Banking Law Prof Blog

Eighth Circuit Recognizes Limits on Federal Preemption

The U.S. Court of Appeals for the Eighth Circuit recently ruled that national bank assignees or purchasers of mortgages are not completely shielded from state law violation claims by a blanket claim of federal preemption.  The case is Thomas v. U.S. Bank. 

Plaintiff/Appellants are Missiouri homeowners who received "high loan-to-value" second mortgages (reflecting total debt of 125% of the value of their homes) from FirstPlus Bank, a federally insured state-chartered bank which has since failed.  Their mortgages were purchased or assumed by other banks, including some national banks.

Plaintiffs claim that the loans violated state law, specifically the Missouri Second Mortgage Loans Act (MSMLA) which limits the type and amount of closing costs and fees that can be imposed on residential second mortgages secured by MissourI real estate.

The national banks removed the case to federal court and successfully moved for dismissal of the case, contending that state law claims were completely preempted by the Depository Institutions Deregulation and Monetary Control Act (DIDA). 

On appeal, the Eighth Circuit reversed and remanded to state court for trial.  The Eighth Circuit opinion distinguished preemption under the National Bank Act (NBA) and the limited scope of preemption provided by the plain language of DIDA.  NBA would have applied if national banks had originated the loans.  DIDA applies to loans originated by statte-chartered banks.

State law claims in this case are not preempted because state law usury limits are higher than the ceiling provided under federal law -- even though these claims are for non-refundable broker's fees that exceeded MSMLA limits and for closing costs and fees that exceeded the fees actually charged by third-party providers where the originator FirstPlus retained the difference.

The state law remedy -- forfeiture of interest and twice the interest paid -- is not preempted here -- if the state law claims can be established at trial.

Link:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/ThomasvUSBankNational.pdf

(ag) Sept. 5, 2009, in Federal Preemption, Lending Issues, Consumer Protection, Predatory Lending, Dual Banking

Wake Up and Smell the Roses -- or Whatever -- at OCC!

I continue to be appalled but not surprised that Comptroller John Dugan can still argue against state consumer protections because the costs "will be ultimately be borne by consumers."  As if consumers are not bearing the costs of the OCC's shameless history of focusing only on standardization for national banks, preemption of state law regardless of purpose, and maximization of short-term bank profit whatever the long-run consequences! 

This agency is part of the problem we are living with today.  The current administration and Congress need to take this agency and its senior staff to the woodshed.  What will it take for them to recognize that all banking agencies must refocus and that consumer protections cannot continue to be disregarded?  A national banking crisis?  Oh, we have that -- well then, what????   It is clear that without a good housecleaning, this agency will not "get it."  There is no reason -- other than short-term greed -- why national banks cannot comply with reasonable state consumer protection laws.  There is also no reason -- other than arrogance and agency capture -- why the national banking supervisor cannot cooperate with state regulators to assure consumer protections.  

Link to OCC Statement about "Regulatory Reform as long as the OCC gets to keep doing exactly what it has been doing":  http://occ.treas.gov/ftp/release/2009-88.htm

(ag) July 28, 2009, in Consumer Protection, Economy, OCC, Dual Banking System, Financial Regulatory Reform

What Exactly Is a Dual Banking System?

One reader of this blog asks, "What exactly is a dual banking system?"  So here's the background:

In the U.S. today, we have two types of bank charters:  1.  Each State has the authority to charter and supervise banks within its borders through a State Banking Commissioner and State Banking Department (although states may consolidate regulation of banking with other industries such as insurance and name their supervisory department something different); and 2.  At the federal level, the Office of the Comptroller (OCC) has the authority to issue national bank charters and has exclusive supervisory authority (sometimes called "visitorial power") over national banks.

National banks trace their existence and powers to the National Bank Act of 1864.  The national bank charter was instituted as a means of raising funds for the Civil War.  State chartered banks were already in existence and continued on a parallel track with national banks. Many present-day legal disputes over the powers of national banks go back to the original language of the National Bank Act of 1864.  Of course, the National Bank Act has been amended repeatedly since then and the business of banking has evolved into many areas that could not have been foreseen in 1864.

