in activities that are related to the express powers.96 Further, some states grant their banks, the same powers given to national banks, through state "parity" acts.97 The primary regulator of state-chartered banks is the state bank supervisor.

A federal regulatory overlay exists due to the federal insurance that state banks typically purchase. If a state-chartered bank is a member of the Federal Reserve System, it is subject to some federal oversight by the Federal Reserve Board.98 On the other hand, the Federal Deposit Insurance Corporation (FDIC) retains certain federal authority over insured state-chartered nonmember banks and regularly examines these institutions.99 The FDIC's oversight centers upon safety and soundness concerns, bank conversions, the insurance fund and its solvency, and other administrative matters.100

In 1980, Congress created parity between federally insured state-chartered banks (including state savings banks) and national banks in one area. Congress extended the most favored lender status granted to national banks under the National Bank Act to these state institutions.101

As a result of receiving the mantle of the most favored lender, a federally insured state-chartered financial institution may charge the greater of: (1) one percent above the discount rate on ninety-day commercial paper in effect at the Federal Reserve bank in the district in which such state bank is located; or (2) the rate allowed by the laws of the state in which the state bank is located.102

The FDIC has issued several letters over the years in which it opines that section 521 of DIDA should be interpreted in the same manner as § 85 of the National Bank Act. For example, the agency defines "interest" in the same manner as does the Office of the Comptroller of the Currency for national banks.103 The FDIC interprets the scope of section 521 of DIDA to include the preemption of common law usury rate restrictions in addition to the preemption of statutory and constitutional restrictions.104 Finally, the FDIC adopted OCC Letter No. 822, defining the "location" of the bank for exportation purposes.105

Beyond most favored lender interest rate preemption and the exportation rights that accompany it, the ability of federally insured state-chartered banks to preempt other aspects of their home or host state law is limited. As noted above, state-chartered banks are first and foremost creatures of state law.106 The instances where federal law creates preemption rights related to consumer transactions are few in number and limited in scope.

First, state-chartered banks may make adjustable rate mortgage loans in accordance with regulations issued by the OCC, regardless of any applicable state law restrictions. Congress extended this type of preemption to state banks in the Alternative Mortgage Transactions Parity Act (AMTPA).107 Second, DIDA permits federally insured depository lenders to charge any interest rate or any amount of points and fees that relate to the annual percentage rate in transactions involving residential first lien mortgage loans, unless the state opted out.108 Third, Congress expanded the ability of state-chartered banks to preempt state laws when the bank branches into another state. The Interstate Banking and Branching Efficiency Act of 1994, as amended in 1997 (also known as the Riegle-Neal Act) provides that the laws of the host state applies to branches of state-chartered banks to the extent those state laws apply to national bank branches.109

If the host state law does not apply to the branch, then the bank's home state law applies.110 The preemption of state law permitted under this act does not apply outside of the interstate branching context. Further, Congress did not intend to weaken the authority of states to protect the interests of consumers.111 The scope of Congress' concern that consumer protections apply to in-state branches of out-of-state banks to the same extent as to branches of banks chartered by those states is evident in the Conference Report.112 The Reigle-Neal Act and the 1997 amendments will be discussed more fully below.

Fourth, Congress created loan-pricing parity among state and local banks in the limited number of states (perhaps only Arkansas) with constitutional usury provisions limiting interest rates to under a certain percentage. 113 Fifth, the Gramm-Leach-Bliley Act (GLB) opens the doors to financial institutions to engage in insurance and securities activities previously restricted or prohibited, but relevant to consumer transactions. Banks can now sell, solicit, and crossmarket credit insurance.114 Sixth, certain federal consumer protections laws apply to "creditors" broadly defined.115 As a general rule, these laws preempt "inconsistent" state laws.

To summarize, state law generally applies to the activities of state banks related to consumer transactions except in the limited circumstances outlined above. Even industry representatives agree that: "FDIC-insured state-chartered banks must comply with state laws regarding licensing and other loan related restrictions as well as general state laws and consumer protection laws in each state in which they do business."116

Given the federal statutory frameword, the FDIC simply does not have the authority to create the comparability that the Roundtable is seeking. The FDIC is not the primary regulator of state banks; state banking commissioners are the primary regulators. Congress did not grant the FDIC visitorial control over state banks, in contrast to the authority it granted to the OCC over national banks.117

Having set the federal and state stages upon which state-chartered banks and the FDIC operates, we now turn to a more focused dissection of the laws relied upon by the Financial Services Roundtable (hereafter "Roundtable").

III. The 1997 Amendment to the Riegle-Neal Act Does Not Provide a Platform To Launch Preemption Beyond the Interstate Context
The Riegle-Neal amendments of 1997 simply put state-chartered banks on par with national banks when the state-chartered bank branches into another state118. Riegle-Neal has nothing to do with the preemption of state law outside of the branching context. Significantly, the provision of the Act cited (but not quoted) by the Roundtable expressly applies the law of the host state to the business of branches except in certain circumstances. Section 1831a(j) states:

The laws of the 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.119

In contrast to the Roundtable's arguments, the plain language of this provision accomplishes several goals. First, it applies only in the interstate branching context. Second, the section speaks in the affirmative regarding the broad application of host state law. Third, Congress highlighted certain state laws of the host state that apply to a branch. Fourth, the provision identifies the circumstances under which the host state law may not apply, i.e., the parity clause. Fifth, section 1813a(j) applies the law of the home state only to the extent that the host state's law does not apply due to the operation of this section.

In the course of enacting the Riegle-Neal Act, Congress instructed the Office of the Comptroller of the Currency (OCC) and courts to avoid finding conflicts between federal and state law where possible.120 Though the Act as a whole expanded bank powers by permitting both state and national banks to establish branches and sister banks across state lines, the conference report accompanying the Act stated that Congress did not intend to weaken a state's authority to protect the interests of its consumers or to change the substantive theories of preemption that existed in law at that time.121 The conference report directly instructed the Comptroller to refrain from concluding that a state law is preempted unless "the legal basis is compelling and the Federal policy interest is clear."122

The Roundtable's reliance upon the Riegle-Neal Act to support its request that the FDIC extend to state banks the same preemption rights available to national banks beyond the interstate branching context is completely misplaced. There are no "gaps" in the Riegle-Neal Act that need to be filled. Indeed, the title which Congress gave to the Act says it all: "The Interstate Banking and Branching Efficiency Act." Congress did not and never intended to create broad parity between state and national banks in this Act. The Roundtable, in essence, is asking the FDIC to create a whole new preemption regime for state banks, in spite of (and not due to) the current state of federal law.

