a

GAO

United States Government Accountability Office

Report to the Subcommittee on Oversight 

and Investigations, Committee on 

Financial Services, House of 

Representatives

April 2006 OCC PREEMPTION 

RULES

OCC Should Further 

Clarify the 

Applicability of State 

Consumer Protection 

Laws to National 

Banks

GAO-06-387
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2006

OCC PREEMPTION RULES 

OCC Should Further Clarify the 

Applicability of State Consumer 

Protection Laws to National Banks 

Highlights of GAO-06-387, a report to the 

Subcommittee on Oversight and 

Investigations, Committee on Financial 

Services, U.S. House of Representatives 

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 Recommends

GAO recommends that the OCC 

undertake an initiative to clarify 

the characteristics of state 

consumer protection laws that

would make them subject to 

federal preemption. 

OCC generally concurred with the

report and agreed with the 

recommendation. 

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. 

www.gao.gov/cgi-bin/getrpt?GAO-06-387.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David G. Wood 

at (202) 512-8678 or woodd@gao.gov. 
Page i GAO-06-387 OCC Preemption Rules

Contents

Letter 1

Background 3

Results in Brief 8

OCC Described Types of State Laws That Would Be Preempted, but 

Questions Remain Regarding the Rules’ Scope and Effect 10

According to Most State Officials We Contacted, the Preemption 

Rules Have Diminished State Consumer Protection Efforts 17

The Rules’ Effect on Charter Choice Is Uncertain, but Some States 

Are Addressing Potential Charter Changes 25

Suggested Measures for Addressing State Consumer Protection 

Concerns Include Shared Regulation, Which Raises Complex 

Policy Issues, and Greater Coordination between OCC and 

States 37

Conclusions 43

Recommendation for Executive Action 44

Agency Comments and Our Evaluation 45

Appendixes

Appendix I: Objectives, Scope, and Methodology 47

Appendix II: Legal Arguments Regarding the Preemption Rules 52

Appendix III: Bank Charter Changes from 1990 to 2004 65

Appendix IV: How OCC is Funded 75

Appendix V: How Selected Federal Financial Industry Regulators Are 

Funded 81

Appendix VI: Information on Funding of States’ Bank Regulators 83

Appendix VII: Comments from the Office of the Comptroller of the 

Currency 86

Appendix VIII: GAO Contact and Staff Acknowledgments 88

Tables Table 1: OCC’s Assessment Formula 76

Table 2: Price of Supervision per Million Dollars in Assets 78

Table 3: Effect of Mergers and Consolidations 79

Table 4: Information on Funding for Selected State Bank 

Regulators 83

Figures Figure 1: Structure and Supervision of Banks 4
Contents

Page ii GAO-06-387 OCC Preemption Rules

Figure 2: Assets of National and State Banks as a Percentage of 

Assets of All Banks, 1992–2004 29

Figure 3: Percentage of OCC’s Total Assessments from the 20 

Largest National Banks, from June 30, 1999 through 

December 31, 2004 31

Figure 4: Gains and Losses in Assessment Payments to OCC 

Relative to Total Assessments OCC Collected, from June 

30, 1999 through December 31, 2004 32

Figure 5: Total Annual Changes between Federal and State 

Charters, 1990-2004 66

Figure 6: Annual Changes between Federal and State Charters 

Resulting from Conversions, 1990–2004 67

Figure 7: Annual Changes between Federal and State Charters 

Resulting from Mergers, 1990–2004 68

Figure 8: Assets of Banks That Changed between Federal and State 

Charters, 1990–2004 69

Figure 9: Assets of Banks That Changed between Federal and State 

Charters as a Result of Conversions, 1990–2004 70

Figure 10: Assets of Banks That Changed between Federal and State 

Charters as a Result of Mergers, 1990–2004 71

Figure 11: Total Annual Changes between Federal and State 

Charters, as a Percentage of All Banks, 1990–2004 72

Figure 12: Assets of Banks That Converted between Federal and 

State Charters, as a Percentage of All Bank Assets, 1990–

2004 73

Figure 13: Sources of OCC Revenue, 1999-2004 75
Contents

Page iii GAO-06-387 OCC Preemption Rules

Abbreviations

CAG Customer Assistance Group

CSBS Conference of State Bank Supervisors

FCA Farm Credit Administration

FDIC Federal Deposit Insurance Corporation

FHFB Federal Housing Finance Board

FRB Board of Governors of the Federal Reserve System

FTC Federal Trade Commission

GDPIPD Gross Domestic Product Implicit Price Deflator

GLBA Gramm Leach Bliley Act

HOLA Home Owners Loan Act

MOU Memorandum of Understanding

NAAG National Association of Attorneys General

NCUA National Credit Union Administration

OCC Office of the Comptroller of the Currency

OFHEO Office of Federal Housing Enterprise Oversight

OTS Office of Thrift Supervision

SEC Securities and Exchange Commission

UDAP Unfair and Deceptive Acts and Practices

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-06-387 OCC Preemption Rules

United States Government Accountability Office

Washington, D.C. 20548

A

April 28, 2006 Letr

The Honorable Sue W. Kelly

Chairwoman

The Honorable Luis V. Gutierrez

Ranking Minority Member

Subcommittee on Oversight and Investigations

Committee on Financial Services

House of Representatives

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: one covering the preemption of state 

laws relating to the banking activities of national banks and their operating 

subsidiaries (“bank activities rule”) and one concerning OCC’s supervisory 

authority over those institutions (“visitorial powers rule”). Together, these 

rules are commonly referred to as the OCC preemption rules.1

 The bank 

activities rule addresses the applicability of state laws to lending, deposittaking, and all other activities of national banks authorized by the National 

Bank Act. The visitorial powers rule clarifies OCC’s view of its supervisory 

authority over national banks and their operating subsidiaries, which OCC 

interprets to be its exclusive power to inspect, examine, supervise, and 

regulate the business activities of national banks. 

The rules drew strong opposition from a number of state legislators, 

attorneys general, consumer group representatives, and Members of 

Congress. Some opposed OCC’s legal justification for issuing the proposed 

rules. Others opposed the rules because of what they viewed as potentially 

adverse effects on consumer protection and the dual banking system.2

More specifically, opponents stated that the scope of preemption of state 

law under the rules would weaken consumer protections and that the rules 

could undermine the dual banking system because, for example, statechartered banks located in states with regulatory schemes more stringent 

than that for national banks would have an incentive to change their 

charters from state to federal. Supporters of the rules asserted that 

1

69 Fed. Reg. 1895 (Jan. 13, 2004) (visitorial powers); 69 Fed. Reg. 1904 (Jan. 13, 2004) 

(national bank activities).

2

Because the nation’s banking system includes both federally and state-chartered banks, it is 

generally referred to as the “dual banking system.”
Page 2 GAO-06-387 OCC Preemption Rules

providing uniform regulation for national banks, rather than differing state 

regulatory regimes, was necessary to ensure efficient nationwide operation 

of national banks. 

In your letter, you requested that we review OCC’s rulemaking process for 

promulgating the bank activities and the visitorial powers rules; examine 

OCC’s process and capacity to handle consumer complaints; and assess the 

impact and potential impact of the rules on consumer protection and the 

dual banking system. On October 17, 2005, and February 23, 2006, 

respectively, we provided you with reports on the rulemaking process and 

OCC’s consumer complaints process and capacity.3

 This final report 

focuses on the impact and the potential impact of the rules on consumer 

protection and the dual banking system. Specifically, the report examines 

(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.4

 Additionally, we 

provide information on how OCC and other federal regulators, as well as 

state bank regulators, are funded. We provide this additional information in 

appendixes IV, V, and VI. 

To address these objectives, we analyzed the content of comment letters 

submitted to OCC during the rulemaking process and reviewed transcripts 

of congressional hearings on the rules to identify issues raised. We 

conducted site visits or phone interviews with officials and representatives 

of state attorneys general offices, state banking departments, consumer 

groups, state bankers associations, and national and state banks in six 

states (California, Georgia, New York, North Carolina, Idaho, and Iowa). In 

addition, we interviewed legal and academic individuals and conducted our 

own legal research. We selected these states, among other reasons, 

because of their interest in the preemption issue, as identified by 

congressional testimony, comment letters, and referrals from 

3

See GAO, OCC Preemption Rulemaking: Opportunities Existed to Enhance the 

Consultative Efforts and Better Document the Rulemaking Process, GAO-06-8

(Washington, D.C.: Oct. 17, 2005); and GAO, OCC Consumer Assistance: Process Is Similar 

to That of Other Regulators but Could Be Improved by Enhanced Outreach, GAO-06-293

(Washington, D.C.: Feb. 23, 2006).

4

Unless otherwise noted, throughout this report, the term “bank” includes state-chartered 

and federally chartered commercial banks and does not include credit unions, thrifts, and 

savings and loan institutions. 
Page 3 GAO-06-387 OCC Preemption Rules

representatives of national organizations. Therefore, the views expressed 

by officials in these six states may not be representative of all state 

officials. In Washington, D.C., we interviewed the national associations 

comprising state attorneys general and state bank regulators; 

representatives of national consumer groups; and officials at OCC and 

other federal bank regulatory agencies, including the Board of Governors 

of the Federal Reserve System (FRB) and the Federal Deposit Insurance 

Corporation (FDIC). To assess trends in chartering decisions and their 

effects on OCC’s and states’ budgets, we obtained and analyzed data on 

charter conversions, mergers, assets, and assessment payments from OCC, 

FRB, and certain state bank regulators. To describe how the OCC and state 

banking departments are funded, we interviewed OCC and state bank 

regulators, and reviewed annual reports, past GAO reports, and the 

Conference of State Bank Supervisors’ (CSBS) Profile of State-Chartered 

Banking.5

 We conducted our audit work in the previously mentioned six 

states and Washington, D.C., from August 2004 through March 2006 in 

accordance with generally accepted government auditing standards. 

Appendix I provides a detailed description of our objectives, scope, and 

methodology.

Background

Regulation and Structure of 

Banking Organizations

The regulatory system for banks in the United States is known as the “dual 

banking system” because banks can be either federally or state-chartered. 

As of September 30, 2005, there were 1,846 federally chartered banks and 

5,695 state-chartered banks.6

 National banks are federally chartered under 

the National Bank Act. The act sets forth the types of activities permissible 

for national banks and, together with other federal law, provides OCC with 

supervisory and enforcement authority over those institutions. State banks 

receive their powers from their chartering states, subject to activities 

restrictions and other restrictions and requirements imposed by federal 

5

The Conference of State Bank Supervisors was founded in 1902 as a clearinghouse for ideas 

to solve common problems of state bank regulators. One of the goals of the organization is 

to represent the interests of the state banking system to federal and state legislative and 

regulatory agencies. 

6

These data on the numbers of federally and state-chartered banks were obtained from 

FDIC’s Statistics on Depository Institutions.
Page 4 GAO-06-387 OCC Preemption Rules

law. State banks are chartered and supervised by the individual states but 

also have a primary federal regulator (see fig. 1). FRB is the primary federal 

regulator of state banks that are members of the Federal Reserve System. 

FDIC is the primary federal regulator of state banks that are not members 

of the Federal Reserve System. OCC and state regulators collect 

assessments and other fees from banks to cover the costs of supervising 

these entities. OCC does not receive congressional appropriations.

Figure 1: Structure and Supervision of Banks

Note: The primary supervisor(s) are shown in parentheses.

a

As discussed elsewhere in this report, financial subsidiaries of national banks, which may engage in 

nonbanking financial activities, are subject to regulation by OCC, but certain activities are subject to 

functional regulation by the Securities and Exchange Commission, the Commodity Futures Trading 

Commission, and state insurance regulators. Nonbank holding company subsidiaries may also be 

subject to federal supervision and under the jurisdiction of the Federal Trade Commission. The Federal 

Trade Commission is responsible for enforcing federal laws for lenders that are not depository 

institutions but it is not a supervisory agency and does not conduct routine examinations.

Source: GAO.

Financial institutions and

their subsidiaries within

a holding company

A bank holding company or financial 

holding company can include 

national and state banks and their 

subsidiaries. In addition, such a

holding company can have nonbank 

subsidiaries that engage in mortgage 

lending or other financial activities. 

These nonbank components of the 

holding company are “affiliates” of 

the national bank.

Independent banks

Holding company

(FRB)

State

nonmember bank

(FDIC, state

regulators)

State

member bank

(FRB, state

regulators)

National bank

(OCC)

Operating

subsidiary

(OCC)

National bank

(OCC)

Operating

subsidiary

(OCC)

Subsidiary

(FRB, state

regulators)

State

member bank

(FRB, state

regulators)

Subsidiary

(FRB, state

regulators)

Subsidiary

(FDIC, state

regulators)

State

nonmember bank

(FDIC, state

regulators)

Subsidiary

(FDIC, state

regulators)

Nonbank

subsidiary

(states)

a
Page 5 GAO-06-387 OCC Preemption Rules

Banks chartered in the United States can exist independently or as part of a 

bank holding company. OCC, which administers the National Bank Act, 

permits national banks to conduct their activities through operating 

subsidiaries, which typically are state-chartered businesses. OCC has 

concluded that a national bank’s use of an operating subsidiary is a power 

permitted by the National Bank Act and that national banks’ exercise of 

their powers through operating subsidiaries is subject to the same laws that 

apply to the national banks directly. Because OCC supervises national 

banks, the agency also supervises national bank operating subsidiaries.7

Further, many federally and state-chartered banks exist as parts of bank 

holding companies. Bank holding companies may also include nonbank 

financial companies, such as finance and mortgage companies that are 

subsidiaries of the holding companies.8

 These holding company 

subsidiaries are referred to as affiliates of the banks because of their 

common ownership or control by the holding company. Unlike national 

bank operating subsidiaries, nonbank subsidiaries of bank holding 

companies often are subject to regulation by states and their activities may 

be subject to federal supervision as well. 

OCC’s Mission and 

Regulatory Responsibilities

OCC’s mission focuses on the chartering and oversight of national banks to 

assure their safety and soundness and on fair access to financial services 

and fair treatment of bank customers. OCC groups its regulatory 

responsibilities into three program areas: chartering, regulation, and 

supervision. Chartering activities include not only review and approval of 

charters but also review and approval of mergers, acquisitions, and 

reorganizations. Regulatory activities result in the establishment of 

regulations, policies, operating guidance, interpretations, and examination 

7

An operating subsidiary of a national bank is defined to be under control or majority 

ownership by the bank. Federal regulations contain additional criteria for qualification as a 

national bank operating subsidiary. See 12 C.F.R. § 5.34(2005). Under the Gramm Leach 

Bliley Act, qualifying national banks may own or control “financial subsidiaries,” through 

which the banks may conduct certain nonbanking financial activities. By definition, 

financial subsidiaries are not operating subsidiaries. Pub. L. No. 106-102 §121 (Nov. 12, 

1999), 12 U.S.C. § 24a(g)(3). 

8

For the purposes of this report, the term “holding company” refers to both (traditional) 

bank holding companies and bank holding companies that qualify as financial holding 

companies as defined by FRB. Under the Gramm Leach Bliley Act, bank holding companies 

that satisfy standards contained in the Bank Holding Company Act of 1956, as amended, 12 

U.S.C. §§ 1841–1850, can qualify as financial holding companies and in that capacity may 

own or control entities engaged in a wider variety of financial services than those permitted 

for traditional bank holding companies and their subsidiaries. 
Page 6 GAO-06-387 OCC Preemption Rules

policies and handbooks. OCC’s supervisory activities encompass bank 

examinations and enforcement activities, dispute resolution, ongoing 

monitoring of banks, and analysis of systemic risk and market trends.

As of March 2005, the assets of the banks that OCC supervises accounted 

for approximately 67 percent—about $5.8 trillion—of assets in the nation’s 

banks. Among the banks OCC supervises are 14 of the top 20 banks in asset 

size. OCC also supervises federal branches and agencies of foreign banks.

As the supervisor of national banks, OCC has regulatory and enforcement 

authority to protect national bank consumers. In addition to exercising its 

supervisory responsibilities under the National Bank Act, which include 

consumer protection, OCC enforces other consumer protection laws. 

These include the Federal Trade Commission Act or FTC Act, which 

prohibits unfair and deceptive practices, and the Federal Home Ownership 

and Equity Protection Act, which addresses predatory practices in 

residential mortgage lending. With respect to real estate lending, other 

consumer protection laws that national banks and their operating 

subsidiaries are subject to include, but are not limited to, the Truth in 

Lending Act, the Home Mortgage Disclosure Act, the Fair Housing Act, and 

the Equal Credit Opportunity Act. 

One of OCC’s strategic goals is to ensure that all customers of national 

banks have equal access to financial services and are treated fairly. The 

agency’s strategic plan lists objectives and strategies to achieve this goal 

and includes fostering fair treatment through OCC guidance and 

supervisory enforcement actions, where appropriate, and providing an 

avenue for customers of national banks to resolve complaints. The main 

division within OCC tasked with handling consumer complaints is the 

Customer Assistance Group (CAG); its mission is to ensure that bank 

customers receive fair treatment in resolving their complaints with national 

banks. In our recent report on OCC consumer assistance efforts, we found 

that, in addition to resolving individual complaints, OCC uses consumer 

complaint data collected by CAG (1) to assess risks and identify potential 

safety, soundness, or compliance issues at banks; (2) to provide feedback 

to banks on complaint trends; (3) and to inform policy guidance for the 

banks it supervises. OCC’s bank examiners use consumer complaint 

information to focus examinations they are planning or to alter 

examinations in progress.9

9

GAO-06-293.
Page 7 GAO-06-387 OCC Preemption Rules

OCC and Preemption Preemption of state law is rooted in the U.S. Constitution’s Supremacy 

Clause, which provides that federal law is the “supreme law of the land.” 

Because both the federal and state governments have roles in supervising 

financial institutions, questions can arise about whether federal law 

applicable to a depository institution preempts the application of a state’s 

law to the institution. Before promulgating the preemption rules in January 

2004, OCC primarily addressed preemption issues through opinion letters 

issued in response to specific inquiries from banks or states. According to 

OCC, the preemption rules “codified” judicial decisions and OCC opinions 

on preemption of particular state laws by making those determinations 

generally applicable to state laws and clarifying certain related issues. 

However, the preemption rules were controversial. In commenting on the 

proposed rules, some opponents questioned whether OCC, in issuing the 

bank activities rule, interpreted the National Bank Act too broadly, 

particularly with respect to the act’s effect on the applicability of state law 

to national bank operating subsidiaries.10 Others opposed the rules because 

of what they viewed as potentially adverse effects on consumer protection 

and the dual banking system. For example, consumer groups and state 

legislators feared that the preemption of state law, particularly with respect 

to predatory lending practices, would weaken consumer protections. In 

comments on the proposed visitorial powers rule, most opponents 

questioned OCC’s assertion of exclusive visitorial authority with respect to 

national bank operating subsidiaries. Opponents expressed concern that 

the visitorial powers rule eliminates states’ ability to oversee and take 

enforcement actions against national bank operating subsidiaries, even 

though those entities may be state-licensed businesses.

Supporters of the proposed bank activities rule, a group consisting largely 

of national banks, asserted that subjecting national banks to uniform 

regulation, rather than differing state regulatory regimes, was necessary to 

ensure efficient nationwide operation of national banks. According to these 

commenters, national banks operating under varied state laws would face 

increased costs, compliance burdens, and exposure to litigation based on 

differing, and sometimes conflicting, state laws. In comments on the 

proposed visitorial powers rule, most proponents suggested that OCC 

10As OCC stated in the preamble to the bank activities rule, OCC regulations in effect before 

promulgation of the preemption rules provided that national bank operating subsidiaries are 

subject to the same terms and conditions as apply to national banks, unless federal law 

provides otherwise. 69 Fed. Reg. 1905, 1906, 1913.
Page 8 GAO-06-387 OCC Preemption Rules

make technical clarifications to the rule, specifically related to the 

exclusivity of OCC’s visitorial powers with respect to national banks’ 

operating subsidiaries.11

Results in Brief In issuing the preemption rules, 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 and the 

nature of its visitorial powers over those institutions. However, the bank 

activities rule does not fully resolve uncertainties about the applicability of 

state consumer protection laws to national banks and their operating 

subsidiaries. This is because 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. Some state officials questioned the extent to 

which state consumer protection laws, particularly those aimed at 

preventing unfair and deceptive acts and practices, are preempted for 

national banks and their operating subsidiaries. Some national bank 

representatives with whom we spoke had mixed views about the 

applicability of state laws regarding unfair and deceptive acts and 

practices. 

State officials reacted differently to the rules’ effect on their relationships 

with national banks. In the views of most state officials we contacted, the 

preemption rules have had the effect 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. 

