National banks can skirt state lending laws

January 9, 2004

Critics say federal preemption rules compromise consumer protection

By Jessica Swesey
Inman News

A U.S. bank regulator on Wednesday issued final rules that exempt national banks from state lending laws, including those aimed at curbing abusive lending practices known as "predatory" lending.

The federal Office of the Comptroller of the Currency said national banks don't have to comply with state banking laws, such as those that regulate loan terms, impose conditions on lending and deposit relationships and require state licenses.

"These laws create higher costs and operational burdens that the banks either must shoulder, or pass on to consumers, or that may have the practical effect of driving them out of certain businesses," Comptroller of the Currency John Hawke said in a statement.

State banking authorities and consumer protection groups alike say the lack of state authority compromises consumer protection from deceptive lending practices.

New York Attorney General Eliot Spitzer criticized the new federal rules. He called the decision "bad public policy" and said it disregards the dual banking system that's been in place for more than 100 years.

"The OCC's actions are a thinly disguised attempt to shield national banks from important state consumer protection laws, and to entice state chartered banks to obtain a national charter and seek the immunity that the OCC is offering," Spitzer said in a statement.

Spitzer noted that a bi-partisan coalition of state officials opposed the federal regulations when the OCC proposed them in October. Indeed, all 50 state attorneys general submitted comments to the OCC opposing the proposed regulations.

The OCC defended its position. The agency noted that national banks are already subject to federal banking laws and that further subjecting them to state laws imposes unnecessary costs and burdens.

"When national banks are unable to operate under uniform, consistent and predictable standards, their business suffers and so does the safety and soundness of the national banking system," Hawke said.

The OCC's final rule also revised federal anti-predatory lending standards to expressly prohibit national banks from engaging in unfair and deceptive trade practices when making consumer loans. But Spitzer alleged the OCC doesn't have the states' experience, expertise or resources to address such consumer protection issues.

The OCC said the final preemption rules respond to numerous questions it has received in recent years about the extent to which state laws apply to national banks and the states' authority to take actions against national banks.

Such national banks as Quicken Loans and Wells Fargo in recent years have challenged various states' authority to impose consumer lending laws on them.

Quicken Loans last year won a dispute with California when it filed a lawsuit against the California Department of Corporations alleging the state disregarded federal law when it imposed its own mortgage interest payment rules on national banks. A Federal Court in California ruled in a summary judgment motion that federal law supersedes state law governing per diem restrictions on mortgage interest payments.

The Independent Community Bankers of America, a national trade association of 4,600 mostly small community banks, said it has supported some instances of federal preemption of state laws as they apply to national banks. However, the group is skeptical about broad preemption rules.

"(W)e would have preferred that OCC continue to take action in this area on a case by case basis, rather than adopt a broad general preemption regulation," ICBA said in a statement.

Copyright: Inman News Features

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