April 2, 2001
VIA FACSIMILE AND FIRST CLASS MAIL
Public Information Room
Office of the Comptroller of the Currency
250 E Street, SW, Mailstop 1-5
Washington, DC 20219
Attention: Docket No. 01-01
Dear Sir or Madam:
This is in reference to the Notice of proposed rulemaking published in the Federal Register on January 30, 2001, in which the Office of the Comptroller of the Currency ("OCC") solicits comments with respect to proposed rules governing investment securities, bank activities and operations and leasing. I am writing to voice my objection to proposed Section 7.4006 ("Proposal") which provides that state laws apply to national bank operating subsidiaries to the same extent that they apply to the parent national bank, unless otherwise provided by federal law or OCC regulation. As discussed more fully below, the OCC's attempted preemption of state law through the Proposal is outside the scope of its authority and does not serve the public interest.
As Commissioner of Banking of the State of Connecticut, my jurisdiction extends, in relevant part, to the administration and enforcement of the consumer credit provisions of Title 36a of the Connecticut General Statutes, the "Banking Law of Connecticut", several of which apply to operating subsidiaries of national banks but not to national banks. For example, under Part I of Chapter 668 of the Connecticut General Statutes, "Mortgage Lenders and Brokers", depository institutions, both state- and federally-chartered, are exempt from licensure as first and secondary mortgage brokers and lenders while their subsidiaries are not exempt from such licensure. Similarly, depository institutions are exempt from licensure as sales finance companies and as small loan companies, whereas their subsidiaries are not so exempt. Such licensed subsidiaries are examined and supervised by this agency for compliance with applicable state licensing and consumer protection laws.
The Proposal is outside the OCC's rule-making authority. Once again, the OCC, under the guise of a "clarification", is attempting to preempt state law with respect to entities that traditionally have been subject to numerous state laws. This preemption of state law rests on a legal foundation that is shaky, at best. The fact that operating subsidiaries have been authorized for years, and that it is convenient and useful for a national bank to conduct activities that it could conduct directly through an operating subsidiary, does not transform such subsidiary into a "department or division" of the bank. Operating subsidiaries are corporate entities that are chartered under state law and have a legal existence separate from that of the parent national bank, and it is nothing short of a legal fiction to treat them as a division of the bank. Carried to its logical conclusion, the Proposal would eliminate all state corporate governance and other laws, such as those concerning state taxation, unclaimed property, foreign corporation qualification, and service of process, that apply to state-chartered corporations but not to national banks. The Supreme Court has repeatedly confirmed the primacy of state laws relating to corporate governance in the absence of any federal statute that preempts such laws. See, e.g., Atherton v. FDIC, 519 U.S. 213 (1997); CTS Corp. v. Dynamics Corp., 481 U.S. 69 (1987); Hopkins Federal Savings and Loan Ass'n v. Cleary, 296 U.S. 315 (1935). I would also remind the OCC that Section 104(f)(2) of the Gramm-Leach-Bliley Act preserves the applicability of state laws relating to the governance of corporations to depository institutions and their affiliates and associates.
In support of the Proposal, the OCC also points to a similar rule promulgated by the Office of Thrift Supervision ("OTS"), with respect to operating subsidiaries of federal savings associations. Setting aside the question of the legal validity of the OTS rule, this reliance on the rule is misplaced since federal thrifts have a broader exemption from state laws under HOLA than national banks have under the National Bank Act ("NBA"). See e.g., North Arlington National Bank v. Kearny Fed. Savings & Loan Ass'n, 187 F.2d 564, 566 (3d Cir.), cert. denied, 342 U.S. 816 (1951); Independent Bankers Ass'n v. FHLBB, 557 F. Supp. 23, 26 (D. Cir. 1982); Bloomfield Fed. Savings & Loan Ass'n v. American Community Stores Corp., 396 F. Supp. 384, 386-389 (D. Neb. 1975).
Moreover, it is noteworthy that the Proposal will have the effect of preempting a whole host of state laws in the area of consumer protection, an area that Congress generally has left to regulation by the states. A recent expression of the intent of Congress to preserve state consumer protection laws is found in 12 U.S.C. Section 36(f)(1), as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which provides that the laws of the host state regarding consumer protection shall apply to each host state branch of an out-of-state national bank to the extent they apply to branches of banks chartered by that state. Indeed, where Congress intended to preempt state consumer protection laws, it did so expressly and, in one case, even afforded states the opportunity to opt-out. See, e.g., the Alternative Mortgage Transaction Parity Act of 1982. Most recently, in the Gramm-Leach-Bliley Act, Congress preempted state laws in several areas. However, it chose not to expressly preempt state laws applicable to operating subsidiaries of national banks even though, as noted in the commentary to the Proposal, it recognized the authority of national banks to own such subsidiaries. In sum, the Proposal's preemption of state laws violates the clear intent of Congress and, therefore, the OCC does not have the authority to promulgate the Proposal. See, e.g., FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000).
As a state regulator, I am even more concerned that the Proposal does not serve the public interest. Preemption of state laws applicable to operating subsidiaries of national banks will deprive the public of the panoply of consumer protections that are currently afforded by state law. For example, Connecticut laws governing mortgage lenders and brokers, sales finance companies and small loan companies generally provide benefits and protections for consumers not found in federal law, such as advance fee disclosures, rate lock-in agreements, bond requirements, prohibition on prepayment penalties, interest rate limitations and restrictions on loan-related fees. Through the licensing and examination of such entities, the state regulatory scheme furnishes consumers protection from wrongdoing and abuse. It goes without saying that licensing is an effective tool that states use to enforce compliance with consumer protection laws. As you can appreciate, the threat of license revocation is particularly effective in extreme cases, such as failure to fund a loan after closing. Because, as a result of preemption, operating subsidiaries of national banks would no longer be required to be licensed by state or federal regulators, and would no longer have to comply with most state consumer protection laws, we cannot expect that consumers who are wronged by such subsidiaries would be made whole. Moreover, states, clearly, are in a better position than the OCC to assess and address such problems and assist consumers in their states because they have a local presence and, therefore, are more accessible to consumers. We are also concerned that the Proposal will prompt many mortgage lenders to become subsidiaries of national banks in order to avoid state licensing requirements and consumer protection laws, as was the case when the similar OTS rule was adopted. Moreover, as the number of institutions exempt from licensing and examination increases, we can expect consumer wrongdoing to multiply. Surely, this is not an outcome that Congress would have intended.
Once again, I urge you to reconsider adoption of the Proposal. This is a matter that goes beyond state/federal jurisdictional issues and turf battles. What is at stake here is nothing less than the very real interest of consumers. Thank you for affording me the opportunity to be heard.
Very truly yours,
John P. Burke
Commissioner of Banking
cc: Connecticut Congressional Delegation
(via first class mail)