Those officials said that since the rules were promulgated, some national 

banks and operating subsidiaries have become less inclined to respond to 

actions by state officials to resolve consumer complaints. However, OCC 

has issued guidance to national banks and proposed an agreement with the 

states designed to facilitate the resolution of and information sharing about 

individual consumer complaints and to address broader consumer 

protection issues that state officials believe warrant attention. Further, 

some state officials reported that, prior to the rules, they examined 

operating subsidiaries and were not challenged by either those entities or 

OCC, yet since the visitorial powers rule was issued some national bank 

11We conducted a content analysis of comment letters that OCC received in response to its 

proposed rulemaking to obtain these views. See appendix I.
Page 9 GAO-06-387 OCC Preemption Rules

operating subsidiaries have declined to submit to state examinations or 

have relinquished their state licenses. 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. 

Some state officials also expressed the view that the preemption rules 

might prompt holding companies that have national bank subsidiaries to 

move lines of business from a national bank’s holding company affiliate 

into a national bank operating subsidiary in order to avoid state regulation. 

Because the financial services industry has undergone significant 

changes—involving interstate banking, globalization, and mergers and 

consolidations—it is difficult to determine what effects, if any, the 

preemption rules—apart from other aspects of the federal charter—might 

have on banks’ choices of charter. Factors affecting charter choice can 

include the size and complexity of an institution’s banking operations, the 

institution’s business needs, and the extent to which supervisory and 

regulatory competence and expertise are tailored to the scale of the bank’s 

operations. Our analysis of FRB and OCC 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. However, the portion of total bank 

assets under the supervision of state bank regulators declined substantially 

in 2004 due to two large formerly state-chartered banks changing to the 

federal charter, and such shifts in assets have budgetary implications for 

both state regulators and OCC. Based on our work, no conclusion can be 

made about the role, if any, the preemption rules had in those events or will 

have on future charter choices. Nevertheless, several state officials 

expressed the view that federal charters likely bestow competitive 

advantages in light of the preemption rules, and some states reported 

actions to address potential charter changes by their state banks.

State officials and consumer groups identified three general measures they 

believed could address their concerns about protecting consumers of 

national banks and operating subsidiaries: (1) clarifying the National Bank 

Act to provide specifically 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. In light of OCC regulations 

and judicial decisions recognizing operating subsidiaries to be authorized 

by the National Bank Act as vehicles through which national banks may 

operate, the first measure would likely require amending the National Bank 
Page 10 GAO-06-387 OCC Preemption Rules

Act to specify either that the states and OCC share jurisdiction over 

operating subsidiaries, or that operating subsidiaries are to be treated as 

national bank affiliates. Moreover, providing for state involvement in the 

supervision of operating subsidiaries, even if only for consumer protection 

purposes, raises both policy and practical questions—for example, in 

drawing a line clearly defining states’ authority. Some officials suggested 

that a national consumer protection lending standard applicable to lending 

activities by all state-chartered and federally chartered financial 

institutions would avoid disputes about preemption and serve to satisfy 

concerns about the effectiveness of current efforts to protect consumers 

from lending abuses. A uniform standard, however, could limit states’ 

abilities to enact standards of their own. The third measure would involve 

OCC initiating efforts to involve the states in addressing their concerns. 

This 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. 

This report makes a recommendation to the Comptroller of the Currency 

that is designed to clarify the applicability of state consumer protection 

laws to national banks. We provided a draft of this report to OCC for review 

and comment. In a letter (reprinted in app. VII), the Comptroller of the 

Currency agreed with our recommendation, specifically recognizing that 

OCC should find more opportunities to work cooperatively with the states 

to address issues that affect the institutions it regulates, enhance existing 

information concerning the principles that guide its preemption analysis, 

and look for opportunities to generally address the preemption status of 

state laws. OCC also provided technical comments which we incorporated 

as appropriate.

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. Specifically, OCC (1) listed subjects of national bank 

activity—for example, checking accounts, lending disclosure, and 

mortgage origination and mortgage-related activities such as processing, 

servicing, purchasing, and selling—to which state laws do not apply; (2) 

listed subjects to which state laws generally apply; and (3) described the 

federal standard for preemption under the National Bank Act that it would 
Page 11 GAO-06-387 OCC Preemption Rules

apply with respect to state laws that do not relate to the listed subjects.12

Although OCC’s purpose in proposing the regulations was “to add 

provisions clarifying the applicability of state law to national banks,”13 we 

found that grounds for uncertainty remain regarding the applicability of 

state consumer protection laws to national banks, particularly state 

statutes that generally prohibit unfair and deceptive practices by 

businesses. In addition, because they disagree with OCC’s legal analysis 

underlying the rules, some state officials we interviewed said they are 

unsure of how to proceed with legal measures, such as proposing, 

enacting, or enforcing laws or issuing and enforcing regulations that could 

relate to activities conducted by national banks and their operating 

subsidiaries.

OCC Sought to Clarify the 

Applicability of State Laws 

to National Banks and Their 

Operating Subsidiaries by 

Interpreting Preemption and 

Visitorial Powers under the 

National Bank Act

In the bank activities rulemaking, OCC amended or added rules in parts of 

its regulations applicable to four categories of national bank activity 

authorized by the National Bank Act: (1) real estate lending; (2) non-real 

estate lending; (3) deposit-taking; and (4) the general business of banking, 

which includes activities OCC determines to be incidental to the business 

of banking. For each of the first three categories, OCC listed subjects that it

concluded are not subject to state law because state laws concerning those 

subjects already had been preempted under OCC interpretations of the 

National Bank Act, or by judicial decisions, or were found to be preempted 

by OTS for federal thrifts. For state laws relating to any of the three 

categories but not to subjects specified in the lists, OCC announced that it 

would apply the test for federal preemption established by Supreme Court 

precedents. According to OCC, that test calls for a determination of 

whether a state law “obstructs, impairs, or conditions” a national bank’s 

ability to perform a federally authorized activity. For the fourth category—a 

“catch all” provision for state laws that do not specifically relate to any of 

the other three categories—the rule states that OCC will apply its 

articulation of the test for preemption under the National Bank Act. Finally, 

for each of the four categories of banking activity, the rule lists subjects to 

which state laws generally apply. These include torts, contracts, the rights 

to collect debts, taxation, and zoning. The rules also provide that a state 

law applies to a national bank if OCC determines that the law has only “an 

12For each of the categories, OCC specified that preemption does not occur if a federal law 

makes state law applicable to national banks.

1369 Fed. Reg. 1905 (Jan. 13, 2004).
Page 12 GAO-06-387 OCC Preemption Rules

incidental effect” on the bank’s activity or “is otherwise consistent with” 

powers authorized under the National Bank Act. 

Although it is referred to as part of the “preemption rules,” the visitorial 

powers rule does not announce the preemption of state laws that affect a 

particular subject or activity. Instead it is OCC’s refinement of how it 

interprets the federal statute that establishes OCC’s visitorial power over 

national banks. OCC’s view of its visitorial powers is as follows:

[F]ederal law and OCC regulations vest the OCC with exclusive “visitorial” powers over 

national banks and their operating subsidiaries. (Citation omitted) Those powers include 

examining national banks, inspecting their books and records, regulating and supervising 

their activities pursuant to federal banking law, and enforcing compliance with federal or 

any applicable state law concerning those activities. (Citation omitted) Federal law thus 

limits the extent to which any other governmental entity may exercise visitorial powers over 

national banks and their operating subsidiaries.14

In the visitorial powers rulemaking, OCC sought to clarify the extent of its 

supervisory authority. The agency amended its rule setting forth OCC’s 

visitorial powers so that the rule: (1) expressly states that OCC has 

exclusive visitorial authority with respect to the content and conduct of 

activities authorized for national banks under federal law, unless otherwise 

provided by federal law; (2) recognizes the jurisdiction of functional 

regulators under the Gramm Leach Bliley Act (GLBA); and (3) clarifies 

OCC’s interpretation of the statute establishing its visitorial powers, 12 

U.S.C. § 484.That provision makes national banks subject to the visitorial 

powers vested in courts of justice, such as a state court’s authority to issue 

orders or writs compelling the production of information or witnesses, but 

according to OCC, does not authorize states or other governmental entities 

to exercise visitorial powers over national banks. 

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. One set of concerns, discussed in appendix II of this report, 

reflects differences about how the rules and OCC’s authority under the 

14OCC Interpretive Letter No. 971 (Jan. 16, 2003). OCC’s visitorial powers are set forth at 12 

U.S.C. § 484 and OCC’s implementing regulation, 12 C.F.R. § 7.4000.
Page 13 GAO-06-387 OCC Preemption Rules

National Bank Act should be interpreted. In OCC’s view, the rules resolved 

many uncertainties that had existed before the rules but did not resolve all 

issues about the extent of preemption. A second set of concerns regarding 

uncertainty over the applicability of state consumer protection laws, 

particularly those prohibiting unfair and deceptive acts and practices 

(UDAP) exists, at least in part, because of OCC’s statements that under the 

preemption rules such laws may apply to national banks.

Statements by OCC Suggest That 

State Consumer Protection Laws 

Can Be Consistent with Federal 

Law

In the bank activities rulemaking, OCC specified that a state law relating to 

a subject listed as preempted, as well as any other state law determined to 

be preempted by OCC or a court, does not apply to national banks and their 

operating subsidiaries regardless of how the law is characterized.15

Accordingly, a state law would not escape preemption simply because the 

state describes it as a consumer protection law. 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. Moreover, to the extent that a state’s consumer 

protection law might apply to a subject on one of the preemption lists, OCC 

has not specifically indicated what characteristics of the state law would 

cause it to be preempted.

Some state officials and consumer groups we met with were unclear as to 

whether or not a state consumer protection law would apply to national 

banks because it is “otherwise consistent with” the National Bank Act, even 

if the law were to have more than an incidental effect on a national bank’s 

activity. Some referred to a long-standing decision by a Federal Court of 

Appeals, discussed below, holding that a state’s law restricting 

discriminatory real estate lending practices applied to national banks. They 

said that the court’s reasoning could justify the application of other types of 

state laws, such as consumer protection laws, to national bank business 

practices. Moreover, on several occasions, OCC has made statements that 

reasonably could be interpreted to indicate that state consumer protection 

laws can be consistent with federal law and, therefore, not preempted, 

even if they directly affect a national bank’s business activity.

1569 Fed. Reg. 1912 n. 59 (stating, in pertinent part, as follows: “The label a state attaches to 

its laws will not affect the analysis of whether that law is preempted.”).
Page 14 GAO-06-387 OCC Preemption Rules

In National State Bank of Elizabeth, N.J. v. Long, the United States Court 

of Appeals for the Third Circuit ruled that a provision of a New Jersey law 

prohibiting redlining in mortgage lending applied to a national bank.16

Recognizing that prohibiting redlining was consistent with federal policy, 

the court ruled that the bank’s compliance with the New Jersey statute 

would not frustrate the “aims of the federal banking system” or “impair a 

national bank's efficiency” in conducting activities permitted by federal 

law.17 This decision demonstrates that a state law determined to be 

consistent with federal policy can govern a national bank’s exercise of a 

federally granted power, even if the law directly affects the way in which 

the bank conducts its activity. According to some of the individuals we 

interviewed, the same analysis justifies application of state consumer 

protection laws to national bank activities such as real estate lending.

Some of the individuals we interviewed asserted that the Long court’s 

analysis justifies the application of state consumer protection laws to 

national banks, at least to the extent that the laws are consistent with 

federal policy. They pointed out, moreover, that federal consumer 

protection laws applicable to banking activities (discussed later in this 

report) accommodate state laws that impose standards and requirements 

stricter than those contained in the federal laws themselves, provided the 

state laws are otherwise consistent with the federal law. Those federal laws 

contain savings clauses preserving from preemption state laws that impose 

stricter standards than in the federal laws. However, courts have 

recognized that those savings clauses do not necessarily preserve such 

state laws from preemption by the National Bank Act.18 Several consumer 

groups and state officials also referred to OCC statements as indications of 

OCC’s recognition that, to some extent, the application of consumer 

protection laws to national banks is consistent with federal policy. 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. Also, while the 

16630 F.2d 981 (3rd Cir. 1980). In general terms, redlining can be described as the practice of 

denying or increasing the cost of credit or other financial products to residents of certain 

areas based on prohibited factors such as race, religion, or gender.

17Id. at 987. Although the court found the New Jersey law applicable to a national bank’s 

lending activity, the court also held that OCC has exclusive jurisdiction to enforce the law 

with respect to national banks.

18Bank One v. Guttau, 190 F.3d 844 (8th Cir. 1999); see also, Bank of America v. City and 

County of San Francisco, 309 F.3d 551, 565 (9th Cir. 2002).
Page 15 GAO-06-387 OCC Preemption Rules

bank activities rule specifies that national banks may engage in real estate 

lending without regard to state law limitations concerning the “terms of 

credit,” the Comptroller recently referred to the agency’s responsibility to 

enforce “applicable state consumer protection laws” and referred to state 

fair lending laws as an example.19 

OCC held this position before it promulgated the preemption rules. In a 

2002 Advisory Letter to national banks, their operating subsidiaries, and 

others entitled “Guidance on Unfair or Deceptive Acts or Practices,” OCC 

advised the recipients that “[t]he consequences of engaging in practices 

that may be unfair or deceptive under federal or state law can include 

litigation, enforcement actions, monetary judgments, and harm to the 

institution’s reputation.” The letter alerted the recipients to the potential 

that the activities of national banks and their operating subsidiaries could 

be subject to state UDAP laws, stating as follows:

A number of state laws prohibit unfair or deceptive acts or practices, and such laws may be 

applicable to insured depository institutions. See, e.g., Cal. Bus. Prof. Code 17200 et seq. and 

17500 et seq. Operating subsidiaries, which operate effectively as divisions or departments 

of their parent national bank, also may be subject to such state laws. . . . Pursuant to 12 CFR 

7.4006, state laws apply to national bank operating subsidiaries to the same extent that 

those laws apply to the parent national bank, unless otherwise provided by federal law or 

OCC regulation. 

19Letter to the Honorable Barney Frank from Comptroller of the Currency John Dugan, Nov. 

21, 2005.
Page 16 GAO-06-387 OCC Preemption Rules

Although OCC published this guidance before it issued the bank activities 

rule, at the time of the guidance OCC had been following the same 

preemption standard it applied in the rulemaking.20

Officials Expressed Differing 

Views on Applicability of State 

Consumer Protection Laws

We found differing views among state officials with respect to the 

applicability of state consumer protection laws, particularly their UDAP 

laws, to national banks. Officials from some state attorney general offices 

said that their states’ UDAP laws probably are preempted by the bank 

activities rule, while officials in one state were unclear. State banking 

department officials we spoke with also had mixed views regarding the 

applicability of state UDAP laws. In one state, a banking department 

official said that the state’s UDAP statute would likely be preempted. In 

another state, an official said that state’s UDAP laws would not be 

preempted. Two other state banking department officials were unclear 

about the status of their states’ UDAP laws. 

Representatives of national banks also had mixed views about the 

applicability of state UDAP laws. Representatives of one national bank 

stated that state UDAP laws were preempted, whereas representatives of 

two other national banks stated that state UDAP laws were, in fact, 

applicable to national banks and their operating subsidiaries. The status of 

state UDAP laws is not clear because, some argued, those laws generally 

are consistent with federal laws and policies and, therefore, might not 

obstruct, impair, or condition the ability of national banks and operating 

subsidiaries to carry out activities authorized by the National Bank Act. 

20In a 1997 interpretive letter, an OCC official made the following point about Supreme Court 

decisions concerning preemption under the National Bank Act:

In reviewing these decisions, a recurrent theme is apparent. The Court has repeatedly used 

words and phrases such as “impair,” “interfere with,” “conflict with,” “frustrate,” “infringe,” 

and “burden” to describe the effect of state laws that it has found to be preempted with 

respect to national banks. The lesson to be derived is that state laws apply to national banks 

only if they do not conflict with federal law, which includes impairing or interfering with the 

powers granted to national banks by federal law. . . . 

OCC Interpretive Letter No. 789 (June 27, 1997). Also, in 2003, OCC stated that, with respect 

to requests for a preemption opinion, “[w]e will continue to review these requests on a caseby-case basis and, in so doing, we will continue to apply the preemption standards 

articulated by the United States Supreme Court in Barnett Bank of Marion County, N.A. v. 

Nelson, 517 U.S. 25 (1996) and other applicable Federal judicial precedents.” OCC Advisory 

Letter 2002—3 (Mar. 22, 2002).
Page 17 GAO-06-387 OCC Preemption Rules

In addition to uncertainty over the applicability of state consumer 

protection laws, state officials, consumer groups, and others asserted that 

the effects of the preemption rules will remain unclear until legal 

arguments are resolved. The legal disputes pertain to whether OCC 

correctly articulated and applied the federal preemption standard, OCC’s 

reasons for including certain subjects of state law in the preemption lists, 

and the application of state laws to national bank operating subsidiaries. 

These issues, which essentially concern OCC’s legal authority and rationale 

for the rules, are summarized in appendix II. 

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. More specifically, the state 

officials asserted that, after the preemption rules went into effect, some 

national banks and operating subsidiaries became less responsive to 

actions by state officials to resolve consumer complaints. In addition, some 

state officials noted that they previously had been able to examine 

operating subsidiaries without challenge, but after the visitorial powers 

rule was issued some national bank operating subsidiaries declined to 

submit to state examinations or relinquished their state licenses. 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. While we found some examples of operating subsidiaries that did 

not comply with state regulatory requirements after the preemption rules 

were issued, we note that others had not complied with state requirements 

before the rules were issued. Some state officials also believed that the 

preemption rules might prompt holding companies with national bank 

subsidiaries to move lines of business from a national banks’ holding 

company affiliate into an operating subsidiary to avoid state regulation. No 

data are available that would allow us to determine the extent of any such 

activity, and state officials did not provide conclusive documentary 

evidence to support their concerns. 
Page 18 GAO-06-387 OCC Preemption Rules

State Officials Expressed 

Differing Reactions to the 

Rules’ Effect on 

Relationships with National 

Banks

While all state officials we interviewed agreed that the preemption rules 

have changed the environment in which they relate to national banks and 

their operating subsidiaries, they have responded differently to the 

changes. Officials from some state attorney general offices and state 

banking departments told us that the preemption rules have caused them to 

approach national banks and their operating subsidiaries about consumer 

protection issues differently than they did in the past. For example, one 

state banking department official said that, instead of approaching a 

national bank operating subsidiary from a regulatory posture, the 

department now will try to resolve a consumer complaint with a national 

bank operating subsidiary only if the department has a contact at that 

particular operating subsidiary, but having a contact is the exception rather 

than the rule. Other state officials told us that the preemption rules have 

not caused them to change their practices, either because they continued 

to attempt resolution at the local level or because they continued to 

forward unresolved complaints to OCC as they had done prior to the 

issuance of the preemption rules. 

Both before and after issuing the preemption rules, OCC issued guidance 

that, among other things, addressed how banks should handle contacts 

from state officials. Specifically, OCC issued guidance in 2002—prior to the 

visitorial powers rule—encouraging national banks to consult the agency 

about information requests by state officials to determine whether the 

request constituted an attempt to exercise visitorial or enforcement power 

over the bank. 21 The guidance also advised national banks that state 

officials were to contact OCC, rather than the bank itself, if they had 

information to indicate that the bank might be violating federal law or an 

applicable state law. In February 2004, approximately 1 month after the 

visitorial powers rule became effective, OCC updated its 2002 guidance to 

clarify how national banks should respond to consumer complaints 

referred directly to the bank by state officials.22 While the 2002 guidance 

was silent on consumer complaint handling specifically, the 2004 guidance 

stated that OCC does not regard referral of complaints by state officials as 

an exercise of supervisory powers by the states and that national banks 

should deal with the complaining customer directly. The 2004 guidance 

advised national banks to contact OCC if (1) the bank considers a referral 

to be a state effort to direct the bank’s conduct or otherwise to exercise 

21OCC Advisory Letter 2002-9 (Nov. 25, 2002).

22OCC Advisory Letter 2004-2 (Feb. 26, 2004).
Page 19 GAO-06-387 OCC Preemption Rules

visitorial authority over the national bank or (2) the state-referred 

complaint deals with the applicability of a state law or issues of 

preemption. Further, the guidance notifies national banks that state 

officials are encouraged to send individual consumer complaints to OCC’s 

Customer Assistance Group, and as outlined in the 2002 guidance, 

reiterates that state officials should communicate any information related 

to a national bank’s involvement in unfair or deceptive practices to OCC’s 

Office of Chief Counsel. 

