OCC Preemption Rulemaking
Opportunities Existed to Enhance the Consultative Efforts and Better Document the Rulemaking Process Gao ID: GAO-06-8 October 17, 2005On January 13, 2004, the Office of the Comptroller of the Currency (OCC) issued two sets of rules (the preemption rules) on the extent to which the National Bank Act preempts the application of state and local laws to national banks and their operating subsidiaries. The rules and the manner in which OCC promulgated them generated considerable controversy. Some state officials, consumer groups, and congressional members questioned whether OCC adhered to the statutes and executive orders pertaining to rulemaking and whether the process was as inclusive as it could have been. GAO (1) assessed OCC's rulemaking process within the framework of applicable laws and executive orders, (2) described the issues raised in comment letters and OCC's responses, and (3) identified and discussed stakeholder concerns about how OCC promulgated its preemption rules.
Federal preemption of state law affecting national banks always has been controversial and seems to have become more so with consolidation in the financial services industry, which has resulted in the presence of large national banks in nearly every state. OCC followed the statutory framework for rulemaking and appears to have followed applicable executive orders, but it was difficult to fully determine the basis for some agency actions or assess the extent of its consultation with stakeholders because OCC did not always document its actions. The agency also lacked its own guidance or procedures for its rulemaking process and instead used a rulemaking checklist as a guide for completing reviews and routing documents. Federal internal control standards call for documenting actions to verify that an agency has complied with its policies and applicable law. The standards also call for agencies to follow written procedures in making important decisions, to provide a framework for ensuring compliance with management directives and applicable law and regulations. Without such documentation and procedures, evidence to substantiate OCC's actions was limited. OCC considered all of the approximately 2,700 comment letters it received on its banking activities proposal, but strongly disagreed with comments questioning its preemptive authority and the rules' adverse effect on consumers. GAO's analysis of the letters revealed that commenters were concerned that the rule could diminish enforcement of state consumer protection laws, questioned the bases for OCC's legal analysis and conclusions, and posited adverse effects on state-chartered banks. In response, OCC contended that it has a comprehensive consumer protection effort for national banks, reiterated its preemptive authority, and asserted the rule would preserve the "dual banking" system. However, OCC agreed with some issues raised in the public comments and made some changes to the final rules. For instance, OCC included an explicit reference to a provision of the Federal Trade Commission Act that prohibits national banks from engaging in practices considered unfair and deceptive. Most criticism about how OCC promulgated the rules focused on what some believed was a lack of opportunity to discuss and comment on the proposed rules. Although OCC briefed several congressional members about the proposals before they were published, some criticized OCC for issuing the rules while Congress was in recess and not allowing time for hearings on the rules. OCC officials told GAO that a lengthy delay would have harmed banks' ability to securitize their loans, left consumers with fewer choices, or imposed burdensome costs on banks seeking to comply with a multitude of state laws. According to consumer groups, OCC could and should have offered additional mechanisms for soliciting public input--such as public meetings. Some financial institution regulators have used other means besides the comment period to solicit input for rulemakings they deemed controversial. GAO observed that such efforts, while not required, might have contributed to a better understanding about the rules.
GAO-06-8, OCC Preemption Rulemaking: Opportunities Existed to Enhance the Consultative Efforts and Better Document the Rulemaking Process
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Report to the Subcommittee on Oversight and Investigations, Committee
on Financial Services, House of Representatives:
October 2005:
OCC Preemption Rulemaking:
Opportunities Existed to Enhance the Consultative Efforts and Better
Document the Rulemaking Process:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-8]:
GAO Highlights:
Highlights of GAO-06-8, a report to the Subcommittee on Oversight and
Investigations, Committee on Financial Services, House of
Representatives.
Why GAO Did This Study:
On January 13, 2004, the Office of the Comptroller of the Currency
(OCC) issued two sets of rules (the preemption rules) on the extent to
which the National Bank Act preempts the application of state and local
laws to national banks and their operating subsidiaries. The rules and
the manner in which OCC promulgated them generated considerable
controversy. Some state officials, consumer groups, and congressional
members questioned whether OCC adhered to the statutes and executive
orders pertaining to rulemaking and whether the process was as
inclusive as it could have been. GAO (1) assessed OCC‘s rulemaking
process within the framework of applicable laws and executive orders,
(2) described the issues raised in comment letters and OCC‘s responses,
and (3) identified and discussed stakeholder concerns about how OCC
promulgated its preemption rules.