IV. The Gramm-Leach-Bliley Act Only Applies to Activities Permitted by Its Terms and Creates No General Preemption Powers for Depository Institutions
Again, the Roundtable uses wishful analysis in its Petition to blow the GLB Act into something Congress never intended in its attempt to create clothes that the emperor never had. Even a quick reading of section 6701, the provision upon which the Roundtable relies, makes clear the limited nature of Congressional concern.

First, the section GLB Act exists in the portion of the Act related to permissible insurance activities. Section 6701(d)(1) prevents states from preventing or restricting banks and their affiliates from engaging in any activity authorized or permitted by this Act. The GLB Act does not address the fundamental powers or preemption rights of state banks generally. Consequently, this section does not grant new powers to depositories beyond the insurance or securities context.

Second, section 6701(d)(2) refers only to insurance sales. Preemption discussed therein is expressly limited to insurance sales. Similarly, section 6701(d)(3) only addresses insurance activities other than sales and is irrelevant to the Roundtable's petition.

Finally, we come to section 6701(d)(4) which speaks to financial activities other than insurance.123 There, Congress made clear that state laws, regulations, orders, interpretation, or other actions shall not be preempted by the language in section 6701(d)(1) as long as the state law does not relate to or is adopted for the purpose of regulating insurance activities or securities investigations and enforcement and does not distinguish by its terms between depository institutions (and their affiliates) and other entities engaged in the same activity in a way that is adverse to the depository institution.124 The Roundtable fails to identify any state laws that fit this description in its petition. Indeed, it is fair to say that most, if not all, state laws relating or referring to consumer credit transactions apply equally to depository institutions and other types of lenders or treat depository institutions more favorably by exempting them from coverage.125

This subsection goes on to permit state regulation of depositories unless the state law as interpreted or applied has substantially more of an adverse effect on depositories than it does on non-depositories institutions.126 Again, the Roundtable points to not one specific state law that fits this description.

Section 6701(d)(4)(D)(iii) permits the state regulation of depositories unless the state law prevents the depository institution from engaging in an activity permitted by this Act or other federal law. By its terms, this provision does not provide new preemption rights for depositories. Instead, it affirms existing federal law. The Roundtable fails to identify any state laws that meet these criteria.

Finally, section 6701(d)(4)(D)(iv) acknowledges affiliations with depositories that are authorized by federal law. As with section 6701(d)(4)(D)(iii), this subsection does not grant new authority to depositories. It merely affirms the relationships permitted to depository institutions under existing federal law. Again, the Roundtable fails to identify any state laws that meet these criteria.

Reviewing section 6701as a whole and parsing out subsection 6701(d) in particular make clear that there is no support for the position of the Roundtable that the GLB Act creates new preemption rights to depository institutions, beyond insurance and security activities, to "operate across the country…under uniform rules and not…be subject to the individual state rules or actions that would disadvantage some or all depository institutions."127 Further, there is no whisper in the GLB Act to support any action by the FDIC to adopt preemption regulations like those adopted by the OCC and the Office of Thrift Supervision (OTS).

Significantly, even the OCC did not rely on the GLB Act to bolster its authority to promulgate the new preemption regulations in 2004. In fact, the agency mentioned the GLB Act twice to highlight examples where Congress specifically applied state law to depository institutions.128 If the GLB Act could be read to support its exercise of regulatory muscle, the OCC would have used it.

V. State Bank Operating Subsidiaries, Agents of the Banks, or Other Third Parties Are NOT Entitled to Preemption Rights
The FDIC poses several questions relating to whether the operating subsidiary of a state bank should be governed by the same law as its parent bank. The answer is no. The FDIC does not possess Congressional permission to extend preemption beyond state banks to operating subsidiaries or others. Congress has not granted such authority to operating subsidiaries of federal savings associations or national banks, though that did not stop the OTS and OCC.

The OTS was the first agency to grant preemption rights to operating subsidiaries of a depository institution in 1996.129 However, a careful review of the provisions of the HOLA and the Federal Deposit Insurance Act upon which the OTS relied to promulgate this regulation reveals that Congress did not expressly address this issue.130 In the Supplementary Information accompanying the regulation, the OTS simply relied upon its long-standing policy to treat the subsidiary in the same way as the parent federal savings association for purposes of preemption.131

In 2001, the OCC conferred national bank preemption rights upon national bank subsidiaries.132 Nowhere has Congress explicitly addressed the extension of national bank preemption to operating subsidiaries. The Comptroller did not argue this point in the Supplementary Information accompanying the regulation expanding preemption to these entities.133 Instead, he relied upon the OCC's longstanding approval of banks owning operating subsidiaries, Congress' more recent recognition of the role of financial subsidiaries vis-a-vis banks in the Gramm-Leach-Bliley Act,134 and the fact that the Office of Thrift Supervision extended preemption rights to operating subsidiaries of federal savings associations in 1996, a "me too" rationale.135 However, the OCC rule is being challenged in litigation and at least cases are now on appeal to the federal Circuit Courts of Appeal.136

VI. Practical Reasons Why the FDIC Should NOT Take the Bait Offeredby the Roundtable and the Destructive Consequences of Doing So
The current state of preemption rights claimed by national banks is due in large part to administrative, not legislative, fiat. The OCC has swollen the preemption playing field for national banks and their subsidiaries without Congressional permission. The FDIC should not snatch the bait presented by the Roundtable to say "me too."

The implications of the Roundtable's request are frightening for state banks chartered in most states and certainly for consumers. First, a significant portion of the home state law of states like Delaware and South Dakota could apply in all states and the District of Columbia. In effect, the state law of states willing to race to the bottom and completely deregulate consumer protections would become the federal law governing state banks. In the absence of state law on a subject, the federal law would become what the OCC says it is for national banks. If the Riegle-Neal Act is the basis of any regulation issued by the FDIC, that Act ties the extent of host state law preemption for state banks to that permitted national banks.

This scenario is devastating for several reasons. First, the FDIC would weaken the dual banking system further by enhancing the power of the OCC to determine state bank preemption beyond the interstate branching context. Second, the OCC has not nor can it create federal law in areas where state laws are silent or where the OCC claims state laws are preempted. For example, in its regulations, the OCC lists the types of state laws that are not preempted if they do no more than incidentally affect the business of banking.137 Noticeably absent from this list are foreclosure laws and redemption or cure laws. Congress never gave the OCC the power to pass these types of laws for national banks or to fill in the gaps of state laws regarding consumer protection.138 Most disturbing is the fact that when the OCC preempts state law, the federal law outside of the usury context becomes what the banks decide it should be by crafting its loans to include whatever terms or conditions they desire, unless expressly prohibited by the OCC.139 As a result, we see the abuses outlined above.

