State and local attempts to regulate federally chartered financial institutions not only run afoul of over a century of federal law - their success would bring serious economic consequences for consumers and the national economy.
Retail banking is a national market, with banks nationwide competing for customer business. The back-office servicing of banks - from ATM systems to data and transaction processing - is also a nationwide market in which smaller local banks can outsource functions to third parties to drive down costs and better compete with larger rivals.
This nationwide competition has resulted in lower costs, better service, and a wider array and better availability of credit and financial services for consumers. Local controls would set up barriers to national competition that would inevitably affect consumers.
Some state and local efforts, including recently preempted California legislation, seek to limit credit to consumers by forcing a faster repayment schedule on credit cards, for example, or restricting offers to subprime borrowers. From a macro-economic perspective, systematic constriction of credit at the bottom of a recession is a bad idea, like slamming on the brakes while driving on ice. It can make a dangerous situation spin out of control.
Consumer spending is keeping the economy afloat and keeping people in their jobs and homes. Allowing state governments to force federally chartered financial institutions to sharply restrict consumer credit is like having 50 backseat drivers - each with access to the brake pedal and personal political incentives to step down on it.
A bad economic situation could get much worse.
The federal agencies that charter and regulate federal financial institutions are already effectively addressing the issues that the state and local governments have seized upon. For example, the credit-card-practices release from the federal regulators in January highlights the fact that the federal regulatory agencies are fully capable of ensuring safe, sound, and legally compliant institutions. So do the enforcement actions brought by the OCC and OTS over the years to enforce compliance by national banks and federal thrifts with applicable consumer lending laws.
Duplicative and conflicting state and local regulatory and enforcement efforts burden our financial system and serve no real purpose. Nevertheless, more and more federally chartered financial institutions are becoming the targets of state and local government efforts to regulate or supervise their activities.
Sometimes these efforts take the form of a letter of inquiry about a particular line of business, sometimes an administrative subpoena or complaint or a lawsuit seeking documents or other information or attempting to force compliance with state or local and in some cases even federal law.
In deciding how to deal with these actions, financial institutions should be aware that there are two separate questions to answer with respect to federal preemption issues.
- Does federal law preempt the particular substantive state or local law?
If the law is applicable, which government entity has jurisdiction to enforce it against such institutions?Recent efforts by a number of state and local governments to expand their supervisory jurisdictions into the federal arena have been met by sharp industry and federal resistance.
- Late last year, in American Bankers Association v. Lockyer, a federal district court ruled that a California law imposing elaborate requirements on credit card issuers nationwide that issue credit cards to California residents was preempted as applied to federally chartered financial institutions. Other recent decisions in California have also struck down state and local efforts to regulate the fees that federal law authorizes for federally chartered banks and thrifts, such as ATM and loan-related fees.
- In a Jan. 30 letter, the Office of Thrift Supervision stated that New York's predatory-lending laws are preempted and void as applied to federal savings associations. On Jan. 31 the Office of the Comptroller of the Currency proposed to clarify its rules on preemption of state jurisdiction over national banks to note that the clause preserving traditional court powers does not allow state or local governments to exercise visitorial powers over national banks by filing an action in court.
These court decisions and regulatory pronouncements are a good start, but just a start, in turning back the tide of state and local regulation.
