U.S. Agency Rejects State Bank Laws

Federal regulators issued a set of regulations Wednesday that asserted their dominance over state banking rules, raising the ire of consumer advocates and state officials.

The U.S. Office of the Comptroller of the Currency said state laws would still apply to national banks on certain narrow issues such as zoning and lost property. But the OCC asserted that Congress had granted it virtually all control over the fundamentals of retail banking, including lending and deposit taking, at all federally chartered banks.

These include the national bank subsidiaries of major players such as Bank of America Corp. and Wells Fargo & Co., which dominate the retail banking market in California and most other states.

The agency said its authority would benefit consumers because it would be, among other things, more cost-efficient.

That assertion was hotly disputed by many consumer groups and state officials. And chief law enforcement officials of California and New York were particularly galled by the OCC’s contention that only it -- not state regulators -- may enforce state laws that apply to federally chartered banks.

New York Atty. Gen. Eliot Spitzer said the OCC’s “shamefully wrong” policy “demonstrates an utter disregard for the dual banking system that has existed in this country for over 100 years.”

Tom Dresslar, a spokesman for California Atty. Gen. Bill Lockyer, said the OCC was “trying to shove the states and their attorneys general into a shed in the backyard and just pulling us out when they deem it appropriate.”

The Consumer Federation of America said in a statement, “This uniformity will come at the expense of consumer protection.”

In an interview, Comptroller of the Currency John D. Hawke Jr. defended the move by the OCC, which is part of the Treasury Department. Hawke said state and local attempts to rein in abusive lending had backfired. At the OCC, he said, “we’ve got a very good track record” of consumer protection.

Federal courts have ruled repeatedly that nationally chartered banks aren’t governed by state and local laws concerning fundamental banking practices. The courts have overturned attempts by San Francisco and Santa Monica to limit automated teller machine fees at national banks and California laws that required greater disclosures by credit card issuers and restricted mortgage-interest charges.

For their part, multi-state banks have contended that layers of regulations result in high costs for their customers. “A patchwork of inconsistent rules passed by states and municipalities is not in the best interest of either consumers or businesses,” Wells Fargo, the biggest California-based bank, said in a statement praising the OCC.

The issue of federal preemption, always heated, has been brought to a boil by the recent adoption of numerous state and local laws to combat “predatory” lending practices such as hidden fees, excessive interest rates and high-cost credit insurance.

In the battles over whether those laws apply to national banks, Democratic legislators have cast themselves in an unaccustomed role as champions of state rights.

In a Nov. 24 letter to Hawke, all 10 Democratic senators on the U.S. Senate Banking Committee argued that “states regularly have enforced their unfair- and deceptive-practices laws against national banks, without controversy,” and should be allowed to continue to do so.

The OCC already prohibits a wide range of questionable bank practices, the agency said, insisting, for example, that all home loans must be made based mainly on the borrowers’ ability to pay, not on the equity that could be salvaged at a foreclosure sale.

The agency said federal lending regulations would be the only ones that apply to national banks in states like Georgia and cities such as Oakland and Los Angeles that have adopted their own predatory-lending laws.

Characterizing the OCC as concerned chiefly with keeping banks financially sound, Dresslar said California would enforce general consumer-protection laws against false advertising and unfair business practices if violations occurred at national banks “and we’ll see what happens.”

Jennette Gayer of the California Public Interest Research Group, a consumer advocacy organization, said that if the OCC’s “overreaching regulation is upheld by the courts, unelected bureaucrats at the OCC will become the de facto regulators of much more of the nation’s financial system than people know.”