Let us assume, instead, that the FDIC issues regulations along the lines requested by the Roundtable and makes itself the primary regulator of state banks, a position it does not now enjoy. The FDIC would then face some of the issues confronting the OCC under the scenario just discussed. Could the FDIC decide state bank preemption without tagging it to national bank preemption in order to maintain its primacy? No, the FDIC would be stuck operating in the shadow of the OCC. Is the FDIC prepared to become the federal consumer protection agency for state banks, assuming it has the authority to do so? That is very unlikely. The OCC itself cannot protect consumers effectively.140 How would the FDIC propose to fulfill this function if state consumer protection laws no longer apply to state banks? The FDIC simply does not have the authority to create consumer protection laws if the home state law is deficient. Nor does it have the resources to do the job.141

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? The answer is a resounding NO. As described in these 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.

Congress created the federal banking system and the overlay of administration of state-chartered banks through the Federal Deposit Insurance Act. Congress empowered the FDIC to act only as a secondary regulator of state banks. Congress chose to grant most favored lender status regarding interest to national banks, federal savings associations, and state banks. Congress permits banks to branch subject to host state law under certain circumstances. Congress has not condoned the whole sale preemption of state laws or the federalization of the laws of Delaware or South Dakota for any type of depository institution. The FDIC must operate within the framework of the system Congress has created to date. Only Congress legally can change it, not the banking agencies.

1The National Consumer Law Center, Inc. (NCLC) is a non-profit Massachusetts Corporation, founded in 1969, specializing in low-income consumer issues, with an emphasis on consumer credit. On a daily basis, NCLC provides legal and technical consulting and assistance on consumer law issues to legal services, government, and private attorneys representing low-income consumers across the country. NCLC publishes a series of sixteen practice treatises and annual supplements on consumer credit laws, including Truth In Lending, (5th ed. 2003) and Cost of Credit (2nd ed. 2000) and Repossessions and Foreclosures (5th ed. 2002) as well as bimonthly newsletters on a range of topics related to consumer credit issues and low-income consumers. NCLC attorneys has written and advocated extensively on all aspects of consumer law affecting low income people, conducted training for thousands of legal services and private attorneys on the law and litigation strategies to deal predatory lending and other consumer law problems, and provided extensive oral and written testimony to numerous Congressional committees on these topics. NCLC=s attorneys have been closely involved with the enactment of the all federal laws affecting consumer credit since the 1970s, and regularly provide extensive comments to the federal agencies on the regulations under these laws. These comments are written by Elizabeth Renuart.

2 70 Fed. Reg. 13413 (Mar. 21, 2005).

3 Marquette Nat’l Bank of Minn. v. First of Omaha Serv. Corp., 439 U.S. 299, 99 S. Ct. 540, 58 L. Ed. 2d 534 (1978).

4 It is worth noting that there was no interstate banking when the National Bank Act was passed.

5 South Dakota and Delaware, at the beginning of the explosive growth of the financial services industry around 1980, sought to attract that industry as part of their economic development strategy. They wanted to "provide [their] citizens with the jobs and benefits a large national credit card operation can provide (attracted by the ability to export limitless credit card rates to other states)," while, it should be noted, protecting their local banks from competition with the exporting banks. Indep. Cmty. Bankers’ Ass’n of S.D. v. Board of Governors, Federal Reserve Sys., 838 F.2d 969, 975 (8th Cir. 1988). Cf. Richard Eckman, Recent Usury Law Developments: The Delaware Consumer Credit Bank Act and Exporting Interest Under § 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980, 39 Bus. Law. 1251, 1264 (1984).

It worked, too. South Dakota’s tax revenue from banks went from $3.2 million in 1980 to almost $27.2 million in 1987, with the comparable figures for Delaware rising from $2.4 million to almost $40 million. The Economist, July 2, 1988, at 26.

6 Codified at 12 U.S.C. § 1831d.

7 Diane Ellis, The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and in the Personal Bankruptcy Rate, FDIC--Division of Insurance, Bank Trends, 98-05 (Mar. 1998), available at

8 Smiley v. Citibank (S.D.), Nat'l Assn., 517 U.S. 735, 116 S. Ct. 1730, 135 L. Ed. 2d 25 (1996). The OCC definition of interest is found in 12 C.F.R. § 7.4001(a).

9 For example, banks often charge all or many of the following at account opening and for various types of account activities: annual, cash advance, late payment, over-the-limit, credit-limit-increase, set-up, return-item, expedited payment, expedited delivery, replacement card, additional card, currency conversion, and other fees. See Federal Reserve Board brochure "Choosing a Credit Card," available at (visited March 4, 2005).

10 Federal Reserve Board Statistical Release G.19 (Mar. 2005), available at

11 See, e.g., Dean Baker, Dangerous Trends: The Growth of Debt in the U.S. Economy (Center for Economic and Policy Research (Sept., 2004), www.; Financial Markets Center, Flow of Funds Brief, June 10, 2004 (household debt as share of disposable income rose by 15.8% between 2001 and 2004, to "cross the 110% threshold in final quarter of 2003.)

12 Ana M. Aizcorbe, Arthur B. Kennickell, & Kevin B. Moore, Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances, Fed. Res. Bull. at 25 (Jan. 2003), available at - PDF 173k (PDF Help).

13 U.S. Census Bureau, Statistical Abstract of the United States: 2003 at 751, No. 1190: Credit Cards - Holders, Numbers, Spending, and Debt, 1990 and 2000, and Projects, 2005, available at - PDF 329k (PDF Help); U.S. Bureau of the Census, Projections of the Number of Households and Families in the United States: 1995 to 2010 at 9 (1996), available at - PDF 297k (PDF Help) (projecting 108.8 million households by 2005).

14 Elizabeth Warren & Amelia Warren Tyagi, The Two-Income Trap at 130 (Basic Books 2003).

15 Tamara Draut & Javier Silva, Borrowing to Make Ends Meet; The Growth of Credit Card Debt in the 1990s (Sept. 18, 2003), available at - PDF 732k (PDF Help).

