“License to Bank: Examining the Legal Framework Governing Who Can Lend and Process Payments in the Fintech Age.”
Thank you for inviting me to participate in this very important hearing. My testimony today criticizes recent attempts by the
In
Despite the district court's decision, Acting Comptroller of the Currency
In
In addition,
The OCC has made two attempts to confer the privileges of national banks on nonbank firms. In
In
In
Part I of this testimony shows that the OCC's nondepository fintech national bank charter and the
I. The OCC's Nondepository Fintech Charter and the
As shown below, several federal banking laws prohibit the OCC from granting national bank charters to financial institutions that do not accept deposits. In addition, the OCC's nondepository fintech national bank charter and the
A. The National Bank Act Requires National Banks to Accept Deposits in Order to Conduct the "Business of Banking"
Since 1864, deposit-taking has been an essential part of the "business of banking" conducted by national banks. Since 1864, the NBA has authorized the OCC to issue national bank charters only if the OCC determines that each proposed national bank "is lawfully entitled to commence the business of banking." n10 Since 1864, the NBA has defined "the business of banking" to include the activities of "receiving deposits," making loans, paying ("discounting") negotiable instruments and other evidences of debt, buying and selling "bullion" and foreign exchange, and obtaining and issuing circulating bank notes, along with "all such incidental powers as shall be necessary to carry on the business of banking." n11 Since 1864, the NBA has required every national bank to identify in its organization certificate "[t]he place where its operations of discount and deposit are to be carried on." n12
The NBA's designation of deposit-taking as a crucial aspect of "the business of banking" reflects the fundamental role of bank deposits in our monetary system and economy. Banks increase our nation's money supply by issuing deposits. Banks use deposits as a funding device for extending loans and purchasing investment securities. n13 Bank customers use deposits as a vehicle for savings and for making payments to others. Under federal law, only banks and other chartered depository institutions are allowed to issue deposits. n14
Thus, banks perform essential functions through their issuance of deposits. Bank deposits expand our money supply and support our economy by funding loans and investments, promoting savings, and facilitating payments by businesses and consumers to other persons. n15
Federal courts have repeatedly identified deposit-taking as an "essential" element of the "business of banking" authorized by the NBA and other federal statutes. n16 The power to accept deposits is a special privilege conferred by federal and state governments on banks and other depository institutions through a demanding chartering process. That special privilege also warrants the comprehensive regime of regulation and supervision that federal and state governments impose on banks and other depository institutions. n17
In 1975, the OCC took an unprecedented step by approving a national bank charter for a special-purpose trust company. That trust company that did not accept deposits other than trust funds and did not exercise any other non-fiduciary powers. A district court invalidated the OCC's special-purpose trust charter, holding that it violated the NBA's requirement that all national banks must engage in the "business of banking." n18 In response to that court decision,
The OCC rests its claim of authority to charter nondepository national banks on Section 36 of the NBA. However, Section 36 was not added to the NBA until 1927 - more than 60 years after the NBA's enactment. Section 36 deals only with the authority of national banks to establish branches. Section 36 says nothing about the chartering of banks, and it does not refer to "the business of banking." The OCC did not assert any chartering authority under Section 36 until 2003, and the OCC did not take any definitive steps to implement that asserted authority until 2016. n23
Section 36 defines a "branch" as a location "at which deposits are received, or checks paid, or money lent." n24 Based on the disjunctive word "or" in Section 36, the OCC argues that it can charter national banks that engage in lending or payment activities but do not accept deposits. However, a branch is a subset of a national bank, and Section 36 merely authorizes a branch to exercise a subset of "the business of banking." The fact that a national bank may lawfully establish a subsidiary branch without accepting deposits has no bearing on whether the OCC may lawfully charter a bank that does not accept deposits.
In contrast to Section 36, Section 24 (Seventh) of the NBA uses the conjunctive word "and" when it identifies the activities - including "receiving deposits" - that are part of "the business of banking." The activities specified in Section 24 (Seventh) include all three of the functions listed in Section 36. Viewed in combination with Section 22 (Second) - which requires every national bank to identify "[t]he place where its operations of discount and deposit are to be carried on" - as well as Section 27(a) - which forbids the OCC from chartering banks that are not "lawfully entitled to commence the business of banking" - Section 24 (Seventh) plainly bars the OCC from chartering nondepository national banks other than special-purpose trust companies. n25
As the district court pointed out in Vullo, the OCC's nondepository fintech charter could have a major "impact . . . on at least 'a significant portion' of the national economy" by causing a "dramatic disruption of federal-state relationships in the banking industry." The OCC's fintech charter threatens to preempt a broad array of state financial regulations (including state licensing and supervisory standards) and other state consumer protection laws (including state usury laws), which currently apply to nonbank providers of lending and payment services. n26 In addition, the OCC could conceivably assert that fintech "banks" are exempt from state privacy and data protection laws. n27 Thus, the OCC's fintech charter threatens to abrogate the longstanding federal policy of allowing states to regulate nonbank firms that provide lending, payment, and other financial services within their borders. n28
The OCC's fintech charter would severely undermine the states' authority to enforce laws that protect their residents against abusive, deceptive, and exploitative practices by nonbank providers of lending and payment services. As the NYDFS pointed out in its Complaint in Vullo, "preemption of state law governing mortgage lenders and servicers" by the OCC and the
The OCC's fintech chartering initiative offers federal corporate charters to a wide range of nonbank firms that provide lending and payment services. Big Tech giants like Alphabet (
B. The Federal Reserve Act Confirms That National Banks Must Operate as Depository Institutions
The FRA provides that
Since 1913, the FRA has required every national bank to become a member bank of the
Deposits held by national banks and other federally-regulated depository institutions play important roles in the Fed's implementation of monetary policy. National banks and other depository institutions must maintain reserves against their deposits in accordance with the Fed's regulations. n38 Bank reserve requirements are one of the "primary means through which the [
National banks and other depository institutions enjoy a privileged relationship with the Fed, and they receive highly beneficial services from the Fed.
As shown above, the FRA embodies
If nondepository fintech "banks" obtained recognition as Fed member banks, they would immediately qualify for loans from the Fed's discount window. Such an outcome would destroy the vital distinction established by
If nondepository fintech national banks achieved the status of Fed member banks, they could establish master accounts that provide access to the Fed's payment services (including Fedwire) as well as the Fed's custody and settlement services. Fedwire provides real-time payments and guaranteed finality - important privileges that are currently available only to depository institutions. Depository institutions can also obtain intraday overdraft credit from the Fed. n47 Granting nondepository fintech national banks access to the Fed's payment and settlement services and overdraft credit would violate
Obtaining access to the Fed's benefits and services would give nondepository fintech "banks" major advantages over nonbank competitors that could not obtain fintech charters. Allowing nondepository fintech "banks" to obtain and exploit such competitive advantages would be contrary to the public policies embodied in the NBA and FRA. In addition, as explained below in Part I(D), the OCC's fintech charter would allow fintech "banks" to evade a number of important regulatory requirements and public interest safeguards that apply to
The OCC's nondepository national bank charter would also permit Big Tech giants and other technology firms to influence our monetary and economic policies. National banks and other Fed member banks elect six of the nine directors of each
C. The Federal Deposit Insurance Act Requires National Banks to Obtain
The Banking Acts of 1933 and 1935 established a federal deposit insurance program and created the
The OCC's claim of plenary authority to charter nondepository national banks is completely unfounded, given
The statutory requirement that all other national banks must obtain deposit insurance is consistent with
D. The OCC's Fintech Charter and the
1. The BHC Act's Mandate for Separating Banking and Commerce
The BHC Act regulates all "companies" that control "banks." n54 The original BHC Act of 1956 applied to companies that controlled two or more banks. In 1970,
Section 4 of the BHC Act prohibits banks from controlling commercial firms, and it also bars commercial firms from controlling banks. Section 4 embodies our nation's "longstanding policy of separating banking from commerce." n56 The BHC Act prohibits affiliations between banks and commercial firms because those affiliations pose significant dangers, including (1) undue concentrations of economic and financial power, (2) conflicts of interest that destroy the ability of banks to act objectively in providing loans and other services, and (3) unacceptable risks to the federal "safety net" for banks, including the
The 1970 amendments to the BHC Act changed the definition of "bank" to include financial institutions that both accepted demand (business checking) deposits and made commercial loans. In 1980, the OCC began to charter "nonbank banks" - national banks that refrained from either accepting demand deposits or making commercial loans. By omitting one of those functions, nonbank banks enabled their parent companies to evade regulation under the BHC Act. The OCC allowed many commercial firms to acquire "nonbank banks," thereby threatening the BHC Act's policy of separating banking and commerce. n58
In 1987,
2. The OCC's Fintech Charter Would Allow Technology Firms to Evade the BHC Act's Prohibition Against Combinations of Banking and Commerce
The OCC's nondepository fintech national bank charter represents the latest attempt by the OCC to evade the BHC Act and undermine the separation of banking and commerce.
Parent companies of the OCC's nondepository fintech national banks would escape regulation under the BHC Act. Fintech national banks would not be
As discussed above in Part I(B), fintech national banks could offer lending and payment services and could potentially claim all of the privileges provided to national banks under the FRA - including access to the Fed's discount window loans, payment and settlement services, guarantees for payments made on Fedwire, and overdraft credit. If fintech national banks achieved status as Fed member banks, ownership of those banks by Big Tech giants and other commercial enterprises would expose major components of the federal safety net to the risks posed by their unregulated parent companies. That outcome would severely compromise the BHC Act's fundamental principle of separating banking and commerce to protect the federal safety net from risks and losses generated by commercial firms.
In addition to avoiding the BHC Act's prohibition on commercial ownership of banks, fintech national banks and their owners would evade a number of other important regulatory requirements and public interest safeguards that apply to
The OCC's nondepository fintech "banks" would not be subject to any of the foregoing regulatory requirements and public interest safeguards because they would not be
3. The
The
The
In
In response to the strong public opposition against
It is highly unlikely that
Consequently, the
The
For example,
The
Commercial ownership of ILCs would pose serious threats to the stability of our financial system and our economy. The federal government bailed out several large corporate owners of ILCs during the financial crisis of 2007-09, including
Widespread ownership of ILCs by commercial firms would greatly increase the likelihood of contagious spillovers of risks and losses between the financial system and the general economy. During future financial crises and economic downturns, federal agencies would face intense pressures to rescue large commercial owners of ILCs to ensure the stability of our financial system and the health of our economy. For example, the German technology firm
The financial industry and many commercial sectors of our economy (including the information technology industry) already display very high levels of concentration and are dominated by a small number of giant firms. That domination enable big incumbent firms to capture unjustified super-profits by using their market power to impose unfair prices on customers and suppliers, by acquiring or crowding out smaller firms, and by deterring entry by new firms. n77 Allow Big Tech giants and other large commercial firms to acquire ILCs would give them an additional competitive edge, thereby further impairing competition and harming customers and suppliers in many lines of commerce.
4. Acquisitions of ILCs and Fintech "Banks" by Commercial Firms Would Inflict Serious Harm on
Acquisitions of ILCs and nondepository fintech national banks by Big Tech giants and other commercial firms would transform our financial system and economy in ways that are likely to impose significant harm on taxpayers, consumers, and communities. Big Tech firms already enjoy technological superiority over banks in the fields of automation, artificial intelligence, data management, and mobile payments. The rapid growth of Alibaba, Ant Financial, and
The
As shown above, Big Tech giants and other commercial firms that acquire ILCs or fintech "banks" would not be regulated by the Fed under the BHC Act. The
The
Even if
Big Tech giants and other large commercial owners of ILCs and fintech "banks" would inevitably be considered "too big to fail" by both regulators and market participants. Their "too big to fail" status, their extensive lobbying resources, and their political influence would also make them "too big to discipline adequately." Thus, any attempt to establish an effective system of consolidated supervision for commercial-financial conglomerates would almost certainly fail. The unfeasibility of consolidated supervision for large commercial-financial conglomerates provides a further compelling reason for prohibiting their existence. n83
II. The OCC's and
A. Federal Laws Prohibit the OCC and
1. The OCC's and
Since 1864, Section 85 of the NBA has specified the "interest" that a national bank may "take, receive, reserve, and charge" on its loans. The "interest" allowed to a national bank under Section 85 is governed by the usury laws of the state in which the bank is "located." Section 85 confers on each national bank a preemptive immunity from state usury laws except for the usury laws of the state in which that bank is "located." n84
The OCC lacked authority to issue its usury preemption transfer rule, which purports to extend the preemption provided to national banks under Section n85 to reach third-party purchasers, assignees, and transferees of loans made by national banks.85 Section 85's explicit terms make clear that the power to charge "interest" thereunder is granted only to national banks and does not extend to purchasers, assignees, or transferees of loans made by national banks. Less than a decade after
In 1980,
Sections 1463(g) and 1831d were enacted as part of Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). n92 Like Section 85, Sections 1463(g) and 1831d do not include any reference to the right of a federally-chartered or federally-insured depository institution to transfer its preemptive immunity from state usury laws to purchasers, assignees, and other transferees of its loans.
In contrast, 12 U.S.C. [Sec.] 1735f-7a - enacted as part of Section 501 of DIDMCA - preempts state usury laws from applying to originations and "credit sales" of first-lien residential mortgages that qualify as "federally related mortgage loans" under 12 U.S.C. [Sec.] 1735f-5(b).
Thus, the preemption authorized by Section 501 of DIMCA applies to sales of qualifying first-lien residential mortgages and covers purchasers of those mortgages. In contrast, the preemption authorized by Section 521 of DIDMCA, which enacted Sections 1463(g) and 1831d, does not refer to "sales" of loans or to purchasers of loans. The
The absence of any reference to "sales" of loans in Section 521 of DIDMCA supports the conclusion that the preemption provided to national banks by 12 U.S.C. 85 - the historical model for Section 521 - also does not extend to purchasers of loans. n97 That conclusion is further bolstered by the Alternative Mortgage Transactions Parity Act, 12 U.S.C. [Subsec.] 3801-06 (AMTPA), which was enacted only two years after DIDMCA. Under 12 U.S.C. [Sec.] 3803, "housing creditors" (including state-chartered, non-depository lenders) can "make, purchase, and enforce alternative mortgage transactions" in accordance with AMTPA, regardless of contrary state laws. Thus, the scope of AMTPA's preemption expressly extends to purchasers of qualifying alternative mortgages, in the same way that the preemptive scope of Section 501 of DIDMCA includes purchasers of qualifying first-lien residential mortgages. Section 501 of DIDMCA and AMTPA show that
The preemption standards for national banks under 12 U.S.C.[Sec.] 25b - which
The foregoing provisions of Section 25b overruled several court decisions prior to 2010 that extended the NBA's preemptive scope to cover nonbank subsidiaries and agents of national banks. n99 In light of Section 25b's express denial of NBA preemption to nonbank subsidiaries, affiliates, and agents of national banks, the OCC's usury preemption transfer rule violated congressional intent by purporting to extend the preemptive scope of Sections 85 and 1463(g) to reach purchasers and assignees of loans. Purchasers and assignees of loans are counterparties to contracts with national banks and federal thrifts, just as agents are and most subsidiaries and affiliates are. Purchasers and assignees of loans cannot claim any entitlement to a preemptive immunity that
Section 25b(f) provides additional evidence of
Like Sections 85, 1463(g), and 1831d, Section 25b(f) does not refer to purchasers, assignees, or other transferees of loans made by national banks.
When the OCC proposed its usury preemption transfer rule, the OCC acknowledged that its assertion of preemptive immunity for purchasers, assignees, and other transferees of loans made by national banks and federal thrifts was not based on any language "expressly stated" in Sections 85 and 1463(g). n100 The OCC also recognized that its rule was contrary to the decision of the
The OCC argues that its usury preemption transfer rule is supported by the "common-law [principles of] valid-when-made and the assignability of contracts," which it derives from court decisions dating back to the 19th century. According to the OCC, it is "not citing these tenets as independent authority for this rulemaking but rather as tenets of common law that inform its reasonable interpretation of section 85." n102
The OCC cannot rely on common-law principles from federal court decisions to expand the preemptive scope of federal statutes. The
In its 1997 Atherton decision, the
In its 1993
The OCC's reliance on common-law "tenets" to expand the preemptive scope of 12 U.S.C. [Subsec.] 85 and 1463(g) is invalid for the same reasons that the
Consequently, the OCC cannot rely on common-law "tenets" to expand the preemptive scope of 12 U.S.C. 85 and 1463(g). In determining whether federal statutes preempt state authority in a traditional field of state regulation, such as consumer protection, federal courts "start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of
There is no "compelling evidence" of any "clear and manifest purpose of
When the
2. The OCC's Proposed "True Lender" Rule Is Unlawful and Would Enable National Banks to Form "Rent-a-Charter" Schemes with Predatory Nonbank Lenders
Under the OCC's proposed "true lender" rule, a national bank or thrift would be deemed to "make" a loan if the institution, "as of the date of origination," is either "named as the lender in the loan agreement" or "[f]unds the loan." n112 The proposed rule is designed to "operate together" with the OCC's usury preemption transfer rule. n113 Working in tandem, the rules would permit national banks or federal thrifts to form "partnerships" with nonbank lenders. A nonbank lender that generates loans through such a "partnership" could claim preemptive immunity from state usury laws under 12 U.S.C. 85 or 1463(g), even if its bank "partner" does not retain any meaningful credit risk or other economic risk related to those loans. The bank "partner" could act as a mere conduit by quickly transferring loans to the nonbank lender, and the nonbank lender could assume all of the economic risks, dictate the terms, and control the enforcement of those loans. Such "partnerships" would represent "rent-a-charter" schemes, which the OCC barred national banks from establishing during the early 2000s. n114
The OCC's proposed "true lender" rule evidently seeks to preempt not only state usury laws but also a wide range of other state laws - including state licensing, examination, and consumer protection laws - that would otherwise apply to nonbank lenders that establish "partnerships" with national banks. For example, a loan that is deemed to be "made" by a national bank under either of the proposed rule's two tests would apparently be covered by the OCC's sweeping claims of preemption of state law under 12 C.F.R. [Sec.] 7.4008 (for loans "made" by national banks that are not secured by real estate) or 12 C.F.R. [Sec.] 34.4 (for real estate loans "made" by national banks) - even if the bank subsequently transfers the loan to a nonbank "partner." The proposed rule's potential scope of preemption therefore embraces a very broad array of state laws. n115
In its notice of proposed rulemaking, the OCC acknowledged that federal statutes - including 12 U.S.C. [Subsec.] 85 and 1463(g) - "do not specifically address which entity makes a loan (or, in the vernacular commonly used in case law, which entity is the 'true lender')" and therefore do not identify "what legal framework applies, when the loan is originated as part of a lending relationship between a bank and a third party." In addition, the OCC admitted that none of the federal statutes authorizing national banks and federal savings associations to make contracts and loans "describes how to determine when a bank has, in fact, exercised this authority, and when, by contrast, the bank's relationship partner has made the loan." n116 Thus, the OCC conceded that its proposed "true lender" tests are not supported by any explicit statutory authority.
The proposed rule also ignores the fact that contracts made by national banks are governed by applicable state laws unless a particular state law creates an irreconcilable conflict with a federal statute. The
Similarly, the
Contracts for loans are subject to state usury laws as well as general state contract laws. State usury laws are valid exercises of the states' historic police power to protect their residents from abusive and exploitative lending practices. n119 Because usury is a traditional field of state regulation, federal courts have declined to infer from statutory silence that
Federal courts have repeatedly held that Section 85 incorporates the entire usury jurisprudence of the relevant state, including that state's usury statutes and interpretations of those statutes by the state's courts. n122 Federal and state courts have also held that usury claims should be determined based on the "substance" of the relevant transactions and not their legal "form." In an 1835 decision, the
Several courts have applied a substance-over-form analysis in determining whether nonbank lenders were actually the "true lenders" even though they claimed to be "partners" of banks." Those courts rejected claims by nonbank lenders for preemptive immunity under 12 U.S.C. [Sec.] 85 or 12 U.S.C. [Sec.] 1831d, based on their status as "partners" or "agents" of national banks or
The OCC's proposed rule disregards the foregoing court decisions and seeks to preempt state "true lender" laws. The proposed rule attempts to create a conclusive, inflexible, and formalistic standard for determining the "true lender" for loans produced by "partnerships" between national banks and nonbank lenders. The proposed rule would consider only two narrow factors - whether the national bank was named as the lender in the loan agreements or funded the loans for at least one day. The proposed rule would grant preemptive immunity to nonbank lenders from a wide range of state laws even if those lenders held the "predominant economic interest" in loans generated by "partnerships" with national banks.
The OCC's proposed rule would enable national banks and federal thrifts to form "rent-a-charter" schemes with nonbank lenders. "Rent-a-charter" schemes are designed to prevent states from enforcing their usury laws and other consumer protection laws against high-cost nonbank lenders, including payday lenders and auto title lenders. Those lenders impose very high interest charges on consumers and small businesses with annual percentage rates ("APRs") that often exceed 100%. Loans made by high-cost nonbank lenders produce staggering rates of delinquency and default among borrowers. For example, Elevate, a high-cost lender that is a "partner" of several banks, reported charge-off rates on its loans that exceeded 52% of its revenues in 2016 and 2017. Similarly, more than one-fifth of borrowers who enter into auto title loans eventually lose their cars through repossession. High-cost nonbank lenders usually focus their marketing efforts on vulnerable minority and lower-income households. n126
In
In announcing a similar enforcement order against
We have been greatly concerned with arrangements in which national banks essentially rent out their charters to third parties who want to evade state and local consumer protection laws . . . . The preemption privileges of national banks derive from the
In a speech delivered in
Thus, the OCC established a strong policy in the early 2000s against allowing national banks to organize "rent-a-charter" schemes with nonbank payday lenders. As shown by the OCC's current website, that policy has remained in effect - at least formally - until now. n131 The OCC's enforcement orders from the early 2000s provide compelling evidence of the significant harms that the OCC would inflict on states, consumers, and small businesses if it adopts its proposed "true lender" rule and implements its usury preemption transfer rule. Those harms would include: undermining the states' longstanding authority to protect their residents from predatory nonbank lenders, threatening the financial and reputational soundness of national banks, encouraging reckless lending practices, and facilitating efforts by predatory nonbank lenders to exploit consumers and small businesses with exorbitant interest charges and fees, deceptive marketing practices, privacy violations, abusive debt collection practices, and other unconscionable conduct. n132
In the early 2000s, the OCC recognized the dangers to consumers from payday loans that were marketed by "rent-a-charter" schemes between national banks and nonbank lenders. n127 The OCC took decisive action to shut down those schemes. The OCC issued enforcement orders that required four national banks (
By enabling predatory lending and impairing the states' authority to protect their residents, the OCC's proposed "true lender" rule and its usury preemption transfer rule undermine fundamental purposes of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). n133
The
B. The OCC's Fintech Charter Initiative and Preemption Rules Do Not Comply with Section 25b
Section 25b of the NBA, enacted as part of the Dodd-Frank Act, establishes a new framework for determining whether state consumer financial laws apply to national banks and federal savings associations. Under Section 25b(b)(1) , a state consumer financial law is preempted "only if" (A) the state law has "a discriminatory effect on national banks," or (B) the state law "prevents or significantly interferes with the exercise by the national bank of its powers," or (C) the state law is preempted by a federal statute other than the NBA. Section 25b(b)(1)(B) expressly incorporates the "prevent or significantly interfere" standard for preemption established by the
When the OCC issues a preemptive ruling, Section 25b(c) requires the OCC to demonstrate that "substantial evidence, made on the record of the proceeding," supports the OCC's "specific finding" of preemption in accordance with
The OCC fintech charter initiative, usury preemption transfer rule, and proposed "true lender" rule did not comply with Section 25b. The OCC did not apply the "prevents or significantly interferes" preemption standard, or satisfy the "substantial evidence" requirement, or follow the "case-by-case" procedure when it issued those measures. Indeed, the OCC did not even attempt to fulfill Section 25b's requirements when it adopted those measures. n139
The OCC claimed that its usury preemption transfer rule fell "outside of the scope of section 25b because of section 25b(f)." n140 However, that assertion is clearly erroneous. As shown above, Section 25b(f) provides that Section 25b does not affect "the authority conferred by [Section 85] for the charging of interest by a national bank" (emphasis added). Section 25b(f) did not exempt the OCC from complying with Section 25b when it sought to extend the preemptive scope of Section 85 to reach purchasers, assignees, and transferees of bank loans. The OCC's rule went far beyond the subject of the "charging of interest by a national bank."
The OCC's recent actions are the latest examples of its repeated failures to comply with Section 25b. When
In 2011, the OCC revised its preemption rules, purportedly to bring them into conformity with Section 25b. n142 However, the OCC's revised rules do not include the "prevent or significantly interfere" preemption standard established by
Three of the preemption rules that the OCC reissued in 2011 - 12 C.F.R. [Subsec.] 7.4007, 7.4008, and 34.4 - continue to assert that broad categories of state laws are preempted across the nation. When the OCC issued those sweeping and categorical preemption rules in 2011, the OCC did not comply with Section 25b's "substantial evidence" and "case-by-case" requirements. The OCC claimed that it did not need to comply with those requirements because its blanket preemption rules were based on the rules it adopted in 2004. The OCC claimed that its "regulations in effect prior to the effective date [of Dodd-Frank] are not subject to the case-by-case requirement." n144
The OCC's contention that its 2004 rules remained valid - even though they did not comply with Section 25b's requirements - was plainly wrong. Under Section 25b(b)(1), state consumer financial laws are preempted "only if" a federal agency or court makes a preemption determination in full compliance with all of the requirements of Section 25b. Section 1043 of the Dodd-Frank Act (codified at 12 U.S.C. [Sec.]5553) provides a very limited exception to that mandate. Section 1043 preserves the applicability of previous OCC regulations and orders to "any contract entered into [by a national bank or its subsidiary] before
Section 1043's carefully limited exception demonstrates
The OCC has also failed to comply with Section 25b(d), which requires the OCC to "periodically conduct a review, though notice and public comment, of each determination that a provision of Federal law preempts a State consumer financial law," within five years after issuing that determination. The OCC must issue a public notice for each preemption review, including an invitation for public comments. After completing each preemption review, the OCC must issue a public notice describing the results of its review and submit a report to the
The
n1 Vullo v. OCC, 378 F.Supp.3d 271 (S.D.N.Y. 2019), appeal pending sub nom. Lacewell v. OCC, No. 19-4271-cv (2d Cir.).
n2
n3
n4 OCC final rule, "Permissible Interest on Loans That Are Sold, Assigned or Otherwise Transferred," 85 Fed. Reg. 33530 (
n5 OCC notice of proposed rulemaking, "National Banks and Federal Savings Associations as Lenders," 85 Fed. Reg. 44223 (
n6
n7 See
n8 Hammond, supra note 7, at 724, 731-32; Symons, supra note 7, at 699.
n9 Act of
n10 12 U.S.C. [Sec.] 27(a) (derived from [Sec.] 18 of the NBA of 1864, 13 Stat. 104-05).
n11 12 U.S.C. [Sec.] 24 (Seventh) (derived from [Sec.] 8 of the NBA of 1864, 13 Stat. 101-02). As discussed below in Part I(B), the function of issuing a national currency in the form of circulating notes was transferred from national banks to the
n12 12 U.S.C. [Sec.] 22 (Second) (derived from [Sec.]6 (Second) of the NBA of 1864, 13 Stat. 101).
n13
n14 12 U.S.C. [Sec.] 378(a).
n15 See
n16
n17
n18
n19 The 1978 amendment to Section 27(a) provides that a national bank "is not illegally constituted solely because its operations are . . . limited to those of a trust company and activities related thereto." Pub. L. 95-630, [Sec.] 1504, 92 Stat. 3713 (1978) (codified as amended at 12 U.S.C. [Sec.] 27(a)).
n20
n21 See Vullo v. OCC, 378 F.Supp.3d at 294-95.
n22 See Independent. Ins. Agents of America v. Hawke, 211 F.3d. 638, 641-45 (
n23 See Vullo, 378 F.Supp.3d at 279, 288-90, 295-96 ("The Court finds that a delay of that length" in asserting chartering authority under Section 36 "provides substantial grounds to cast doubt on OCC's interpretation" of Section 36).
n24 12 U.S.C. [Sec.] 36.
n25 See Vullo v. OCC, 378 F.Supp.3d at 297-98 ("receiving deposits is an indispensable part of the 'business of banking' as used by
n26 Vullo, 378 F.Supp.3d at 286-88, 296 (citing and quoting the NYDFS' Complaint, pp 3, 11-12, 35, 43-49).
n27 As discussed in Part II(B), the OCC has authority to issue regulations or orders preempting state consumer financial laws if those state laws would "prevent or significantly interfere" with the federally-authorized powers of national banks. See 12 U.S.C. [Sec.] 25b(b)(1)(B). If the OCC issues national bank charters to nondepository fintech firms, the OCC could potentially issue preemptive rules or orders claiming that state privacy or data protection laws "prevent or significantly interfere" with the lending and payment activities of those firms.
n28 See, e.g., 12 U.S.C. [Subsec.] 5551-5552; Meade v.
n29 NYDFS Complaint in Vullo, p 12; see also S. Rep. No. 111-176, at 11-18, 175-76 (2010);
n30
n31 H.R. Rep. No. 63-69, at 16-19, 22-26 (1913); see also
n32 Act of
n33 Act of
n34 H.R. Rep. No. 63-69, at 26, 54-55 (1913).
n35 Act of
n36 H.R. Rep. No. 63-69, at 16-19, 31-37, 39-41 (1913); see also
n37
n38 Act of
n39 Committee for Monetary Reform v.
n40 Fed Purposes and Functions, supra note 36, at 17, 38-44.
n41 Id. at 23, 38-40, 50-51; Ricks, supra note 15, at 786-90.
n42 Corrigan supra note 15; see also Fed Purposes and Functions, supra note 36, at 17 (explaining that depository institutions perform "important roles in the
n43 Fed Purposes and Functions, supra note 36, at 40-46, 130-34.
n44 See 12 U.S.C. [Sec.] 222 (requiring all national banks to become Fed member banks); id. [Sec.] 301 (requiring the Fed to carry out its duties under the FRA "fairly and impartially and without discrimination in favor of or against any member bank or banks").
n45 See Guida, supra note 2.
n46 12 U.S.C. [Sec.] 343; see also Fed Purposes and Functions, supra note 36, at 64.
n47 Fed Purposes and Functions, supra note 36, at 131-34, 146-48.
n48 See 12 U.S.C. [Subsec.] 304, 341 (Fifth); Fed Purposes and Functions, supra note 36, at 12-17.
n49 Act of
n50 Act of
n51 12 U.S.C. [Subsec.] 222, 501a.
n52 See OCC Proposed Rule, "Receiverships for Uninsured National Banks," 81 Fed. Reg. 62835 (2016) ("There are only a small number of uninsured national banks in operation today. ... [A]ll of these institutions are trust banks.").
n53 12 U.S.C. [Sec.] 378(a).
n54 12 U.S.C. [Sec.] 1841(b) & (c).
n55 See
n56 12 U.S.C. [Sec.] 1843; see S. Rep. No. 91-1084, at 2-4 (1970) (quote at 3); S. Rep. No. 100-19, at 2 (1987) ("At the foundation of American financial law is a longstanding tradition of separating banking and commerce.").
n57 S. Rep. No. 91-1084, at 2-4 (1970); S. Rep. No. 100-19, at 2, 8-10 (1987); Wilmarth, "
n58 Independent Bankers Ass'n of America v. Conover, 1985 U.S. Dist. LEXIS 22529, at *2 -*6 (
n59 The BHC Act's definition of "bank," as amended in 1987, includes exemptions for state-chartered ILCs, special-purpose trust companies, and limited-purpose credit card banks (which cannot maintain any checking accounts or accept any time deposits smaller than
n60 S. Rep. No. 100-19, at 2, 6-10 (1987) (quote at 8).
n61 See 12 U.S.C. [Sec.] 1841(c)(2)(D)(iv); S. Rep. No. 100-19, at 29 (1987).
n62 See OCC,
n63 See 12 U.S.C. [Sec.] 1841(c)(2)(H); Wilmarth, "
n64 85 Fed. Reg. at 17772.
n65 In 1992,
n66 Id. at 2-3 (quoting
n67 Id. at 3 (quoting
n68 Id.
n69 Id. (summarizing floor statements by 11 Senators and House members).
n70 Id.; see also Wilmarth, "
n71 Wilmarth, "Industrial Banks," supra note 3, at 1, 3-4 (also noting that
n72 Id. at 1-2 (quoting statements on
n73 See Wilmarth, "Industrial Banks," supra note 3, at 2-13; see also infra note 79 and accompanying text (discussing the public interest factors that the
n74 Id. at 6-8.
n75 See
n76 Wilmarth, "Industrial Banks," supra note 3, at 8-9; Wilmarth, "
n77 See
n78 See
n79 Wilmarth, "Industrial Banks," supra note 3, at 9-13. The public interest factors that regulators must consider under the FDI Act include (a) risks to the federal deposit insurance fund, (b) the "convenience and needs" of communities and their residents, (c) adverse effects on competition, and (d) risks to the stability of the
n80 See id. at 10-11; see also 12 U.S.C. [Subsec.] 5365, 5371.
n81
n82 Wilmarth, "Industrial Banks," supra note 3, at 4-7, 11-12; see also supra note 29, infra note 134 and accompanying text (discussing regulatory failures that contributed to the financial crisis of 2007-09).
n83 Wilmarth, "Industrial Banks," supra note 3, at 11-12; Wilmarth, "
n84 Act of
n85 OCC Usury Preemption Transfer Rule, supra note 4.
n86 Tiffany v. National
n87
n88 See Marquette, 439 U.S. at 307-08 ("There is no allegation in petitioners' complaints that either
n89
n90
n91 See In re
n92 Pub. L. No. 96-221, [Sec.] 521, 94 Stat. 132, 164.
n93 Smith v.
n94 See S. Rep. No. 96-368, at 19 (1979) ("[I]t is the committee's intent that loans originated under this usury exemption will not be subject to claims of usury even if they are later sold to an investor who is not exempt under this section.").
n95 Barnon v.
n96 Cardoza-Fonseca, 480 U.S. at 432.
n97
n98 See S. Rep. No. 111-176, at 176 (2010) (Under Dodd-Frank, "State law applies to State-chartered nondepository institution subsidiaries, affiliates, and agents of national banks, other than entities that are themselves chartered as national banks."); Wilmarth, "Dodd-Frank," supra note 29, at 934-35.
n99
n100 OCC, Notice of proposed rulemaking, "Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred," 84 Fed. Reg. 64229, 64230 (
n101 Madden v.
n102 OCC Usury Preemption Transfer Rule, supra note 4, at 33532 (citing, inter alia, Nichols v. Fearson, 32 U.S. (7 Pet.) 103 (1833), and Gaither v.
n103
n104 Atherton v.
n105 Atherton, 519 U.S. at 218-26.
n106
n107 Bank of America National Trust & Savings Ass'n v. Parnell,
n108 Wyeth v. Levine,
n109 Lusnak v.
n110
n111 See Wilmarth Usury Preemption Transfer Comment Letter, supra note 4, at 7-13.
n112 OCC Proposed "True Lender" Rule, supra note 5, at 44228.
n113 Id. at 44227.
n114 See
n115 See id. at 2 (citing 85 Fed. Reg. at 44225).
n116 OCC Proposed "True Lender" Rule, supra note 5, at 44224, 44225.
n117 Atherton v.
n118 Cuomo v. Clearing House Ass'n,
n119 See Griffith v.
n120 See Doyle v. Southern
n121 See the third paragraph of this Part 2(b).
n122
n123 Scott v. Lloyd,
n124 Anderson v. Hershey, 127 F.2d 884, 886 (6th Cir. 1942) (applying
n125 In re
n126 Testimony of
n127 OCC Consent Order 2003-2, at 1-2 (
n128 OCC News Release 2002-1 (
n129 OCC News Release 2003-6 (
n130 Remarks by Comptroller of the Currency
n131 OCC webpage, "Consumers and Communities: Consumer Protection - Payday Lending," available at https://www.occ.gov/topics/consumers-and-communities/consumer-protection/payday-lending/index-payday-lending.html (visited on
n132 See Comments filed by the
n133 Pub. L. No. 111-203, 124 Stat. 1376 (2010).
n134 S. Rep. No. 111-176, at 15-18 (2010). For analysis of the pervasive failures by federal financial regulators to stop predatory nonprime lending and the devastating injuries caused to states, consumers, and the
n135 S. Rep. No. 111-176, at 16-17, 25-26, 175-77 (2010).
n136
n137 12 U.S.C. [Sec.] 1465. Sections 25b(b)(4) and Section 1465(b) declare that the statutes governing national banks and federal thrifts do not create a regime of field preemption. Accordingly, state laws apply to national banks and federal thrifts unless they create an irreconcilable conflict with federal law, based on the "prevent or significantly interfere" preemption standard set forth in
n138 12 U.S.C. [Sec.] 25b(b)(3)(A), (B); see Lusnak, 883 F3d at 1192, 1194; Elosta, supra note 137, at 1300-01; Wilmarth, "Dodd-Frank," supra note 29, at 931-32.
n139 See Wilmarth Usury Preemption Transfer Comment Letter, supra note 4, at 2-4;
n140 See OCC Usury Preemption Transfer Rule, supra note 4, at 33533.
n141 S. Rep. No. 111-176, at 175-76 (2010); see also Elosta, supra note 138, at 1298-1300; Wilmarth, "Dodd-Frank," supra note 29, at 936-37.
n142 OCC, "
n143 Id. at 43555; see Lusnak, 883 F.3d at 1193-94 ("[T]he OCC has largely reaffirmed its previous preemption conclusions without further analysis under the
n144 76 Fed. Reg. at 43553, 43556-57, 43558.
n145 12 U.S.C. [Sec.] 5553.
n146 S. Rep. No. 111-176, at 175 (2010).
n147 Independent Ins.
n148 12 C.F.R. [Subsec.] 7.4007, 7.4008 & 34.4. See
n149 12 U.S.C. [Sec.] 25(d); see, e.g., 12 C.F.R. [Subsec.] 7.4002, 7.4003, 7.4004, 7.4005, 34.5, and 37.1.
n150
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