Banking Rule Incites Ire
State officials' hackles are up over a new federal banking rule they say erodes consumer protections and favors the federal government in a turf war that's been simmering for more than a century.
A long list of opponents, including the National Governors Association, the National Conference of State Legislatures and the attorneys general and banking supervisors from all 50 states, is prepared to go to the mat to see the rule rescinded.
The new rule was issued in January by the Office of the Comptroller of the Currency (OCC), the federal agency that charters, regulates, and supervises national banks. The rule allows national banks to ignore protective state banking laws related to false and deceptive advertising, predatory lending, customer privacy, general consumer credit issues and no-call lists.
OCC representatives say they are simply clarifying power the federal government has had for 140 years. But opponents say the OCC has overstepped its bounds; they fear the rule is a bold attempt to shrink states' role in passing and enforcing consumer-protection laws and a move by federal regulators to usurp state powers.
State officials now are pushing Congress to step in and re-assert states' authority over all banks within their borders.
The rule change means that of the nation's approximately 9,000 banks, 2,000 institutions such as Bank of America, Citibank and Wachovia would not be subject to state regulation because they are nationally chartered. Seven of the country's 10 largest banks hold national charters.
In recent years, states have passed a number of laws to prevent abusive bank practices. In 1999, for example, North Carolina passed the first state law prohibiting predatory lending, which can include an array of unsavory loan policies that target unwary borrowers. Others states have since followed suit.
OCC representatives say the patchwork of laws creates difficulty for national banks that often operate in many states.
But states say consumers will suffer without both state and federal regulations governing national banks. One of the rule's impacts is to strip state attorneys general of their authority to investigate or prosecute national banks or their subsidiaries, state officials say.
Four years ago, Idaho's attorney general took U.S. Bank, a subsidiary of nationally chartered U.S. Bancorp, to task on behalf of 600,000 Idaho customers whose personal information the bank shared with telemarketing companies.
"That's the kind of action that would be prohibited under the new OCC rules," Lawrence Wasden, the state's current attorney general, said in an interview with Stateline.org.
Opponents also worry the change will incite a "race to the bottom," spurring banks to choose national rather than state charters to avoid being subject to state consumer-protection laws and leaving bank customers with less protection.
When there are problems, state officials contend that the new rule forces consumers to go only to the federal government via the OCC's call center in Houston, Texas if they think they've been wronged by a national bank or a subsidiary, which can include a range of companies involved in mortgage lending, credit cards, pay-day lending, securities or gift cards.
"With all due respect to the federal government, have you ever tried calling the IRS?" Wasden of Idaho said. "You get sent all over the place. A lot of times you don't even talk to a live human being. (The OCC is) going to try to run that kind of operation for all over the United States. It doesn't make any sense."
By comparison, between the state attorney general's office and the state Department of Finance, Idaho has 27 state employees who handle banking issues for consumers.
While the OCC's call center in Houston has only 40 customer service agents to deal with consumer complaints nationwide and no plans to increase its staff, U.S. Comptroller John Hawke said his agency "has a strong track record of taking vigorous enforcement action to remedy" any customer abuse problems.
Hawke, testifying before the U.S. House Committee on Financial Services on April 1, said federal consumer-protection rules and regular inspections by the OCC's more than 100 bank examiners help reduce chances that national banks will employ practices that could harm customers.
In a written statement, Hawke pledged the OCC's willingness to work with states to protect consumers. Hawke said states are welcome to refer customer complaints to the OCC, which has set up procedures to handle them.
"Unfortunately, we have received very little response to the overtures," Hawke said. (Click here to view all of Hawke's testimony.)
The banking tug-of-war ignited last summer when the OCC announced that Georgia's Fair Lending Act, which went so far as to limit the interest rates and fees that banks could charge, did not apply to national banks. The OCC then spelled out its own anti-predatory lending standards.
State officials were unhappy with the standards and questioned the OCC's authority to exempt national banks from Georgia law. The OCC's January action attempted to outline who has authority to regulate national banks. But instead of ending the disagreement, the new rules sparked the latest controversy.
"We're not looking to extend our authority," OCC spokesman Kevin Mukri said. "We're just trying to codify and simplify and clarify the authority that we've had for 140 years."
He said the National Bank Act of 1864 gives regulatory authority over national banks exclusively to the federal government.
A growing list of national and local interest groups has weighed in on the issue. The National Association of Realtors says the rule harms consumers by putting local real estate companies at a competitive disadvantage when compared to national banks and their operating subsidiaries. The NAACP claims it allows some national banks to exploit racial and ethnic minorities and the elderly.
A slew of consumer groups, including the Consumers Union of the United States, the Consumer Federation of America, the Center for Responsible Lending, the National Community Reinvestment Coalition, the National Consumer Law Center and the U.S. Public Interest Research Group, also have come out against the rule.