16 Federal Reserve Board Statistical Release G.19 (Mar. 2005), available at

17 Id.

18 Patrick McGeehan, Plastic Trap—Debt That Binds: Soaring Interest Compounds Credit Card Pain for Millions, N.Y. Times, Nov. 21, 2004.

19 Heather G. McGee & Tamara Draut, Retiring in the Red: The Growth of Debt Among Older Americans (Jan. 19, 2004), available at

20 Tamara Draut & Javier Silva, The Growth of Debt Among Young Americans (Oct. 2004), available at

21 Tamara Draut & Heather G. McGee, Retiring in the Red: The Growth of Debt Among Older Americans (Jan. 19, 2004), available at

22 The number of personal bankruptcy filings has increased steadily since TILA was enacted in 1968, reaching 1,624,272 in 2004. Administrative Office of the U.S. Courts News Release, Number of Bankruptcy Cases Filed in Federal Courts Down Less Than One Percent (Aug. 27, 2004), available at - PDF 329k (PDF Help). Personal bankruptcy filings declined by a small number, 13,111, between 2003 and 2004

23 See Elizabeth Warren & Amelia Warren Tyagi, The Two-Income Trap (Basic Books 2003).

24 Board of Governors of the Federal Reserve System, The Profitability of Credit Card Operations of Depository Institutions (June 2004) at 2, available at - PDF 108k (PDF Help). While the profitability of the credit card industry as a whole has fluctuated somewhat over these years, this appears to be largely due to the changeability of the group of banks included in the sample. Id. at 2.

23 3.

26, Late Fees (Jan. 28, 2005), at

27, Overlimit Fees (Feb. 2, 2005), at

28, Fee Party (Jan. 13, 2005), at

29 Id.

30 Id. If merchant-paid fees are combined with consumer-paid fees, the total fee income is estimated at $50.8 billion.

31, Card Profits 04, (Jan. 24, 2005), at

32 See Complaint, State of Minnesota v. Capital One Bank, available at - PDF 101k (PDF Help) ; Kathleen Day & Caroline Mayer, Credit Card Fees Bury Debtors, Washington Post, Mar. 7, 2005, at A1; Patrick McGeehan, Plastic Trap—Debt That Binds: Soaring Interest Compounds Credit Card Pain for Millions, N.Y. Times, Nov. 21, 2004 (the New York Times article was the companion piece to the PBS Frontline television episode The Secret History of the Credit Card, (PBS Frontline broadcast, Nov. 23, 2004), which focused on among other issues, universal default and change-in-terms.

33 Rossman v. Fleet Bank (R.I.) Nat'l. Assn., 280 F.3d 384 (3d Cir. 2002); Roberts v. Fleet Bank (R.I), Nat'l Assn, 342 F.3d 260 (3rd Cir. 2003); Gaynoe v. First Union Direct Bank, Nat'l Assn., 571 S.E.2d 24 (N.C. Ct. App. 2002); Consent Order, In re Direct Merchants Credit Card Bank, No. 2001-24 (Dept. of Treasury, Office of the Comptroller of the Currency, May 3, 2001), available at - PDF 79k (PDF Help). For an interesting analysis of the deceptiveness of Capital One's heavy promotion including its prolific TV ad campaign, see Complaint, State of Minnesota v. Capital One Bank, available at - PDF 101k (PDF Help).

34 Johnson v. Chase Manhattan Bank USA, 784 N.Y.S.2d 921 (N.Y. Sup. Ct. 2004); Broder v. MBNA Corp., 722 N.Y.S.2d 524 (N.Y. Sup. Ct. 2001) (promotional material ambiguously disclosed in small print footnote that card issuer "may" allocate payments to promotional balances first).

35 See, e.g., Lawrence v. Household Bank, 343 F.Supp.2d 1101 (M.D. Ala. 2004) (9 AM cut-off for payment posting); Landreneau v. Fleet Financial Group, 197 F. Supp.2d 551 (M.D. La. 2002) (9 AM cut-off for payment posting); Schwartz v. Citibank (S.D.), Nat'l Assn, Clearinghouse No. 53,023, Case No. 00-00078 (JWJX) (C.D. Cal. May 5, 2000) (class action settlement notice in case challenging 10 AM cut-off). At one point, MBNA supposedly set the cut-off time as early as 6:00 AM. Kevin Hoffman, Lerner's Legacy – MBNA's Customers Wouldn't Write Such Flattering Obituaries, Cleveland Scene, Dec. 18, 2002, available at

36 Complaint, State of Minnesota v. Capital One Bank, available at - PDF 101k (PDF Help).

37 See, e.g., Order Granting Motion for Temporary Injunction, State of Minnesota v. Cross County Bank, No. MC 03-5549 (Minn. Dist. Ct. 4th Dist. Nov. 10, 2004).

38 According to documents produced by the National Arbitration Forum itself, the consumer prevailed in just 87 out of 19,705 arbitrations conducted by NAF for First USA Bank. Thus, the credit card company prevailed a disturbing 99.56% of the time. See also National Consumer Law Center & Trial Lawyers for Public Justice, New Trap Door for Consumers: Card Issuers Use Rubber-Stamp Arbitration to Rush Debts Into Default Judgments (Feb. 27, 2005), available at - PDF 1000k (PDF Help).

39 See Federal Financial Institutions Examination Council, Credit Card Lending Account Management and Loss Allowance Guidance (Jan. 2003), available at, - PDF 45k (PDF Help) (these agencies urge credit card banks to consider repayment ability, not just a FICO score, when granting new credit).

40 Kathleen Day & Caroline Mayer, Credit Card Fees Bury Debtors, Washington Post, Mar. 7, 2005, at A1; Linda Sherry, Annual Credit Card Survey 2004, Consumer Action (Spring 2004), available at

41 Available at

42 The interest rate "caps" are the higher of 1) the interest rate allowed lenders in the state where the bank is located or 2) 1% above the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the district where the bank is located. 12 U.S.C. § 85.

4312 U.S.C. § 1463(g).

44 For a discussion of the history of usury and the forces that pushed the states to deregulate to a certain extent, see Margot Saunders & Alys Cohen, Federal Regulation of Consumer Credit: The Cause or the Cure for Predatory Lending?, Joint Center for Housing Studies, Harvard University BABC 04-21 (Mar. 2004), available at - PDF 179k (PDF Help).

45 Marquette Nat'l Bank of Minn. v. First of Omaha Serv. Corp., 439 U.S. 299, 99 S. Ct. 540, 58 L. Ed. 2d 534 (1978).

46 Pub. L. No. 960221, 94 Stat. 161 (1980), codified throughout Title 12 of the U.S. Code.

47 12 U.S.C. §3801.