FDIC statistics show that as of 3/31/09, there are 1,519 commercial banks (not thrifts or credit unions or other lending institutions but insured deposit-taking institutions with a bank charter) operating as national banks and 5,518 commercial banks operating as state-chartered banks.  The organizers of a bank can choose whether to operate under a state or national charter when the bank is formed and they can switch charters from state to national or national to state at any time (unless they are in poor financial condition and a charter change will not be approved). 

What factors influence choice of charter? 

• Those who choose a national charter often cite nationwide uniformity of regulation; thus most really large banks hold a national charter. 
• Those who choose a state charter are often smaller community banks that focus on a smaller geographic area and like the idea of going to the state capital to deal with a banking department that is smaller and more accessible, with decisions made on the basis of state-wide conditions.  However, there are also many smaller community banks holding national charters. 
• A comparison of charter fees, assessment fees, perceived expertise of examination staff, prior good or bad experience with the regulator, and perceived strictness of regulation may influence charter choice. 
• Because both national and state regulators are funded by fees and assessments paid by the banks they regulate, regulators in effect compete to get more and larger entities to choose their charter.  In the worst case, this can lead to a "captive" regulator who trades on "lax regulation" to gain in the turf war.  Commentators cite the former Federal Home Loan Bank Board that chartered federal savings and loan associations up until the S&L crisis of the 1980s as the poster child for a "captive" regulator that kowtowed to the industry it was supposed to regulate.  As a result, Congress dissolved this agency and created the Office of Thrift Supervision ("OTS"). 
• Nationwide banking operation, whether under a national or state charter, has brought convenience and lower cost financial products to consumers.  It is possible to operate a nationwide banking system under a charter from one state, with authorized branches in other states.  This does require complying with laws in each state of operation and increases the cost of compliance.  On the other hand, the costs of trying to evade state consumer protection have been quite high for consumers and the economy.  
• Over the past five years, the Office of the Comptroller of the Currency ("OCC"), the chartering authority for national banks, and the Office of Thrift Supervision ("OTS"), the chartering authority for federal thrifts, have responded to their industries by aggressively claiming that more and more state laws are preempted by the National Bank Act.  Former Comptroller of the Currency John D. Hawke openly marketed the national bank charter as a way to escape state consumer protection laws.  Subsequent Comptrollers have continued to pursue litigation to shield national banks from state laws.  
• Two recent Supreme Court decisions have addressed federal preemption. 
  •  In Watters v. Wachovia (2007), the Supreme Court allowed a mortgage lending corporation (not a depository institution but a state corporation) to exempt itself from state consumer protection law by becoming an operating subsidiary of a national bank.  Thus on one day, the entity was required to submit to registration requirements under Michigan law, but on the day after it was acquired as a subsidiary of a national bank doing exactly the same mortgage lending it had previously previously conducted in the State of Michigan, it placed itself beyond the reach of Michigan consumer protection law.  Although the OCC claimed exclusive "visitorial power" over subsidiaries of national banks to the same extent it possessed exclusive "visitorial power" over the banks themselves, the OCC never had the staff, the funding, or the schedule to go into operating subsidiaries to check on their lending practices as they did for banks themselves.  Wachovia (failed), Wells Fargo, Citibank (troubled), HSBC all had subprime mortgage lending subsidiaries that were exempt from state consumer protection laws.  One has to question why the OCC expended its resources fighting the State's efforts to enforce consumer protection laws instead using those resources to cooperate with the States to ensure consumer protection. 
  • In Cuomo v. Clearing House Association (2009), the Supreme Court found that the OCC had overstepped its legal authority in claiming that a State Attorney General could not sue a national bank for violations of valid state consumer protection and anti-discrimination laws.  The OCC had claimed that it was the only enforcer of consumer protection for national banks -- with the obvious problem that it was not equipped to do that job.  This month, the Supreme Court ruled that a State Attorney General can sue a national bank to enforce state consumer protection laws. 
  • The Obama administration's draft legislation presented to Congress this week (which I have outlined in a previous post) would reverse the Watters decision and allow States to pass and enforce consumer protection laws which are expressly not preempted by federal law, even when the State law sets a higher consumer protection standard than federal law, as long as the State law applies equally to State banks and National Banks (and subsidiaries).
  • The draft legislation would adopt the Cuomo decision, making it clear that State Attorneys General can sue national banks to enforce valid state consumer protection laws.  
• Some people as whether the State banking charter has any value today.  They may also ask why we do not have a single federal banking charter and a single national bank regulator.  Stated another way, why should we continue to have a "dual banking system," with the ability to choose either a State or a National Bank charter?  
  • Our nation is based on a balance between State and federal powers.  Americans have never wanted the federal government to overpower the ability of States to address issues particular to their citizens.
  • The Constitution's Tenth Amendment recognizes "federalism" and the state/federal balance by providing that powers not expressly granted to the federal government are reserved to the States and the people.
  • Congress and the Supreme Court have expressed reluctance to preempt state laws unless there is a strong reason to do so,
  • State banks have been described as "laboratories of innovation."  The State banks originated checking accounts, the first NOW accounts which paid interest, and interstate branching.  A State legislature can move more quickly than Congress to adopt new practices and products that apply to a more limited area.  If successful, the innovations can spread, and if not, they can be changed.
  • Having a single charter and a single regulator would create a monopoly, which is less efficient and less responsive that when we have a choice between state and federal regulation.  A single regulator can be coopted more easily by industry.  Absolute power corrupts.  There would be few checks on a single regulator's mistaken understanding of the economy or failure to regulate appropriately.  With the dual banking system, state regulators can catch issues that might be missed by a single federal regulator.
  • State and federal regulators have a long, successful track record of cooperating in bank examinations and regulations.  Cooperative pooling of resources leads to better oversight coverage.  Incorporating both State and national perspectives leads to a more comprehensive understanding of the economic costs and benefits involved in banking regulation.   

