October 1, 2003

Office of Comptroller of the Currency
Attention Docket No. 03-16
Fax (202) 874-4448
www.regs.comments@occ.treas.gov

Re: Opposition to Proposed Rule on Preemption, Docket No. 03-16

Dear Comptroller of the Currency,

Consumers Union, the nonprofit publisher of Consumer Reports(1), strongly opposes the OCC proposed rule, Docket No. 03-16. This rule, if adopted and upheld by the courts, would exempt nationally chartered banks from nearly all state consumer protection statutes. Large and small national banks would escape state laws concerning real estate lending, other lending, deposit taking, and many other types of state laws. The loss of these state laws would harm U.S. consumers, make it likely that abuses against consumers in which banks participate would have to spread nationwide before such abuses could be outlawed, place national banks at an unfair advantage as compared to their non-bank competitors, and reduce innovation in consumer protection at the state level.

State Laws of Many Types Are at Risk

Nearly all state consumer protection laws, and many other state laws, are threatened by this proposed rule. If this rule becomes effective, these and other types of state laws would become inapplicable to national banks:

• Anti-predatory lending laws,

• State laws on checking accounts,

• Requirements on banks to assist identity theft victims,

• Restrictions on credit card company practices,

• State laws on when a bank can get a credit report and how it can use it,

• Requirements on abandoned and unused accounts,

• Mandates for bank disclosures in credit contracts and ads for credit,

• Restrictions on credit terms for any kind of loan,

• Loan to value ratios,

• Requirements on escrow and impound accounts, and

• Requirements to cancel private mortgage insurance.

Under this sweeping proposed rule, a state law would generally be applicable to a national bank only if the state law falls into one of a few narrow categories or if the OCC specifically decides that the particular state law has “only an incidental effect on the exercise of national bank powers or is otherwise consistent with [the purposes of the regulation].” Unless the OCC acts to authorize a specific state law, the only types of state laws that would ordinarily apply to a national bank are laws related to contracts, torts, criminal law, debt collection, property transfer, taxes and zoning. National banks could be exempted even from these types of laws unless the state law “only incidentally affects the exercise of national bank powers.” A national bank charter could literally become a “get out of jail free” card. National banks also could escape obligations of care and the contract rules that apply to all other businesses in a state.

An Exemption from State Consumer Protection Law for National Banks Would Gut State Consumer Protection Law

National banks dominate the U.S. banking marketplace, accounting for more than 55% of U.S. banking assets. The proposed rule would exempt from most state consumer protection laws seven of the ten U.S. financial institutions with assets over $100 billion. State consumer protection laws cannot be effective if they do not apply to national banks with such a large presence in the marketplace. State legislators will not wish to enact new consumer protections if those protections apply only to state-chartered banks and to non-banks, but not to their national bank competitors.

State Laws Are Needed to Promptly Address Emerging Consumer Issues

Consumers need state laws to prevent and solve consumer problems. State legislators generally have smaller districts than members of Congress do. State legislators are closer to the needs of their constituents than members of Congress. States often act sooner than Congress on new consumer problems. Unlike Congress, a state legislature may act before a harmful practice becomes entrenched nationwide. In a September 22, 2003 speech to the American Bankers Association in Hawaii, Comptroller John D. Hawke admitted that consumer protection activities “are virtually always responsive to real abuses.” He continued by pointing out that Congress moves slowly. Comptroller Hawke said, “It is generally quite unusual for Congress to move quickly on regulatory legislation – the Gramm-Leach-Bliley privacy provisions being a major exception. Most often they respond only when there is evidence of some persistent abuse in the marketplace over a long period of time.” U.S. consumers should not have to wait for a persistent, nationwide abuse by banks before a remedy or a preventative law can be passed and enforced by a state to protect them.

States can and do act more quickly than Congress, and states can and do respond to emerging practices that can harm consumers while those practices are still regional, before they spread nationwide. One illustration of how much quicker states act on consumer issues than Congress is in the area of identity theft. There are seven to ten million victims of identity theft in the U.S. every year, yet Congress did not take its first serious look at protections such as a security alert and a consumer block on credit report information generated by a thief until late in 2003. Congress’ pending action, as reflected in the House and Senate Fair Credit Reporting Act bills, adopts just some of the protections that have already been enacted in states such as California, Connecticut, Louisiana, Texas, and Virginia. See California Civil Code §§ 1785.11.1, 1785.11.2, 1785,16.1; Conn. SB 688 §9(d), (e), Conn. Gen. Stats. § 36a-699; IL Re. Stat. Ch. 505 § 2MM; LA Rev. Stat. §§ 9:3568B.1, 9:3568C, 9:3568D, 9:3571.1 (H)-(L); Tex. Bus. & Comm. Code §§ 20.01(7), 20.031, 20.034-039, 20.04; VA Code §§ 18.2-186.31:E.