48 DIDMCA also extends certain protections of federally chartered banks under the National Bank Act to any federally insured commercial bank, savings and loan, or credit union.

49 Indeed, the laws of 35 states and the District of Columbia limiting or prohibiting the charging of prepayment penalties on mortgages were preempted explicitly by the 1996 OTS regulation pursuant to AMTPA, 12 C.F.R. § 560.34, for loans made by finance companies and other state housing creditors. After advocates convinced the OTS that this regulation was facilitating predatory lending and the bleeding of home equity, OTS rescinded the rule, effective June 2003. 67 Fed. Reg. 60542 (Sept. 26, 2002). See also National Home Equity Mortgage Association v. Office of Thrift Supervision, 271 F.Supp.2d 264 (D.D.C. 2003).

50 The legislative history makes clear that Congress was concerned about the solvency of the savings and loan industry, although concerns about the viability of consumer lending in such an interest rate environment also seem to have played a role. See Cathy L. Mansfield, The Road to Subprime "Hel" was Paved with Good CongressionalIntentions: Usury Deregulation and the Subprime Home Equity Market, 51 S.C.L. Rev. 473, 495 (2000).

51 Kathleen Keest & Elizabeth Renuart, The Cost of Credit: Regulation and Legal Challenges § 3.6.5, 3.9 (2d ed. 2004 Supp.).

52 OCC, Financial Performance of National Banks, 23 Quarterly J. 180, 191 (March 2004), available at - PDF 554k (PDF Help); OTS, Thrift Industry Highlights Fourth Quarter 2003, available at

53 For a discussion of this history and the scope of preemption accorded to financial institutions, see Kathleen Keest & Elizabeth Renuart, The Cost of Credit: Regulation and Legal Challenges §§ 3.4, 3.5 (2d ed. 2004 Supp.).

54 12 C.F.R. § 560.2 (effective Jan. 1, 1997); see also Richard J. Hillman & Lynn H. Gibson, Role of the Office of Thrift Supervision and Office of the Comptroller of the Currency in the Preemption of State Law, General Accounting Office, OGC-00-51R (Feb. 7, 2000) (OTS claims that HOLA "occupies the field," a broader form of preemption than "conflict" preemption).
Until 1996, the analysis applied by the courts to determine if a state law was preempted by the Home Owners Loan Act or an OTS regulation was the same as that used when national banks were involved, that is, "conflict" preemption analysis. Fidelity Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 159 n.14, 102 S. Ct. 3014, 73 L. Ed. 2d 664 (1982) ("Because we find an actual conflict between federal and state law, we need not decide whether the HOLA or the Board's regulations occupy the field of due-on-sale or the entire field of federal savings and loan regulation. . . ."; interestingly, only one of the justices in the 6-2 majority is currently on the bench, and she (O'Connor, J.) filed a concurrence in which she stated: "[I]t is clear that HOLA does not permit the Board to pre-empt the application of all state and local laws to such institutions"; on the other hand, the two dissenters are still on the Court (Rehnquist, C.J. & Stevens, J.).

55 12 C.F.R. §§ 7.4007 (deposit-taking), 7.4008 (non-mortgage lending), 7.4009 (business of banking generally), 34.3 (mortgage lending), 34.4 (mortgage lending). See 69 Fed. Reg. 1904 (Jan. 13, 2004).

56 12 C.F.R. § 7.4006 (national banks); 12 C.F.R. § 559.3(h), (n)(savings associations).

57 66 Fed. Reg. 28593 (May 23, 2001)(OCC preemption determination regarding car dealers operating as agents for national banks); OTS Letter P-2004-7 (Oct. 25, 2004)(letter regarding agents of savings associations and the preemption of state licensing laws).

58 OTS Letters (Sept. 2, 2003), (July 22, 2003), (Jan. 1, 2003), relating to the laws of New Mexico, New Jersey, New York, and Georgia; OCC Determination, 68 Fed. Reg. 46264 (Aug. 5, 2003), relating to the law of Georgia.

59 Kathleen Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 Tex. L. Rev. 1255 (2002).

60 Much of the information in this section is derived from Elizabeth Renuart, An Overview of the Predatory Lending Process, 15 Housing Pol'y Debate 467, 474-487 (2004), available at - PDF 312k (PDF Help.

61 See Howard Lax, Michael Manti, Paul Raca & Peter Zorn, Subprime Lending: An Investigation of Economic Efficiency, 15 Housing Pol'y Debate 533 (2004); Alan M. White, Risk-Based Mortgage Pricing: Present and Future Research, 15 Housing Pol'y Debate 503, 512-518 (2004).

62 Elizabeth Renuart, An Overview of the Predatory Lending Process, 15 Housing Pol'y Debate 467, 475 (2004)(and citations contained therein), available at - PDF 312k (PDF Help.

63 Freddie Mac, Special Report on Automated Underwriting (1996), available at

64 See Consesco Fin. Serv. Corp. v. North Am. Mortgage Co., 381 F.3d 811, 814-815 (8th Cir. 2004)(describes how Conseco conducted its outreach and that some of its employees worked on commission); Testimony of Thomas J. Miller on Protecting Homeowners: Preventing Abusive Lending While Preserving Access to Credit, U.S. House Subcommittee on Financial Institutions and Consumer Credit and the Subcommittee on Housing and Community Opportunity (Nov. 5, 2003), available at - PDF 228k (PDF Help.

