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| ## Comptroller of the Currency                                        |
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| > Administrator of National Banks                                     |
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Washington, DC 20219

###### Interpretive Letter #999

March 9, 2004 **August 2004**

The Honorable Barney Frank

Ranking Member

Committee on Financial Services

U.S. House of Representatives

Washington, D.C. 20515

Dear Congressman Frank:

I am writing in response to your letter of February 11, 2004, concerning
the impact of the preemption and visitorial powers rules recently issued
by the OCC. Your letter raises a particular concern that these rules
will leave consumers vulnerable to predatory lending practices and urges
us to delay their effective date pending further dialogue with Congress
on this issue. As I am sure you are aware, our rules went into effect,
in accordance with their previously established effective date,
literally hours after our receipt of your letter. Thus, I welcome this
opportunity to provide additional background on their scope and
application, which I hope will help to alleviate your central concerns.
I know the devastating impact of predatory and abusive lending, and I am
absolutely committed to assuring that those practices have no place in
the national banking system.

First, the OCC has not exempted national banks and their operating
subsidiaries from all state laws. The preemption rule adds provisions to
our regulations expressly addressing the applicability of particular
types of State laws to national banks' lending and deposit-taking
activities. In both areas, the listed types of laws either already are
preempted under longstanding, pre-existing OCC regulations, have been
found to be preempted in OCC preemption opinions, have been found to be
preempted by the courts, or have been determined to be preempted with
respect to Federal thrifts by the Federal thrift supervisor, the OTS.
Other types of laws, not listed in the regulations, will continue to be
evaluated by the OCC and the courts under pre-existing, established
judicial standards for Federal preemption.

Second, the rule prohibits national banks from making any consumer loan
based predominantly on the foreclosure or liquidation value of a
borrower's collateral, rather than on the borrower\'s ability to repay
the loan according to its terms. This anti-predatory lending standard
applies uniformly to all consumer lending activities of national banks,
regardless of the location from which the bank conducts those activities
or where its customers live. I believe this standard addresses the
essential characteristic of predatory lending, namely lending practices
that effectively swindle a homeowner out of his or her property.

Third, the new rule provides that, in connection with *any* type of
lending, national banks may not engage in unfair and deceptive practices
within the meaning of Section 5 of the Federal Trade Commission Act (FTC
Act), which prohibits \"unfair or deceptive acts or practices\" in
interstate commerce. We added an express reference to Section 5 to our
rule in response to commenters who urged us to affirm that this Federal
standard applies to national banks. We viewed this addition as
particularly appropriate in light of the fact that the OCC pioneered the
use of Section 5 as a basis for enforcement actions against banks that
have engaged in such conduct. Many practices typical of predatory
lending, such as "equity stripping," and "loan flipping," could be
characterized as unfair or deceptive under Section 5 and thus would be
barred under our new rule.

It is important to emphasize that these new standards apply nationwide
to all national banks and national bank operating subsidiaries. They
apply strong protections for national bank customers in every State.
They complement the detailed anti-predatory lending guidance that the
OCC has had in place since last year.[^1] Together, the new regulatory
provisions and our existing supervisory guidance provide a comprehensive
framework governing our supervision of national banks\' lending
operations to protect against predatory lending practices.

Our regulations and guidance are in addition to the multitude of Federal
consumer protection statutes with which national banks and their
operating subsidiaries must comply. [^2] As you know, national banks and
their operating subsidiaries are highly regulated and closely
supervised. The largest national banks have teams of examiners on
premises at all times, constantly reviewing their operations. Other
banks have regular on-site exams, supplemented by targeted reviews as
needed and off-site monitoring. The OCC supervises approximately 2200
national banks, together with their subsidiaries. We have nearly 1700
examiners in the field, hundreds of which are involved in both safety
and soundness and compliance supervision. Over 100 examiners throughout
the country work exclusively on compliance supervision. We have over 300
examiners on site at our largest national banks, engaged in continuous
supervision of all aspects of their operations. These resources are
supplemented by dozens of attorneys in our district offices and
Washington D.C. who work on compliance matters.

Our Customer Assistance Group in Houston, Texas (CAG) supplements these
functions. In addition to providing direct assistance to customers to
resolve their individual complaints, the CAG collates and disseminates
complaint data that help point our examiners toward banks, activities,
and products that require further investigation or transaction testing
through product sampling. We also obtain additional valuable insight and
information from community and consumer groups and from consumer
complaint referrals by other Federal and State authorities.

Our approach to predatory lending is a comprehensive, ongoing, and
integrated supervisory approach, focused on *preventing predatory
practices*, not just punishing those that commit them. Clearly,
predatory lending is a problem in this country, but our supervisory
experience, the experience of the CAG, views expressed by all 50 State
Attorneys General,[^3] and a recently issued GAO report on predatory
lending,[^4] all indicate that national banks and their operating
subsidiaries are not where the problem is festering.

If, however, as a result of our examination or supervisory processes, or
upon investigation of referrals or complaints, we find abusive practices
in a particular institution, we take action to stop them.[^5] Our
enforcement record shows that we have been willing and able to protect
customers and to address unfair, deceptive, or abusive practices when
those situations occur.[^6] This commitment has resulted in hundreds of
millions of dollars of restitution to consumers over the past several
years.