Further, in July 2003—prior to the visitorial powers rule—OCC suggested a 

“Memorandum of Understanding” (MOU) between itself and state 

attorneys general and other relevant state officials that could, in OCC’s 

words, “greatly facilitate” its ability to provide information on the status 

and resolution of specific consumer complaints and broader consumer 

protection matters state officials might refer to them. The MOU was sent to 

all state attorneys general as well as the National Association of Attorneys 

General (NAAG) and CSBS. Some of the officials from banking 

departments and the offices of attorneys general that we interviewed, as 

well as representatives of CSBS, said they viewed OCC’s proposed MOU as 

unsatisfactory because, in their view, it essentially favored the OCC. In 

addition, some of the state officials with whom we spoke believed that 

signing the proposed MOU would amount to a tacit agreement to the 

principles of the banking activities and the visitorial powers rules.

According to OCC, states’ attorneys general—in informal comments on the 

proposed MOU—felt that the proposal was unilateral, imposing certain 

conditions upon states that received information from OCC but not upon 

OCC when it received information from state officials. Also, OCC noted 

that the proposed MOU did not provide for referrals from OCC to state 

agencies of consumer complaints OCC received pertaining to stateregulated entities. Therefore, in 2004, OCC attempted to address these 

concerns in a revised MOU, which it provided to CSBS and the Chairman of 

the NAAG Consumer Protection Committee. According to OCC, the revised 

MOU expressly says that an exchange of information does not involve any 

concession of jurisdiction by either the states or by OCC to the other. Only 

one state official signed the original 2003 MOU, and according to OCC, to 

date, no additional state officials have signed the 2004 version.

Some State Officials Believe That 

National Banks and Operating 

Subsidiaries Are Less Inclined to 

Cooperate 

Some state officials asserted that before the preemption rules they were 

able to deal with national banks on more than merely a complaint-referral 

basis. They said that, through their regular dealings with national banks 

and their operating subsidiaries, consumer complaints typically had been 
Page 20 GAO-06-387 OCC Preemption Rules

resolved effectively and expeditiously. Among the anecdotes they provided 

are the following:

• State officials in two states said that they treated national banks and 

their operating subsidiaries just like any other state-regulated business; 

they would simply approach the institution about consumer complaints 

and jointly work with the institution to resolve them.

• An official in one state attorney general’s office referred to an effort in 

which the attorney general’s office successfully resolved complaints 

about a national bank’s transmittal of customer account information to 

telemarketers.

• Officials from another attorney general’s office said that, before the 

visitorial powers rule was amended, they often were able to persuade 

national banks to change their business practices; for example, they said 

they were able to encourage a national bank to discontinue including 

solicitations that they viewed as deceptive in consumers’ credit card 

statements. These officials also stated that, in the past, they were able to 

speak informally with national banks to get them to alter the way certain 

products were advertised.

As further examples of national banks cooperating with state officials prior 

to the preemption rules, state officials in two states cited voluntary 

settlements that national banks entered with states concerning 

telemarketing to bank credit card holders and the sharing of bank customer 

information with third parties. In each of two settlements, one in March 

2002 and the other in January 2003, national banks entered an agreement 

with 29 states in connection with judicial proceedings brought by the states 

concerning telemarketing practices and the disclosure of cardholder 

information to third parties. Also, in an October 2000 settlement made in 

connection with judicial proceedings initiated by a state, a national bank 

agreed to follow certain practices concerning the sharing of customer 

information with third parties. Although these settlements were made 

voluntarily and do not represent a judicial determination that the states had 

authority to enforce laws against the national banks, state officials used 

them to illustrate that they had some influence over the banks prior to the 

preemption rules. In addition, some state officials said that prior to the 

visitorial powers rule, many operating subsidiaries submitted to state 

requirements regulating the conduct of their business, such as license 

requirements for mortgage brokering. Also, according to some state 

officials, prior to the issuance of the visitorial powers rule their states 
Page 21 GAO-06-387 OCC Preemption Rules

examined and took enforcement actions against operating subsidiaries 

because they were state-licensed and regulated, and OCC did not 

interfere.23

Some state authorities maintained, however, that by removing 

uncertainties about state jurisdiction and the applicability of state law that 

may have served as an incentive for cooperation, the preemption rules 

made it opportune for the institutions to be less cooperative. One official 

from an attorney general’s office, emphasizing the importance of consumer 

protection at the local level, stated that the preemption rules have in effect 

precluded the state from obtaining information from national banks that 

could assist the state in protecting consumers. The official pointed out that 

the state’s ability to obtain information from operating subsidiaries 

enhanced state consumer protection efforts because the institutions would 

refrain from abusive practices to avoid reputation risk associated with the 

disclosure of adverse information.24 Further, many state officials we spoke 

with expressed a concern that, because of the preemption rules, national 

bank operating subsidiaries that formerly submitted to state supervision no 

longer do so. 

According to some state officials, because of the preemption rules, 

operating subsidiaries either threatened to relinquish or actually 

23One example of state regulation of a national bank operating subsidiary can be found in 

Wells Fargo Bank, N.A. v. Boutris, 419 F.3d 949 (9th Cir. 2005). The case involved a national 

bank operating subsidiary engaged in the business of mortgage lending, which became 

licensed by California in 1997 and underwent an examination by the state in 2002 for 

compliance with state laws. In 2003, the state agency demanded that the subsidiary conduct 

an audit of its residential mortgage loans made in California during a certain time period. 

The subsidiary refused, asserting that in connection with its mortgage lending it was subject 

to OCC’s exclusive jurisdiction even though the entity had submitted to the state 

examination. The court held in favor of the operating subsidiary, permanently enjoining the 

state from exercising visitorial powers over the subsidiary. See also, National City Bank of 

Indiana v. Boutris, 2003 U.S. Dist. LEXIS 25852 (E.D. Cal. July 2, 2003).

24A federal court has ruled that this type of policy concern does not undermine the 

exclusiveness of OCC’s supervisory authority. In OCC v. Spitzer, 396 F. Supp. 2d 383 (S.D. 

N.Y. 2005), the court held that the Attorney General for the State of New York is permanently 

enjoined from issuing subpoenas or demanding inspection of the books and records of any 

national bank in connection with an investigation into residential lending practices; from 

instituting any enforcement actions to compel compliance with informational demands; and 

from instituting actions in the courts of justice against national banks to enforce state fair 

lending laws. 
Page 22 GAO-06-387 OCC Preemption Rules

relinquished their state licenses, or did not register for or renew their 

licenses.25 Specifically:

• State officials in two states provided copies of letters they received from 

operating subsidiaries, citing the visitorial powers rule as the basis for 

relinquishing their state licenses.

• An official in one state attorney general’s office provided a list of 27 

national bank operating subsidiaries that notified the office that they 

would no longer maintain their state licenses.

• Banking department officials in one state estimated that 50-100 

operating subsidiaries had not renewed their licenses.

While the preemption rules may have prompted some national bank 

operating subsidiaries to relinquish their state licenses or otherwise choose 

not to comply with state licensing laws, we note that others did so before 

the preemption rules were issued. For example, in January 2003 an entity 

licensed by the State of Michigan that engaged in making first mortgage 

loans became a national bank operating subsidiary. In April 2003, the entity 

advised the state that it was surrendering its lending registration for 

Michigan.26

Some state officials said that because the visitorial powers rule precludes 

state banking departments from examining operating subsidiaries, the 

potential exists for a “gap” in the supervision of operating subsidiaries. 

According to them, without state examination, consumers may be harmed 

because unfair and deceptive, or abusive, activities occurring within 

operating subsidiaries may not be identified. Although OCC’s procedures 

state that any risks posed by an operating subsidiary are considered in the 

conduct of bank examinations and other supervisory activities, state 

officials nonetheless doubted OCC’s willingness to detect compliance with 

applicable state laws. Some questioned how examiners would know what 

25In the bank activities rule, OCC listed as preempted state licensing or registration 

requirements (except for purposes of service of process) with respect to deposit-taking, 

non-real estate lending, and real estate lending. 69 Fed. Reg. at 1916-1917.

26See Wachovia Bank, N.A. v. Watters, 334 F. Supp. 2d 957 (D. Mich. 2004) (upholding OCC 

rule declaring that state laws apply to national bank operating subsidiaries to the same 

extent that they apply to their parent national banks); aff’d, Wachovia Bank, N.A. v. Watters, 

431 F.3d 556 (6th Cir. 2005).
Page 23 GAO-06-387 OCC Preemption Rules

state laws, if any, apply to national banks and how examiners would review 

compliance with such laws. While OCC examiners noted that they 

generally did not have procedures for examining compliance with state 

laws, OCC officials explained that if they identify a state law requirement 

that is applicable to national banks and operating subsidiaries, examiners 

are advised so that they can take the requirement into account as they 

determine the scope of their examinations. 

Other State Officials Reported 

Little Change in Relationships 

with National Banks

The above-described concerns of state officials are not universal. In one 

state, officials with whom we spoke acknowledged that they still have good 

working relationships with national banks and their operating subsidiaries. 

Further, officials of some national banks with whom we spoke stated that 

they viewed cooperation with state laws and attorneys general as good 

business practice. For example, one national bank representative stated 

that knowing about problems that consumers were having helped to 

provide better services and reduce the potential for litigation. The 

individual added that the bank wants to maintain relationships with state 

attorneys general, and if they make an honest effort to engage the bank, 

then the bank also would engage the attorneys general. Another national 

bank representative stated that the bank typically tries to focus on 

resolving the concern rather than quibble about whose jurisdiction—

federal or state—the issue falls under.

Some State Officials Were 

Concerned That the 

Preemption Rules Could 

Prompt the Creation of 

Operating Subsidiaries to 

Avoid State Regulation

Some state officials with whom we spoke expressed concern that the 

preemption rules might cause national banks to bring into the bank lines of 

business traditionally regulated by states. According to this view, 

nonsubsidiary affiliates of national banks, such as a mortgage broker 

controlled by a holding company that also controls a national bank, could 

be restructured as operating subsidiaries to avoid state supervision and 

licensing requirements. According to FRB officials, movements of bank 

holding company subsidiaries to national bank operating subsidiaries have 

occurred for some time, including before OCC issued the preemption 

rules.27 However, FRB does not collect data specifically on such 

movements. 

Many lines of business that constitute the business of banking under the 

National Bank Act, such as mortgage lending and brokering and various 

27FRB supervises bank holding companies and their nonbank subsidiaries. 
Page 24 GAO-06-387 OCC Preemption Rules

types of consumer lending, are conducted by nonbank entities. According 

to some individuals we spoke with, a bank holding company controlling 

both a national bank and such a nonbank entity might perceive some 

benefit in having the nonbank’s business take place through the bank and, 

therefore, cause the bank to acquire the nonbank as an operating 

subsidiary.

Federal courts considering the status of national bank operating 

subsidiaries have upheld OCC’s position that operating subsidiaries are a 

federally authorized means through which national banks exercise 

federally authorized powers, holding that operating subsidiaries are subject 

to the same regulatory regime that applies to national banks, unless a 

federal law specifically provides for state regulation.28 Under these 

precedents, converting a nonsubsidiary affiliate or unaffiliated entity into a 

national bank operating subsidiary would subject the entity to OCC’s 

exclusive supervision. Moreover, state laws preempted from applying to 

national banks would be preempted with respect to the entity once it were 

to become an operating subsidiary.29

FRB individuals with whom we spoke said that a national bank’s cost of 

conducting a business activity in an operating subsidiary could be less than 

the cost of conducting that activity through a holding company affiliate. 

Therefore, a bank holding company could have an incentive to place a 

state-regulated activity in a national bank operating subsidiary. However, 

this would be true both before and after the preemption rules, all else being 

equal. As discussed in the following section, the financial services industry 

has undergone many technological, structural, and regulatory changes 

during the past decade and longer. Determining how the preemption rules, 

in comparison with any number of other factors that might influence how 

banks or holding companies are structured, would factor into the national 

bank’s decision to acquire a nonbank entity was beyond the scope of our 

work.30

28See, e.g., Wells Fargo Bank, N.A. v. Boutris, 419 F.3d 949 (9th Cir. 2005); Wachovia Bank, 

N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005); Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6th

Cir. 2005). 

29See, e.g., Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6th Cir. 2005).

30According to OCC, many other factors drive the decision about where an entity is placed—

whether it will be a subsidiary or affiliate of the bank—including, among others, statutory 

and regulatory restrictions on transactions with affiliates, regulatory capital requirements, 

and accounting considerations.
Page 25 GAO-06-387 OCC Preemption Rules

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 some state 

regulators and participants in the banking industry, federal bank regulation 

could be advantageous to banks when compliance with state laws would be 

more costly, thereby creating an incentive for banks to change charters. 

However, because the financial services industry has undergone significant 

changes--involving interstate banking, globalization, mergers, and 

consolidations—it is difficult to isolate the effects of regulation from other 

factors that could affect choice of charter. 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. However, total bank assets under state supervision declined 

substantially in 2004 because two large state-chartered banks changed to 

the federal charter; further, such shifts in assets have budgetary 

implications for both state regulators and OCC. Based on our work, no 

conclusion can be made about the extent to which OCC’s preemption rules 

had any effect on those events or will have on future charter choices. 

Nevertheless, several state officials expressed the view that federal 

charters likely bestow competitive advantages in light of the preemption 

rules; in response, some states addressed potential charter changes by their 

state banks. For example, one state changed its method of collecting 

assessments.

Industry Changes and Other 

Factors May Affect Charter 

Choice

A discussion of any effect or perceptions of the effect of the preemption 

rules on charter choices by state-chartered banks has to be viewed in the 

broader environment of the evolution of the financial services industry 

over the past approximately 20 years—changes that make it difficult to 

assess the impact of the preemption rules. Some of the bank officials and 

other bank industry participants we interviewed noted these industry 

changes when discussing their views on the preemption rules and 

acknowledged that many factors may affect banks’ choices between 

federal and state charters.

Banking Business Has Changed 

in Many Ways

Like other parts of the financial services industry, which includes the 

securities and insurance sectors, modern banking has undergone 

significant changes. Interstate banking and globalization have become 

characteristics of modern economic life. On both the national and 

international levels, banks have a greater capacity and increased regulatory 

freedom to cross borders, creating markets that either eliminate or 

substantially reduce the effect of national and state borders. Deregulation 
Page 26 GAO-06-387 OCC Preemption Rules

and technological changes have also facilitated globalization. 

Consolidation (merging of firms in the same sector) and conglomeration 

(merging of firms in other sectors) have increasingly come to characterize 

the large players in the financial services industry. The roles of banks and 

other financial institutions and the products and services they offer have 

converged so that these institutions often offer customers similar services. 

As a result, the financial services industry has become more complex and 

competition sharper. 

In our October 2004 report on changes in the financial services industry, we 

cited technological change and deregulation as important drivers of 

consolidation in the banking industry.31 For example, in the early 1980s, 

bank holding companies faced limitations on their ability to own banks 

located in different states. Some states did not allow banks to branch at all. 

With the advent of regional interstate compacts in the late 1980s, some 

banks began to merge regionally. Additionally, the Riegle-Neal Interstate 

Banking and Branching Efficiency Act of 1994 removed restrictions on 

bank holding companies’ ability to acquire banks located in different states 

and permitted banks in different states to merge, subject to a process that 

permitted states to opt out of that authority.32 While the U.S. banking 

industry is characterized by a large number of small banks, the larger 

banking organizations grew significantly through mergers after 1995.

Convergence of products and services in the banking industry means that 

now many consumers can make deposits, obtain a mortgage or other loan, 

and purchase insurance or mutual funds at their bank. Other market 

factors have made some banks rely more on fee-based income from, among 

other services and products, servicing on loans they sold to other 

institutions and fees on deposit and credit card activity (including account 

holder fees, late fees, and transactions fees). Thus, consumer protection 

issues have become increasingly important to the industry.

Many Factors May Affect Choice 

of Charters

Bank and banking industry association officials and state and federal 

regulators we interviewed told us that choice of charter is influenced by 

many factors. For example, the size and complexity of banking operations 

are important factors in determining which charter will service an 

31GAO, Financial Regulation: Industry Changes Prompt Need to Reconsider U.S. 

Regulatory Structure, GAO-05-61 (Washington, D.C.: Oct. 6, 2004).

32Pub. L. No. 103-328, 108 Stat. 2238 (1994).
Page 27 GAO-06-387 OCC Preemption Rules

institution’s business needs. Bank and other officials also cited the 

importance of supervisory and regulatory competence and expertise 

tailored to the scale of a bank’s operations. For example, officials of some 

large national banks stated that they valued OCC’s ability to effectively 

supervise and regulate large scale banks with complex financial products 

and services. Officials from one large state bank said that they valued 

federal supervision by FDIC and, at the holding company level, FRB. Some 

bank and state and federal regulatory officials said that smaller banks 

prefer the generally lower examination fees charged by state regulators and 

lower regulatory compliance costs associated with their state charters 

relative to the federal charter. For example, officials of one small state 

bank, which was previously federally chartered, said that they had to 

undertake more administrative tasks under the federal charter, such as 

greater reporting requirements needed to demonstrate compliance with 

federal laws, and that such tasks were relatively burdensome for a small 

bank.

Some bank officials and state and federal regulators agreed that smaller 

banks with few or no operations in other states value accessibility to and 

convenient interaction with state regulators.33 Additionally, officials of 

smaller banks said they value the state regulators’ understanding of local 

market conditions and participants and the needs of small-scale banking. 

Officials of one small state bank said that, when their bank switched from 

the federal charter to a state charter, one important consideration was the 

state regulators’ frequent visits to the bank and their responsiveness and 

accessibility. Bank officials, industry representatives, and regulators also 

agreed that new banks tend to be state-chartered because state regulators 

tend to play an important role in fostering the development and growth of 

start-up banks. 

Bank and state regulatory officials noted that a pre-existing relationship 

between a bank’s senior management and a regulator or management’s 

knowledge about a particular regulator can play an important role in 

choosing or maintaining a charter. For example, officials noted that if 

management has already established a good, long-term relationship with a 

particular regulator, or if they were familiar with a regulator, they would 

likely remain with that regulator when considering charter options. 

Officials from two large, state-chartered banks operating in multiple states 

33OCC officials, in commenting on a draft of this report, noted that OCC, too, has a local 

presence with four district offices and numerous field offices throughout the United States.
Page 28 GAO-06-387 OCC Preemption Rules

said that they valued their relationship with their home state regulators 

because they were very responsive and provided quality services. Officials 

from one of the banks stated that they knew the staff of their state banking 

department very well, and they respected the banking commissioner’s 

“hands-on” approach to supervision. 

Mergers and acquisitions of banking institutions also influence charter 

choice. For example, officials from a large banking institution stated that, 

because their merger with another large banking institution combined 

federally and state-chartered entities, they decided to convert from a state 

to the federal charter to maintain only one charter type in the resulting 

company. As a result, they believed they would be able to simplify their 

operations, reduce inefficiencies, and lower risks to the financial safety and 

soundness of the merged company and have the advantages of the federal 

charter companywide. The history of acquisitions in a company also may 

affect charter choice. For instance, officials of one bank said they obtained 

their federal charter by acquiring a federally chartered bank and then 

continued to acquire more federally chartered banks. Similarly, according 

to officials of a state bank, they typically integrate banks they acquire into 

their existing state charter. 

Few Banks Have Changed 

Charters, but Shifts in Bank 

Assets Have Budgetary 

Implications for State 

Regulators and OCC

Our analysis of data on charter changes among federally and statechartered banks from 1990 through 2004 showed that few banks overall 

changed charters—either switching from federal to state or state to 

federal—during that period.34 About 2 percent or less of all banks in these 

years changed charters; 60 percent of all changes were to the federal 

charter. Most charter changes occurred in connection with mergers rather 

than conversions.35 Appendix III provides details on charter changes.

34Data on charter changes for 2005 were not available at the time of our study. The category 

“state-chartered bank” includes state member banks, state nonmember banks, and state 

savings banks. According to an FRB official, both FRB and FDIC data for state banks 

include state-chartered savings banks that are regulated by FDIC. Therefore, we included 

state-chartered savings banks in the category “state-chartered bank” to make the data we 

used from OCC, FRB, and FDIC as comparable as possible.

35According to OCC and FRB officials, a charter change resulting from a conversion is a 

business decision involving one entity changing to another charter whereas a charter 

change resulting from a merger is a business transaction involving the consolidation of two 

or more entities into one entity under a state or federal charter. 
Page 29 GAO-06-387 OCC Preemption Rules

While the numerical shift in bank charters was not significant from 1990 

through 2004, there was a major shift in the distribution of bank assets in 

2004 to the federal charter. As illustrated in figure 2, the share of assets 

divided among federally chartered and state-chartered banks remained 

relatively steady for a decade; between 1992 and 2003, national banks held 

an average of about 56 percent of all bank assets, and state banks held an 

average of about 44 percent. However, in 2004, the share of bank assets of 

banks with the federal charter increased to 67 percent, and the share of 

bank assets of banks with state charters decreased to 33 percent. 

Figure 2: Assets of National and State Banks as a Percentage of Assets of All 

Banks, 1992–2004

Note: FDIC data were only available beginning in 1992.