State Law Has Long Been a Source of Federal Consumer Protections

This expansive rule on National Bank Act preemption would stymie the development of consumer protections for consumers of financial services. A key principle of federalism is the role of the states as laboratories for the development of law. New State Ice Co. v. Leibman, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting). California has played an important role as a laboratory for the development of protections for consumers of financial services. State and federal consumer protection laws can develop in tandem. After one or a few states legislate in an area, the record and the solutions developed in those states provide important information for Congress to use in deciding whether to adopt a national law, how to craft such a law, and whether or not any new national law should displace state law.

A few examples from California illustrate the important role of the states as a laboratory and a catalyst for federal consumer protections for bank customers. In 1986, California required that specific information be included in credit card solicitations with enactment of the then-titled Areias-Robbins Credit Card Full Disclosure Act of 1986. That statute required every credit card solicitation to contain a chart showing the interest rate, grace period, and annual fee. 1986 Cal. Stats., Ch. 1397, codified at California Civil Code § 1748.11. Two years later, Congress chose to adopt the same concept in the Federal Fair Credit and Charge Card Disclosure Act (FCCCDA), setting standards for credit card solicitations, applications and renewals. P. L. 100-583, 102 Stat. 2960 (Nov. 1, 1988), codified in part at 15 U.S.C. §§ 1637(c) and 1610(e). The implementing changes to federal Regulation Z included a model form for the federal disclosure box. 54 Fed. Reg. 13855, Appendix G.

The 1989 federal disclosure box is strikingly similar to the disclosure form required under the 1986 California law. The California statute required each credit card solicitation to include the information:

THE FOLLOWING INFORMATION IS PROVIDED PURSUANT TO THE
AREIAS-ROBBINS CREDIT CARD FULL DISCLOSURE ACT OF 1986:

INTEREST RATES, FEES, AND FREE-RIDE PERIOD FOR PURCHASES UNDER THIS CREDIT CARD ACCOUNT

ANNUAL PERCENTAGE RATE (1) VARIABLE RATE INDEX AND SPREAD (2) ANNUALIZED MEMBERSHIP OR PARTICIPATION FEE TRANSACTION FEE FREE-RIDE PERIOD (3)
         

California Civil Code § 1748.11.

The federal “Schumer Box” required by Congress in 1988 and promulgated by regulation in 1989 for credit card solicitations is markedly similar:

Annual percentage rate for purchases Variable rate information Grace period for repayment of the balance for purchases Method of computing the balance for purchases Annual fees Minimum finance charge Transaction fee for purchases
____% Your annual percentage rate may vary. The rate is determined by (explanation). [_days]
[Until___]
[Not less than _days]
[Between and _days on average]
[none]
  [Annual fee: $__per year]
[Membership fee: $__per year]
[(type of fee): $__per year]
[(type of fee): $___]
$__ [$___]

[__% of__]

Transaction fee for cash advances: [$__][__%of__]
Late payment fee: [$__][__%of___]
Over-the-credit-limit fee: $____


54 Fed. Reg. 13855 (April 6, 1989 Appendix G, form G-10(B)).

States also led the way in protecting financial services consumers from long holds on deposited checks. California enacted restrictions on the length of time a bank could hold funds deposited by a consumer in 1983; Congress followed in 1986. 1983 Cal. Stats. c. 1011, codified at California Financial Code § 866.5.

California’s 1983 funds availability statute required the California Superintendent of Banks, Savings and Loan Commissioner, and Commissioner of Corporations to issue regulations to define a reasonable time after which a consumer must be able to withdraw funds from an item deposited in the consumer’s account. 1983 Cal. Stat. Ch. 1011, § 2, codified at Cal. Fin. Code § 866.5. Congress followed a few years later with the federal Expedited Funds Availability Act of 1986, P. L. 100-86, Aug. 10, 1987, 101 Stat. 552, 635, codified at 12 U.S.C. § 4001.

As these examples show, state law is an important source of ideas for future federal consumer protections. As Justice Brandeis said in his dissent in New State Ice Co., “Denial of the right [of states] to experiment may be fraught with serious consequences to the Nation.” 285 U.S. at 311. A state law will not serve this purpose if states cannot apply their laws to national banks, who are big players in the marketplace for credit and banking services. State lawmakers simply won’t pass new consumer protection laws that do not apply to the largest players in the banking marketplace.

Significant State Consumer Protections Are At Risk

The extensive comments filed by the Privacy Rights Clearinghouse illustrate the variety of consumer protections that would be lost in the area of identity theft alone if the OCC proposed rule were to be adopted. In particular, the rule would eliminate important state protections such as the right to have the security alert accompany either a credit report or a credit score, California Civil Code § 1785.11.1; the right to freeze access to a credit file, California Civil Code § 1785.11.2; a bank’s obligation when acting as a creditor to verify a change of address on certain mailed credit solicitations, California Civil Code § 1785.14(a)(3); a bank’s obligation when acting as a creditor to verify that there was no identity theft where the address on the credit application and the credit report do not match, Civil Code § 1785.20.3(a); a law against forwarding instant loan checks, California Financial Code § 22342; a duty to cooperate with victims and law enforcement by providing access to records after a bank has extended credit to an identity thief, California Penal Code § 530.8; and an obligation not to sell a debt to a debt collector once the individual has reported to the credit bureau that the debt resulted from a fraud, California Civil Code § 1785.16.2.

