OCC issues final rules on national bank pre-emption and visitorial powers.

ON JAN. 7, THE OFFICE OF THE COMPTROLLER of the Currency (OCC), Washington, D.C., issued two final rules on national bank pre-emption and visitorial powers. The first final rule clarifies the extent to which operations of national banks and operating subsidiaries are subject to state laws. The

In the first final rule, the OCC clarifies the types of state laws that are pre-empted by the federal powers of national banks under the National Bank Act, revises the list of types of state laws that are not pre-empted and establishes new provisions to prevent abusive or predatory lending practices.

The pre-emption rule provides that state laws that "obstruct, impair or condition" a national bank's powers in the areas of both non-real estate- and real estate-secured lending, deposit-taking and other national bank operations are not applicable to national banks.

With respect to real estate-secured lending, the rule provides that state law limitations on the following activities do not apply to a national bank: licensing and registration (except for service of process); restrictions relating to private mortgage insurance or other credit enhancements; loan-to-value (LTV) ratios; terms of credit; the aggregate amount of funds that may be loaned on the security of real estate; escrow and impound accounts; security property; access to and use of credit reports; disclosures and advertising generally; processing, origination, servicing, sale/purchase of or investment/participation in mortgages; disbursements and repayments; and rates of interest and due-on-sale clauses (which are governed by other provisions of federal law).

The rule also lists state laws that "are not inconsistent with" the real estate lending powers of national banks and therefore would continue to apply to the activities of a national bank. The list includes laws dealing with contracts, torts, criminal law, homestead laws, rights to collect debts, acquisition and transfer of real estate, taxation and zoning.

The first rule also establishes an antipredatory lending standard that provides that national banks may not make consumer loans based on the foreclosure or liquidation value of a borrower's collateral, without regard to the borrower's ability to repay. While the OCC does not have legal authority to issue regulations defining particular acts or practices as unfair and deceptive practices under the Federal Trade Commission Act, it does have the authority to take enforcement actions when a national bank is found to have engaged in unfair or deceptive practices.

The new rules are OCC's response to numerous questions it has received about the extent to which state laws apply to national banks and the authority of state or other agencies to examine or take actions against national banks. National banks are already subject to a set of federal requirements, and the overlay of multiple state law standards would impose unnecessary and excessively costly burdens.

"When national banks are unable to operate under uniform, consistent and predictable standards, their business suffers and so does the safety and soundness of the national banking system," said Comptroller of the Currency John D. Hawke Jr. "The application of multiple and often unpredictable state laws interferes with their ability to plan and manage their business, as well as their ability to serve the people, the communities and the economy of the United States."

While states are free to pass laws governing the operation of institutions they supervise and regulate, customers of national banks will benefit from an array of consumer protections provided by federal law, OCC regulations and the supervision of national banks and their subsidiaries by the OCC, according to Hawke.

In an October 2003 letter to the OCC, the Mortgage Bankers Association (MBA) expressed its support of the OCC's actions to issue regulations that codify the firm standards for pre-emption regarding national bank activities. MBA said it believes that it is crucially important for federal policy-makers to realize that the limited reach of the pre-emptive activities by federal regulatory agencies could have unforeseen effects on the national mortgage market. MBA strongly advocates the need for a national uniform mortgage lending standard that applies to all lenders equally and that will protect consumers through consistent application of a uniform federal law.

The National Conference of State Legislatures (NCSL), Washington, D.C., condemned the new rulings, specifically focusing on the second rule giving the OCC the exclusive visitorial rights for national banks. According to the NCSL, this action effectively bars states from identifying wrongdoing on the part of national banks and their subsidiaries and keeps states from bringing enforcement actions in either state or federal court.

"There is no evidence that this broad expansion of the OCC's authority is needed or appropriate," said State Representative Donna Stone, chair of the House Economic Development, Banking and Insurance Committee in Delaware and chair of the NCSL Financial Services Committee. "This action imposes a one-size-fits-all approach that threatens the states' role as laboratories of innovation and a safety valve against rigid federal controls."

The OCC's pre-emption and visitorial powers rulings take effect 30 days after publication in the Federal Register. Under existing regulations that were not changed in January's rulemakings, both the pre-emption regulation and the visitorial powers rule apply to the operating subsidiaries of national banks. They do not apply to financial subsidiaries, nor do they authorize any new powers or activities such as real estate brokerage.

The regulations and additional explanatory materials are available on the OCC's Web site at www.occ.treas.gov/newrules.htm.