While part of this increase may be explained by the growth of federally 

chartered banks, two charter changes in 2004— JP Morgan Chase Bank and 

HSBC Bank—substantially increased the share of all bank assets under the 

federal charter.

0

20

40

60

80

100

State bank assets

National bank assets

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Percentage

Year

Source: GAO analysis of FDIC data.
Page 30 GAO-06-387 OCC Preemption Rules

Changes in bank assets among state and federal regulators have budgetary 

implications because of the way the regulators are funded. Most state 

regulators are funded by assessments paid by the banks they oversee. The 

state banking departments collect assessments, often based on the 

supervised bank’s asset size. As a result, a department’s budget may be 

vulnerable when the department collects a significant portion of its 

revenue from a few large banks if one or more change to the federal 

charter. For instance, when two of the largest banks in one state changed to 

the federal charter, the state regulator lost about 30 percent of its revenue.

We analyzed funding information in two states we visited to estimate how a 

change to the federal charter by the largest state bank in each state could 

affect those state regulators’ budgets. In the first state, if the largest state 

bank were to change to the federal charter, the state regulator’s assessment 

revenue would decrease by 43 percent. In the second state, the charter 

change of the largest state bank would decrease assessment revenue by 39 

percent. Some state banking department officials told us that loss of 

revenue has caused or may cause them to adjust their assessment formula 

and find other sources of revenue. Others suggested that budget volatility 

also might make hiring and retaining the expert staff that they needed 

difficult. 

OCC is funded primarily from assessments it charges the banks it 

supervises; it does not receive any appropriations from Congress. (See app. 

IV for details on OCC’s assessment formula and app. V for information on 

how some other federal regulators are funded.) Between 1999 and 2004, the 

assessments collected from national banks funded an average of 96 percent 

of OCC’s budget. Thus, its budget also could be affected by charter 

changes. OCC derives much of its assessments from a relatively small 

number of institutions. Although OCC oversees about 1,900 national banks, 

the 20 largest banks accounted for approximately 57 percent of OCC’s 

assessments in December 2004.36 Since 1999, the percentage of OCC’s 

budget paid by its largest banks has been increasing (see fig. 3). 

36According to OCC’s Fiscal Year 2005 Annual Report, OCC was responsible for regulating 

and supervising 1,933 national banks.
Page 31 GAO-06-387 OCC Preemption Rules

Figure 3: Percentage of OCC’s Total Assessments from the 20 Largest National Banks, from June 30, 1999 through December 

31, 2004

The potential exists for OCC to experience budget repercussions if large 

national banks decided to change to a state charter, resulting in fewer 

assets under OCC’s supervision. However, before December 2004, 

conversions generally affected less than 1 percent of OCC’s assessment 

revenue. Figure 4 shows gains and losses in assessments paid to OCC 

relative to the total amount collected in assessment payments. OCC’s 

assessment revenue from conversions to the federal charter jumped by 

about 8 percent, or about $23 million, as of December 31, 2004.37 The 

increase is largely attributable to the conversion of one of the two large 

state banks mentioned previously, which accounted for about 98 percent of 

the increase in OCC’s assessment revenue from charter conversions. 

0

10

20

30

40

50

60

6/30/99 12/31/99 6/30/00 12/31/00 6/30/01 12/31/01 6/30/02 12/31/02 6/30/03 12/31/03 6/30/04 12/31/04

Percentage

Source: OCC.

37Assessments are due January 31 and July 31 of each year based on asset balances as 

reported in call reports dated December 31 and June 30, respectively. Reports of Condition 

(call reports) provide details on assets, liabilities, and capital accounts. 
Page 32 GAO-06-387 OCC Preemption Rules

Figure 4: Gains and Losses in Assessment Payments to OCC Relative to Total Assessments OCC Collected, from June 30, 1999 

through December 31, 2004 

According to OCC officials, the agency is in a position to sustain any 

serious decrease to its revenue stream. OCC’s financial strategy includes 

establishing reserves to address unexpected fluctuations in assessment 

revenue and an increase in demand on resources.38 According to OCC, its 

“contingency reserve” would be used to counter any adverse budgetary 

effects of a large national bank changing charters. OCC’s policy is to 

Source: OCC.

0

50

100

150

200

250

300

Total assessments

Losses in assessment payments from conversions to state charters

Gains in assessment payments from conversions to the federal charter

12/31/04

6/30/04

12/31/03

6/30/03

12/31/02

6/30/02

12/31/01

6/30/01

12/31/00

6/30/00

12/31/99

6/30/99

Dollars in millions

0

5

10

15

20

25

12/31/04

6/30/04

12/31/03

6/30/03

12/31/02

6/30/02

12/31/01

6/30/01

12/31/00

6/30/00

12/31/99

6/30/99

Gains and losses only

38OCC has three reserves that can be used at the discretion of the Comptroller. According to 

OCC officials, the “contingency reserve” supports OCC’s ability to fund generally 

foreseeable, but rare, events that may interfere with OCC’s ability to accomplish its mission. 

The “special reserve” supplements revenue from assessments and other sources to fund 

OCC’s annual budget authority. The “asset replacement reserve” was established to fund 

leasehold improvements and replacement of furniture and equipment scheduled for future 

years.
Page 33 GAO-06-387 OCC Preemption Rules

maintain the contingency reserve at between 40 and 60 percent of its 

budget. According to OCC, at the beginning of fiscal year 2006, the 

contingency reserve was 49 percent of OCC’s budget. According to OCC, 

having a reserve allows the agency to handle any change in revenue in a 

controlled way and reduce the impact of budget volatility and any need to 

suddenly increase assessments charged to the banks they supervise. 

Some Officials Perceive 

Competitive Advantages in 

the Federal Charter and 

Have Taken Actions to 

Address Potential Charter 

Changes by State Banks

According to some state officials, because of federal preemption, national 

banks do not have to comply with state laws that apply to banking activities 

and, to the extent that compliance with federal law is less costly or 

burdensome than state regulation, the federal charter provides for lower 

regulatory costs and easier access to markets. Therefore, some state 

regulators and banking industry officials expressed concern that the 

federal charter, and particularly the preemption of state laws, will result in 

competitive advantages for federally chartered banks over state chartered 

banks. According to some state officials, state chartered banks that operate 

in multiple states could be at the greatest competitive disadvantage. In 

contrast, according to OCC and many banking industry participants, from a 

legal perspective, the preemption rules did not change anything; state laws 

always have been subject to preemption under the National Bank Act and 

the Supremacy Clause of the U.S. Constitution and, therefore, state banks 

historically have faced the possibility that a federal charter could be more 

beneficial than a state charter.

As noted above, many factors may influence banks’ choice of a state or 

federal charter. Substantiating claims about any competitive advantage for 

federally chartered banks would involve, among other things, comparisons 

of states’ laws and regulations with federal law and regulations, 

conclusions about which set of laws and regulations overall would be less 

burdensome or costly for a particular bank, and obtaining and analyzing 

data and individual opinions about whether differences in burden and 

compliance costs, if any, would be significant enough to limit a state bank’s 

ability to compete with national banks. A study of this magnitude was 

beyond the scope of this report and, during our work, we did not learn of 

any study demonstrating that the preemption-related aspects of a national 

bank charter generally give national banks a competitive advantage over 

state-chartered institutions. 

Officials Perceived Some 

Competitive Advantages for the 

Federal Charter

Many officials that we spoke with said that preemption of state law could 

make the federal bank charter attractive for some state banks. 

Representatives of a number of federally and state-chartered banking 
Page 34 GAO-06-387 OCC Preemption Rules

institutions and industry associations stressed the value of not having to 

comply with different state laws and of having more regulatory uniformity 

throughout the country under a federal charter. They stated that large 

banks and banks with operations in multiple states prefer the federal 

charter because it makes it easier and less costly to do business. Some 

bank officials stated that OCC preemption also makes the federal charter 

attractive because the rules clarify supervisory and regulatory authority for 

national banks and their operating subsidiaries and also encourage more 

standardized banking practices. For example, officials from one national 

bank said that changes in the banking industry, such as interstate banking, 

make it more important for banks with multistate operations to have 

uniform federal regulations to operate across states and to achieve 

economies of scale. Similarly, an official from another large national bank 

noted that having a consistent set of national regulations also facilitates 

banks in offering consumers, who are becoming increasingly mobile, 

financial products and services across the country. 

Officials from one large federally chartered bank said that a state charter 

for them would be impractical because it would be expensive to develop 

and maintain different operational systems for different state laws. 

Officials from one large, state-chartered bank operating in multiple states 

said that they need to tailor their products, fees, forms, disclosures, and 

staff training to the requirements of each state and that the requirements 

could be conflicting. In contrast, they said, for national banks, there are 

fewer legal discrepancies when operating under the federal charter. 

Officials from one state-chartered bank with multistate operations also said 

that they invest significant resources to keep abreast of and monitor state 

regulatory matters in the various states where they operate. Furthermore, 

some bank officials noted that mistakes are more likely to occur when 

business operations must be tailored to the multiple and different 

requirements of different states. Despite these challenges, officials from 

these state-chartered banks believed the benefits of being state-chartered 

outweighed the challenges. 

Some States Have Made Efforts 

to Address the Potential Impact 

of Charter Changes

State officials noted two efforts to address potential charter changes by 

their state banks: strengthening their state parity laws, which generally 

confer on state banks the same powers given to national banks, and 

changing their funding sources.
Page 35 GAO-06-387 OCC Preemption Rules

Parity Laws

Some individuals we interviewed suggested that the use of state “parity” 

statutes could help even the regulatory playing field between federal and 

state regulation. Parity statutes generally grant state-chartered banks the 

same powers given to national banks and treat state banks like national 

banks in other ways. According to data from CSBS, prior to the rules, 46 

states had parity statutes granting state-chartered banks parity with 

national banks.39 Of those, 11 states had parity statutes that were triggered 

automatically; that is, when national banks were granted certain powers, 

state banks in that state were automatically granted the same powers.40

According to CSBS, the remaining 35 states’ parity laws require the state 

bank regulator’s permission before a state bank is allowed to operate under 

the parity law’s provisions. Representatives of one state bankers 

association told us in their state—where regulator approval for parity is 

required—there are often long delays, with some state bank’s parity 

applications pending for 2-3 years. Further, according to state regulators 

many states’ parity laws include other restrictions that some say may make 

it difficult for a state bank to be competitive with national banks. After the 

preemption rules were promulgated, one state bank regulator proposed to 

enhance the state’s current parity statute to include an automatic trigger for 

state-chartered banks when national banks are given certain powers by the 

OCC. Thus, in the view of many industry participants and observers we 

spoke with, state parity laws are not an ideal solution to leveling any 

competitive advantage federally chartered banks might have over statechartered banks. However, an effective parity law could provide an 

incentive for existing state-chartered banks to maintain their state charters. 

We note that views about the rationale for parity laws generally did not 

address other possible explanations for those laws, such as a belief that 

federal regulation is an appropriate model for regulating and supervising 

state banks. Regardless of a state’s reasons for having a parity law, many 

39Data taken from the “CSBS 2002 Profile of State-Chartered Banking,” a compendium of 

information on the structure and condition of the state bank regulatory system developed 

through a survey. New Hampshire and South Carolina did not respond to survey questions 

about wildcard authority; the District of Columbia and Puerto Rico were not included 

because they are not states; Iowa and North Carolina responded “no” to having a parity 

statute for commercial banks.

40According to the CSBS information, Kentucky grants automatic parity to those banks that 

receive the highest examination ratings.
Page 36 GAO-06-387 OCC Preemption Rules

participants and regulators in the banking industry maintain that without 

regulatory parity the dual banking system will suffer because banks will 

migrate to the regulatory regime they consider to be most advantageous. In 

recent testimony before FDIC, some regulatory officials and banking 

industry representatives testified that unless efforts were made to restore 

parity between federal and state bank regulation, the dual banking system, 

which they described as having encouraged economic development 

especially at the community level, would be adversely affected, as would 

healthy competition, regulatory innovation, and checks and balances 

among state and federal regulators.41

Budget Concerns

Some state regulatory officials with whom we spoke recognized the 

budgetary consequences associated with state banks changing to the 

federal charter. To reduce the impact on their budgets if one of their largest 

state-chartered banks changed charters, some state regulators we spoke 

with have taken steps to limit the potential for instability. For example, one 

state banking department has changed its method of collecting 

assessments. Prior to 2005, this state banking department was not 

collecting assessments from sources other than approximately 300 

depository institutions, a small portion of the approximately 3,400 bank 

and nonbank institutions such as check cashers and money transmitters 

that it oversaw. Now this state regulator collects assessments from all of its 

regulated entities. Other officials have said they were considering 

alternative methods of determining assessments to decrease the banking 

department’s reliance on one or a few banks to sustain their budgets. 

Although state banking departments would experience smaller budgets if 

assessments were lost, the decrease in assessments would be somewhat 

offset by the decreased costs of supervising a smaller group of banks and 

other financial entities. There are other factors that could mitigate the 

consequences of any loss of revenue to a state regulator; for example, 

funding formulas that cushion the impact of charter conversions. For 

instance, in one state that we visited, each bank effectively paid a 

proportionate amount of the banking department’s expenses as its 

assessment, with consideration given for asset size. As a result, 

assessments varied directly with changes in the department’s spending and 

41FDIC Public Hearing on the Financial Services Roundtable’s Petition for Rulemaking to 

Preempt Certain State Laws, May 24, 2005, Washington, D.C.
Page 37 GAO-06-387 OCC Preemption Rules

with the number of state-chartered banks. Banking department officials in 

this state believed that it would take about 100 state-to-federal charter 

conversions to affect funding significantly. (See app. VI for information on 

how state bank regulators are funded.) 

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. The first measure would most likely involve 

amending the National Bank Act and, along with the second measure, 

raises a number of legal and policy issues. The third measure would involve 

OCC’s clarification of the effect of the bank activities rule on state 

consumer protection laws.

Shared Supervisory 

Authority over Operating 

Subsidiaries Would Assist 

State Officials with 

Consumer Protection 

Efforts, but the Concept 

Raises Questions about the 

Supervision of National 

Bank Activities

Some state officials we interviewed suggested that states should have a 

direct monitoring or supervisory role over operating subsidiaries, 

particularly with respect to consumer protection matters, because the 

subsidiaries are state chartered. Providing such a role would likely require 

amending the National Bank Act to specify either that (1) the states and 

OCC share jurisdiction over operating subsidiaries or (2) operating 

subsidiaries are to be treated as national bank affiliates. However, 

providing for state involvement in the supervision of operating 

subsidiaries, even if only for consumer protection purposes, raises difficult 

questions. Some individuals we interviewed said that doing so would 

significantly interfere with Congress’ objectives in establishing a national 

banking system. Others maintained that state and federal supervisory 

interests could be balanced without undermining national banks’ ability to 

conduct business.

Some supporters of state supervision maintain that the National Bank Act 

currently does not preempt the application of state laws to operating 

subsidiaries. Those subscribing to this view maintain that OCC’s 

interpretation of the act is wrong because the preemption standards and 
Page 38 GAO-06-387 OCC Preemption Rules

visitorial powers limitations under the act pertain specifically to national 

banks, not to their operating subsidiaries. According to this position, under 

the National Bank Act and other federal banking laws, operating 

subsidiaries should be treated as “affiliates” of national banks, and federal 

law recognizes the authority of states to regulate affiliates. However, 

several recent federal court decisions have held that OCC has reasonably 

interpreted the National Bank Act to permit a national bank’s use of 

operating subsidiaries to conduct its business.42 Some authorities assert 

that Congress agrees with OCC’s regulatory scheme for operating 

subsidiaries, pointing out that Congress has let the interpretation stand for 

more than 30 years. They also refer to a provision of GLBA, in which 

Congress specifically recognized the existence of operating subsidiaries by 

using OCC’s interpretation to describe them.43 Further, they maintain that, 

in GLBA, Congress implicitly recognized that OCC’s authority over 

operating subsidiaries is exclusive unless Congress specifically says 

otherwise.44

Because operating subsidiaries are, by definition, a part of a national bank’s 

business activity, amending the National Bank Act to provide states with 

authority to regulate them concurrently with OCC would set the stage for 

state regulation of a national bank in exercising its federally granted 

powers. One possible effect of this approach is that, even if a state’s 

authority over an operating subsidiary were limited to consumer 

protection, it would be difficult to limit state supervision of the bank. 

Assuming that a regulatory line could be drawn to separate the activities of 

the operating subsidiary from those of the bank, states would need to 

monitor, if not supervise, the activities that trigger consumer protection 

concerns. To the extent that these activities reflect business decisions, 

policies, or practices by the national bank, an opportunity would exist for 

state intrusion into the bank itself. This could lead to, among other things, 

regulatory disputes over jurisdiction, differing views about the safety and 

soundness of the bank, or other points of contention arising from 

regulatory policies and objectives of OCC and the states. 

42See, e.g., Wells Fargo Bank, N.A. v. Boutris, 419 F.3d 949 (9th Cir. 2005); Wachovia Bank, 

N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005); Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6th

Cir. 2005); National City Bank of Indiana v. Turnbaugh, 367 F. Supp. 2d 805 (D. MD 2005).

43Pub. L. No. 106-102 § 121, codified at 12 U.S.C. 24A(g)(3).

44See Id. § 133(a), codified at 15 U.S.C. § 41 note.
Page 39 GAO-06-387 OCC Preemption Rules

Similarly, amending the National Bank Act to specify that operating 

subsidiaries are affiliates of national banks could have unintended 

consequences. Assuming that the activities of an operating subsidiary 

continued to be limited to activities permissible for its parent bank, the 

bank simply could move those activities into the bank, in which case the 

efficiencies gained from conducting those activities through a separate 

unit, if any, would be lost. Alternatively, those activities could be shifted to 

an affiliate of the bank. The potential impact on the national bank’s delivery 

of products and services, its costs, and its safety and soundness could be 

significant. 

Some state officials noted that states already work effectively with other 

federal regulators to monitor and enforce compliance with consumer 

protection laws. They described efforts their offices took with federal 

regulators, such as FTC, to identify and take enforcement actions against 

unlawful practices. One official said FTC works with state officials by 

meeting periodically with state regulators to discuss issues of mutual 

concern and, when appropriate, to divide investigative responsibilities. In 

one instance, the state attorney general coordinated efforts with FTC to 

investigate and reach settlement with certain entities that had engaged in 

deceptive practices. Some state officials said that their relationships with 

federal regulators were based on shared regulatory authority over statechartered entities and that a similar relationship with OCC should exist 

with respect to national bank operating subsidiaries. 

We were told of similar federal-state arrangements with respect to statechartered depository institutions that are subject to both federal and state 

supervision. State officials said that they work with FDIC and FRB 

regularly to conduct bank examinations and identify and stop practices 

that violate applicable laws. As an example, one official said that state 

regulators, FDIC, and FRB have entered into cooperative regulatory 

agreements to supervise interstate operations of state-chartered banks that 

conduct activities in other (host) states. Some state officials said that 

having the same kind of relationship with OCC concerning national bank 

operating subsidiaries would enhance consumer protection in their states. 

All of the above examples involve state-chartered entities that are outside 

of a national bank and are subject to supervision by both federal and state 

authorities. Although those entities are subject to some federal laws that 

preempt or can have a preemptive effect on state laws, state officials 

generally believed that states have enough supervisory authority over the 

institutions to ensure their conformity with state policies as expressed in 
Page 40 GAO-06-387 OCC Preemption Rules

state laws. The extent to which those examples should serve as models for 

national bank regulation depends on several considerations, not the least 

of which would involve policy judgments about the autonomy, if not the 

purpose, of the national bank charter.

A Consensus-Based 

National Consumer 

Protection Lending 

Standard Applicable to All 

Lending Institutions Would 

Provide Uniformity but 

Limit State Autonomy

During our work, we asked state officials and others for their opinions on 

whether it is desirable to have a federal lending law ensuring the same level 

of consumer protection to customers of all lending institutions, including 

banks and regardless of charter. Officials from state bankers’ associations 

asserted that a national standard may already exist, for example, in the FTC 

Act, which among other things prohibits businesses from engaging in unfair 

and deceptive acts and practices.45 In addition, officials referred to other 

federal consumer protection laws that apply to national banks and national 

bank operating subsidiaries.46 Others stated that existing consumer 

protection standards in federal lending laws are weak and suggested a 

stricter, consensus-based national consumer protection standard 

applicable to lending activities by all state-chartered and federally 

chartered financial institutions. Assuming such a standard could be set, 

lenders and consumers could rely upon protections that would not change 

based upon the lending institution’s charter. A consensus-based national 

consumer protection lending standard, however, would appear to limit 

states’ abilities to enact standards of their own. 

