WASHINGTON - A nasty debate involving a complex tangle of issues revolves around the meaning of one word: preemption.
At issue is which state laws apply to national banks, and whether the Office of the Comptroller of the Currency is the arbiter - and the enforcer - of the laws that do apply. Powerful competing interests are pushing the debate into the hands of lawmakers.
"We will litigate this if need be, but it is certainly an issue that has to be debated in the halls of Congress," New York Attorney General Eliot Spitzer said Tuesday.
The OCC's new preemption regulations "were opposed by all 50 states, Democrats and Republicans," said Mr. Spitzer, who filed a lawsuit two weeks ago against a unit of First Tennessee National Corp. that could be the rule's first test. "They are wrong as a matter of law. They are injurious to consumers."
Congress is scheduled to wade into the debate today with a House Financial Services subcommittee hearing featuring testimony from both the OCC and its critics. The courts, too, have been active; a New York state court ruled Monday that state and federal law, including the National Bank Act, preempted a New York City measure aimed at keeping predatory lenders from doing business with the city government.
With so much going on and such high stakes, here is a primer on preemption - its origins, evolution, and the arguments on all sides.
The competing interests make things messy. National banks want to conduct their business without having to deal with varying state laws that carry real costs for shareholders and consumers alike. States want to uphold their laws and regulate businesses operating within their borders.
The federal government asserts a constitutional right to primacy where its laws conflict with those of the states. Federal regulators need consistency in rules to have credibility with the companies they oversee.
And somewhere on the list - presumably not at the bottom - is the consumer's expectation of protection against abusive, illegal, unfair, deceptive, and coercive practices.
The debate has spawned zealots.
"There is an element on every side of this debate of true believerism," says Gail Hillebrand, a lawyer with Consumers Union in San Francisco.
Legal issues involving the Constitution tend to generate that kind of passion, and the framers established preemption in Article VI: "The laws of the United States … shall be the supreme law of the land; and the judges in every state shall be bound thereby, any thing in the constitution or laws of any state to the contrary notwithstanding."
In creating the national bank charter - and the OCC - in 1863, Congress extended those principles to banking. And for most of the years since then, nobody much cared. The OCC figures there have been about 70 judicial opinions regarding preemption and national banks, including 12 in the past two years, and 40 since 1990.
So the debate, while old, has gained steam. In fact, seven of the judicial opinions came last year, more than any previous year. The OCC points to those figures as evidence that states are increasingly trying to limit the powers of national banks, and that national banks need, now more than ever, the clarity of a rule guiding them on which state laws apply to them.
Opponents of preemption - including state advocates and consumer advocates, two broad groups with substantial overlap - see something more sinister.
In the states' camp are attorneys general, lawmakers, and banking officials worried about the destruction of the dual-banking system that has characterized the depository system since national charters were created. Each has a slightly different reason to fear that collapse, but they argue generally that there would be economic and legal consequences for their residents.
Consumer advocates offer overlapping arguments, primarily that the OCC cannot do as good a job as the states in protecting consumers from abusive and predatory lending practices. They also say that state laws did not come out of thin air - that scores of state and municipal lawmakers are passing laws against predatory lending because it is a growing problem.
"Predatory lending is a lot more sensitive than the preemption issues in the past," said Helen Garten, a professor at Rutgers School of Law in Newark, N.J.
The charter battle is also not new, and regulators on all sides are looking for advantages to offer to insured depositories. The Federal Deposit Insurance Corp. and the Federal Reserve Board generally fund examinations of state-chartered banks through their insurance funds, so state assessments are less expensive than assessments of national banks.
That point clearly was not lost on Comptroller of the Currency John D. Hawke Jr., who has told anyone willing to listen about the fee disparity. His detractors say that he has been looking a way to justify higher fees to his national bank constituency and that expanding powers is really a blatant means of expanding his constituency.
"What better way to attract state charters than to say, 'We can give you blanket immunity from restrictive state law,' " said Art Wilmarth, a professor at George Washington University Law School in Washington.
So the OCC expected resistance when it issued a rule Jan. 7 that broadly stated its preemption powers. (The document included a reference list of preempted state laws and compared the OCC's preemption authority with that of the Office of Thrift Supervision.)
The OCC claimed the rule was not an expansion of its powers but an articulation of them, but those on the other side of the fight dismissed that claim out of hand.
"We think this is a very significant over-reaching of the National Bank Act," said Ms. Hillebrand.
The rule does shift the burden of proof. Under previous regulations, the OCC followed a public notice and comment procedure before it preempted a state law. Now a national bank may presume a state law is preempted by relying on the rule, and it may cover its bases by seeking a legal interpretation from the OCC confirming its presumption.
The OCC said its rule was based on the current status of federal law as interpreted by the highest courts in the land. That opinion, though not universal, is widely shared by banking lawyers.
"When it has come to the courts," the OCC has received "very wide preemption powers," said Ms. Garten. "Barnett was an incredibly broad formulation that said they had the power to preempt laws that significantly interfere with the national bank's operations."
"Barnett" is short for Barnett Bank of Marion County NA v. Nelson, a seminal text in the preemption debate. In the 1996 ruling, the Supreme Court determined that states can regulate national banks where "doing so does not prevent or significantly interfere with the national bank's exercise of its powers."
The "prevent or significantly interfere" standard has guided OCC preemption philosophy since and was the keystone of the Jan. 7 rule, in which it claimed authority to preempt laws that "obstruct, impair, or condition a national bank's exercise of its lending, deposit-taking, or other powers granted to it under federal law."
Mr. Wilmarth said the rule overlooks an important facet of the Barnett standard.