What GAO Found:
Federal preemption of state law affecting national banks always has
been controversial and seems to have become more so with consolidation
in the financial services industry, which has resulted in the presence
of large national banks in nearly every state. OCC followed the
statutory framework for rulemaking and appears to have followed
applicable executive orders, but it was difficult to fully determine
the basis for some agency actions or assess the extent of its
consultation with stakeholders because OCC did not always document its
actions. The agency also lacked its own guidance or procedures for its
rulemaking process and instead used a rulemaking checklist as a guide
for completing reviews and routing documents. Federal internal control
standards call for documenting actions to verify that an agency has
complied with its policies and applicable law. The standards also call
for agencies to follow written procedures in making important
decisions, to provide a framework for ensuring compliance with
management directives and applicable law and regulations. Without such
documentation and procedures, evidence to substantiate OCC‘s actions
was limited.
OCC considered all of the approximately 2,700 comment letters it
received on its banking activities proposal, but strongly disagreed
with comments questioning its preemptive authority and the rules‘
adverse effect on consumers. GAO‘s analysis of the letters revealed
that commenters were concerned that the rule could diminish enforcement
of state consumer protection laws, questioned the bases for OCC‘s legal
analysis and conclusions, and posited adverse effects on state-
chartered banks. In response, OCC contended that it has a comprehensive
consumer protection effort for national banks, reiterated its
preemptive authority, and asserted the rule would preserve the ’dual
banking“ system. However, OCC agreed with some issues raised in the
public comments and made some changes to the final rules. For instance,
OCC included an explicit reference to a provision of the Federal Trade
Commission Act that prohibits national banks from engaging in practices
considered unfair and deceptive.
Most criticism about how OCC promulgated the rules focused on what some
believed was a lack of opportunity to discuss and comment on the
proposed rules. Although OCC briefed several congressional members
about the proposals before they were published, some criticized OCC for
issuing the rules while Congress was in recess and not allowing time
for hearings on the rules. OCC officials told GAO that a lengthy delay
would have harmed banks‘ ability to securitize their loans, left
consumers with fewer choices, or imposed burdensome costs on banks
seeking to comply with a multitude of state laws. According to consumer
groups, OCC could and should have offered additional mechanisms for
soliciting public input”such as public meetings. Some financial
institution regulators have used other means besides the comment period
to solicit input for rulemakings they deemed controversial. GAO
observed that such efforts, while not required, might have contributed
to a better understanding about the rules.
What GAO Recommends:
GAO is not making recommendations because OCC generally followed laws
and executive orders. GAO makes observations on how OCC could enhance
consultation and better document its rulemaking process. In its
comments, OCC agreed to develop detailed written procedures, disagreed
with GAO‘s observations about the sufficiency of documentation and
consultation relative to the executive orders, but intends to enhance
its consultation.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Richard J. Hillman at
(202) 512-8678 or hillmanr@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
OCC Generally Followed Rulemaking Requirements but Lacked Documentation
and Written Guidance, Making It Hard to Verify Consultation Efforts:
OCC Considered All Comments on Its Banking Activities Rule, and
Strongly Disagreed with Those Challenging Its Authority, but Made Some
Changes in Response to Others:
Stakeholders Raised Issues Regarding the Process OCC Used to Promulgate
Its Preemption Rules:
Observations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Office of the Comptroller of the
Currency:
Appendix III: GAO Contact and Staff Acknowledgments:
Figures:
Figure 1: OCC Informal Rulemaking Procedures:
Figure 2: Sample OCC Rulemaking Checklist:
Figure 3: Composition of Commenters, Based on Our Analysis of 373
Nonform Letters:
Figure 4: Frequently Cited Concerns of Selected Commenters Opposed to
OCC's Banking Activities Proposal:
Abbreviations:
APA: Administrative Procedure Act:
CRA: Congressional Review Act:
CSBS: Conference of State Bank Supervisors:
