OCC Preemption Rules: OCC Should Further Clarify the Applicability of State Consumer Protection Laws to National Banks
Published: 2006-04-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. The bank  activities rule addresses the applicability of state laws to lending, deposit- taking, 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.  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, state- chartered 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  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. 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. 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  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. 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.
subsections: section_title: Background
subsections: section_title: Regulation and Structure of Banking Organizations
paragraphs: 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. 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  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.
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.  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. 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.
section_title: OCC’s Mission and Regulatory Responsibilities
paragraphs: 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  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.
section_title: OCC and Preemption
paragraphs: 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. 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  make technical clarifications to the rule, specifically related to the  exclusivity of OCC’s visitorial powers with respect to national banks’  operating subsidiaries.
section_title: OCC Described Types of State Laws That Would Be Preempted, but Questions Remain Regarding the Rules’ Scope and Effect
paragraphs: 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  apply with respect to state laws that do not relate to the listed subjects.  Although OCC’s purpose in proposing the regulations was “to add  provisions clarifying the applicability of state law to national banks,” 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.
subsections: section_title: 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
paragraphs: 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  incidental effect” on the bank’s activity or “is otherwise consistent with”  powers authorized under the National Bank Act. 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.
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.
section_title: Questions Remain Concerning the Applicability of State Consumer Protection Laws
paragraphs: 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  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.
subsections: section_title: Statements by OCC Suggest That State Consumer Protection Laws Can Be Consistent with Federal Law
paragraphs: 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.  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.
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.  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. 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. 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  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.
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.
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.
section_title: Officials Expressed Differing Views on Applicability of State Consumer Protection Laws
paragraphs: 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.
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.
section_title: According to Most State Officials We Contacted, the Preemption Rules Have Diminished State Consumer Protection Efforts
paragraphs: 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.
subsections: section_title: State Officials Expressed Differing Reactions to the Rules’ Effect on Relationships with National Banks
paragraphs: 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. 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. 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  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 state- regulated 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.
subsections: section_title: Some State Officials Believe That National Banks and Operating Subsidiaries Are Less Inclined to Cooperate
paragraphs: 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  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  examined and took enforcement actions against operating subsidiaries  because they were state-licensed and regulated, and OCC did not  interfere.
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. 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  relinquished their state licenses, or did not register for or renew their  licenses. 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.
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  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.
section_title: Other State Officials Reported Little Change in Relationships with National Banks
paragraphs: 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.
section_title: Some State Officials Were Concerned That the Preemption Rules Could Prompt the Creation of Operating Subsidiaries to Avoid State Regulation
paragraphs: 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. 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  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. 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.
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.
section_title: The Rules’ Effect on Charter Choice Is Uncertain, but Some States Are Addressing Potential Charter Changes
paragraphs: 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.
subsections: section_title: Industry Changes and Other Factors May Affect Charter Choice
paragraphs: 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.
subsections: section_title: Banking Business Has Changed in Many Ways
paragraphs: 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  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. 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. 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.
section_title: Many Factors May Affect Choice of Charters
paragraphs: 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  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. 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  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.
section_title: Few Banks Have Changed Charters, but Shifts in Bank Assets Have Budgetary Implications for State Regulators and OCC
paragraphs: Our analysis of data on charter changes among federally and state- chartered 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. 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. Appendix III provides details on charter changes.
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.
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.
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. Since 1999, the percentage of OCC’s  budget paid by its largest banks has been increasing (see fig. 3).
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. 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.
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. 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  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.
section_title: Some Officials Perceive Competitive Advantages in the Federal Charter and Have Taken Actions to Address Potential Charter Changes by State Banks
paragraphs: 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.
subsections: section_title: Officials Perceived Some Competitive Advantages for the Federal Charter
paragraphs: 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  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.
section_title: Some States Have Made Efforts to Address the Potential Impact of Charter Changes
paragraphs: 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.
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. 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.
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 state- chartered 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  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.
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  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.)
section_title: Suggested Measures for Addressing State Consumer Protection Concerns Include Shared Regulation, Which Raises Complex Policy Issues, and Greater Coordination between OCC and States
paragraphs: 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.
subsections: section_title: 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
paragraphs: 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  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. 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. Further, they maintain that,  in GLBA, Congress implicitly recognized that OCC’s authority over  operating subsidiaries is exclusive unless Congress specifically says  otherwise.
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.
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 state- chartered 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 state- chartered 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  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.
section_title: A Consensus-Based National Consumer Protection Lending Standard Applicable to All Lending Institutions Would Provide Uniformity but Limit State Autonomy
paragraphs: 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. In addition, officials referred to other  federal consumer protection laws that apply to national banks and national  bank operating subsidiaries. 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  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.
section_title: An OCC Initiative to Clarify Preemption With Respect to State Consumer Protection Laws Could Assist in Achieving Consumer Protection Goals
paragraphs: 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  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. 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 state- chartered affiliates. 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.