Link to FDIC's website for a very simplified timeline of banking from the 1700s to the 2000s:  http://www.fdic.gov/about/learn/learning/when/1700s.html

(ag) July 2, 2009, in Dual Banking, Federal Preemption 

Arthur Wilmarth Interview on Cuomo Decision

National Public Radio talked with George Washington University Law Professor Arthur Wilmarth yesterday.  He is a highly regarded proponent of the dual banking system and an opponent of aggressive federal preemption in the financial institutions arena, as well as a prolific author of Law Review articles in the banking law field. 

Link to interview:  http://www.npr.org/templates/story/story.php?storyId=106062165

(ag) June 30, 2009, in Federal Preemption/Dual Banking

State Officials Testify About Obama Plan and State Consumer Protection

The House Financial Services Committee held its first hearing on President Obama's Plan for the Restructuring of the American Financial Regulatory System. 

As expected, the proposed independent Consumer Financial Protection Agency is garnering attention -- pro and con.  Testimony from State officials supports the President's plan to restore balance to the Dual Banking System that represents a cornerstone of the U.S. financial system by rolling back some inappropriately aggressive attempts to exclude national banks and their affiliates from the reach of state consumer protection laws. 

The House Financial Services Committee website carries a webcast of the hearing and the Conference of State Bank Supervisors (CSBS) reported on the hearing in its weekly bulletin, quoting Massachusetts Secretary of the Commonwealth William Galvin as saying that,  "Investors and consumers have been harmed when the states have been preempted from protecting their interests. . . .States remain the regulators that are closest to the investing public, and they have demonstrated they can respond quickly and effectively to help investors.” He also discussed the good track record states have in coordinating their regulatory efforts with federal examination and enforcement.    

Link to Hearing:  http://www.house.gov/apps/list/hearing/financialsvcs_dem/fullhr_061109.shtml

(ag) June 26, 2009, in Consumer Protection/Dual Banking

Let's Not Do This Again!

Here's an interesting comment on my item discussing Richard Fisher's talk to bankers this week:

"Our government and constitution were constructed around sentiments very similar to McKay's.  But in this last economic boom cycle, the conditions that played into it were approved by the government itself, so how do we prevent this from happening again?" --Thanks to Joseph Marchelewski for this question!

Coincidentally, I had just sent the following e-mail to Rebecca Christie in Bloomberg's newsroom:

Knowing that some reorganization of the financial regulatory structure is necessary, my greatest fear is that the focus will be exclusively on federal regulation -- to the detriment of the state banking system.  A strong dual banking system is key to avoiding a regulatory monopoly.  Checks and balances inherent in a strong system of state and federal regulation will guard against regulatory capture and "inside-the-beltway group think."

(ag) June 4, 2009, in Dual Banking/Economy