OCC Described Types of State Laws That Would Be Preempted, but Questions Remain Regarding the Rules’ Scope and Effect

In the bank activities rule, OCC attempted to clarify the types of state laws  that would be preempted by relating them to certain categories, or  subjects, of activity conducted by national banks and their operating  subsidiaries. In the visitorial powers rulemaking, OCC sought to clarify the extent of its  supervisory authority. Questions Remain Concerning the Applicability of State Consumer Protection Laws

Although OCC issued the bank activities rule to clarify the applicability of  state laws to national banks and their operating subsidiaries, many of the  state officials, consumer groups, and law professionals we interviewed said  that the preemption rules did not resolve questions about the applicability  of certain types of state law to national banks and their operating  subsidiaries. However, OCC has  indicated that even under the standard for preemption set forth in the rules,  state consumer protection laws can apply to national banks and their  operating subsidiaries. For  example, since the promulgation of the preemption rules, OCC has said  that state consumer protection laws, and specifically fair lending laws, may  apply to national banks and their operating subsidiaries. According to Most State Officials We Contacted, the Preemption Rules Have Diminished State Consumer Protection Efforts

According to most state officials we contacted, the preemption rules have  limited the actions states can take to resolve consumer issues and  negatively affected the way national banks respond to consumer  complaints and inquiries from state officials. However,  other state officials reported good working relationships with national  banks and their operating subsidiaries, and some national bank officials  said that cooperation with state attorneys general was good business  practice. The Rules’ Effect on Charter Choice Is Uncertain, but Some States Are Addressing Potential Charter Changes

Many factors affect charter choice, and we could not isolate the effect of  the preemption rules, if any, on charter changes. According to our analysis of  FRB and OCC data from 1990 to 2004, the number of banks that changed  between the federal and state charters was relatively small compared with  all banks. For example, the size and complexity of banking operations  are important factors in determining which charter will service an  institution’s business needs. Suggested Measures for Addressing State Consumer Protection Concerns Include Shared Regulation, Which Raises Complex Policy Issues, and Greater Coordination between OCC and States

Some state officials and consumer groups identified three general  measures that they believed could help address their concerns about  protecting consumers of national banks and operating subsidiaries: (1)  providing for some state jurisdiction over operating subsidiaries; (2)  establishing a consensus-based national consumer protection lending  standard; and (3) working more closely with OCC, in part to clarify the  applicability of state consumer protection laws to national banks and their  operating subsidiaries. OCC has issued  guidance to national banks designed to facilitate the resolution of  individual consumer complaints and address broader consumer protection  issues that state officials believe warrant attention. Objectives, Scope, and Methodology

On January 13, 2004, the Treasury Department’s Office of the Comptroller  of the Currency (OCC), which supervises federally chartered “national”  banks, issued two sets of final rules covering the preemption of state laws  relating to the banking activities of national banks and their operating  subsidiaries (“bank activities rule”) and OCC’s exclusive supervisory  authority over those institutions (“visitorial powers rule”). In this report, we  examine (1) how the preemption rules clarify the applicability of state laws  to national banks; (2) how the rules have affected state-level consumer  protection efforts; (3) the rules’ potential effects on banks’ decisions to  seek the federal, versus state, charters; and (4) measures that could  address states’ concerns regarding consumer protection. Additionally, this  report provides information on how OCC and other federal regulators, as  well as state bank regulators, are funded.
Why GAO Did This Study

In January 2004, the Office of the Comptroller of the Currency (OCC)--the federal supervisor of federally chartered or "national" banks--issued two final rules referred to jointly as the preemption rules. The "bank activities" rule addressed the applicability of state laws to national banking activities, while the "visitorial powers" rule set forth OCC's view of its authority to inspect, examine, supervise, and regulate national banks and their operating subsidiaries. The rules raised concerns among some state officials and consumer advocates. GAO examined (1) how the rules clarify the applicability of state laws to national banks, (2) how the rules have affected state-level consumer protection efforts, (3) the rules' potential effects on banks' choices of a federal or state charter, and (4) measures that could address states' concerns regarding consumer protection.

What GAO Found

In the bank activities rule, OCC sought to clarify the applicability of state laws by relating them to certain categories, or subjects, of activity conducted by national banks and their operating subsidiaries. However, the rule does not fully resolve uncertainties about the applicability of state consumer protection laws, particularly those aimed at preventing unfair and deceptive acts and practices. OCC has indicated that, even under the standard for preemption set forth in the rules, state consumer protection laws can apply; for example, OCC has said that state consumer protection laws, and specifically fair lending laws, may apply to national banks and their operating subsidiaries. State officials reacted differently to the rules' effect on relationships with national banks. In the views of most officials GAO contacted, the preemption rules have had the effects of limiting the actions states can take to resolve consumer issues, as well as adversely changing the way national banks respond to consumer complaints and inquiries from state officials. OCC has issued guidance to national banks and proposed an agreement with the states designed to facilitate the resolution of, and sharing information about, individual consumer complaints. Other state officials said that they still have good working relationships with national banks and their operating subsidiaries, and some national bank officials stated that they view cooperation with state attorneys general as good business practice. Because many factors, including the size and complexity of banking operations and an institution's business needs, can affect a bank's choice of a federal or state charter, it is difficult to isolate the effects, if any, of the preemption rules. GAO's analysis of OCC and other data shows that, from 1990 to 2004, less than 2 percent of the nation's thousands of banks changed between the federal and state charters. Because OCC and state regulators are funded by fees paid by entities they supervise, however, the shift of a large bank can affect their budgets. In response to the perceived disadvantages of the state charter, some states have reported actions to address potential charter changes by their state banks. Measures that could address states' concerns about protecting consumers include providing for some state jurisdiction over operating subsidiaries, establishing a consensus-based national consumer protection lending standard, and further clarifying the applicability of state consumer protection laws. The first two measures present complex legal and policy issues, as well as implementation challenges. However, an OCC initiative to clarify the rules' applicability would be consistent with one of OCC's strategic goals and could assist both the states and the OCC in their consumer protection efforts--for example, by providing a means to systematically share relevant information on local conditions.