65 See Jim Campen, Borrowing Trouble? V: Subprime Mortgage Lending in Greater Boston, 2000-2003 (Mass. Community & Banking Council jan. 2005), available at; Paul S. Calem, Jonathan E. Hershaff & Susan M. Wachter, Neighborhood Patterns of Subprime Lending: Evidence from Disparate Cities, 15 Housing Pol'y Debate 603 (2004) (minority status is significantly related to subprime borrowing in seven cities); Calvin Bradford, Center for Community Change, Risk or Race? Racial Disparities and the Subprime Refinance Market (May 2002)(significant racial disparities in subprime lending which increase as income increases; high concentrations of subprime lending and racial disparities exist in all regions throughout the United States and in metropolitan areas of all sizes); Ken Zimmerman, Elvin Wyly & Hilary Btein, N.J. Inst. for Social Justice, Predatory Lending in New Jersey: The Rising Threat to Low-Income Homeowners 5, 6 (Feb. 2002), available at - PDF 788k (PDF Help) (New Jersey African-Americans are 2.5 times more likely than whites to be provided subprime loans); Ira Goldstein, Predatory Lending: An Approach to Identify and Understand Predatory Lending, The Reinvestment Fund (2002) (study shows that areas within the City of Philadelphia with a higher potential vulnerability to predatory lending tended to have greater concentrations of foreclosure sales; areas that are predominately African-American and/or Latino also tended to have higher concentrations of foreclosure sales and were more vulnerable to predatory lending); Kevin Stein & Margaret Libby, Stolen Wealth: Inequities in California's Subprime Mortgage Market, California Reinvestment Committee at 41, 47, 50 (Dec. 2001) (25% of the surveyed borrowers took out loans from a subsidiary or affiliate of a regulated financial institution, yet none were referred to the prime lender for lower-cost loans; 60% of all surveyed homeowners thought they had good or excellent credit; about 62% of the participants were people of color; and about 45% of respondents were age 55 or older); HUD, Unequal Burden: Income and Racial Disparities in Subprime Lending in America (Apr. 2000) (report includes data from studies conducted in 5 cities, Atlanta, Baltimore, Chicago, Los Angeles, and New York; key findings show that: (1) from 1993/-/1998, the number of subprime refinancing loans increased ten-fold; (2) subprime loans are more than three times likely in low-income neighborhoods than in high-income neighborhoods; (3) subprime loans are five time more likely in black neighborhoods than in white neighborhoods; (4) homeowners in high-income black areas are twice as likely as homeowners in low-income white areas to have subprime loans; Debbie Gruenstein and Christopher E. Herbert, Analyzing Trends in Subprime Originations and Foreclosures: A Case Study of the Boston Metro Area, Abt Associates, Inc. (Sept. 2000); Daniel Immergluck and Marti Wiles, Two Steps Back: The Dual Mortgage Market, Predatory Lending, and the Undoing of Community Development (Woodstock Institute, Nov. 1999)(data from Chicago shows that mortgage refinancing by subprime lenders occured predominately in African-American neighborhoods; refinance lending by subprime lenders in African-American neighborhoods grew by almost 30 times during the period 1993/-/1998, much faster than in white neighborhoods (only 2.5 times)).

66 Kevin Stein & Margaret Libby, Stolen Wealth: Inequities in California's Subprime Mortgage Market, California Reinvestment Committee at 41, 47, 50 (Dec. 2001)(in a study of subprime lending in four cities in California, the authors reported that 25% of the surveyed borrowers took out loans from a subsidiary or affiliate of a regulated financial institution, yet none were referred to the prime lender for lower-cost loans; 60% of all surveyed homeowners thought they had good or excellent credit).

67 Elizabeth Renuart, An Overview of the Predatory Lending Process, 15 Housing Pol'y Debate 467, 479 (2004). The source relied upon to create Figure 1 in this article was the National Delinquency Survey of the Mortgage Bankers Association of America.

68 Roberto G. Quercia, Michael A. Stegman & Walter R. Davis, The Impact of Predatory Loan Terms on Subprime Foreclosures: The Special Case of Prepayment Penalties and Balloon Payments (Kenan Institute for Private Enterprise, University of North Carolina Jan. 25, 2005), available at - PDF 289k (PDF Help). (the differential is about 20% higher for loans with prepayment penalties and 50% higher for loans with balloon payments).

69 Daniel Immergluck & Geoff Smith, Risky Business---An Econometric Analysis of the Relationship Between Subprime Lending and Neighborhood Foreclosures (Woodstock Institute 2004), available at - PDF 5000k (PDF Help).

70 Elizabeth Renuart, An Overview of the Predatory Lending Process, 15 Housing Pol'y Debate 467, 476 (2004)(and studies discussed therein).

71 Id. at 479-487 (and references contained therein); Kathleen Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 Tex. L. Rev. 1255, 1259-1270 (2002); U.S. Departments of Housing and Urban Development and Treasury, Joint Recommendations to Curb Predatory Mortgage Lending (2000), available at - PDF 689k (PDF Help).

72 Comments of the National Consumer Law Center, et al. to the Office of the Comptroller of the Currency regarding Banking Activities and Operations, Docket No. 03-16 (Oct. 6, 2003), available at

73 The listed lenders are those who have been the subject of federal and/or state enforcement actions, numerous individual lawsuits or class actions, and/or of newspaper articles or other press.

74 For the most comprehensive information about the growth and characteristics of this industry, see Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and its Challenge to Current Thinking About the Socio-Economic Role of Usury Law in Today's Society, 51 S.C. L. Rev. 589 (2000); Jean Ann Fox & Anna Petrini, Internet Payday Lending: How High-Priced Lenders Use the Internet to Mire Borrowers in Debt and Evade State Consumer Protections (Consumer Federation of America Nov. 30, 2004); Uriah King & Keith Ernst, Quantifying the Cost of Predatory Payday Lending, (Center for Responsible Lending Dec. 2003), available at; Edmund Mierzwinski & Jean Ann Fox, U.S. PIRG & Consumer Federation of America, Show Me the Money! A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures (Feb. 2000).

75 Jerry L. Robinson, Stephens, Inc., Update on the Payday Loan Industry: Observations on Recent Industry Developments (Sept. 26, 2003). Stephens, Inc. is a Little Rock, Arkansas investment firm; its website is located at

76 Stephens, Inc., Non-Bank Financial Services Industry Notes (Mar. 23, 2000); Stephens, Inc., Developing "Payday Advance" Business (Sept. 28, 1999); Bob Van Voris, Payday Loans Under Scrutiny, The Nat'l L.J., May 17, 1999, B1 at 4.

77 Edmund Mierzwinski & Jean Ann Fox, U.S. PIRG & Consumer Federation of America, Show Me the Money! A Survey of Payday Lenders and Review of Payday Lender Lobbying in State Legislatures (Feb. 2000).

78 Steven M. Graves & Christopher L. Peterson, Predatory Lending and the Military: The Law and Geography of "Payday" Loans in Military Towns (March 29, 2005), available at; see also Steve Tripoli & Amy Mix, National Consumer Law Center, In Harm's Way--At Home: Consumer Scams and the Direct Targeting of America's Military and Veterans (May 2003), available at (look under "Special Reports"); see also Mark Muecke, Consumers Union, Payday Lenders Burden Working Families and the U.S. Armed Forces 2 (July 2003).