The rationale for a consensus-based national consumer protection lending 

standard generally is that (1) developing such a standard would protect 

consumers more than existing laws do and (2) having the right type of 

standard would help reduce concerns about the preemptive effect of 

federal laws on state consumer protection programs. However, some of the 

individuals we interviewed agreed that adopting a consensus-based 

national consumer protection lending standard, even if sound policy, would 

be difficult to accomplish. Among other things, defining the conduct 

subject to a standard could be difficult. While some individuals referred to 

4515 U.S.C. § 45(a)(1).

46Other federal laws include: Truth in Lending 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; Fair Credit Reporting Act; Federal Privacy Laws; and the Fair Debt Collection 

Practices Act.
Page 41 GAO-06-387 OCC Preemption Rules

certain antipredatory lending bills pending in Congress as appropriate 

models, others stated that it would be difficult to find a uniform solution to 

practices that are viewed as predatory. 

We also found mixed views on whether a consensus-based national 

consumer protection lending standard should serve as a ceiling (which 

would not allow state authorities to impose more stringent standards) or a 

floor (which would so allow). Some officials stated they would prefer a 

floor so that states could go farther to address the particular needs of their 

states. One state attorney general official stated that the benefits of having 

a floor would be realized when there were more specific practices that 

needed to be addressed, such as predatory lending. On the other hand, 

another attorney general official said that floor-type standards such as 

those contained in federal laws, such as the Truth in Lending Act and the 

FTC Act, do not themselves impose adequate protections and often have 

not led to more protective state laws. 

Under either approach, valid regulatory objectives could be compromised. 

A federal “ceiling” could deprive states of the ability to address practices 

and implement policies unique to local conditions. State officials and 

consumer groups maintain that the states serve as laboratories for 

regulatory innovation necessary for adequately policing financial industry 

products and practices. A uniform national “ceiling” could deprive states of 

the ability to act independently. Conversely, a limitation of the “floor” 

approach is that states could impose differing standards that would defeat 

the objective of uniformity. 

An OCC Initiative to Clarify 

Preemption With Respect to 

State Consumer Protection 

Laws Could Assist in 

Achieving Consumer 

Protection Goals 

As discussed earlier in this report, many state officials and consumer 

groups have expressed uncertainty over the extent to which state 

consumer protection laws apply to national banks and their operating 

subsidiaries. At the same time, OCC stated that the agency would like to 

work cooperatively with the states to further the goal of protecting 

consumers. Based on our work, it appears that OCC’s clarification of the 

effect of the preemption rules on state consumer protection laws would 

assist states in their consumer protection efforts and could provide an 

opportunity for the agency to work with states more broadly on consumer 

protection concerns. 

OCC informed us of their efforts to work with states on preemption issues. 

For example, an OCC representative stated that OCC hoped to harmonize 

the OCC’s and states’ authorities to provide effective and efficient 
Page 42 GAO-06-387 OCC Preemption Rules

protections for consumers. Also, in 2004 testimony before the Senate, the 

Comptroller described OCC’s commitment to protect consumers and 

welcomed opportunities to share information and cooperate and 

coordinate with states to address customer complaints and consumer 

protection issues.47 However, OCC has no formal initiative specifically 

addressing the applicability of state consumer protection laws. 

State officials and others suggested that OCC undertake an initiative to 

work with the states in clarifying the scope of preemption with respect to 

state consumer protection laws and to coordinate OCC and state consumer 

protection objectives. Clarifying the applicability of state consumer 

protection laws would be consistent with a strategy for achieving one of 

OCC’s strategic goals, which is to enhance communication with state 

officials to facilitate better coordination on state law issues affecting 

national banks. Further, unlike the two measures discussed previously, 

such an OCC initiative would not involve statutory amendments. 

One state official cited an example of cooperation between OCC and the 

state to protect consumers: a case in which OCC and the State of California 

coordinated their efforts to initiate proceedings against a national bank and 

some of its state-chartered affiliates. The actions were based on alleged 

unfair and deceptive practices that violated the FTC Act, the California 

Business and Professions Code, the Fair Credit Reporting Act, and other 

applicable laws. OCC instituted an enforcement action against the national 

bank, while the state filed a civil judicial action against the national bank’s 

state-chartered parent—a financial corporation—and two other statechartered affiliates.48 In June 2000, both actions were settled. The 

defendants did not admit or deny the allegations against them, but in both 

proceedings they agreed to payment of a $300 million “restitution floor” as 

seed money for a restitution account. Under the settlement, any payment 

made by a defendant in one proceeding would discharge any identical 

payment obligation by the other defendants in the other proceedings. Even 

though OCC and the state initiated separate proceedings against separately 

supervised institutions, they worked together to treat the restitution floor 

obligation as a joint settlement.

47Senate, John D. Hawke, Jr., Comptroller of the Currency, speaking to Committee on 

Banking, Housing and Urban Affairs, Congressional Record (7 April 2004). 

48See In the Matter of Providian National Bank, Tilton, NH, OCC EA No. 2000-53 (June 28, 

2000).
Page 43 GAO-06-387 OCC Preemption Rules

According to some state officials and others, an OCC initiative to clarify the 

applicability of state consumer protection laws could assist both OCC and 

the states in their consumer protection efforts. It could also have the added 

benefit of facilitating the sharing of information among the states and OCC 

on conditions in a state or a location that might be conducive to predatory 

lending or other abuses and could help individual states, as well as OCC. 

State officials told us that states have knowledge of local conditions that 

allow them to identify abusive practices within their jurisdictions. A means 

for the states to systematically share this kind of information with OCC 

could help the agency in its supervision of national banks and operating 

subsidiaries. 

Conclusions Although the preemption rules were intended to provide a clear statement 

of OCC’s standard for preemption and its exclusive visitorial powers 

authority, the bank activities rule does not fully resolve uncertainties about 

the applicability of state consumer protection laws to national banks and 

their operating subsidiaries. Based on OCC’s own statements, the scope 

and the effects of the rules are not entirely clear. It is, therefore, not 

surprising that some state officials said they are uncertain as to what state 

consumer protection laws apply to national banks and their operating 

subsidiaries.

Many state officials we spoke with maintain that their ability to protect 

consumers by directly contacting national banks and their operating 

subsidiaries has been diminished by the preemption rules. However, to 

date, courts have upheld OCC’s view that it has exclusive authority to 

supervise national bank operating subsidiaries. State officials reported that 

they have maintained cooperative relationships with national banks and/or 

operating subsidiaries since OCC issued the preemption rules. While state 

officials expressed particular concerns that the rules could prompt national 

banks, or their holding companies, to move activities into operating 

subsidiaries in order to avoid state regulation, such movements occurred 

prior to the rules and can result from many factors. 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. 

Changes in charter type—federal or state—are influenced by many factors 

including whether or not a bank has operations in multiple states. 

Consistent federal laws throughout the country are an attraction to banks 

with a presence in more than one state and especially banks with a national 
Page 44 GAO-06-387 OCC Preemption Rules

presence. Preemption of state law is part of that attraction for such banks 

but cannot be attributed as the sole reason some banks choose the federal 

charter. While the number of charter changes has been relatively small 

during the period we reviewed (1990 through 2004), the amount of the 

corresponding bank assets that moved from state bank regulators’ 

supervision to that of OCC as a result of charter changes did increase 

noticeably in 2004, albeit largely because of the charter conversion of one 

large bank. Because both OCC and state banking departments are funded 

by the entities they regulate and their formulas for the assessments charged 

are based partially, if not totally, on the assets of the banks and other 

entities they regulate, their budgets and workloads can be affected by 

changes in bank charters. OCC has a reserve fund to protect itself from any 

dramatic shifts away from the federal charter, but some state banking 

departments’ budgets and workloads could face reductions if large state 

banks changed to the federal charter. 

Our work identified three general measures that, while not necessarily 

exhaustive of all potential measures, could help address state officials’ 

concerns about protecting consumers of national banks and operating 

subsidiaries. Two of these—providing for some state jurisdiction over 

operating subsidiaries and establishing a consensus-based national 

consumer protection lending standard—raise a number of complex legal 

and policy issues of their own and could be difficult to achieve. The third 

measure, in contrast to the first two, would not raise complex issues such 

as the potential need to amend the National Bank Act. Rather, it would 

require OCC to clarify the characteristics of state consumer protection 

laws that would make them subject to federal preemption. We recognize 

the impracticality of specifying precisely which provisions of state laws 

are, or are not, preempted, and acknowledge that some uncertainty may 

always exist. Nevertheless, we believe that an OCC outreach effort to 

describe in more detail which characteristics of state consumer protection 

laws would make them subject to preemption could help state officials 

better understand the effect of the rules and help allay their concerns. OCC 

has expressed a willingness to reach out to states regarding consumer 

protection issues. Further, such efforts would be consistent with OCC’s 

strategic goal of enhancing communication with state officials to facilitate 

better coordination on state law issues affecting national banks. 

Recommendation for 

Executive Action

We recommend that the Comptroller of the Currency undertake an 

initiative to clarify the characteristics of state consumer protection laws 

that would make them subject to federal preemption. Such an initiative 
Page 45 GAO-06-387 OCC Preemption Rules

could serve as an opportunity for dialogue between OCC and the states on 

consumer protection matters. For example, OCC could hold forums where 

consumer protection issues related to federal and state laws could be 

discussed with state officials and consumer advocates. This could improve 

communication and coordination between OCC and state officials with 

respect to the impact of the preemption rules on the applicability of state 

consumer protection laws and could also assist both OCC and the states in 

their consumer protection efforts. 

Agency Comments and 

Our Evaluation

We provided a draft of this report to OCC for review and comment. In 

written comments (see app. VII), the Comptroller of the Currency generally 

concurred with the report and agreed with the recommendation. 

Specifically, the Comptroller stated that the report contained a number of 

observations that were consistent with OCC’s views on the relationship 

between the preemption rules and a bank’s choice between the federal and 

state charters. OCC commented that the preemption rules provided 

clarification regarding the types of state laws listed in the regulations, and 

noted that recent court decisions reflect a growing judicial consensus 

about uniform federal standards that form the core of the national banking 

system. OCC agreed with our observation that it may be impractical to 

specify precisely which provisions of state laws are, or are not, preempted. 

However, OCC recognized that it should find more opportunities to work 

cooperatively with the states to address issues that affect the institutions it 

regulates, enhance existing information concerning the principles that 

guide its preemption analysis, and look for opportunities to generally 

address the preemption status of state laws. Accordingly, OCC described 

one new initiative intended to enhance federal and state dialogue and 

coordination on consumer issues. OCC stated that the Consumer Financial 

Protection Forum, chaired by the U.S. Department of the Treasury, was 

established to bring federal and state regulators together to focus 

exclusively on consumer protection issues and to provide a permanent 

forum for communication on those issues. OCC also provided technical 

comments which we incorporated as appropriate.
Page 46 GAO-06-387 OCC Preemption Rules

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the 

Comptroller of the Currency and interested congressional committees. We 

also will make copies available to others upon request. In addition, the 

report will be available at no charge on the GAO Web site at 

http://www.gao.gov.

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-8678 or woodd@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this report. Key contributors are acknowledged in appendix 

VIII. 

David G. Wood

Director, Financial Markets and 

Community Investment
Page 47 GAO-06-387 OCC Preemption Rules

Appendix I

Objectives, Scope, and Methodology AAppenednxidexiIs

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”). The rules drew 

strong opposition from a number of state legislators, attorneys general, 

consumer group representatives, and Members of Congress, who opposed 

the rules because of what they viewed as potentially adverse effects on 

consumer protection and the dual banking system. 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. 

Identification of Key Issues 

and Legal Review of 

Preemption Standard

Many of the arguments supporting and opposing OCC’s preemption rules 

related to legal opinions and policy objectives. Therefore, to identify key 

concerns and questions about the preemption rules, we conducted a 

content analysis of comment letters that OCC received in response to its 

rulemaking.1

 In addition to the analysis we conducted for our previous 

report on OCC’s rulemaking process, we reviewed the 55 comment letters 

OCC received on its visitorial powers proposal and conducted a content 

analysis on 30 of the letters.2

 To analyze the comments, we first separated 

the 30 letters into two categories: letters that supported the visitorial 

powers rule (17) and letters that opposed the rule (13). We then randomly 

selected a test set of letters from each category and established an initial 

set of codes that would further characterize comments within each 

category. We applied these codes to the test set of letters and made 

refinements to establish the final codes for each category. A pair of trained 

coders independently coded the remaining sets of letters and resolved 

discrepancies to 100 percent agreement. The coders regularly performed 

1

See GAO-06-8 for a detailed description of the content analysis we conducted on the 

comments for the bank activities rule. 

2

Of the 55 letters, we identified 25 as concurring letters; that is, the letter writers expressed 

agreement with their national trade or consumer group organization, which also had 

submitted a comment letter.
Appendix I

Objectives, Scope, and Methodology

Page 48 GAO-06-387 OCC Preemption Rules

reliability checks throughout the coding process and recorded results in an 

electronic data file, in which the data were verified for accuracy. 

Descriptive statistics for the codes were computed by an analyst using 

SPSS statistical software and a second, independent analyst reviewed the 

data analysis. 

To further identify stakeholder concerns, we also reviewed three 

congressional hearings on the preemption rules. We grouped statements 

from these hearings under the following categories: issue, implication, or 

suggestion. The “issue” category included statements that described the 

nature of the commenters’ concerns. The “implication” category included 

statements that explained the perceived effect the rules would have 

relative to a specific issue or concern. The “suggestion” category included 

statements that described ways certain issues or concerns could be 

resolved, as well as measures that could facilitate state and federal 

authorities working together to protect consumers. We also categorized the 

statements by source and whether the statements were made in support of 

or opposition to the rules. 

Finally, to obtain more in-depth information on the issues identified by 

stakeholders, we conducted site visits or phone interviews with officials 

and representatives of state attorneys general offices, state banking 

departments, consumer groups, state bankers associations, and national 

and state banks in six states (California, Georgia, New York, North 

Carolina, Idaho, and Iowa). We judgmentally selected the states based on 

the following characteristics: state officials’ interest in the issue; location of 

noteworthy federally or state-chartered banks (that is, large banks based 

on asset size or banks that experienced a recent charter conversion); 

notable consumer group presence or consumer protection laws; and 

geographic dispersion. We gauged state officials’ interest in the issue and 

identified state contacts by reviewing congressional hearings and 

reviewing comment letters on the proposed rules. We also solicited 

appropriate state contacts from officials we interviewed, such as the 

National Association of Attorneys General (NAAG), the Conference of 

State Bank Supervisors (CSBS), and several consumer group 

representatives. In Washington, D.C., we interviewed the national 

associations comprising state attorneys general and state bank regulators; 

representatives of national consumer groups; and officials at OCC and 

other federal bank regulatory agencies, including the Board of Governors 

of the Federal Reserve System (FRB) and the Federal Deposit Insurance 

Corporation (FDIC). 
Appendix I

Objectives, Scope, and Methodology

Page 49 GAO-06-387 OCC Preemption Rules

With the information obtained from the content analysis, review of 

congressional hearings, and the site visits and interviews, we conducted a 

legal review of the preemption rules, past OCC preemption determinations, 

relevant case law, and relevant federal and state regulations to determine 

how OCC clarified the applicability of state laws to national banks. 

Effects of Preemption Rules 

on State Consumer 

Protection Efforts and the 

Dual Banking System

In the discussions with officials noted above, we solicited their views on 

the effects and potential effects of the rules on consumer protection and 

asked them how the preemption rules have affected the dual banking 

system (for example, charter choice and the distribution of assets among 

the national and state banks).

To obtain an industrywide view of how bank assets are divided among 

state-chartered and federally chartered banks, we obtained data from 

FDIC’s online database, Statistics on Depository Institutions, and its online 

version of Historical Statistics on Banking. We extracted data on the 

number and asset sizes of all banks from 1990 through 2004. To assess the 

extent to which banks have changed between the federal charter and state 

charters from 1990 through 2004, we collected and analyzed data from OCC 

and FRB on the annual number of charter changes and asset sizes of banks 

experiencing charter changes during this period. According to agency 

officials, OCC data came from its Corporate Applications Information 

System and FRB data came from the National Information Center database. 

To determine the total number of conversions to the federal charter each 

year, we used OCC data to sum the total number of conversions that 

occurred in each year from 1990 through 2004 for each type of financial 

institution as listed in the data. We also summed the corresponding assets 

for each type of entity. In order to find the total number of conversions out 

of the federal charter, we separated charter terminations resulting from 

conversions from charter terminations listed as occurring for other 

reasons. We then summed the total number of all charter terminations due 

to conversions out of the federal charter and their total corresponding 

assets each year.3

For charter additions to the federal charter resulting from mergers, we 

used OCC data to sum the total number of additions that occurred in each 

year from 1990 through 2004 for each type of financial institution (as listed 

3

OCC’s data did not identify the type of institution involved in terminations from the federal 

charter resulting from conversions. 
Appendix I

Objectives, Scope, and Methodology

Page 50 GAO-06-387 OCC Preemption Rules

in the data) involved in the merger. Using FRB data, we summed the total 

assets of banks that changed to the federal charter from state charters as a 

result of mergers in each year. For deletions from the federal charter 

resulting from mergers, we first separated charter terminations that OCC 

categorized as resulting from mergers from charter terminations listed as 

occurring for other reasons. We then, using OCC data, summed the total 

number of all charter terminations attributed to mergers.4

 Using FRB data, 

we summed the total assets of banks that changed from the federal charter 

to state charters as a result of mergers in each year. 

To determine how bank chartering decisions affected OCC’s budget, we 

summarized data provided by OCC on assessments paid by institutions that 

converted charters between 1999 and 2004 to determine how choice of 

charter and fees assessed from each type of charter affected OCC’s total 

revenue. We also collected data from certain states and applied their 

respective assessment formulas to analyze the effects of chartering 

decisions on the state regulators’ budgets. To describe how the OCC and 

state banking departments are funded, we interviewed OCC officials, 

reviewed agency annual reports, past GAO reports, and CSBS’ Profile of 

State-Chartered Banking. We also interviewed federal and state regulators 

to understand their funding mechanisms. 

Measures to Address States’ 

Concerns Regarding 

Consumer Protection

As noted previously, we conducted site visits and reviews of congressional 

hearings to obtain information on ways state and federal authorities could 

work together to protect consumers. During our site visits, we asked 

officials and representatives of state attorneys general offices, state 

banking departments, consumer groups, and state bankers associations to 

identify measures that would facilitate state and federal authorities 

working together to protect consumers. When measures were identified, 

we asked follow-up questions to determine perceived advantages and 

disadvantages of the measure and challenges to implementing the measure. 

We then obtained and reviewed relevant information, such as statutes, 

judicial opinions, and related documents.

4

OCC data for terminations from the federal bank charter resulting from mergers were listed 

under the category “Transaction Form,” which did not have specific information on 

institution type; rather, it classified the termination as “National Bank to State.”
Appendix I

Objectives, Scope, and Methodology

Page 51 GAO-06-387 OCC Preemption Rules

Overall Data Reliability We assessed the reliability of all data used in this report in conformance 

with generally accepted government auditing standards. To assess the 

reliability of the data on bank charters, assets, and assessments, we (1) 

interviewed OCC, FRB, and FDIC agency officials who are knowledgeable 

about the data; (2) reviewed information about the data and the systems 

that produced them; and (3) for certain data, reviewed documentation 

provided by agency officials on the electronic criteria used to extract data 

used in this report.

For OCC data on the yearly number and assets of banks experiencing 

charter changes between the federal and state charters, we performed 

some basic reasonableness checks of the data against FRB data and data 

reported in a research study by an economist at OCC. We found that the 

data differed among these three data sources. We identified discrepancies 

and discussed these with agency officials. We also found that OCC data on 

assets of banks that changed charters as a result of mergers were very 

different from both FRB data and data in the research study. Furthermore, 

according to OCC officials, asset data based on call report information was 

considered more reasonable for the purposes of our report.5 Therefore, we 

did not use OCC data on assets of banks that changed charters as a result of 

mergers. Instead, we decided to use FRB data because they were more 

reasonable in comparison to those in the research study and because they 

were based entirely on call report information. Although OCC data on 

assets of banks that changed charters as a result of conversions was not 

based on call report information, we decided to use that data because it 

was reasonable in comparison with those reported in the research study. 

After reviewing possible limitations in OCC’s Corporate Applications 

Information System, we determined that all data provided, with the 

exception of OCC assets data noted above, were sufficiently reliable for the 

purposes of this report.

We conducted our work in California, Georgia, New York, North Carolina, 

Idaho, Iowa, and Washington, D.C., from August 2004 through March 2006 

in accordance with generally accepted government auditing standards.