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.
section_title: Conclusions
paragraphs: 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  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.
section_title: Recommendation for Executive Action
paragraphs: 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  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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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.
section_title: Objectives, Scope, and Methodology
paragraphs: 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.
subsections: section_title: Identification of Key Issues and Legal Review of Preemption Standard
paragraphs: 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. 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. 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  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).
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.
section_title: Effects of Preemption Rules on State Consumer Protection Efforts and the Dual Banking System
paragraphs: 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.
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  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. 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.
section_title: Measures to Address States’ Concerns Regarding Consumer Protection
paragraphs: 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.
section_title: Overall Data Reliability
paragraphs: 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. 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.
section_title: Legal Arguments Regarding the Preemption Rules
paragraphs: 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.
subsections: section_title: OCC’s Interpretation of the Preemption Standard
paragraphs: 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. Opponents of the bank activities  rule asserted that this standard misstates the test for preemption under the  National Bank Act.
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.
Under the Supremacy Clause, state law is preempted by federal law when  Congress intends preemption to occur. 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  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. 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.
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.
In defining the pre-emptive scope of statutes and regulations granting a power to national  banks, these  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.
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. 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 “he variety of formulations quoted by the Court, . . . defeats  any suggestion that any one phrase constitutes the exclusive standard for  preemption.”
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. 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.” 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  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. 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  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.”
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.
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.” 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.
section_title: Breadth of the Preemption Lists in the Bank Activities Rule
paragraphs: 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. 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  had been preempted by the Office of Thrift Supervision (OTS). 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). 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. 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  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.
section_title: Other Aspects of the Preemption Rulemaking
paragraphs: 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.” Section 1828(o) requires the federal banking  agencies to have uniform regulations prescribing standards for real estate  loans. 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. In interpretive letters describing  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 “t was not the intention of  , however, to preempt all state regulation of real estate lending.”  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.” 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.
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  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.
section_title: Applicability of Rules to National Bank Operating Subsidiaries
paragraphs: 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. 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.
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  restrictions that apply to national banks; one of those decisions is under  review by the Supreme Court. 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.
section_title: Disagreement with OCC’s Interpretation of Its Visitorial Powers
paragraphs: In the visitorial powers rulemaking, OCC clarified its position regarding its  supervisory authority over national banks and their operating  subsidiaries. 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.
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).
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. Those disagreeing with the rule described it as an attempt by  OCC to limit both state supervision of activities conducted by state- chartered 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.
section_title: Bank Charter Changes from 1990 to 2004
subsections: section_title: From 1990 to 2004, More Banks Changed to the Federal Charter, but Most Changes Resulted from Mergers
paragraphs: 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. 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.
The majority of changes between the federal and state charters during this  period resulted from mergers rather than conversions. 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,  there were 132 more conversions to state charters than to the federal  charter.
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.
section_title: Recent Charter Changes Substantially Increased the National Bank Share of All Bank Assets
paragraphs: 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.
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.
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. In 1990-2004, about $296 billion more in assets shifted to  the federal charter than to state charters as a result of mergers.
section_title: The Annual Number and Assets of Banks That Changed between Federal and State Charters Was Small Relative to All Banks and All Bank Assets
paragraphs: 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.
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.
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. For  example, as shown in figure 10, assets for mergers into state charters from  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.
section_title: How OCC is Funded
paragraphs: 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.
subsections: section_title: OCC Is Funded Primarily by the Assessments It Charges National Banks
paragraphs: 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.
section_title: OCC’s Assessment Formula Is Based on Asset Size but Includes Other Factors
paragraphs: 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.  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. 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].
OCC also levies a surcharge for banks that require increased supervisory  resources as reflected in the bank’s last OCC-assigned CAMELS rating.   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  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. For example, in the 2004  Notice of Comptroller of the Currency Fees, OCC reduced the assessment  of nonlead national banks by 12 percent.
section_title: The Price of OCC Supervision Decreases with Asset Size
paragraphs: 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. 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).
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.
section_title: Mergers and Consolidations Result in Less Revenue for OCC
paragraphs: 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.
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  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.
section_title: How Selected Federal Financial Industry Regulators Are Funded
paragraphs: 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.
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.
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.
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, state- chartered 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.
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.
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.
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.
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.
section_title: Information on Funding of States’ Bank Regulators
paragraphs: 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. 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.
section_title: Comments from the Office of the Comptroller of the Currency
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.