Finally, our jurisdiction over national banks and their subsidiaries
does not deprive State regulators of a role in protecting consumers in
their States,[^7] and we welcome opportunities to work cooperatively
with them to further that goal. We have invited State authorities to
refer consumer complaints concerning national banks to the OCC, and to
bring to our attention concerns that any national bank is engaged in
unfair, deceptive, abusive, or predatory practices. We have set up
special procedures to coordinate and track referrals from State
authorities. Just last week we issued a new Advisory Letter clarifying
our expectations concerning how national banks should respond to
consumer complaints received directly from State agencies.[^8] The OCC
and the States already cooperate extensively in many respects, referring
consumer complaints to the appropriate regulator of the entity
generating the complaint, and we welcome opportunities to leverage off
these existing cooperative processes to maximize their coverage and
their impact.

We appreciate this opportunity to explain our position, and would be
happy to provide you with any further information you require.

Sincerely,

**signed**

John D. Hawke, Jr.

Comptroller of the Currency

[^1]: The OCC is the first, and thus far the only, Federal banking
    agency to issue anti-predatory lending guidance. *See* Advisory
    Letter 2003-2, \"Guidelines for National Banks to Guard Against
    Predatory and Abusive Lending Practices,\" February 18, 2003;
    Advisory Letter 2003-3, \"Avoiding Predatory and Abusive Lending
    Practices in Brokered and Purchased Loans,\" February 18, 2003. This
    supervisory guidance provides comprehensive direction to ensure that
    national banks and their operating subsidiaries do not become
    involved in abusive or predatory mortgage lending practices. It
    details steps for national banks to take to ensure that they do not
    engage in such practices. The guidance makes clear that national
    banks should adopt policies and procedures to prevent predatory
    lending practices in *both* direct lending *and* in transactions
    involving brokers and purchased loans. Each of the Advisory Letters
    expressly covers national banks as well as their operating
    subsidiaries. The advisories appear on our web site at
    <http://www.occ.treas.gov/ftp/advisory/2003-2.doc> and
    <http://www.occ.treas.gov/ftp/advisory/2003-3.doc>. The OCC has also
    issued standards on unfair and deceptive practices, which appear at
    <http://www.occ.treas.gov/ftp/advisory/2002-3.doc>.

[^2]: Federal consumer protection laws and regulations that apply to
    national banks and to national bank operating subsidiaries include:
    the Federal Trade Commission Act; Truth in Lending Act; Home
    Ownership and Equity Protection Act; Fair Housing Act; Equal Credit
    Opportunity Act; Real Estate Settlement Procedures Act; Community
    Reinvestment Act; Truth in Savings Act; Electronic Fund Transfer
    Act; Expedited Funds Availability Act; Flood Disaster Protection
    Act; Home Mortgage Disclosure Act; Fair Housing Home Loan Data
    System; Credit Practices Rule; Fair Credit Reporting Act; Federal
    privacy laws; and the Fair Debt Collection Practices Act.

[^3]: In *supporting* the Office of Thrift Supervision's decision to
    retain preemption of state laws for supervised depository
    institutions and their subsidiaries but *not* for unsupervised
    housing creditors, the State Attorneys General stated: "Based on
    consumer complaints received, as well as investigations and
    enforcement actions undertaken by the Attorneys General, predatory
    lending abuses are largely confined to the subprime mortgage lending
    market and to *non‑depository institutions. Almost all of the
    leading subprime lenders are mortgage companies and finance
    companies, not banks or direct bank subsidiaries."* Brief for Amicus
    Curiae State Attorneys General, *Nat'l Home Equity Mortgage Ass'n v.
    OTS*, Civil Action No. 02-2506 (GK) (D.D.C.) at 10-11 (emphasis
    added). The Attorneys General continue to be of this view, although
    they opposed the OCC's preemption rule. In their comment letter
    submitted to the OCC on the preemption rule, the National
    Association of Attorneys General stated: "It is true that most
    complaints and state enforcement actions involving mortgage lending
    practices have not been directed at banks." National Association of
    Attorneys General Comment Letter at 10.

[^4]: *See* U.S. General Accounting Office, Report to the Chairman and
    Ranking Minority Member, Special Committee on Aging, U.S. Senate,
    \"Consumer Protection: Federal and State Agencies Face Challenges in
    Combating Predatory Lending\" (January 2004) at 22 (based on HUD
    data, only about 18 Federally regulated banks or thrifts
    concentrated primarily in subprime mortgage lending in 2001); 51
    ("\[S\]everal state attorneys general have written that predatory
    lending abuses are 'largely confined' to the subprime lending market
    and to non-depository institutions, not banks or direct bank
    subsidiaries.").

[^5]: Section 8 of the Federal Deposit Insurance Act gives the OCC broad
    powers to compel compliance with any \"law, rule, or regulation.\"
    This includes the ability to issue cease and desist orders when the
    OCC determines that a national bank or its operating subsidiary has
    violated any applicable Federal law or regulation or any applicable
    State law or regulation. 12 U.S.C. § 1818(b)(1). In an appropriate
    case, the cease and desist order may include restitution or a
    requirement for such other affirmative action as the OCC determines
    is appropriate. *Id.* at § 1818(b)(6).

[^6]: A listing of enforcement actions that the OCC has taken recently
    to remedy abusive lending and marketing practices appears on our
    website within the "Popular FOIA Requests" section, at
    http://[www.occ.treas.gov](http://www.occ.treas.gov/)/foia/foiadocs.htm.

[^7]: The National Bank Act provides that, with certain express
    exceptions, national banks are not subject to \"any visitorial
    powers except as authorized by Federal law . . . ." Existing OCC
    regulations implement the statute by providing that state officials
    are not authorized to inspect, examine, or regulate national banks,
    except where another Federal law authorizes them to do so. 12 CF.R.
    § 7.4000.

[^8]: Advisory Letter 2004-2, "Consumer Complaints Referred to National
    Banks from State Officials," February 26, 2004.