5

Reports of Condition and Income collect basic financial data from commercial banks in the 

form of a balance sheet, an income statement, and supporting schedules. These reports are 

required by statute and collected by the FDIC under the provision of Section 1817(a)(1) of 

the Federal Deposit Insurance Act. The Report of Condition (call report) schedules provide 

details on assets, liabilities, and capital accounts.
Page 52 GAO-06-387 OCC Preemption Rules

Appendix II

Legal Arguments Regarding the Preemption 

Rules ApendxiI

In addition to expressing uncertainty about the applicability of state 

consumer protection laws to national banks, some opponents of the 

preemption rules disagreed with the Office of the Comptroller of the 

Currency’s (OCC) legal interpretations of the National Bank Act in support 

of the rules. They asserted that the effects of the preemption rules will 

remain unclear until these legal arguments are resolved. As discussed 

below, legal challenges to the preemption rules consistently have been 

rejected by federal courts.

OCC’s Interpretation of the 

Preemption Standard 

Many critics of the bank activities rule disagreed with OCC’s articulation of 

the standard for federal preemption, asserting that the agency 

misinterpreted controlling Supreme Court precedents as well as the 

regulatory scheme Congress has established for national banks. The 

regulations contained in the bank activities rule provide that, except where 

made applicable by federal law, state laws that “obstruct, impair or 

condition” a national bank’s ability to fully exercise its federally authorized 

powers do not apply to national banks.1

 Opponents of the bank activities 

rule asserted that this standard misstates the test for preemption under the 

National Bank Act. 

The preemption doctrine is rooted in the Supremacy Clause of the U.S. 

Constitution, which states as follows; 

This Constitution, and the laws of the United States which shall be made in pursuance 

thereof; and all treaties made, or which shall be made, under the authority of the United 

States, shall be the supreme law of the land; and the judges in every state shall be bound 

thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.2

Under the Supremacy Clause, state law is preempted by federal law when 

Congress intends preemption to occur.3

 Preemption may be either 

express—where Congress specifically states in a statute that the statute 

preempts state law—or implied in a statute’s structure and purpose. 

Implied preemption occurs through either “field preemption” or “conflict 

1

69 Fed. Reg. at 1916-1917.

2

U.S. Constitution Article VI.

3

Chicago & N. W. Transp. Co. v. Kalo Brick & Tile Co., 450 U.S. 311 (1981) (Supremacy 

Clause invalidates state laws that interfere with or are contrary to the laws of Congress); see 

also, Bank of America v. City & County of San Francisco, 309 F.3d 551, 558 (9th Cir. 2002) 

(determining preemptive effect of federal law requires ascertaining intent of Congress).
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 53 GAO-06-387 OCC Preemption Rules

preemption.” Field preemption occurs when Congress (1) has established a 

scheme of federal regulation so pervasive that there is no room left for 

states to supplement it or (2) has enacted a statute that touches a field in 

which the federal interest is so dominant that the federal system will be 

assumed to preclude enforcement of state laws on the same subject. In 

contrast, conflict preemption occurs when a state law actually conflicts 

with federal law. To determine whether a conflict exists, courts consider 

whether compliance with both federal and state law is a physical 

impossibility or whether the state law stands as an obstacle to the 

accomplishment and execution of the full purposes and objectives of 

Congress.4

 Despite these separate analytical approaches, in practice the 

differences between the two are not always exclusive or distinct. Rather, as 

a practical matter, there can be a substantial overlap between the 

categories, with courts using a similar analysis to address field and conflict 

preemption.5

Even though field preemption and conflict preemption are not mutually 

exclusive concepts, the Supreme Court and federal courts traditionally 

have applied the conflict analysis to determine preemption questions 

arising under the National Bank Act. Supreme Court and other federal 

court cases addressing preemption under the act have been decided on the 

basis of whether a conflict exists between the federal law and a state law. It 

is well settled that with respect to national banks, the National Bank Act 

preempts a state law that stands as an obstacle to the accomplishment and 

execution of the full purposes and objectives of Congress. Critics of the 

bank activities rule asserted that (1) the controlling Supreme Court 

precedent for finding this type of conflict preemption under the National 

Bank Act is set forth in the Supreme Court’s opinion in Barnett Bank of 

Marion County v. Nelson and (2) the Barnett Bank decision sets a 

standard for preemption that is stricter than the one applied by OCC, so 

that under that standard fewer state laws would be preempted.6

 

The decision in Barnett Bank states, in part, as follows:

4

Bank of America v. San Francisco, 309 F.3d at 558. 

5

See GAO letter, Role of the Office of Thrift Supervision and Office of the Comptroller of 

the Currency in the Preemption of State Law (Feb. 7, 2000), GAO-B-284372.

6

Barnett Bank of Marion County v. Nelson, 517 U.S. 25 (1996).
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 54 GAO-06-387 OCC Preemption Rules

In defining the pre-emptive scope of statutes and regulations granting a power to national 

banks, these [Supreme Court] cases take the view that normally Congress would not want 

States to forbid, or to impair significantly, the exercise of a power that Congress explicitly 

granted. To say this is not to deprive States of the power to regulate national banks, where 

(unlike here) doing so does not prevent or significantly interfere with the national bank’s 

exercise of its powers.7

Several critics of the bank activities rule interpret this passage to mean that 

state law applies to national banks if the law does not “prevent or 

significantly interfere with” the banks’ ability to engage in activities 

authorized by the National Bank Act. They said that, in the Barnett 

decision, the Supreme Court clarified its earlier articulations of conflict 

preemption under the National Bank Act and that this standard tolerates 

state regulation of national banks to a greater extent than OCC’s “obstruct, 

impair or condition” test. According to this argument, state law governs a 

national bank’s exercise of its federally granted powers unless applying the 

law would at least significantly interfere with the bank’s ability to engage in 

banking. OCC interprets the Barnett language to be one of many ways in 

which the Supreme Court has articulated the standard for preemption 

under the National Bank Act.8

 In the preamble accompanying publication 

of the final bank activities rule, OCC explained that its articulation of the 

standard does not differ in substance from the language used in Barnett or 

any other Supreme Court test for preemption under the National Bank Act, 

stating that “[t]he variety of formulations quoted by the Court, . . . defeats 

any suggestion that any one phrase constitutes the exclusive standard for 

preemption.”9

7

Id. at 33 (citations omitted).

8

69 Fed. Reg. at 1910 (stating that “(t)he words of the (OCC preemption standard) are drawn 

directly from applicable Supreme Court precedents . . . .”).

9

Id. OCC’s recognition and use of various terms invoked by the Supreme Court to apply the 

preemption test was not a new position announced in the preemption rulemaking but 

reflects the agency’s standing interpretation of Supreme Court precedents. See OCC 

Interpretive Letter No. 789 (June 27, 1997) (preempting portions of a Colorado banking law 

that would have caused a national bank to remove its name and logo from an off-site ATM 

owned by the bank and operated in Colorado). In that letter, OCC’s Chief Counsel reviewed 

several Supreme Court decisions addressing preemption under the National Bank Act, 

observing that the decisions used various words to state the general principle of conflict 

preemption, which, according to the Chief Counsel, is that “state laws apply to national 

banks only if they do not conflict with federal law, which includes impairing or interfering 

with the powers granted to national banks by federal law.” 
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 55 GAO-06-387 OCC Preemption Rules

According to some of the sources we consulted, primarily state regulators 

and consumer groups, under the Barnett decision the application of state 

laws to national bank activities can be consistent with the National Bank 

Act. Referring to the rule that state law is preempted when applying it 

would create “an obstacle to the accomplishment of the full purposes and 

objectives of Congress,” one legal individual asserted that since at least the 

early twentieth century it has been an objective of Congress to provide for 

state regulation of banking activities regardless of whether a bank has a 

federal or state charter. The individual described this objective as a 

congressionally established “competitive equilibrium” within the U.S. 

banking system. According to this perspective, allowing a state law to 

govern a national bank’s exercise of its federally granted powers would be 

consistent with the purposes and objectives of Congress. 

In support of this position, several state officials and consumer groups we 

interviewed referred to a provision of the Riegle-Neal Interstate Banking 

and Branching Efficiency Act of 1994 (Interstate Banking Act). In that 

legislation, Congress specified that host state laws regarding community 

reinvestment, consumer protection, fair lending, and the establishment of 

intrastate branches apply to branches of out-of-state national banks except 

when, among other things, federal law preempts their application to a 

national bank.10 In the conference report accompanying the legislation, the 

conferees stated that preemption determinations made by the federal 

banking agencies through opinion letters and interpretive regulations “play 

an important role in maintaining the balance of Federal and State law under 

the dual banking system.”11 The conference report did not discuss how 

preemption determinations affect the dual banking system. Instead, the 

discussion referred to state interests in protecting individuals, businesses 

and communities in their dealings with depository institutions. However, 

some parties we interviewed maintained that the Interstate Banking Act 

and its legislative history show that Congress intends states to have a role 

in regulating national bank activities and that this relationship is a feature 

of the dual banking system.

Several individuals and industry participants we interviewed said that, 

while Congress may not have prohibited some state regulation of national 

banks, Congress consistently has endorsed the concept that state laws do 

10Pub. L. No. 103-328 § 102(b)(1)(B), codified at 12 U.S.C. § 36(f).

11H.R. Conf. Rep. No. 103-651 at 53-54. 
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 56 GAO-06-387 OCC Preemption Rules

not apply to national banking when those laws are inconsistent with federal 

law. This, they said, is because Congress established the national bank 

system to be separate from state banking systems. According to this view, 

the concept of a dual banking system does not contemplate state regulation 

of national banks, but recognizes that states have authority to regulate the 

banks they charter. 

Those sharing this perspective, including OCC representatives, referred to 

various authorities to demonstrate that Congress established the national 

bank system to be independent of state regulation, except to the extent 

provided by federal law. They relied primarily on Supreme Court decisions 

that referred to the National Bank Act and its legislative history as an 

expression of Congress’ intent to have a national charter separate from 

state regulation.12 For example, in one of those decisions the Supreme 

Court indicated that the National Bank Act does not contemplate state 

regulation as a component of the national bank regulatory system. 

Describing national banks as “federal instrumentalities,” the Supreme 

Court concluded that a state law was preempted under the National Bank 

Act because, among other things, Congress had not expressed its intent 

that a federally authorized national bank activity be subject to local 

restrictions. In that decision, the Supreme Court held that the National 

Bank Act preempted a state law forbidding national banks from using 

“saving” or “savings” in their names or advertising. The Supreme Court said 

12Supreme Court decisions addressing this subject include: Easton v. Iowa, 188 U.S. 220, 229, 

232 (1903). (the National Bank Act “has in view the erection of a system extending 

throughout the country, and independent, so far as powers conferred are concerned, of state 

legislation which, if permitted to be applicable, might impose limitations and restrictions as 

various and as numerous as the states. . . . If [the states] had such power it would have to be 

exercised and limited by their own discretion, and confusion would necessarily result from 

control possessed and exercised by two independent authorities.”); see also, Marquette 

Nat'l Bank v. First of Omaha Serv. Corp., 439 U.S. 299, 314-315 (1978) (“Close examination of 

the National Bank Act of 1864, its legislative history, and its historical context makes clear 

that, . . .Congress intended to facilitate . . . a ‘national banking system.’” (citation omitted)); 

Franklin Nat'l Bank of Franklin Square v. New York, 347 U.S. 373, 375 (1954) (“The United 

States has set up a system of national banks as federal instrumentalities to perform various 

functions such as providing circulating medium and government credit, as well as financing 

commerce and acting as private depositories.”); Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 

(1896) (“National banks are instrumentalities of the Federal government, created for a 

public purpose, and as such necessarily are subject to the paramount authority of the United 

States.”). In Farmers’ & Mechanics’ Bank v. Dearing, 91 U.S. 29, 34 (1875), the Court 

similarly found that “(s)tates can exercise no control over [national banks] nor in anywise 

affect their operation, except in so far as Congress may see proper to permit. Anything 

beyond this is ‘an abuse, because it is the usurpation of power which a single State cannot 

give.’”
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 57 GAO-06-387 OCC Preemption Rules

that it found “no indication that Congress intended to make this phase of 

national banking subject to local restrictions, as it has done by express 

language in several other instances.”13 

Several individuals, including OCC representatives, also said that even if 

Congress, in the 1994 Interstate Banking Act, contemplated the potential 

application of state laws to national bank activities, Congress clearly did 

not intend state laws to apply if they conflict with federal law. They said 

that, although the Interstate Banking Act demonstrates Congress’ belief 

that states have an interest in how national banks conduct their activities in 

the four areas specified in the act, neither the act nor its legislative history 

suggest that state laws in those four areas override federal preemption. In 

their view, Congress’ recognition that state laws are subject to preemption 

signifies that Congress did not intend the application of state laws covering 

those four areas to be a purpose or objective of national bank regulation 

when such state laws conflict with federal law.

In the conference report accompanying the Interstate Banking Act, the 

conferees questioned OCC’s preemption of a New Jersey law relating to 

consumer checking accounts and the agency’s preemption of state laws 

that prohibit, limit, or restrict deposit account service charges. However, 

the conferees recognized that despite the states’ interests in regulating 

bank activities concerning consumer protection, fair lending, and the other 

two areas mentioned previously, state laws in those areas are subject to 

preemption under the National Bank Act. In the legislation, Congress 

established a process for federal banking agencies to follow when they 

preempt state laws concerning those four areas.14 In describing the 

process, which includes publication for public comment of federal banking 

agency preemption determinations regarding state laws applicable to any 

of the four areas of state interest, the Conferees specified that the 

legislation was not intended to change “the substantive theories of 

preemption as set forth in existing law.”15 At the time, OCC’s standard for 

preemption was the same as the agency applied in the bank activities rule. 

For example, in a 1989 interpretive letter, OCC stated the federal 

preemption standard under the National Bank Act as follows: 

13Franklin National Bank v. New York, 347 U.S. at 378.

14Pub. L. No. 103-328 § 114, codified at 12 U.S.C. § 43.

15H. R. Conf. Rep. No. 103-651 at 55.
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 58 GAO-06-387 OCC Preemption Rules

The general rule governing preemption under the National Bank Act is that state law applies 

to national banks unless that law conflicts with federal law, unduly burdens the operations 

of national banks, or interferes with the objectives of the national banking system. (citations 

omitted). 

In addition to disagreement over the regulatory objectives of the National 

Bank Act, we also encountered differences of opinion over the scope of the 

preemption rules. Some individuals we interviewed asserted that, despite 

OCC’s invocation of the conflict preemption standard, in fact OCC has 

preempted the field of national bank regulation. That is, under OCC’s test, 

there is no room for state law in the regulation of the business activities of 

national banks because those activities are solely a matter of federal law. 

OCC, on the other hand, maintains that it applies the conflict preemption 

standard with the objective of enabling national banks to operate to the full 

extent of their powers under federal law “without interference from 

inconsistent state laws.”16 As discussed previously, courts sometimes apply 

field and conflict preemption analyses interchangeably. To date, however, 

federal courts have recognized that OCC preemption determinations are 

based on an analysis of whether a conflict exists between federal and state 

law. Courts addressing the preemption regulations have not questioned 

OCC’s determination that conflict between state and federal laws is the 

predicate for the preemption rules.

Breadth of the Preemption 

Lists in the Bank Activities 

Rule 

In the bank activities rule, OCC explained that state laws concerning the 

subjects listed as preempted already had been preempted, either by OCC 

administrative determinations, or by federal court decisions or precedents 

applicable to federal thrifts.17 However, some of the subjects listed as 

preempted have not been specifically addressed in precedents applying the 

National Bank Act. Rather, information from OCC shows that some 

subjects of state law were included on the preemption lists because they 

1669 Fed. Reg. at 1908. In the bank activities rule, OCC specifically declined to occupy the 

fields of national banks’ real estate lending, other lending, and deposit-taking activities 

because it concluded that labeling its preemption rules in those areas as “field preemption” 

is immaterial to the objectives of the regulations. 69 Fed. Reg. at 1911.

17OCC stated that the lists of preempted state laws “reflect judicial precedents and OCC 

interpretations” concerning the types of state laws subject to preemption because they 

conflict with national banks’ exercise of powers granted in the National Bank Act. 69 Fed. 

Reg. 1906.
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 59 GAO-06-387 OCC Preemption Rules

had been preempted by the Office of Thrift Supervision (OTS).18 In issuing 

the bank activities rule, OCC concluded that with respect to the 

applicability of state law, Congress used the same scheme for both national 

banks and federally chartered thrifts under the Home Owners Loan Act 

(HOLA).19 Opponents of the bank activities rule criticized this approach. 

They questioned the applicability of OTS precedents to preemption under 

the National Bank Act, asserting that Congress did not intend HOLA and 

the National Bank Act to have identical preemptive effects. In addition, 

several state officials and consumer groups said that the terms OCC used to 

describe preempted subjects of state law are too broad. 

Those questioning OCC’s reliance on OTS regulations asserted that 

preemption under the National Bank Act is not as expansive as it is under 

HOLA, and thus OCC wrongly concluded that state laws preempted under 

HOLA also are preempted under the National Bank Act. They maintained 

that the Supreme Court’s description of OTS’ preemptive authority 

recognizes the broad preemptive impact of HOLA, which some federal 

courts have characterized as field preemption.20 Critics of the bank 

activities rule said that, because preemption under the National Bank Act is 

conflict-based, it calls for an analysis of whether a state law covering an 

OTS-preempted subject conflicts with the National Bank Act. They 

maintained that OTS, using a field preemption analysis, would not have 

considered whether a conflict exists. They asserted that the National Bank 

18These subjects include: (1) escrow, impound, and similar accounts; (2) access to, and use 

of, credit reports; and (3) processing, originating, servicing, sale or purchase of mortgages 

and investment or participation in mortgages.

19See OCC Interpretive Letter No. 999 (August 2004) (stating that some of the types of laws 

listed in the preemption regulation “have been determined to be preempted with respect to 

Federal thrifts by the Federal thrift supervisor, the OTS.”) In the bank activities rule, OCC 

stated as follows: “The extent of Federal regulation and supervision of Federal savings 

associations under the Home Owners’ Loan Act is substantially the same as for national 

banks under the national banking laws, a fact that warrants similar conclusions about the 

applicability of state laws to the conduct of the Federally authorized activities of both types 

of entities.” 69 Fed. Reg. 1912, n. 62.

20See Fidelity Savings and Loan Ass’n v. de la Cuesta, 45 U.S. 141, 160-162 (1982) (concluding 

that HOLA gave OTS’ predecessor agency, the Federal Home Loan Bank Board, “plenary 

authority to issue regulations governing federal savings and loans” that contemplates the 

[agency’s] promulgation of regulations superseding state law); see also, Bank of America v. 

City and County of San Francisco, 309 F.3d 551, 558-559 (9th Cir., 2002), (stating that field 

preemption applies under HOLA because”the regulation of federal savings associations by 

the OTS has been so pervasive as to leave no room for state regulatory control,” (citations 

omitted), but the National Bank Act provides for conflict preemption). 
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 60 GAO-06-387 OCC Preemption Rules

Act, unlike HOLA, contemplates that states have a role in regulating 

activities of national banks, and particularly those of national bank 

operating subsidiaries, which typically are formed under state laws 

governing the establishment of business entities. According to OCC, for 

purposes of the bank activities rule labeling preemption as either “field 

preemption” or “conflict based” is “largely immaterial to whether a state 

law is preempted under the National Bank Act.21

Other Aspects of the 

Preemption Rulemaking 

State representatives, consumer groups, and others challenged the bank 

activities rule with respect to real estate lending. Referring to the grant of 

real estate lending powers in the National Bank Act and past versions of 

OCC’s real estate lending rule, these individuals asserted that in the bank 

activities rule OCC broadened the scope of preemption beyond what 

Congress intends. One argument was based on the provision in the 

National Bank Act that authorizes national banks to make real estate loans. 

The provision permits national banks to conduct real estate lending 

“subject to section 1828(o) of this title (12 U.S. Code) and such restrictions 

and requirements as the Comptroller of the Currency may prescribe by 

regulation or order.”22 Section 1828(o) requires the federal banking 

agencies to have uniform regulations prescribing standards for real estate 

loans.23 The standards include a requirement that lenders comply with “all 

real estate related laws and regulations.” Some individuals we interviewed 

said that this standard means that the same real estate lending laws must 

apply to all federally insured depository institutions and that, because state 

laws apply to one set of institutions—specifically state banks— those same 

laws apply to national banks. 

Opponents also argued that OCC, by broadening the scope of preemption 

for real estate lending, acted contrary to its previous determinations of 

limited preemption for this activity. Before the bank activities rule was 

issued, OCC’s regulations specifically preempted state law with respect to 

only five aspects of real estate lending. 24 In interpretive letters describing 

2169 Fed. Reg. at 1911.

2212 U.S.C. § 371(a).

2312 U.S.C. § 1828(o). See 12 C.F.R. § 34.62 (OCC Real Estate Lending Standards).

24These were: loan-to-value ratios, amortization requirements, maturity requirements, 

aggregate limits, and certain terms of loans secured by leaseholds. 
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 61 GAO-06-387 OCC Preemption Rules

the preemptive effect of the rule, OCC officials sometimes stated that its 

purpose was to preempt only five categories of state law restrictions on 

national bank real estate lending, and that “[i]t was not the intention of 

[OCC], however, to preempt all state regulation of real estate lending.”25

OCC stated that the rule clarified the “limited scope” of preemption with 

respect to real estate lending, thus “any state regulations outside of the five 

areas cited continue to apply to national banks, unless preempted by other 

regulation.”26 OCC maintained this position while applying the same 

preemption standard it applied in the bank activities rule. 

