The OCC's Preemption Rules Exceed the Agency's Authority and Present a Serious Threat to the Dual Banking System and Consumer Protection
Arthur E. Wilmarth Jr.
George Washington University Law School
Annual Review of Banking and Financial Law, Vol. 23, pp. 225-364, 2004
In January 2004, the Office of the Comptroller of the Currency (OCC) issued new regulations that are intended to preempt a broad range of state laws from applying to national banks and their operating subsidiaries. The OCC's rules declare that state laws are preempted if they obstruct, impair, or condition a national bank's ability to fully exercise its federally-authorized powers, either directly or through operating subsidiaries. According to the OCC, state laws apply to national banks only to the extent that state laws provide the legal infrastructure that makes it practicable for national banks to do business. The OCC's new rules are also designed to prevent state officials from suing in federal or state courts to enforce state laws against national banks or their operating subsidiaries.
The practical effect of the OCC's new rules is to create a regime of de facto field preemption for national banks and their operating subsidiaries. This article contends that the OCC's rules are contrary to decisions of the Supreme Court and the intent of Congress. The Supreme Court and Congress have generally upheld the application of state laws to national banks, except in situations where state laws prevent or significantly interfere with the exercise of congressionally-authorized powers by national banks. During the past century, Congress has preserved the dual banking system by maintaining a competitive equilibrium between national and state banks in the most important areas of banking operations.
The OCC's new rules conflict with congressional intent and threaten to disrupt the competitive balance that has long existed between national and state banks. The OCC has declared that national banks are exempt from state laws dealing with consumer protection, fair lending, and other areas regulated by the states under their historic police powers. Unless the OCC's rules are overturned by Congress or the courts, large state-chartered banks with interstate branches are likely to convert to national charters so that they, too, can obtain the blanket immunity from state regulation offered by the OCC. Over time, the state banking system will probably be reduced to a group composed primarily of smaller, community-oriented banks, and the national banking system will be increasingly dominated by large multistate banks. Even if the state system can survive as a chartering authority for community banks, there will no longer be a meaningful chartering option for most banks. Such an outcome will destroy, or at least severely weaken, the dual banking system's current incentives for regulatory innovation, responsiveness and flexibility.
Federal and state courts have upheld the authority of state officials (i) to obtain judicial remedies to stop violations of state laws by national banks, and (ii) to bring administrative or judicial proceedings to enforce state laws against state-chartered providers of financial services. State enforcement has proven to be an effective and necessary supplement to federal efforts to protect consumers against illegal, fraudulent or unfair conduct by consumer lenders, securities firms, and mutual funds. Large national banks and their affiliates have been involved in abusive practices in all three areas. The OCC's rules, however, bar the states from continuing to license, examine or otherwise regulate state-chartered corporations that are operating subsidiaries of national banks. In doing so, the OCC's rules ignore fundamental principles of corporate separation and vastly expand federal control over state-chartered corporations, thereby eroding the states' historic primacy in corporate regulation.
Public policy does not favor entrusting the OCC with sole authority to enforce fair lending statutes and other consumer protection laws against national banks and their operating subsidiaries. Large national banks and their affiliates have become dominant competitors in today's financial marketplace. Virtually the entire OCC budget is funded by fees and assessments paid by national banks. The OCC therefore acted with an obvious self-interest in issuing preemption rules that encourage large multistate banks to operate under national charters. During the past decade, the OCC has not initiated a single public prosecution of a major national bank for violating a consumer protection law. The OCC's unimpressive enforcement record is, unfortunately, consistent with its strong budgetary interest in maintaining the loyalty of leading national banks. Because the OCC issued its preemption rules to build its regulatory empire and please its largest regulated constituents, the courts should refuse to give deference to the rules and Congress should override them.
Number of Pages in PDF File: 140
Keywords: Consumer Protection, Dual Banking System, National Banks, Preemption
JEL Classification: G20, G21, G28, H77, K23, N20
Date posted: August 20, 2004
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