79 Uriah King, Wei Li, Delvin Davis & Keith Ernst, Race Matters: The Concentration of Payday Lenders in African-American Neighborhoods in North Carolina (Center for Responsible Lending March 22, 2005), available at (authors discovered that African-American neighborhoods have three times as many stores per capita as white neighborhoods; the disparity grows when the proportion of African-Americans in a neighborhood increases; the disparity is not affected when the authors controlled for income, homeownership, poverty, unemployment rate, urban location, age, education, share of households with children, and gender characteristics of the neighborhoods).

80 Jean Ann Fox, Consumer Federation of America, Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank Charters to Peddle Usury (Mar. 2004); Jean Ann Fox & Edmund Mierzwinski, Consumer Federation of America & U.S. PIRG, Rent-a-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer Protections (Nov. 2001).

81 American Banker (Mar. 31, 2004)(list of the community banks with the highest rates of return).

82 For the first comprehensive report about this industry, see Amanda Quester & Jean Ann Fox, Car Title Lending: Driving Borrowers to Financial Ruin, Center for Responsible Lending and Consumer Federation of America (Apr. 14, 2005), available at - PDF 284k (PDF Help).

83 Id. at 5.

84 Id. at 10.

85 See Comments of the National Consumer Law Center, et al., Comments to the Federal Reserve Board's Proposed Revisions to Official Staff Commentary to Regulation Z Truth In Lending regarding Open End Credit and HOEPA Triggers and Solicitation for Comments on Bounce Protection Products, Docket No. R-1136 (Jan. 27, 2003), available at

86 Washington Department of Financial Institutions, Overdraft Protection Programs, Sept. 19, 2003 at p. 4.

87 See Press Release, Consumer Federation of America, et al., Federal Reserve Bank Overdraft Loan Proposals Fail to Protect Consumers: National Groups Call for Truth in Bounce Loans (Aug. 6, 2004), available at - PDF 46k (PDF Help).

88 Alex Berenson, "Some Banks Encourage Overdrafts, Reaping Profit," N.Y. Times, Jan. 22, 2003, at A1.

89 See discussion and examples in National Consumer Law Center, Automobile Fraud (2d Ed. 2003 & Supp.); National Consumer Law Center, Unfair and Deceptive Acts and Practices § 5.4 (6th ed. 2004).

90 66 Fed. Reg. 28593 (May 23, 2001).

91 See listing of these cases and their status at

92 Id.

93 See press articles compiled at


95 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, 202 (2003).

96 Christian A. Johnson, Wild Card Statutes, Parity, and National Banks—The Renascence of State Banking Powers, 26 Loy. U. Chi. L.J. 351, 356 (1995).

97 Id. at 206. Under state parity acts, state-chartered banks may be allowed to operate as national bank "copycats," in their home state. States cannot confer exportation rights beyond their borders.

98 Patricia A. McCoy, Banking Law Manual § 2.05 (Lexis Pub. 2d ed. 2003).

99 12 U.S.C. § 1820(b)(2); § 521 of Pub. L. No. 96-221, tit. v, 94 Stat. 164 (1980).

100 See, e.g., 12 U.S.C. §§ 1814 (continuation of insurance), 1815 and 1816(insurance), 1817 (reporting requirements and assessments), 1818 (termination of insurance), 1819 (powers of the FDIC), 1820 (examinations), 1821, 1821a, 1823 (relating to the insurance fund), 1822 (FDIC as a receiver), 1824 (borrowing authority of the FDIC), 1825 (issuance of notes, debentures, etc. by the FDIC), 1827 (annual reports by the FDIC).

101 Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA), amending, 12 U.S.C. § 1831d(a)(state-chartered banks); 12 U.S.C. §§ 1463(g)(state savings banks); 1831(b)(definition of state savings association as including savings banks). At that time, Congress also granted federally insured or chartered savings associations and federally insured credit unions most favored lender status.

102 12 U.S.C. § 1831d(a).

103 FDIC General Counsel Opinion No. 10, 63 Fed. Reg. 19258 ( Apr. 17, 1998); FDIC Letter (July 8, 1992); FDIC Letter (Oct. 20, 1983). See also Harris v. Chase Manhattan Bank, N.A., 35 Cal. Rptr. 2d 733 (Cal. Ct. App. 1994).

104 FDIC Letter (July 12, 1992).

105 FDIC General Counsel Opinion No. 11, 63 Fed. Reg. 27282 (May 18, 1998).

106 Christian A. Johnson, Wild Card Statutes, Parity, and National Banks—The Renascence of State Banking Powers, 26 Loy. U. Chi. L.J. 351, 358 (1995).

107 12 U.S.C. § 3803; 12 C.F.R. §§ 34.20 to 34.24.

108 12 U.S.C. §§ 1735f-7a, 1735f-5(b).

109 12 U.S.C. § 1831a(j).

110 Id.

111 H.R. Conf. Rep. No. 103-651 at 53 (1994), reprinted in 1994 U.S.C.C.A.N. 2074.

112 H.R. Conf. Rep. No. 103-651 at 51 (1994), reprinted in 1994 U.S.C.C.A.N. 2072. See also 12 U.S.C. § 36(f)(1)(A).

113 Section 731 of the Gramm-Leach-Bliley Act of 1999, amending 12 U.S.C. § 1831u(f). Pub. L. No. 106-102, 113 Stat. 1338 (1999).

114 15 U.S.C. § 6701(d). Banks and their affiliates may preempt state laws where they conflict with the new powers granted by Congress in the Gramm-Leach-Bliley Act, 15 U.S.C. § 6701(d).

115 These federal laws include the Truth In Lending Act, the Equal Credit Opportunity Act, and the Real Estate Settlement Procedures Act.

116 Darrell L. Drecher and Elizabeth L. Anstaett, Common Misconceptions in Bank Interstate Credit Transactions, 56 Consumer Fin. L. Q. Rep. 281 (Summer/Fall 2002).

117 There is no provision similar to 12 U.S.C. § 484.

118 Riegle-Neal Act, 12 U.S.C. § 1831a(j).

119 12 U.S.C. § 1831a(j).

120 H.R. Rep. Conf. Rep. No. 103-651 at 53 (1994), reprinted in 1994 U.S.C.C.A.N. 2074.

121 Id at 53, 55, reprinted in 1994 U.S.C.C.A.N. 2074, 2076. The conference report went on: "This process is not intended to confer upon the agency any new authority to preempt or to determine preemptive Congressional intent in the [the area of consumer protection], or to change the substantive theories of preemption as set forth in existing law."