Critics of the bank activities rule asserted that OCC’s past statements were 

correctly based on the conclusion that the National Bank Act has a limited 

preemptive effect with respect to real estate lending and that OCC has not 

adequately justified its new, contrary interpretation. According to OCC, the 

substance of the bank activities rule is not new; it reiterates preemption 

determinations that had been made before the rule was promulgated. 

Therefore, the rule does not represent a change in OCC’s application of 

preemption principles with respect to real estate lending. Moreover, OCC 

revised the rule in 1995 to say that OCC would apply principles of federal 

preemption to state laws concerning aspects of national bank real estate 

lending not listed in the regulation. OCC had been following this approach 

in its interpretive letters on preemption since at least 1985.27

Some critics of the bank activities rule also challenged preemption with 

respect to deposit-taking, which is one of the four categories of bank 

activity set forth in the bank activities rule. They asserted that (1) deposits 

are personal property and deposit accounts are contracts between the 

depositor and the bank and (2) Congress did not intend the National Bank 

Act to supersede state property and contract laws. The bank activities rule 

provides that state laws on the subjects of contracts and the acquisition 

and transfer of property are not inconsistent with national bank powers 

and apply to national banks “to the extent that they only incidentally affect 

25See OCC Unpublished Interpretive Letter (Dec. 5, 1985).

26Id.; see also, OCC Interpretive Letter No. 354 (Nov. 18, 1985). 

27See OCC Unpublished Interpretive Letter, Dec. 5, 1985, stating: “It has long been 

recognized that national banks are federal instrumentalities governed by a comprehensive 

set of federal laws and regulations, As such, they are subject to only those state laws that are 

not inconsistent with the federal provisions and that do not unduly burden the operations of 

national banks or interfere with the purposes of their creation.” (Supreme Court citations 

omitted). 
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 62 GAO-06-387 OCC Preemption Rules

the exercise” of the bank’s powers. The disagreement with OCC’s 

preemption concerning deposit-taking focuses on whether a particular 

state law that could be preempted (because it relates to deposit-taking) 

might not be preempted (because it is a state contract or property law). We 

found one case in which a California state court held that a state law 

relating to deposit taking was not preempted because, among other things, 

the court concluded it was a law governing contracts having only an 

incidental effect on the bank’s deposit-taking. However, in that decision, 

the court did not question OCC’s authority to preempt state laws applicable 

to bank deposits.28

Applicability of Rules to 

National Bank Operating 

Subsidiaries

State officials and their representative groups disputed OCC’s assertion 

that the preemptive effects of the National Bank Act extend to national 

bank operating subsidiaries. They also disagreed with OCC’s assertion of 

exclusive supervisory and enforcement jurisdiction over national bank 

operating subsidiaries. These disagreements arise mainly from the 

contention that OCC has improperly interpreted the status of operating 

subsidiaries under the National Bank Act. 

Although a national bank operating subsidiary typically is formed under 

state business association laws, under OCC’s interpretation of the National 

Bank Act the entity exists only as a means through which national banks 

may conduct federally authorized banking activities. This is because OCC 

permits national banks to have operating subsidiaries on the theory that 

conducting business through an operating subsidiary is an activity 

permitted by the National Bank Act.29 According to OCC, because operating 

subsidiaries exist and are utilized as a national bank activity, they may not 

be used by national banks to engage in activities not authorized by the 

National Bank Act and, correspondingly, are subject to the same laws, 

terms, and conditions that govern national banks.30 

In several recent cases, federal courts have upheld OCC’s rationale for 

permitting national banks to use operating subsidiaries and, consequently, 

have held that operating subsidiaries are subject to the same laws and 

28Smith v. Wells Fargo Bank, N.A., 135 Cal. App. 4th 1463 (Cal. Ct. App. 2006).

29See 12 C.F.R. § 5.34.

3069 Fed. Reg. at 1905.
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 63 GAO-06-387 OCC Preemption Rules

restrictions that apply to national banks; one of those decisions is under 

review by the Supreme Court.31 Opponents of OCC’s position believe that 

the National Bank Act does not treat national bank operating subsidiaries 

the same as national banks, regardless of OCC’s rationale for their 

existence. They maintain that national bank operating subsidiaries are 

legally independent entities, not banks, and as such they are subject to 

state laws and supervision by state agencies. OCC has permitted national 

bank operating subsidiaries since at least 1966, during which time Congress 

has not enacted legislation to override OCC’s position.32 

Disagreement with OCC’s 

Interpretation of Its 

Visitorial Powers 

In the visitorial powers rulemaking, OCC clarified its position regarding its 

supervisory authority over national banks and their operating 

subsidiaries.33 As discussed in the body of this report, the agency amended 

its visitorial powers rule to clarify the terms of its exclusive visitorial power 

over national banks and their operating subsidiaries with respect to the 

content and conduct of their federally authorized activities. OCC also 

amended the rule to recognize the jurisdiction of functional regulators and 

articulate OCC’s interpretation of a part of the visitorial powers provision, 

12 U.S.C. § 484, that makes national banks subject to the visitorial powers 

vested in courts of justice.34

31Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005); Wells Fargo Bank, N.A. v. Boutris, 

419 F.3d. 949 (9th Cir., 2005); Wachovia Bank v. Watters, 432 F.3d. 556 (6th Cir. 2005); OCC v. 

Spitzer, 396 F.Supp. 2d. 383 (S.D. N.Y. 2005); National City Bank v. Turnbaugh, 367 F.Supp.2d 

805 (D. MD 2005). 

32See Acquisition of Controlling Sock Interest in Subsidiary Operations Corporation, 31 Fed. 

Reg. 11,459 (Aug. 31, 1966).

33The OCC’s Visitorial Powers regulation defines visitorial powers to include: (1) 

examination of a bank; (2) inspection of a bank’s books and records; (3) regulation and 

supervision of activities authorized or permitted pursuant to federal law; and (4) enforcing 

compliance with any applicable federal or state laws concerning those activities. 12 C.F.R. § 

7.4000(a)(2).

34The pertinent portion of 12 U.S.C. § 484 provides as follows:

(a) No national bank shall be subject to any visitorial powers except as authorized by 

Federal law, vested in the courts of justice or such as shall be, or have been exercised or 

directed by Congress or by either House thereof or by any committee of Congress or of 

either House duly authorized.
Appendix II

Legal Arguments Regarding the Preemption 

Rules

Page 64 GAO-06-387 OCC Preemption Rules

During our work, we encountered disagreements with OCC’s assertion of 

exclusive supervisory authority over national bank operating subsidiaries 

and the agency’s view of the nature of the visitorial powers vested in courts 

of justice.35 Those disagreeing with the rule described it as an attempt by 

OCC to limit both state supervision of activities conducted by statechartered entities and the ways in which states can rely on their courts to 

take legal action against operating subsidiaries. These disagreements raise 

complicated legal analyses and policy concerns, but based on our 

interviews and research, there does not appear to be significant uncertainty 

over OCC’s view of its visitorial powers as expressed in the visitorial 

powers regulation. As discussed above, in several recent cases, federal 

courts have upheld OCC’s conclusion that its visitorial powers confer 

exclusive supervisory jurisdiction with respect to the banking activities of 

national banks and their operating subsidiaries.

35Those disagreeing with the rule generally did not assert that states have supervisory 

authority over national banks themselves. The concern over visitorial powers was limited to 

state jurisdiction over operating subsidiaries.
Page 65 GAO-06-387 OCC Preemption Rules

Appendix III

Bank Charter Changes from 1990 to 2004 ApendxiI

From 1990 to 2004, More 

Banks Changed to the 

Federal Charter, but Most 

Changes Resulted from 

Mergers

From 1990 to 2004, the number of bank charter changes to the federal 

charter outnumbered changes to a state charter. Figure 5 shows the total 

annual changes resulting from conversions and mergers between federal 

and state bank charters according to data from Office of the Comptroller of 

the Currency (OCC). Of 3,163 charter changes for that period, 1,884 

involved moving from state charters to the federal charter, and 1,279 

involved moving from the federal to a state charter, a net increase of 605 to 

the federal charter. 

Annual changes between the two types of charters tended to be similar in 

number, with the exception of 1994–1999, when noticeably more state 

banks changed to the federal charter.1

 According to industry observers and 

academics we interviewed, the greater number of changes to the federal 

charter in 1997 could be attributed to the easing of individual state 

restrictions on interstate banking and the passage of the Riegle-Neal 

Interstate Banking and Branching Efficiency Act of 1994, which removed 

remaining state restrictions on interstate banking.

1

In addition to state-chartered banks, nonbank depositories such as thrifts and federal 

savings banks, also converted to the federal bank charter in 1990-2004.
Appendix III

Bank Charter Changes from 1990 to 2004

Page 66 GAO-06-387 OCC Preemption Rules

Figure 5: Total Annual Changes between Federal and State Charters, 1990-2004

The majority of changes between the federal and state charters during this 

period resulted from mergers rather than conversions.2

 Of the 3,163 charter 

changes in that period, 2,353 (or 74 percent) involved mergers. Further, 

1,545 (82 percent) of the 1,884 changes from a state to the federal charter 

involved mergers. Changes from the federal to a state charter involved 

somewhat fewer mergers: 808 (63 percent) of 1,279 changes.

Focusing only on conversions, we found that, over the entire period, there 

was a net increase in state-chartered banks. Figure 6 shows the number of 

annual changes resulting from conversions between the two types of 

charters from 1990 through 2004. There were a total of 339 conversions to 

the federal charter and a total of 471 conversions to state charters. Thus, 

2

According to OCC and the Board of Governors of the Federal Reserve System officials, a 

charter change resulting from a conversion is a business decision involving one entity 

changing to another charter whereas a charter change resulting from a merger is a business 

transaction involving the consolidation of two or more entities into one entity under a state 

or federal charter.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Federal to state

State to federal

Source: GAO analysis of OCC data.

0

50

100

150

200

250

Number of banks
Appendix III

Bank Charter Changes from 1990 to 2004

Page 67 GAO-06-387 OCC Preemption Rules

there were 132 more conversions to state charters than to the federal 

charter.

Figure 6: Annual Changes between Federal and State Charters Resulting from 

Conversions, 1990–2004

Looking only at mergers, we found the opposite—a net increase in federal 

charters. Figure 7 shows the number of annual changes resulting from 

mergers between the federal and state bank charters from 1990 through 

2004. Over the entire period, there were a total of 1,545 mergers into the 

federal charter and 808 mergers into state charters. Thus, there were 737 

more mergers into the federal charter than into state charters.

Number of banks

Federal to state

State to federal

Source: GAO analysis of OCC data.

0

10

20

30

40

50

60

70

80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Appendix III

Bank Charter Changes from 1990 to 2004

Page 68 GAO-06-387 OCC Preemption Rules

Figure 7: Annual Changes between Federal and State Charters Resulting from 

Mergers, 1990–2004

Recent Charter Changes 

Substantially Increased the 

National Bank Share of All 

Bank Assets

When banks change charters, the share of bank assets under the 

supervision of OCC and different state bank regulators also changes. 

Figure 8 shows the total assets of banks that changed charters annually 

from 1990 through 2004 according to data from OCC and the Board of 

Governors of the Federal Reserve System (FRB). In 1990-2003, the total 

assets of all banks that changed charters were less than $200 billion 

annually. However, in 2004 total assets of all state-chartered banks that 

changed to the federal charter increased to about $789 billion, largely due 

to the charter changes of JP Morgan Chase Bank and HSBC Bank. The 

assets of these banks constituted about 96 percent (about $759 billion) of 

the total assets of banks that changed to the federal charter, or 82 and 14 

percent, respectively. Over the entire period, total assets that shifted to the 

federal charter amounted to about $1,574 billion, and total assets that 

shifted to state charters amounted to about $687 billion. Thus, about $887 

billion more in assets shifted to the federal charter than to state charters.

Number of banks

Federal to state

State to federal

Source: GAO analysis of OCC data.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

20

40

60

80

100

120

140

160
Appendix III

Bank Charter Changes from 1990 to 2004

Page 69 GAO-06-387 OCC Preemption Rules

Figure 8: Assets of Banks That Changed between Federal and State Charters, 1990–

2004

Note: For the purpose of describing assets associated with all charter changes, asset data points were 

computed by adding OCC data on charter changes resulting from conversions to FRB data on charter 

changes resulting from mergers. However, we discovered that HSBC’s charter change was recorded 

by OCC as a merger and by FRB as a conversion. To resolve this discrepancy and ensure that HSBC's 

assets were included, we added in HSBC’s change from the state to federal charter in 2004 after 

consulting the FDIC “Statistics on Depository Institutions” for an approximate asset figure. There may 

be other such instances of discrepancies in recording methods, which we were not able to identify.

We also looked at the movement of assets depending on whether charter 

changes resulted from conversions or mergers. Figure 9 shows the assets 

of banks that converted annually between the federal and state charters 

from 1990 through 2004, according to data from OCC. In 1990-2003, about 

$55 billion more in assets shifted to state charters than to the federal 

charter. During that period, total assets of banks that converted charters 

remained below $100 billion annually. However, when 2004 figures are 

included, about $590 billion more in assets shifted to the federal charter 

than to state charters. This is largely due to the conversion of one formerly 

state-chartered bank (JP Morgan Chase Bank), which alone contributed 99 

percent (about $649 billion) of all assets in 2004 of state banks that 

converted to the federal charter. The assets of JP Morgan Chase Bank 

represented almost 8 percent of all bank assets in that year.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Federal to state

State to federal

Sources: GAO analysis of OCC and Federal Reserve Board data.

Dollars in billions

0

100

200

300

400

500

600

700

800
Appendix III

Bank Charter Changes from 1990 to 2004

Page 70 GAO-06-387 OCC Preemption Rules

Figure 9: Assets of Banks That Changed between Federal and State Charters as a 

Result of Conversions, 1990–2004

Similarly, figure 10 shows the assets of banks that experienced mergers 

between the federal and state charters annually in 1990-2004, according to 

data from FRB.3

 In 1990-2004, about $296 billion more in assets shifted to 

the federal charter than to state charters as a result of mergers. 

3

These annual assets do not correspond to the annual number of charter changes resulting 

from mergers as reported earlier because these assets are data from FRB, while the number 

of charter changes is data from OCC. We decided to use these two different sources of data 

as we understand these data to be most reliable for the purposes of this study.

0

100

200

300

400

500

600

700

800

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Dollars in billions

Federal to state

State to federal

Source: GAO analysis of OCC data.
Appendix III

Bank Charter Changes from 1990 to 2004

Page 71 GAO-06-387 OCC Preemption Rules

Figure 10: Assets of Banks That Changed between Federal and State Charters as a 

Result of Mergers, 1990–2004

Note: For the purpose of describing assets associated with all charter changes, asset data points were 

computed by adding OCC data on charter changes resulting from conversions to FRB data on charter 

changes resulting from mergers. However, we discovered that HSBC’s charter change was recorded 

by OCC as a merger and by FRB as a conversion. To resolve this discrepancy and ensure that HSBC’s 

assets were included, we added in HSBC’s change from the state to federal charter in 2004 after 

consulting the FDIC “Statistics on Depository Institutions” for an approximate asset figure. There may 

be other such instances of discrepancies in recording methods, which we were not able to identify.

The Annual Number and 

Assets of Banks That 

Changed between Federal 

and State Charters Was 

Small Relative to All Banks 

and All Bank Assets

From 1990 through 2004, the annual number and assets of banks that 

changed between the federal and state charters constituted a small 

percentage of all banks and all bank assets in those years. During that 

period, the annual number of changes between the federal and state bank 

charters was about 2 percent or less of all banks in those years. For 

example, the number of changes to the federal charter as a percentage of 

all banks was 2.4 percent in 1997, when there were 223 changes. The 

number of changes to the state charter as a percentage of all banks was 1.3 

percent in 1993, when there were 139 changes. Figure 11 shows the total 

annual changes between the federal and state bank charters as a 

percentage of all banks in each year from 1990 through 2004.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Federal to state

State to federal

Source: GAO analysis of Federal Reserve Board data.

Dollars in billions

0

30

60

90

120

150
Appendix III

Bank Charter Changes from 1990 to 2004

Page 72 GAO-06-387 OCC Preemption Rules

Figure 11: Total Annual Changes between Federal and State Charters, as a Percentage of All Banks, 1990–2004

We found that the percentage of assets involved in charter changes was 

also small relative to all bank assets. Figure 12 shows the annual assets of 

banks from 1990 to 2004 that converted between the federal and state 

charters as a percentage of all bank assets. From 1990 to 2004, total assets 

of banks that converted from the federal charter to state charters were 

about 1.5 percent or less of all bank assets annually. For example, assets 

were highest in 1994 at about $59.6 billion, which was 1.49 percent of all 

bank assets that year. Similarly, from 1990 through 2003, the total annual 

assets of banks that converted from state charters to the federal charter 

were about 1 percent or less of all bank assets each year. For example, 

during this period assets were highest in 1997 at about $54 billion, which 

was about 1.07 percent of all bank assets that year. In 2004, however, assets 

for state to federal conversions reached their highest since 1990 at about 

$653 billion, which was about 7.8 percent of all bank assets that year. 

0

.5

1.0

1.5

2.0

2.5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Percentage

Year

Federal to state

State to federal

Sources: GAO analysis of OCC and FDIC data.
Appendix III

Bank Charter Changes from 1990 to 2004

Page 73 GAO-06-387 OCC Preemption Rules

Figure 12: Assets of Banks That Converted between Federal and State Charters, as 

a Percentage of All Bank Assets, 1990–2004

Similarly, the annual charter changes and assets of banks involved in 

mergers have also been a small percentage of all banks and all bank assets 

for those years. During the period, the number of mergers between the two 

types of charters is less than 2 percent of all banks per year. For example, 

as shown in figure 7, the highest number of mergers into state charters 

from the federal charter was 80 in 1998, which was 0.91 percent of all banks 

that year. The highest number of mergers into the federal charter from state 

charters was 158 in 1997, which was 1.73 percent of all banks that year. The 

annual assets of banks experiencing mergers between the two types of 

charters were less than 3 percent of all bank assets each year.4

 For 

example, as shown in figure 10, assets for mergers into state charters from 

4

These asset figures do not correspond to the number of charter changes resulting from 

mergers as reported earlier because these figures are based on data from FRB, while the 

number of charter changes is based on data from OCC. We decided to use these two 

different sources of data as we understand these data to be most reliable for the purposes of 

this study.

Percentage

Federal to state

State to federal

Sources: GAO analysis of OCC and FDIC data.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

1

2

3

4

5

6

7

8
Appendix III

Bank Charter Changes from 1990 to 2004

Page 74 GAO-06-387 OCC Preemption Rules

the federal charter were highest in 1996 at about $136.6 billion, which was 

about 2.98 percent of all bank assets that year. Assets for mergers into the 

federal charter from state charters were highest in 2004 at about $135.9 

billion, which was about 1.62 percent of all bank assets that year. 
Page 75 GAO-06-387 OCC Preemption Rules

Appendix IV

How OCC is Funded ApendxiIV

The Office of the Comptroller of the Currency (OCC) is funded primarily by 

the assessments and fees that it collects from the institutions it oversees. 

The amounts assessed for OCC oversight are primarily based on a bank’s 

asset size, but other factors are included in OCC’s assessment formula. 

Under the formula, bank assessments decrease as asset size increases. As a 

result, mergers and consolidations among banks result in a smaller 

assessment paid to OCC by the resulting bank. 

OCC Is Funded Primarily by 

the Assessments It Charges 

National Banks

As of fiscal year 2004, assessments made up almost all of OCC’s revenue —

about 97 percent. As shown in figure 13, since 1999 assessments have 

constituted no less than 94 percent of OCC’s revenue. OCC also receives 

revenue from other sources: corporate fees banks pay primarily for 

licensing, investment income from gains on U.S. Treasury securities, 

income from the sale of OCC publications, and income from miscellaneous 

internal operations such as parking fees paid by OCC employees. 

Figure 13: Sources of OCC Revenue, 1999-2004

Note: In October 2001, OCC changed its reporting period from a calendar to a fiscal year basis.

Percentages may not add to 100 percent because of rounding.

Source: OCC.