FDIC: Federal Deposit Insurance Corporation:
Federal Reserve: Board of Governors of the Federal Reserve System:
LRA: Legislative and Regulatory Activities Division:
NCUA: National Credit Union Administration:
OCC: Office of the Comptroller of the Currency:
OMB: Office of Management and Budget:
OTS: Office of Thrift Supervision:
RFA: Regulatory Flexibility Act:
SEC: Securities and Exchange Commission:
UMRA: Unfunded Mandates Reform Act:
Letter October 17, 2005:
The Honorable Sue W. Kelly:
Chairwoman:
The Honorable Luis V. Gutierrez:
Ranking Minority Member:
Subcommittee on Oversight and Investigations:
Committee on Financial Services:
House of Representatives:
In the National Bank Act, Congress created the Office of the
Comptroller of the Currency (OCC) to supervise national banks.[Footnote
1] In its capacity as the supervisor of national banks, OCC issues
regulations, policies, and interpretations to establish standards,
define acceptable practices, provide guidance on risks, and prohibit or
restrict practices. However, OCC traditionally has issued opinions,
rather than rules or regulations, on whether the National Bank Act
preempts state laws that impose standards or restrictions on the
business of national banks. In contrast, on January 13, 2004, OCC
issued two final rules (preemption rules) on the extent to which the
National Bank Act preempts the application of state and local laws to
national banks and their operating subsidiaries.[Footnote 2] The rules
and the manner in which OCC promulgated them generated considerable
controversy and debate, including questions about OCC's authority to
issue the rules.
According to OCC, the two sets of rules "codified" judicial decisions
and OCC opinions on preemption under the National Bank Act by making
them generally applicable and clarified certain issues. More
specifically, as stated by OCC, the visitorial powers rule clarifies
that federal law commits the supervision of national banks' banking
activities exclusively to OCC (except where federal law provides
otherwise) and that states may not use judicial actions as an indirect
means of regulating those activities.[Footnote 3] The second rule,
which we refer to in this report as the banking activities rule,
preempts categories of state laws that relate to bank activities and
operations, describes the test for preemption that OCC will apply to
state laws that do not fall within the identified categories, and lists
certain types of state laws that are not preempted.[Footnote 4] In
proposing the banking activities rule, OCC stated that it needed to
provide timely and more comprehensive standards about the applicability
of state laws to lending, deposit taking, and other authorized
activities of national banks because of the number and significance of
questions banks were posing about preemption in those areas.[Footnote
5]
The proposed rules and OCC's rulemaking process drew strong reactions
of either support or opposition from the banking industry, state
legislators, attorneys general, and other officials, consumer group
representatives, and some Members of Congress. For example, all of the
state attorneys general questioned whether OCC reasonably analyzed the
case for preemption. In a comment letter on the banking activities
proposals, they stated that the National Bank Act was not intended to
divest all state authority over national banks, and under Supreme Court
precedent, national banks are subject to state laws that do not
conflict with the powers of national banks or discriminate against
national banks. Further, opponents such as consumer groups and state
legislators feared that the preemption of state law, particularly with
respect to predatory lending practices, would weaken consumer
protections. In contrast, proponents contended that replacing differing
state laws with a consistent standard would increase the health of the
banking system. However, opponents countered that OCC's actions could
have far-reaching effects on the banking industry, such as undermining
the "dual banking system," by conferring undue benefits to federally
chartered banks at the expense of state-chartered banks.[Footnote 6]
Finally, Members of Congress held three hearings in 2004, including one
held by your subcommittee in January of that year, centered on these
and other issues. In addition to airing differences on the limits of
federal versus state powers and potential effects on consumers, the
hearings also featured discussion about such issues as why OCC issued
the rules when Congress was in recess (after receiving a request from
some members to delay the issuance of the rules), to what extent OCC
consulted with state officials and other groups during the rulemaking
process, and the resources OCC dedicates to consumer complaints.
The statutory framework applicable to OCC rulemaking includes the
Administrative Procedure Act (APA), which, among other things, sets
forth the process for federal agency "informal rulemaking"; the
Congressional Review Act (CRA), which provides for Congress's review of
an agency's rules and even disapproval (through a joint resolution);
the Regulatory Flexibility Act (RFA), which requires agencies to assess
the economic impact of their proposed rules on "small
entities";[Footnote 7] and the Unfunded Mandates Reform Act (UMRA),
which generally requires covered agencies to take certain actions if
their proposed rules could result in the expenditure of $100 million or
more in any year by state, local, and tribal governments, or by the
private sector. In addition, OCC is subject to executive orders in its
rulemakings. Executive Order 12866, Regulatory Planning and Review
(E.O. 12866) directs agencies, among other matters, to determine if
their proposed rules constitute a "significant regulatory action" as
that phrase is defined in the order, and, if so, to prepare certain
analyses and provide them to the Office of Management and Budget (OMB),
which is charged with reviewing agencies' proposed rules under the
order. A second order, Executive Order 13132, entitled "Federalism"
(E.O. 13132), sets forth principles, policymaking criteria, and
requirements for agencies to apply when developing "policies that have
federalism implications." Federalism in this context means the division
of government responsibilities between the federal government and the
states. The APA, other laws, and the two executive orders give agencies
discretion about how to promulgate regulations.
You requested that we review the process OCC followed in promulgating
the preemption rules; assess the potential impact of the rules on the
dual banking system and consumer protection; and assess OCC's process
and capacity to handle consumer complaints. As agreed with your staffs,
we will provide you with separate reports on the potential impact of
these rules on the dual banking system and OCC's capacity to handle
consumer complaints at a later date. This report focuses on OCC's
rulemaking process. Accordingly, the report (1) assesses OCC's
rulemaking process within the framework of applicable laws and
executive orders; (2) describes the issues raised in public comment
letters on the banking activities rule, and describes if and how OCC
responded to these comments; and (3) identifies issues that
stakeholders raised about the manner in which OCC promulgated its
preemption rules and how OCC responded to the stakeholders.
To assess OCC's rulemaking process, we reviewed applicable laws and
executive orders related to OCC rulemaking and analyzed the Federal
Register notices pertaining to both the proposed and final preemption
rules. In addition, we interviewed OCC officials who participated in
OCC's promulgation of the rules and analyzed the documents from docket
files that OCC maintained on the two rules. Using this information, we
compared OCC's actions with the provisions of the relevant laws and
executive orders. To determine the issues raised in the comment letters
on the substance of the banking activities rule, we conducted a content
analysis of 373 letters received by the OCC on its preemption proposal.
To describe how OCC responded to the issues raised in the comment
letters, we analyzed the final rule for any changes OCC attributed to
the comments and the preamble of the final rule for discussion
regarding the public comments. To clarify our understanding of how OCC
considered or addressed certain comments, we interviewed OCC officials.
To identify issues raised about how OCC promulgated its preemption
rules, we interviewed officials from consumer groups and state
organizations to obtain their views and reviewed statements and
transcripts from congressional hearings and letters that members sent
to OCC during the public comment period. To identify how OCC responded
to the criticisms of its rulemaking process, we interviewed OCC
officials and reviewed their congressional testimony. In addition, we
interviewed officials from the Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation (FDIC) to
obtain information on how those organizations handle controversial
rules. We conducted our work in Washington, D.C., from August 2004
through August 2005 in accordance with generally accepted government
auditing standards. Appendix I provides a detailed description of our
scope and methodology.
Results in Brief:
OCC followed the statutory framework for rulemaking and appears to have
acted within its discretion in executing the executive orders, but we
could not fully determine the basis for some of the other agency
actions or assess the extent of its consultations with stakeholders,
because OCC did not always document its actions and lacked written
guidance and procedures detailing the rulemaking process. OCC followed
the process for informal rulemaking set forth in the APA by allowing
for public participation through the "notice and comment process." That
is, OCC published both the visitorial powers and banking activities
proposals in the Federal Register, requested and considered public
comments, and promulgated the final rules as prescribed by the APA. OCC
also followed requirements and documented some actions it took related
to the other statutes. However, with regard to the two executive
orders, OCC did not always document its actions and some stakeholders
disputed some of OCC's decisions or actions related to both orders. For
example, in the preamble to the banking activities rule, OCC stated
that the rule was not "significant" for purposes of E.O. 12866. Staff
memorandums, in the official rulemaking file, which we reviewed, did
not articulate the analysis underlying the determination. OCC officials
told us that because the rules were clarifying matters related to the
powers of national banks that had been addressed previously by OCC and
in court decisions, they did not deem the rules to be significant
regulatory actions as defined in the order. In relation to provisions
of E.O. 13132 that direct agencies to consult with state and local
officials early in the process of rulemaking when preemption of state
law is involved, some state bank supervisors, attorneys general, and
their representative organizations maintain that OCC's efforts to
consult with them were not sufficient. OCC disagreed with those views.
Its official rulemaking file contained little to document its
consultation efforts. Further, OCC does not have written guidance,
policies, or procedures detailing the rulemaking process. Instead, OCC
uses a "rulemaking checklist" that serves as a guide for completing the
required reviews and the routing of documents. According to internal
control standards for the federal government, agencies should follow
written procedures in making important decisions. Without such
documentation, it may not be clear--to agency management, auditors, or
oversight committees--that an agency followed applicable requirements.
While OCC considered the comments it received in response to its
banking activities proposal, it disagreed with challenges to its
preemptive authority. However, OCC did make changes in the final rule
in response to some commenter concerns. OCC considered all of the
approximately 2,700 comment letters submitted by a variety of consumer
groups, public officials, businesspeople, and others in response to its
banking activities proposal. Our analysis of the 373 nonform comment
letters revealed that commenters focused on what they believed would be
the rule's diminishing effect on enforcement of state consumer
protection laws, questions about OCC's legal analysis and conclusions
justifying preemption and the rule's effect on the dual banking system.
Consumer groups commented that because national banks and their
subsidiaries would no longer be subject to state consumer protection
laws, some of which have "higher standards" than federal law, consumers
would be vulnerable to predatory lending. Some consumer groups and
state officials with whom we met continue to believe that there is a
"vacuum" in consumer protection under the rule. Opposing comments also
disputed OCC's legal authority to preempt a state's right to regulate
entities organized under its law, such as operating subsidiaries of
national banks. OCC's consideration of comments is reflected in various
documents, including the preamble to the final rule, and internal
memorandums. While OCC considered the comments, it disagreed with
several commenters, particularly those who questioned its ability to
protect consumers and challenged its authority to promulgate its rule.
However, OCC agreed with some issues raised in the comments and made
some changes to the final banking activities rule. For instance,
several consumer groups urged OCC to state that national bank lending
practices should conform to the Federal Trade Commission Act's
prohibition against unfair or deceptive acts or practices. OCC agreed
and added this language to the final rule. OCC noted that this addition
augmented standards it set previously in 2003 guidance for banks
regarding predatory lending.[Footnote 8] In addition, since the rule
was finalized, OCC has issued guidance to national banks on avoiding
predatory, abusive, unfair, or deceptive lending practices.[Footnote 9]
Most criticism of OCC's rulemaking procedures--which came from consumer
groups, some state officials and their respective organizations, some
Members of Congress, and others--focused on what some believed was a
lack of opportunity to discuss and comment on the proposed rules and
OCC's issuance of the final rules when some Members of Congress had
asked for a delay. According to OCC, it provided ample opportunity for
comment, especially since the rules were not "new law," but reflected
precedents and standards already applied by OCC or courts. Although OCC
briefed several Members of Congress about the rules before they were
issued, some criticized OCC for issuing the rules while Congress was
out of session and not allowing additional time for congressional
hearings about many issues raised by the proposed rules. From OCC's
perspective, the length of the delay that some members were requesting
was unclear and other members did not endorse a delay. According to OCC
officials, a lengthy delay would have created more uncertainty for
national banks regarding the applicability of state or local laws and
could have led some lenders to stop lending in certain markets because
of variations in state or local laws, challenges in complying with
them, and difficulties in selling loans made under state and local
laws. Consumer groups we interviewed also suggested that OCC should
have offered additional mechanisms for soliciting public input in its
rulemaking. Other financial institution regulators have used additional
mechanisms for public comment when they deemed rulemakings
controversial. For example, some had used "public meeting type"
hearings. According to OCC officials, they did not take such actions
because they believed that they fully understood the points of view of
all stakeholders. Measures such as public meetings might have promoted
greater understanding of the preemption rules and provided
opportunities for building more constructive relationships between
federal and state authorities.
We provided a draft of this report to OCC for review and comment. In
written comments, the Comptroller of the Currency (see app. II)
concurred with our observation that its rulemaking process could
benefit from detailed written rulemaking procedures and the agency
intends to develop them by year-end 2005. OCC disagreed with our
observation that its documentation did not articulate the analysis
underlying its conclusion that the rules were "not significant" for
purposes of E.O. 12866. We examined OCC's documentation and found it
consisted of stating that the rules were not a significant regulatory
action as defined by the executive order because the annual effect on
the economy was less than $100 million. However, OCC's documentation
did not address other criteria set forth in the order, such as whether
a rule would have an adverse effect in a material way on state, local,
or tribal governments or communities. Thus, we continue to disagree
with OCC. Although OCC maintained that its efforts to consult with
state officials and organizations were appropriate for the preemption
rulemakings, it intends to enhance those efforts. OCC also provided
technical comments that we incorporated, as appropriate.
Background:
The federal agency rulemaking process is subject to statutory
requirements and executive orders issued by the President. Summaries or
brief discussions of OCC's mission and program areas (including
regulation), the statutes and executive orders pertaining to
rulemaking, and the legal basis for preemption follow.
OCC Mission and Regulatory Responsibilities:
OCC's mission focuses on the chartering and oversight of national banks
to assure their safety and soundness and on fair access to financial
services and fair treatment of bank customers. OCC is one of five
federal regulators of institutions whose deposits are federally
insured--the other four are the Board of Governors of the Federal
Reserve System (Federal Reserve), the Federal Deposit Insurance
Corporation (FDIC), the Office of Thrift Supervision (OTS), and the
National Credit Union Administration (NCUA). While the Federal Reserve
and FDIC share supervision of state-chartered banks with the states,
OCC is the sole supervisor for national banks. OTS oversees thrifts or
savings and loan institutions and NCUA oversees credit unions and
insures the member deposits at federally insured credit unions.
OCC groups its regulatory responsibilities into three program areas:
chartering, regulation, and supervision. Chartering activities include
not only review and approval of charters, but also review and approval
of mergers, acquisitions, and reorganizations. Regulatory activities
result in the establishment of regulations, policies, operating
guidance, interpretations, and examination policies and handbooks.
OCC's supervisory activities encompass bank examinations and
enforcement activities; dispute resolution; ongoing monitoring of
banks; and analysis of systemic risk and market trends. Additionally,
in its most recent strategic plan, OCC identified its regulatory
approach as one that would ensure that national banks operated in a
"flexible legal and regulatory framework" that enables them to provide
a "full competitive array" of financial services. The plan also
included fair access to financial services and fair treatment of bank
customers as a strategic goal. The agency also emphasized that it would
"support continued recognition of the preemptive attributes of the
national bank charter through appropriate opinions, regulations, and
participation in litigation where warranted."
As of March 2005, the assets of the banks that OCC supervises account
for approximately 67 percent--about $5.8 trillion--of assets in
commercial banks. Among the more than 1,800 banks OCC supervises are 14
of the top 20 commercial banks in asset size. OCC also supervises
federal branches and agencies of foreign banks.
Statutory Rulemaking Requirements:
Section 553 of the Administrative Procedure Act (APA) contains
requirements for the most long-standing and broadly applicable type of
federal rulemaking, commonly referred to as "informal rulemaking" or
"notice and comment" rulemaking.[Footnote 10] Most federal rulemaking
is conducted as informal rulemaking, in which agencies publish a notice
of proposed rulemaking in the Federal Register and provide "interested
persons" with an opportunity to comment on the proposed rule.[Footnote
11] The act does not specify the length of the comment period, but
agencies commonly provide at least 30 days.The act does not mandate
that an agency hold oral, or "public meeting type," hearings during the
comment period for informal rulemaking; instead, it allows an agency to
decide whether to hold a hearing.[Footnote 12] After giving interested
persons an opportunity to comment on the proposed rule, and after
considering the public comments, the agency may then publish the final
rule, incorporating a general statement of its basis and
purpose.[Footnote 13] The APA's notice and comment procedures do not
apply to interpretative rules; general statements of policy; or rules
that deal with agency organization, procedure, or practice.
The Congressional Review Act (CRA) allows Congress to review proposed
federal regulations and also contains provisions by which Congress may
disapprove agency rules.[Footnote 14] Before any final rule can become
effective, CRA requires that it be filed with each house of Congress
and us. The act also requires federal agencies to submit to us and make
available to each house of Congress a copy of any cost-benefit analysis
prepared for the rule. If the rule is designated by OMB's Office of
Information and Regulatory Affairs as "major" (that is, having a $100
million impact on the economy or having another characteristic
contained in the act), the agency must delay the rule's effective date
by 60 days after publication in the Federal Register or submission to
Congress and us, whichever is later.[Footnote 15] Within 15 days of
receiving a major rule, we are required to provide Congress with a
report assessing the agency's compliance with various acts and
executive orders applicable to the rulemaking process. Finally, under
CRA, congressional members can introduce a joint resolution of
disapproval for any rule regardless of whether it is designated as
major. To date, Congress has issued such a resolution only once--by
disapproving the Occupational Safety and Health Administration's
ergonomics standards in 2001.[Footnote 16]
The Regulatory Flexibility Act of 1980 (RFA) generally requires federal
agencies to assess the impact of their regulation on "small entities,"
including businesses, governmental jurisdictions, and certain not-for
profit organizations having characteristics set forth in the
act.[Footnote 17] Under RFA, Cabinet departments and independent
agencies generally must prepare a "regulatory flexibility analysis" in
connection with proposed and certain final rules, unless the head of
the issuing agency determines that the proposed rule would not have a
"significant economic impact" upon a substantial number of small
entities. The analysis must include, among other things, (1) the
reasons why the regulatory action is being considered; (2) the small
entities to which the proposed rule will apply and, where feasible, an
estimate of their numbers; and (3) the projected reporting, record
keeping, and other compliance requirements of the proposed rule.
Congress enacted the Unfunded Mandates Reform Act of 1995 (UMRA) to
reduce the costs associated with federal imposition of
responsibilities, duties, and regulations upon state, local, and tribal
governments, and the private sector. Title II of the act generally
requires covered federal agencies to prepare a written statement
containing specific information about costs and benefits for any
published rule that includes a federal mandate that may result in
expenditures by state, local, and tribal governments (in the aggregate)
or the private sector of $100 million or more in any year.
Executive Orders on Rulemaking:
In addition to statutory requirements, certain agencies, including OCC,
are subject to Executive Order 12866, "Regulatory Planning and Review"
(E.O. 12866) and Executive Order 13132, "Federalism" (E.O. 13132).
Under E.O. 12866, issued in 1993, covered agencies must submit their
"significant" rules to the Office of Management and Budget (OMB) before
publishing them in the Federal Register.[Footnote 18] Agencies also are
required to prepare a detailed economic analysis for any regulatory
actions that are "economically significant" (that is, have an annual
effect on the economy of $100 million or more or have a material
adverse effect as described in the order). The analysis should include
an assessment of anticipated costs and benefits of the action as well
as the costs and benefits of "potentially effective and reasonably
feasible alternatives." In choosing among alternatives, an agency
should select approaches that maximize benefits, and base its decision
on the best "reasonably obtainable" information. In 1996, OMB issued
"best practices" guidance on preparing cost-benefit analyses under the
order, which gives agencies substantial flexibility on preparing the
analyses, but also prescribes certain elements and requires that the
analysis be "transparent"--that is, that an agency disclose how it
conducted the study, what assumptions it used, and what the
implications of plausible alternative assumptions are.
Executive Order 13132 addresses the division of governmental
responsibilities between the national government and the states as
envisioned by the framers of the Constitution. The order contains
principles, policymaking criteria, and requirements for agencies to
apply and follow when formulating "policies that have federalism
implications," which are defined to include "regulations . . . and
other policy statements or actions that have substantial direct effects
on the States, on the relationship between the national government and
the states, or on the distribution of power and responsibilities among
the various levels of government." The order includes special
requirements for agency actions that preempt state law. Also, E.O.
13132 specifies that rulemaking that has federalism implications be
conducted through an "accountable process" and ensure "meaningful and
timely" input by state and local officials. Further, the order directs
the agency to provide to the Director of OMB a federalism summary
impact statement, which would include: (1) a description of the extent
of the agency's prior consultation with state and local officials, (2)
a summary of the nature of their concerns, (3) the agency's position
supporting the need to issue the regulation, and (4) a statement of the
extent to which the concerns of state and local offices have been met.
