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. 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. 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. 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. 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.