Sources of 

revenue CY 1999 CY 2000 FY 2001 FY 2002 FY 2003 FY 2004

Assessments

Corporate

fees

Investment

income

Publications

Other

Total

$378,562,988 $382,728,368

1,628,110

17,466,934

807,442

923,352

$403,554,206

2,025,886

13,040,584

967,370

718,124

$395,314,952

95.8%

0.5%

3.3%

0.2%

0.2%

100.0%

94.8%

0.4%

4.3%

0.2%

0.2%

100.0%

$395,522,295 $425,802,749

1,410,105

12,846,135

663,460

1,932,661

$442,655,110

1,501,795

16,792,570

1,159,913

899,411

$415,875,984

95.1%

0.4%

4.0%

0.3%

0.2%

100.0%

96.2%

0.3%

2.9%

0.1%

0.4%

100.0%

$452,165,500 $482,278,444

1,371,899

11,289,755

515,503

2,308,874

$497,764,475

1,250,648

10,222,726

541,639

1,929,782

$466,110,295

97.0%

0.3%

2.2%

0.1%

0.4

100.0%

96.9%

0.3%

2.3%

0.1%

0.5%

100.0%
Appendix IV

How OCC is Funded

Page 76 GAO-06-387 OCC Preemption Rules

OCC’s Assessment Formula 

Is Based on Asset Size but 

Includes Other Factors

The assessment formula, changed in the mid-1970s from a flat rate per 

dollar of assets to its current regressive structure, determines how much 

each national bank must pay for OCC supervision. The relationships 

between bank size (assets) and assessments are shown in table 1. Every 

national bank falls into one of the 10 asset-size brackets denoted by 

columns A and B. The semiannual assessment is composed of two parts.1

The first part is the calculation of a base amount of the assessment, which 

is computed on the assets of the bank as reported on the bank’s 

Consolidated Report of Condition (or call report) up to the lower end point 

(column A) of the bracket in which it falls.2

 This base amount of the 

assessment is calculated by OCC in column C. The second part is the 

calculation by the bank of assessments due on the remaining assets of the 

bank in excess of column E. The excess is assessed at the marginal rate 

shown in column D. The total semiannual assessment is the amount in 

column C, plus the amount of the bank's assets in excess of column E 

multiplied by the marginal rate in column D: Assessments = C+[(Assets - E) 

x D]. 

Table 1: OCC’s Assessment Formula 

1

Per federal regulation, each national bank and each District of Columbia bank shall pay to 

the Comptroller of the Currency a semiannual assessment fee, due by January 31 and July 31 

of each year, for the 6-month period beginning 30 days before each payment date, 12 C.F.R. 

8.2(a).

2

Reports of Condition and Income are required by statute and collected by the Federal 

Deposit Insurance Corporation under the provision of Section 1817(a)(1) of the Federal 

Deposit Insurance Act. This report collects basic financial data from commercial banks in 

the form of a balance sheet, an income statement, and supporting schedules. The Report of 

Condition schedules provide details on assets, liabilities, and capital accounts.

If the amount of total balance 

sheet assets (consolidated 

domestic and foreign 

subsidiaries) is: The semiannual assessment will be:

A B C D E

Over But not over This amount Plus Of excess over 

$0 $2,000,000 $5,075 0.000000000 $0 

2,000,000 20,000,000 5,075 0.000210603 2,000,000 

20,000,000 100,000,000 8,866 0.000168481 20,000,000 

100,000,000 200,000,000 22,344 0.000109512 100,000,000 
Appendix IV

How OCC is Funded

Page 77 GAO-06-387 OCC Preemption Rules

Source: OCC 2003-45, Notice of Comptroller of the Currency Fees for Year 2004.

OCC also levies a surcharge for banks that require increased supervisory 

resources as reflected in the bank’s last OCC-assigned CAMELS rating.3

 

The CAMELS score is a numerical rating assigned by supervisors to reflect 

their assessment of the overall financial condition of a bank. The score 

takes on integer values ranging from 1 (best) to 5 (worst). Surcharges are 

calculated by multiplying the assessment, based on the institution’s 

reported assets up to $20 billion, by 50 percent for a CAMELS 3-rated 

institution and 100 percent for 4- and 5- rated institutions. For example, a 

national bank, with a 4 supervisory rating, $15 billion in assets, and no 

independent trust or credit card operations would be charged a standard 

assessment of $968,900 plus a 100 percent surcharge of $968,900, for a total 

assessment of $1,937,800. Since January 1, 2003, OCC special examinations 

and investigations have been subject to an additional charge of $110 per 

hour. 

Each year OCC issues a notice with updates on changes and adjustments, if 

any, to the assessment formula. It may adjust the marginal rates in column 

D and the amounts in column C; most adjustments are made based on the 

percentage change in the level of prices, as measured by changes in the 

Gross Domestic Products Implicit Price Deflator (GDPIPD). GDPIPD is 

sensitive to changes in inflation, and OCC has discretion to adjust marginal 

rates by amounts less than the percentage change in GDPIPD for that time 

200,000,000 1,000,000,000 33,295 0.000092663 200,000,000 

1,000,000,000 2,000,000,000 107,425 0.000075816 1,000,000,000 

2,000,000,000 6,000,000,000 183,241 0.000067393 2,000,000,000 

6,000,000,000 20,000,000,000 452,813 0.000057343 6,000,000,000 

20,000,000,000 $40,000,000,000 1,255,615 0.000050403 20,000,000,000 

$40,000,000,000 $2,263,675 0.000033005 $40,000,000,000 

3

OCC also collects fines and civil monetary penalties, primarily from lawsuits against 

corporations, corporate officers, and directors for impropriety. These funds are collected on 

behalf of the U.S. Treasury and have no effect on OCC’s income or annual budget.

(Continued From Previous Page)

If the amount of total balance 

sheet assets (consolidated 

domestic and foreign 

subsidiaries) is: The semiannual assessment will be:

A B C D E

Over But not over This amount Plus Of excess over 
Appendix IV

How OCC is Funded

Page 78 GAO-06-387 OCC Preemption Rules

period. For example, the GDPIPD adjustment was 1.5 percent in 2004 and 

1.1 percent in 2003. 

OCC also has the authority to reduce the semiannual assessment for banks 

other than the largest national bank controlled by a company; these 

nonlead banks may receive a lesser assessment.4

 For example, in the 2004 

Notice of Comptroller of the Currency Fees, OCC reduced the assessment 

of nonlead national banks by 12 percent.

The Price of OCC 

Supervision Decreases with 

Asset Size

Because the multipliers used to compute assessments beyond the base 

assessment decrease as asset size increases, (see column D in table 1), the 

price of supervision is less per million dollars in assets for larger banks 

than for smaller banks.5

 To illustrate this point, we calculated the price per 

million dollars in assets for the largest possible total asset size within each 

assessment range (see table 2). 

Table 2: Price of Supervision per Million Dollars in Assets

Source: GAO analysis based on OCC 2003-45, Notice of Comptroller of the Currency Fees for Year 2004.

4

This determination is based on a comparison of the total assets held by each national bank 

controlled by one company as reported in each bank’s call report filed for the quarter 

immediately preceding the payment of a semiannual assessment. 

5

This is true of those national banks, federal branches and agencies of foreign banks and 

District of Columbia banks with a satisfactory supervisory rating. However, banks with less 

than satisfactory performance are required to pay an additional surcharge that may result in 

a direct relationship between the price of supervision and asset size. 

Bank asset size Bank assessment amount

Price per $1 million of 

supervision

$2,000,000 $5,075 $2,537.50

20,000,000 8,866 443.29

100,000,000 22,344 223.44

200,000,000 33,295 166.48

1,000,000,000 107,425 107.43

2,000,000,000 183,241 91.62

6,000,000,000 452,813 75.47

20,000,000,000 1,255,615 62.78

$40,000,000,000 $2,263,675 $56.59
Appendix IV

How OCC is Funded

Page 79 GAO-06-387 OCC Preemption Rules

For example, table 2 shows that a national bank with about $2 million in 

total assets would pay about $2,500 per million dollars of assets for 

supervision, while the price of supervision for a national bank of about $2 

billion is less than $100 per million dollars of assets. 

Mergers and Consolidations 

Result in Less Revenue for 

OCC

OCC’s assessment formula prices supervision for merged national banks at 

a rate less than that of individual national banks with equivalent total 

assets. In cases where there is a merger between two national banks, for 

example, bank A is a national bank and bank B is a national bank, the 

merged bank C may have total assets equal to bank A plus those of bank B, 

but the assessment for bank C could be less than the assessment of bank A 

plus the assessment of bank C. 

To illustrate this point, we selected 10 merger transactions and applied 

OCC’s assessment formula. In all cases, OCC received less revenue in 

assessments after the merger occurred, compared with individual 

assessments prior to the merger. Table 3 shows the asset amounts of the 

banks in one of our examples and the effect of OCC’s formula. In this 

example, the impact is a change in OCC’s budget that decreases assessment 

revenue by about $76,500. 

Table 3: Effect of Mergers and Consolidations

Sources: OCC and GAO.

An OCC official acknowledged that the regressive nature of its assessment 

formula could reduce the assessment paid by merged banks compared with 

individual bank assessments prior to a merger. However, the official stated 

that costs associated with supervising merged banks were dependent on 

specific characteristics of the merged bank. For example, if a national bank 

located in California merged with a national bank located in New York, 

OCC may need to continue to maintain bicoastal bank examination teams. 

In this case, assessments would decrease, but costs would remain the 

 Assets 

 Individual 

assessments 

Bank A assessments + 

Bank B assessments

(Bank A+ Bank B) – 

Bank C = decrease in 

OCC budget

A (Acquiring bank) $14,304,670,000 $929,028

B (Target bank 2,794,586,000 236,791 $1,165,819

C (Combined bank) $17,099,256,000 $1,089,278 $76,541
Appendix IV

How OCC is Funded

Page 80 GAO-06-387 OCC Preemption Rules

same. In most cases however, over time, mergers of roughly equal-sized 

banks would realize savings and other synergies that do not require extra 

resources. For example, certain fixed costs could be spread across the 

merged banks; thus, as the bank’s assets grow larger, average costs 

generally decrease.
Page 81 GAO-06-387 OCC Preemption Rules

Appendix V

How Selected Federal Financial Industry 

Regulators Are Funded ApendxiV

Regulator Mission and regulatory role Funding

Federal Deposit 

Insurance Corporation 

(FDIC)

FDIC is to contribute to the stability of and public confidence in 

the nation’s financial system by insuring deposits, examining 

and supervising financial institutions, and managing 

receiverships. In cooperation with state bank regulators, FDIC 

regulates federally insured, state-chartered banks that are not 

members of the Federal Reserve and federally insured state 

savings banks. 

FDIC funds its operations by premiums that 

banks and thrifts pay for deposit insurance 

and earnings on its investments in U.S. 

Treasury securities. FDIC has permanent 

budget authority and, therefore, is not 

subject to the congressional appropriations 

process.

Board of Governors of the 

Federal Reserve System 

(FRB)

As the nation’s independent, decentralized central bank, the 

FRB is responsible for conducting monetary policy, maintaining 

the stability of the financial markets, and supporting a stable 

economy. The FRB supervises and regulates bank holding 

companies and, in cooperation with state bank regulators, 

examines and supervises state-chartered banks that are FRB 

members.

FRB funds its operations primarily from the 

earnings on its investments in Treasury 

securities. FRB has permanent budget 

authority and, therefore, is not subject to the 

congressional appropriations process.

Office of Thrift 

Supervision (OTS)

OTS’s mission is to effectively and efficiently supervise thrift 

institutions to maintain their safety and soundness in a manner 

that encourages a competitive industry. OTS examines and 

supervises all federally chartered and insured thrifts and thrift 

holding companies. In cooperation with state regulators, OTS 

examines and supervises all state-chartered, federally insured 

thrifts. 

OTS funds its operations primarily from 

assessments on the federal financial 

institutions it regulates. It has permanent 

budget authority and, therefore, is not 

subject to the congressional appropriations 

process.

National Credit Union 

Administration (NCUA)

NCUA’s mission is to foster the safety and soundness of 

federally insured credit unions and to better enable the credit 

union community to extend credit. It charters, regulates, and 

insures federally chartered credit unions. It also insures the 

majority of state-chartered credit unions. In cooperation with 

state regulators, it supervises federally insured, statechartered credit unions. 

NCUA funds its operations primarily from 

assessments on the federal credit unions it 

regulates. It has permanent budget authority 

and, therefore, is not subject to the 

congressional appropriations process.

Securities and Exchange 

Commission (SEC)

SEC’s mission is to (1) promote full and fair disclosure; (2) 

prevent and suppress fraud; (3) supervise and regulate the 

securities markets; and (4) regulate and oversee investment 

companies, investment advisers, and public utility holding 

companies. 

SEC is funded by the fees it collects from 

the entities it regulates subject to limits set 

by the congressional authorizations and 

appropriations processes. Excess fees are 

put into an offset fund and may be 

administered by Congress for other 

purposes. SEC is subject to the Office of 

Management and Budget process.

Office of Federal Housing 

Enterprise Oversight 

(OFHEO)

OFHEO is to ensure the capital adequacy and financial safety 

and soundness of Fannie Mae and Freddie Mac, two 

government-sponsored enterprises, privately owned and 

operated corporations established by Congress to enhance the 

availability of mortgage credit. OFHEO examines and regulates 

the two enterprises. 

OFHEO is funded through assessments 

paid by Fannie Mae and Freddie Mac and 

subject to limits set by the congressional 

authorizations and appropriations process. 

OFHEO must deposit collected 

assessments into the Oversight Fund, an 

account held in the Treasury.
Appendix V

How Selected Federal Financial Industry 

Regulators Are Funded

Page 82 GAO-06-387 OCC Preemption Rules

Source: GAO.

Federal Housing Finance 

Board

(FHFB)

FHFB is to ensure the safety and soundness of the Federal 

Home Loan Bank System, a government-sponsored enterprise 

whose mission is to support housing finance, and ensure that 

the system carries out its housing finance mission. FHFB 

examines and regulates the 12 Federal Home Loan Banks. 

FHFB is supported by assessments from the 

12 Federal Home Loan Banks. No tax 

dollars or other appropriations support the 

operations of the FHFB or the Federal Home 

Loan Bank System. 

Farm Credit 

Administration

(FCA)

FCA is an independent federal regulatory agency responsible 

for supervising, regulating, and examining institutions 

operating under the Farm Credit Act of 1971; the institutions 

that it regulates make up a system that is designed to provide a 

dependable and affordable source of credit and related 

services to the agriculture industry.

FCA’s expenses are paid through 

assessments on the institutions it examines 

and regulates. No federally appropriated 

funds are involved.

(Continued From Previous Page)

Regulator Mission and regulatory role Funding
Page 83 GAO-06-387 OCC Preemption Rules

Appendix VI

Information on Funding of States’ Bank 

Regulators ApendxiVI

Information gathered by the Conference of State Bank Supervisors (CSBS) 

indicates that most state bank regulators levy assessments to fund their 

operations. Forty-three states used some type of asset-based assessment 

formula to collect funds from banks and/or other entities they regulated, 

according to the CSBS data for 2004-2005.1

 Of the other seven states, two 

based their assessments on department costs, and two levied assessments 

only for shortfalls in the departments’ budgets. The remaining three states 

did not report information. Most state bank regulators (40 of 49 that 

reported such information) indicated that their legislatures determined 

how those funds would be allocated, appropriated, or spent. Table 4 

provides more detailed information on the funding arrangements for six 

state bank regulators that we interviewed. 

Table 4: Information on Funding for Selected State Bank Regulators

1

2004-2005 CSBS “Profile of State-Chartered Banking,” available for purchase from CSBS. 

State Formula

Who determines how funds are 

spent

California

The California Department of Financial Institutions levies 

assessments on the bank and nonbank entities it 

regulates using a formula set by the commissioner. The 

assessment formula is based on assets and the 

department’s costs (using past budgets) and projected 

expenses. Assessments are deposited into a special 

account for the department and a reserve can be, and is 

now, maintained. The department does not have 

authority to rebate assessed fees. The assessment 

(minimum of $5,000 and a maximum of $2.20 per $1,000 

of assets on a sliding scale) reflects a statutory limit 

applicable to banks.

Flat rate The legislature must approve the 

department’s appropriation each 

fiscal year. The department has 

general autonomy within the 

appropriated amounts of the budget 

categories. 

Georgia

The Georgia Department of Banking and Finance is 

funded primarily through assessments based on asset 

size, as provided by statute and set via agency 

regulations. Some specialty banks, such as credit card 

banks, pay an hourly rate. The department also collects 

fees for examinations of other financial entities, for 

licenses, and for certain transactions. 

Regressive schedule Authority is controlled by the 

legislature and statute, with 

requests made by the 

commissioner during the budget 

process. 
Appendix VI

Information on Funding of States’ Bank 

Regulators

Page 84 GAO-06-387 OCC Preemption Rules

Idaho

The Idaho Department of Finance is funded by 

assessments of regulated financial institutions set by the 

director within a statutory limit. The assessment 

structure includes a graduated base fee and excess fee 

based on total assets and $100 per branch office. The 

department also collects licensing fees from other 

financial entities it regulates. It does not have authority to 

rebate assessments; it maintains a reserve account.

Regressive schedule The department’s budget must be 

approved by the Governor, and 

funds must be appropriated by the 

legislature. 

Iowa

Iowa’s Division of Banking, within the Department of 

Commerce, is funded primarily by assessments and fees 

paid by the banks it supervises. In addition, the division 

supervises nonbank entities that pay fees for licenses, 

examinations, and investigations. The division 

determines its budget and establishes a formula that 

includes a bank’s assets and other factors, such as 

increases for CAMELS ratings over 2, to calculate the 

assessment. The assessed amounts are collected 

quarterly and may fluctuate since they are based on the 

actual operating expenses of the division. The “break 

even” approach does not provide the state’s general fund 

with excess revenue from the division. However, the 

division may rebate excess assessments. The actual 

cost of the division’s operations is the statutory limit to 

the assessments. 

Regressive schedule The division’s budget must be 

approved by the Governor and the 

Department of Management. Funds 

paid to the division go into the 

state’s general fund and are 

appropriated by the legislature. 

New York

The New York State Banking Department levies 

assessments on the banks and nonbank entities it 

supervises based on the cost to supervise them plus a 

regulatory assessment. Each company reports a 

measure of the business size, called the financial basis 

in the calculation. The supervisory cost is calculated on 

the average number of hours needed to supervise like 

size and type institutions, times the hourly rate for 

employees responsible for all institutions in the billing 

group. The amount to be collected through the regulatory 

calculation is determined by subtracting the supervisory 

amount from the total budget allocated to the group. The 

rate is established by dividing the total to be collected by 

the financial basis for the group. That rate is then 

multiplied by the financial basis for each company to 

determine the regulatory portion of the assessment. The 

sum of the regulatory and supervisory amounts is the 

total annual assessment.

N/A The legislature establishes a 

maximum budget annually.

(Continued From Previous Page)

State Formula

Who determines how funds are 

spent
Appendix VI

Information on Funding of States’ Bank 

Regulators

Page 85 GAO-06-387 OCC Preemption Rules

Sources: Respective state bank regulators and the Conference of State Bank Supervisors.

North Carolina

The North Carolina Commission on Banking levies an 

annual assessment based on year-end assets of the 

banks and certain nonbank entities it supervises. The 

regressive assessment formula for banks and a flat rate 

assessment for consumer finance licensees are set by 

statute. All entities pay application fees at entrance while 

most nonbank entities pay annual and other specific fees 

for continued operations within the State. Nonbank 

entities include check cashers, mortgage brokers and 

bankers, money transmitters, and others. The 

commissioner may recommend to the commission 

discounts and premiums to apply to the statutory 

assessment rate.

Regressive schedule 

(for banks)

Flat rate

(for consumer finance companies)

Funds are directed into a special 

account for the commission and are 

available without legislative action. 

A reserve can be maintained. 

(Continued From Previous Page)

State Formula

Who determines how funds are 

spent
Page 86 GAO-06-387 OCC Preemption Rules

Appendix VII

Comments from the Office of the Comptroller 

of the Currency ApendxiVI
Appendix VII

Comments from the Office of the Comptroller 

of the Currency

Page 87 GAO-06-387 OCC Preemption Rules
Page 88 GAO-06-387 OCC Preemption Rules

Appendix VIII

GAO Contact and Staff Acknowledgments ApendxiVI

GAO Contact David G. Wood (202) 512-8678 or woodd@gao.gov

Staff 

Acknowledgments

In addition to the individual named above, Katie Harris, Assistant Director; 

Nancy Eibeck; Nicole Gore; Jamila Jones; Landis Lindsey; Alison Martin; 

James McDermott; Kristeen McLain; Suen-Yi Meng; Marc Molino; Barbara 

Roesmann; Paul Thompson; James Vitarello; and Mijo Vodopic made key 

contributions to this report. 

(250212)
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER