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July 17, 1998 |
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A massive rollback of states' rights to protect consumers from predatory practices by regulating banks that operate within their borders has left consumers at risk. All the more troubling is the fact that this loss has occurred at a time when controls over bad actors in this industry are needed most.
Traditional banks are transforming into diversified financial powerhouses which sell stocks, bonds, and insurance products in addition to the conventional services we expect. Concurrently, state power to provide consumer protections and police abuses in banking have been gradually draining away throughout the 1990's due to actions of Congress and federal regulators. Congress should be moving to stem the damage and prevent this creeping erosion of state authority by clarifying that states have the authority to regulate national banks and by requiring the OCC to adhere to traditional preemption principles. Instead, HR 10 contains sweeping language that could give federal regulators more authority to trample on states’ rights.
OCC Preemption Highlights
The national bank regulator, the Office of the Comptroller of the Currency (OCC), has been the primary culprit for putting states= rights on the firing line. In a series of opinions the OCC gave national banks a green light to ignore state consumer banking protections. A congressional report later characterized these actions as Ainappropriately aggressive and unwarranted (Conference Report on the Interstate Banking Efficiency Act, C. Rep. At 53).
Low-Cost Basic Banking Accounts
In 1992, the OCC permitted national banks in the state of New Jersey to ignore a landmark law governing basic banking even though there was no federal law providing consumers the same protections (Interpretive Letter No.572). Thrown overboard was a worthy effort to extend low-cost banking to low and moderate income consumers. Key lawmakers later said this decision was at odds with the intent of Congress and set an overly broad standard for deposit-taking activities.
Due to the intense criticism of the OCC’s decision in the New Jersey basic banking case, the OCC issued a notice and request for comment on the reconsideration of the case in February 1996 (1). However, after over 2 years, the OCC continues to drag its feet in issuing the final rule on this case. Consumers Union urges the OCC to adhere to the preemption standard set out in the Interstate Branching and Efficiency Act Conference Report which is as follows:
Generally, State law applies to national banks unless the State law is in direct conflict with the Federal law, Federal law is so comprehensive as to evidence Congressional intent to occupy a given field, or the State law stands as an obstacle to the accomplishment of the full purposes and objectives of the Federal law. (C. Rep. at 53).
Other state laws at risk by the precedent set in the New Jersey case
Other states that have set up affordable low cost banking programs will be affected by the precedent set in the New Jersey case. New York requires banks to offer Ano frills@ checking accounts at an affordable price. Illinois requires banks to offer basic checking accounts to seniors. Similarly, Massachusetts requires banks to offer free accounts to seniors and minors.
Interest rates and fees connected with the extension of credit
In 1996, the OCC, through its regulatory power, paved another avenue for national banks to bypass state consumer protections by redefining what is "interest" as used in the National Bank Act. Now national banks are able to export bank fees such as late fees, fees for exceeding a customer’s credit limit, fees for making payment with a check drawn on insufficient funds, membership fees and other fees Aconnected with credit extension or availability" (2) from their home states to other states.
This expansion of what constitutes "interest" coupled with recent interstate banking legislation seriously curtails State representatives’ and agencies’ ability to protect their citizens from excessive and oppressive penalty fees. In 1997, Congress adopted changes to the Riegle-Neal Interstate Branching Act which have the practical effect of exempting all but state-chartered banks from state consumer banking laws. The new law permits out-of-state banks to ignore consumer banking safeguards whenever a national bank may do so. As a result, those states that subordinate consumer interests to those of the banking industry can set the terms for items such as interest rates and fee terms for other states since national banks and out of state banks are able to side-step the host state’s consumer banking laws in these areas.
The end result is a chipping away at the protections afforded in the Interstate Banking and Branching Efficiency Act of 1994, which emphasized that the host state’s laws regarding community reinvestment, consumer protections, fair lending and the establishment of intrastate branches would apply to interstate branches of national banks.
Sample of recent OCC activity and the effects on State consumer banking laws
Credit laws
Maximum interest rate laws
A state has little ability to set interest rate ceilings for its citizens. National banks, through 12 USC section 85 are able to export the interest rates allowed by the state in which they are "located". The OCC’s expansion of the definition of interest through its regulations has further tied the hands of state legislators who want to protect their constituents from onerous charges and fees connected with credit extension or availability.
The types of state banking laws that have been sidestepped because of the broadened definition of "interest" include the following:
The exportability of interest related fees such as late fees, not sufficient fund fees, annual fees, cash advance fees, membership fees, etc. by national banks and interstate branches harms consumers. For example, most credit card issuers are chartered under a handful of deregulated states, thus removing the ability of the more pro-consumer states to protect its citizens from exorbitant credit card fees.
HR 10 Adds Insult to Existing Injury by Federal Regulators and Congress
The already weakened power of states to provide consumer banking safeguards is further hampered by HR10. Of particular concern to consumers is the sweeping language in Section 104(b) which could give expanded authority to regulators to allow federally chartered banks to avoid state consumer law B even where there is no federal law or regulation providing such consumer protections. The section, designed to address regulatory turf battles between insurance, securities and banking interests, goes too far and brings in any activity authorized under Aany other provision of Federal law.
How far will the reach of HR10 go if it is left intact? Nobody knows. What is clear is that if this bill is not reengineered to protect states= rights, it represents a potential disaster for consumers.
Examples of State Consumer Banking Credit Laws at Risk Based on OCC’s Track Record and the Preemption Language in HR10
Protections for Homeowners
Deposit Laws
Is Congress really prepared to surrender these worthy laws, leaving their constituents adrift?
ATM fees
Would HR 10 lead to higher ATM surcharge fees?
States have taken the lead in addressing the proliferation of ATM surcharge fees. According to a recent report by USPIRG, Iowa and Connecticut have banned ATM surcharge fees by order of the Banking Commissioner and at least 25 legislatures, including Alabama, Alaska, Arizona, California, Kentucky, Maryland, Massachusetts, Michigan, Minnesota Missouri, Montana, New Jersey, New Hampshire, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Tennessee, Washington, West Virginia and Wisconsin have considered an ATM surcharge ban, fee cap or moratorium in the past two years.
All these noble efforts are put at risk if HR 10 is not amended.
The Chilling Effect
A recent example of the perceived vulnerability of state consumer banking laws involves a preemption challenge to Iowa’s ATM law. Sears, on behalf of Bank One, has relied heavily on the OCC’s 1992 New Jersey basic banking decision (discussed earlier), to argue that Iowa’s surcharge ban is preempted by the National Bank Act (4).
Furthermore, the OCC’s harmful precedent of allowing state consumer laws to be trampled where there is no inconsistent federal law has had a chilling effect on those who are pressing banks to do more to meet the banking needs of their constituents. CU has learned that the threat of preemption has made state legislatures reluctant to ban ATM surcharge fees. Recently, Massachusetts enacted a scaled back version of legislation to cap fees banks could impose on the recipients of bounced checks. Local consumer advocates said this good idea was muted when the legislature, citing the OCC's opinions, decided to apply the law only to state-charted banks or credit unions.
Congress must protect states' ability to protect their constituents from unfair banking practices and escalating fees.
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(1) Fed. Reg. Vol. 61, No. 25, Feb 6, 1996, p.4515.
(2) 12 CFR section 7.4001(a)
(3) While laws like this may be protected under the Electronic Fund Transfer Act, the broad sweeping preemption language of HR10 could make such a law vulnerable to attack.
(4) Sears Memorandum in Support of Motion to Dismiss/Motion for Summary Judgment, p.19. State of Iowa v. Sears, Roebuck and Co. Law No. CL75008.