122 Id. at 55, reprinted in 1994 U.S.C.C.A.N. 2076.

123 15 U.S.C. § 6701(d)(4) states:
Financial activities other than insurance
No State statute, regulation, order, interpretation, or other action shall be preempted under paragraph (1) to the extent that--

    (A) it does not relate to, and is not issued and adopted, or enacted for the purpose of regulating, directly or indirectly, insurance sales, solicitations, or cross marketing activities covered under paragraph (2);
    (B) it does not relate to, and is not issued and adopted, or enacted for the purpose of regulating, directly or indirectly, the business of insurance activities other than sales, solicitations, or cross marketing activities, covered under paragraph (3);
    (C) it does not relate to securities investigations or enforcement actions referred to in subsection (f); and
    (D) it--
      (i) does not distinguish by its terms between depository institutions, and affiliates thereof, engaged in the activity at issue and other persons engaged in the same activity in a manner that is in any way adverse with respect to the conduct of the activity by any such depository institution or affiliate engaged in the activity at issue;
      (ii) as interpreted or applied, does not have, and will not have, an impact on depository institutions, or affiliates thereof, engaged in the activity at issue, or any person who has an association with any such depository institution or affiliate, that is substantially more adverse than its impact on other persons engaged in the same activity that are not depository institutions or affiliates thereof, or persons who do not have an association with any such depository institution or affiliate;
      (iii) does not effectively prevent a depository institution or affiliate thereof from engaging in activities authorized or permitted by this Act or any other provision of Federal law; and
      (iv) does not conflict with the intent of this Act generally to permit affiliations that are authorized or permitted by Federal law.

124 15 U.S.C. § 6701(d)(4)(D)(i).

125 See, e.g., National Consumer Law Center, Unfair and Deceptive Acts and Practices §§, (6th ed. 2004)(exemptions in state unfair and deceptive acts for depository institutions); Cal. Civ. Code § 2982.5(a)(exception from state auto financing statute for depository institutions and other "supervised" lenders).

126 15 U.S.C. § 6701(d)(4)(D)(ii).

127 Petition, 70 Fed. Reg. 13413, 13423 (Mar. 31, 2005).

128 See 69 Fed. Reg. 1904, 1909 n. 35, 1913 n. 64 (Jan. 13, 2004).

129 12 C.F.R. § 559.3(h), (n).

130 12 U.S.C. §§ 1462, 1463, 1464, 1662a, 1828.

131 See 61 Fed. Reg. 66,561, 66,563 (Dec. 18, 1996).

132 12 C.F.R. § 7.4006; 66 Fed. Reg. 34,784, 34,788-789 (July 2, 2001).

133 66 Fed. Reg. at 34,788.

134 Pub. L. No. 106-102, § 121, 113 Stat. 1338 (1999) (codified at 12 U.S.C. § 24a(g)(3)). This Act appears to acknowledge the ability of national banks to own financial subsidiaries when it defined what constitutes a financial subsidiary. However, the GLB Act does not grant preemption rights to subsidiaries.

135 66 Fed. Reg. at 34,788.

136 Wachovia Bank, N.A. v. Burke, 319 F. Supp. 2d 275 (D. Conn. 2004), appeal pending; Wachovia Bank, N.A. v. Watters, 334 F.Supp.2d 957 (W.D. Mich. 2004), appeal pending; Wells Fargo Bank, N.A. v. Boutris, 252 F. Supp. 2d 1065 (E.D. Cal.) (preliminary injunction granted to the operating subsidiary), further proceedings at 265 F. Supp. 2d 1162 (E.D. Cal. 2003) (summary judgment granted to the operating subsidiary), appeal pending; see also Arthur E. Wilmarth, Jr., The OCC's Preemption Rules Exceed the Agency's Authority and Present a Serious Threat to the Dual Banking System, 23 Ann. Rev. Banking & Fin. L. 225 (2004)(an excellent dissection of the National Bank Act and the lack of authority therein to extend preemption rights to operating subsidiaries); see also Elizabeth R. Schiltz, The Amazing, Elastic, Ever-Expanding Exportation Doctrine and Its Effects on Predatory Lending Regulations, 88 Minn. L. Rev. 518, 581/-/583, 621, 622 (2004) (discussing the phenomena of renting charters and co-branded credit cards; concluding that applying the exportation doctrine to non-bank lenders is not justified under principles of banking law).

137 12 C.F.R. §§ 7.4008(e), 34.4(b).

138 The OCC did state the obvious, that banks must comply with the Federal Trade Commission Act. 12 C.F.R. §§ 7.4008(c), 34.3(c). If these regulations are interpreted to mean that they displace all 51 state unfair and deceptive trade practices statutes, the private right of action these state law afford consumers will be lost. The FTC Act does not give the consumer the right to sue for violations of its provisions.

139 The OCC does not prohibit much. National banks cannot violate the FTC Act and cannot make a loan based on the value of the collateral without regard for ability to repay. 12 C.F.R. §§ 7.4008(b), 34.3(b).

140 The OCC created a customer assistance division that accepts consumer complaints and may attempt to resolve them informally. See OCC's website at, click on "Customer Complaints and Assistance." The website contains a significant disclaimer, however: "Many complaints stem from factual or contract disputes between the bank and the customer. Only a court of law can resolve those disputes and award damages. If your case involves such a dispute, we will suggest that you consult an attorney for assistance." (visited 2/16/05).
While the website states that in the past year, over $6 million in fees have been refunded to consumers, there is no detail provided regarding what kind of fees these were, or whether these are the same fees which are included in the self-laudatory explanation of the OCC's conclusion of its actions pursuant to its unfair and deceptive authority, referred to above. There is also a glaring lack of information regarding whether the consumers were satisfied with the resolution of the disputes, and whether the banks entered into binding stipulations designed to prevent a repeat of the illegal behavior.

141 Common sense dictates that it is unlikely that the FDIC or the OCC could make a noticeable dent in the attack on predatory lending - especially when compared to the resources to protect consumers that an OCC-type of preemption regulation vaporizes. Currently, there is a nationwide network of state banking departments, offices of attorneys general, consumer protection divisions, and others to investigate and prosecute consumer complaints. Most of the state consumer protection laws the FDIC would preempt have private rights of action that allow consumers to file cases in court. Indeed, many of the state anti-predatory lending laws specifically include provisions for attorneys' fees for the purpose of enabling more private prosecutors to facilitate enforcement of these acts. Every one of these state enforcement mechanisms would be eliminated.

Last Updated 07/19/2005

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