State and local predatory lending laws also show why consumers need state consumer protection laws to apply to national banks. It has been nearly a decade since Congress passed the Homeowners Equity Protection Act of 1994, yet predatory lending continues to be a real and serious issue in local communities. This is why states and localities are passing their own anti-predatory lending laws. The extensive comments filed by the California Reinvestment Committee describe the scope of and harm from predatory lending, as does Consumers Union’s own prior work. Predatory Lending, June, 2001, www.consumersunion.org/pdf/swro/Predlend.pdf, Comments of Norma P. García, before Federal Reserve Board of Governors, September 7, 2000, www.consumersunion.org/finance/predatorywc900.htm.

The National Bank Act Cannot Support a Broad Exemption from State Law for National Banks

The National Bank Act does not preempt state law which “does not prevent or significantly interfere with the national bank’s exercise of its powers.” Barnett Bank v. Nelson, 517 U.S. 25, 33 (1996). The general rule is one of applicability of state law, with an exception. McClellan v. Chipman, 164 U.S. 347, 357 (1896). By replacing this standard with a blanket rule of preemption for most types of the state statutes, plus a draconian rule by which to gauge the impact of the remaining state statutes, this proposed rule would radically expand the scope of NBA preemption.

This rule would exempt national banks from a wide variety of obligations that apply to all types of businesses operating in California, including California’s groundbreaking laws to promote the protection of personal information. These laws include the “shredding” law requiring businesses to take reasonable steps to destroy records containing personal information upon disposal of the records by shredding, erasing, or modifying the information to make it unreasonable, California Civil Code §§ 1798.8-82; the requirement to disclose certain computer security breaches, California Civil Code § 1798.29; and the law guaranteeing the confidentiality of Social Security Numbers, California Civil Code § 1798.85. Even California’s just-signed opt-in requirement for spam advertisements seems to be at risk, since the OCC’s proposed rule lists credit advertising as a category of state law that would ordinarily be preempted. See SB 186, www.leginfo.ca.gov.

The simple conferral of banking powers in the National Bank Act cannot support use of the NBA for this type of wholesale gutting of state law. The “national favorites” doctrine developed to protect national banks from discrimination against them in favor of state chartered banks, not to give national banks a near-blanket exemption from state laws that apply equally to national banks, state chartered banks and to non-bank businesses of all types.

The Federal OCC Is Not Big Enough or Strong Enough to Police All National Banks Even If There Were Evidence that it Wished to Do So

The OCC has not shown a desire to vigorously regulate national banks with respect to their consumer practices. In a September 22, 2003 speech to the American Bankers Association, Comptroller John D. Hawke characterized self-regulation as preferable to federal bank regulation, saying in part, “Would you rather have strong and responsible guidance from your own industry in dealing with an issue of this sort, or a governmental dictate enforceable through bank examiners and cease-and-desist orders? In the absence of the former, you are now faced with the latter.” These remarks suggest a preference for industry self-regulation.

Even if the OCC had a desire to effectively regulate the consumer practices of national banks, it lacks the resources to do so. According to the OCC’s own statistics, there are about 2,200 nationally chartered banks, with total assets of $3.5 trillion. The entire staff of the OCC is less than 3,000, which is less than one person per $1 billion in bank assets. Even if the OCC did vigorously develop new consumer protection regulations, which it does not, the OCC does not have enough staff to detect and prevent problems for consumers at big and small nationally chartered banks throughout the U.S.

A Broad OCC Preemption Rule Usurps the Role of Congress

When Congress believes that additional state law in an area would interfere with federal purposes, it does not hesitate to preempt state law. Those Congressional decisions are often quite nuanced, permitting some types of state laws and preempting others. In the 1996 revision to the federal Fair Credit Reporting Act, for example, Congress temporarily preempted in seven specific and carefully described areas, but not in any other areas. Congress is currently engaged in a detailed debate about whether to extend some or all of those temporary preemptions. The Senate measure extends, but does not expand those preemptions. While the House bill would expand the preemptions somewhat, yet stops far short of a broad preemption of all state laws that affect the obligations of creditors (including national banks) as users of credit reports. This sweeping OCC rule would upset these choices by Congress, preventing state legislatures from protecting their state’s consumers from the conduct of national banks even when Congress has chosen not to restrict the states from augmenting Congress’ work with additional state laws.

Conclusion

For these reasons, Consumers Union strongly opposes the proposed amendments to Part 7, subpart D, titled “Preemption”, including proposed new sections 7.4007, 7.4008 and 7.4009. We also oppose the proposed preemption amendment to Part 34, section 34.4, concerning preemption of laws related to real estate lending. We also oppose any attempt by the OCC to move toward an even broader “field preemption” approach.

Sincerely,

Gail Hillebrand

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Notes:

(1) Consumers Union is a non-profit membership organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education, and counsel about goods, services, health and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union has actively supported a wide variety of state consumer protection laws, including in the areas of credit, finance, and disclosure, including identity theft prevention laws and anti-predatory lending laws.