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Throughout the legislative and legal campaigns by powerful bank lobbyists to defeat tough new state and local laws banning double ATM fees, requiring more credit card disclosures, protecting customer privacy, and preventing predatory lending, the bank lobbyists have been aided and abetted by lawyers from the federal Office of the Comptroller of the Currency (OCC). This obscure and previously little-noticed agency regulates all commercial banks with the word "national" (or N.A.) in their names and is part of the US Treasury Department.

Throughout its history, the agency has demonstrated the classic characteristic of a "captive regulator:" OCC places the interests of the regulated above the public interest. Part of its problem is that it has a conflicting mission: it has both supervisory and promotional responsibilities over national banks. A second, perhaps worse problem is that OCC derives the vast bulk of its budget directly from its regulated banks. If it is too hard on national banks, they could switch to state charters, reducing the OCC's budget.

In January, 2004 the OCC issued two related and sweeping rules, one preempting nearly all state and local consumer laws (the "preemption rule") [69 Fed. Reg. 1904 (2004)] and the other restricting nearly all enforcement powers of state regulators and attorneys general (the "visitorial powers rule.") [69 Fed. Reg. 1895 (2004)] over national banks, and incredibly, their state-licensed operating subsidiaries, which are not banks.

The OCC asserts it has somehow been granted broad authority from Congress to "take the field" over virtually all matters pertaining to national banks and their state-licensed operating subsidiaries, even where no federal law protects consumers from unfair or predatory financial practices. The OCC says this, even though the clearest recent statement from the Congress had been that the OCC had been "inappropriately aggressive" in preempting consumer, community and other laws.

In the new preemption rule the OCC re-wrote and weakened the applicable Supreme Court preemption test from the 1996 Barnett decision. The OCC rule downgraded the Court's strict "prevent(s) or significantly interfere(s)" standard with a sweeping preemption of nearly all state laws even if they merely "obstruct, impair, or condition" a national bank's exercise of powers.

In its visitorial powers rule OCC rolled-back long-standing authority of state attorneys general and other officials to investigate or enforce violations by national banks. OCC also boldly asserted that these new limits extended even to actions against a national bank's state-licensed operating subsidiaries.

Unfortunately, the agency's recent preemptive actions have been buttressed by a series of court decisions that have granted undue deference to the agency's rulings. Often, the agency has amended its rules in the middle of court battles, and counted on the courts to agree with their opinion. So, the most likely solution to the OCC's new rules will need to come from Congress, not the courts. Congress needs to re-state more clearly what most impartial (not the OCC, not the banks) observers have always believed to be the law: First, national banks must comply with state and local laws that are stronger than, but not inconsistent with, federal law. Second, operating subsidiaries are not national banks.

States Storm Back Against OCC's Storm Against The States

The issuance of the OCC rules has sparked a bi-partisan storm of protest from state legislatures, state financial regulators and state attorneys general. The attorneys general particularly criticized the OCC'outrageous characterization that the "National Bank Act protect[s] national banks from potential state hostility..." Calling the states "hostile" does not advance any legitimate argument. See the OCC Watch Coalition Partner Links page for more information.

Even the normally complacent House Financial Services Committee has weighed in. In addition to holding OCC oversight hearings, it has passed a bi-partisan budget resolution on a vote of 34-28 stating that the OCC action "may represent an unprecedented expansion of Federal preemption authority" and "comes without congressional authorization, and without a corresponding increase in budget resources for the agency." The committee also pointed out that without a budget increase, the OCC cannot really expect its modest staff of 40 consumer complaint specialists and approximately 100 examiners to both continue their own work and also take over much of the work of an estimated 700 state consumer enforcers and examiners. "In the area of abusive mortgage lending practices alone, State bank supervisory agencies initiated 20,332 investigations in 2003 in response to consumer complaints, which resulted in 4,035 enforcement actions."

The OCC's actions are in defiance of Congressional intent that it narrowly construe and carefully consider the preemption of state laws concerning community reinvestment, consumer protection, fair lending, and establishment of intrastate branches. In the conference report (See pages 6-9 of this version on "Applicable State Law") accompanying the 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act, Congress scolded the agency's "inappropriately-aggressive" preemption of state consumer laws and ordered the agency not to preempt without going through a detailed preemption procedure. Other than issuing one Federal Register notice in 1996, the OCC has.treated this clear Congressional intent with disdain.

Throughout the 1990s, financial deregulation had resulted in skyrocketing bank fees as well as the imposition of new fees. The growth of risk-based pricing in mortgage lending triggered a rapid growth in predatory lending practices. In the absence of federal action to prevent abuses, and based on clear anti-preemptive language in the Truth In Lending Act, Electronic Funds Transfer Act and other laws, states and sometimes cities enacted laws required banks to offer low-cost checking accounts (New Jersey and New York) or banned certain fees, including fees for non-customers to cash checks drawn on the bank itself (Texas) or surcharges imposed by owners of ATMs on non-customers (Iowa and Connecticut by administrative order, the cities of Santa Monica and San Francisco, California by local ordinance), required additional credit card disclosures (California) and restricted predatory lending. A series of unfortunate court decisions that paid too much deference to the OCC held that the National Bank Act preempted some of these actions; the OCC issued preemption determinations over-ruling others. These victories buoyed the agency to take its January actions, essentially "taking the field " over all matters regarding both national banks and their operating subsidiaries. See the OCC Watch OCC documents page where we archived a number of important briefs and decisions in these cases.

Unless overturned, the OCC's power play will also have a chilling effect on state regulatory and legislative actions aimed at state-chartered institutions. No rational state would impose stricter rules or take strong enforcement actions against its regulated-entities if its actions would place them at a competitive disadvantage to federally-regulated entities.

But more importantly, its actions make it the de facto regulator of both the state and national banking systems, and if not unchecked, also of numerous non-bank state licensed corporations. Even a spotlight can't find the law that gives it this authority or justification for its claims that it's the right thing to do from a consumer protection or even a bank regulation perspective.