The OCC is "disregarding the whole notion of 'prevent or significantly interfere,' " he said. "Any burden, any hindrance - which presumably could be a relatively small matter - the OCC will just knock it out of the box. The bank doesn't have to prove it's significant."
Of course, the OCC's rule is just that. It is not the same thing as a law, and the OCC's detractors focus on that difference. They claim that the OCC has suborned congressional intent.
"The states have strong arguments that the OCC has gone beyond its authority," Mr. Wilmarth said. "But litigating against a federal agency is a tough go."
That's because courts, frequently relying on the Supreme Court's 1984 ruling in Chevron USA v. Natural Resources Defense Council, tend to give federal agencies wide latitude in interpreting their implementing statutes.
"The Supreme Court indicated that when you have a federal agency that's entrusted with making rules and enforcing the statute, Congress has already deferred some of its legislative authority to them in order to allow them to make the rules," said Michael Tomkies, a partner with Dreher Langer & Tomkies LP in Columbus, Ohio and the vice chairman of an American Bar Association subcommittee on preemption and federalism. "The courts don't feel they have a whole lot of leeway in not granting deference to what the OCC said."
That's not to say the OCC is guaranteed to win anytime it steps into the courtroom. It just means those considering whether to oppose it had better choose carefully.
But if history is any guide, the OCC's rule will withstand a court challenge, and the states and consumer advocates will be left with only one avenue of redress: Congress.
"Insofar as the OCC has interpreted federal law and that interpretation is upheld by the courts, then that's what the laws says," said Andrew Sandler, a lawyer in Washington with Skadden Arps Slate Meagher & Flom LLP. "Those on the other side of the tape need to go to Congress to change the law."
Mr. Wilmarth, too, says that's the endgame.
"Most of all, it's Congress that needs to step in," he said. "It's clear that the courts thus far are not taking a very aggressive position versus the OCC. If this is not what Congress wants, I think Congress has to do something about it."
Recent events, including the New York state court's ruling, only emphasize the necessity of turning to Capitol Hill.
Though preemption and banking cover plenty of topics and lines of business, the concern about protecting consumers against abusive and predatory lending has given a sense of urgency to the debate.
The OCC has tried to make it clear that its own statutes and services make state protections extraneous, burdensome, and costly for borrowers. Its preemption rule includes new standards designed to stamp out predatory loans. Rather than defining specific terms as predatory, as many state laws have done, the OCC articulated a prohibition against loans made with an eye on collateral value rather than on the borrower's ability to repay.
The intent was to eliminate equity stripping, the most common predatory tactic, in which the lender targets collateral value by extending a loan with the expectation that the borrower will default.
The OCC has also emphasized the abilities of its customer assistance group in Houston. That group fields tens of thousands of complaints a year, and the OCC says it has good record of solving problems.
Not everyone says the OCC is as effective as state regulators in protecting consumers.
Those supporting state laws frequently compare the preemption debate with developments in the securities industry.
If the Securities and Exchange Commission "had absolute enforcement power, not nearly as many of these terrible abuses in the securities industry would have come to light," Mr. Wilmarth said. "They are all being uncovered by the state regulators. A totally unregulated market has dangers in it, and there has to be some kind of reasonable regulation to keep people within ethical and proper bounds of business behavior."
Mr. Tomkies said the legal record is a bit different in national bank lending. Complaints brought by states against national banks are not settled until the OCC gets involved, he said.
"The AGs listed a number of cases brought against national banks, but every one of them was settled once the OCC got on board. That doesn't sound to me like someone who has been hitting home runs out of the park against the big national banks," he said. "The OCC comes in and swings the regulatory hammer."
That's because the OCC's enforcement powers are so broad, and the states are limited by their resources and the law, Mr. Tomkies said.
"How many times is the OCC in a bank during the year? How many policemen get to go into a criminal's home to watch what they are doing?" he asked. State attorneys general may make themselves out to be the sheriff "with the big silver star, going out and saving consumers, but they are riding a pony in some sense."
Howell Jackson, a professor at Harvard Law School, said reliance on state law is a thin shield for many.
"If you're in a state that doesn't have a strong tradition of consumer protection, it's not a great solution [for you] when North Carolina and New York" get involved, said Mr. Jackson, who worked for Mr. Hawke as an associate at the law firm Arnold & Porter. "You're better off with the OCC having a national policy, because at least there is someone looking out for you."
But Ms. Hillebrand said the claim of a nettlesome patchwork of state laws is a theoretical complaint not borne out by actual experience.
"If you look at how consumer-protection law has developed from a state to a federal level, you don't get 50 state laws," she said. "Generally, you get one or two state laws, and then Congress acts."
That, she said, is the reason why so many states have taken action in the case of predatory lending.
"Congress hasn't acted and the problem is too important to ignore and it's not being solved," she said. "That the problem exists and Congress has been unready to solve the problem is why the states and localities are involved."
Overruling state and municipal law will also dampen enthusiasm of state legislators to pass laws that don't reach all lending institutions.
"State legislators don't want to pass a bill that might apply only to the California-chartered banks and not to the national banks, particularly when national banks have 90% of the California credit card market," she said. The rule "seems like an effort by the OCC to dissuade the state legislatures from acting, even in areas where the courts might uphold those laws if they were enacted."
Whether Congress will step into the debate is far from clear, though the calls to do so are increasing.
"If this issue plays out inside the Beltway, momentum is on the side of the industry, who brings a lot financial resources to the table," said John Ryan, the executive vice president at the Conference of State Bank Supervisors. "It depends on the circumstances and how this issue is framed and whether it becomes an issue outside of Washington."