Legal Basis for Preemption:
Preemption of state law is rooted in the Constitution's Supremacy
Clause, which provides that federal law is the "supreme law of the
land." Because both the federal and state governments have roles in
regulating financial institutions, questions can arise about whether
the governing federal statute preempts particular state laws. Analysis
of whether federal law preempts state law has turned on whether
Congress intended that federal law overrides state law. Courts
traditionally have divided preemption analysis into categories of
"express" and "implied" preemptions.
At times, Congress may declare in express terms its intention to
preclude or override state regulation in a given area. With an express
preemption, Congress's intent to preempt state law is clear in the
statute. In addition to express preemption, preemption may be implied
from the federal statute's structure and purpose. Courts have
identified two types of implied preemptions: "field preemptions" and
"conflict preemptions." In the case of field preemption, a court
basically finds that the federal government has so "occupied the field"
in a given area that there is no room for state legislation. Conflict
preemption occurs when a court concludes that state law is in
irreconcilable conflict with federal law. In these instances, a court
finds that while Congress did not intend necessarily to preempt state
regulation in a given area, state law that conflicts directly with
federal law or stands as an obstacle to the accomplishment of federal
objectives is preempted.[Footnote 19]
Before the promulgation of its preemption rules, OCC primarily
addressed preemption issues through opinion letters, issued in response
to a specific inquiry from an institution or state.[Footnote 20] In
2000, we examined OCC's authority and approaches in preempting state
laws.[Footnote 21] We reported that OCC, applying conflict preemption
analysis, issued interpretations of whether federal laws preempt state
laws in opinions and corporate decisions. In the opinions and decisions
it issued, prior to January 2004, particularly in the area of making
loans and taking deposits, the Comptroller maintained consistently that
state laws that conflict with national bank powers authorized under the
National Bank Act are preempted. Additionally, OCC's opinions, based on
regulations, on real estate lending specifically preempted state laws
in five areas relating to certain loan terms and conditions, and stated
that OCC would apply "recognized principles of federal preemption" when
considering whether state laws apply to other aspects of real estate
lending by national banks.[Footnote 22]
OCC Generally Followed Rulemaking Requirements but Lacked Documentation
and Written Guidance, Making It Hard to Verify Consultation Efforts:
OCC followed the statutory framework in conducting its preemption
rulemaking, but we found it difficult to assess some of the other
actions it took in the rulemaking, particularly consultations with the
states, because OCC did not always document its actions and had no
written guidance or procedures detailing the rulemaking process. In
conducting its rulemaking, OCC followed the requirements of the APA,
CRA, RFA, and UMRA. OCC also is subject to both Executive Orders 12866
and 13132, and designated both preemption rules as "not significant"
for purposes of Executive Order 12866, but staff memorandums, in the
rulemaking files, did not articulate the analysis underlying the
determination. We also found that the lack of substantive documentation
about OCC's consultation with stakeholders made it difficult to verify
whether OCC helped ensure "meaningful and timely input" by state and
local officials. Further, while OCC staff used a checklist to document
completion of internal reviews and ensure that documents were routed
properly, OCC did not have written guidance to follow in conducting the
rulemaking process. Moreover, OCC did not document the substance of its
consultation with states or with other OCC offices. In contrast, other
federal agencies with missions similar to OCC's have developed some
rulemaking guidance for their staffs to follow.
OCC Followed the Administrative Procedure Act in Its Rulemaking:
In promulgating both the visitorial powers and banking activities
rules, OCC followed the process for informal rulemaking prescribed in
the APA.[Footnote 23] In the preambles to the visitorial powers and
banking activities proposals and final rules, OCC described the
rulemakings as "clarifications" of interpretations of the scope and
preemptive effect of the pertinent provisions of the National Bank Act
and not as "new law."[Footnote 24] However, OCC followed APA procedures
for informal rulemaking by providing notice of the proposed rules and
an opportunity for public comment, and also doubled the traditional 30-
day comment period to 60 days and satisfied other requirements of the
act, including consideration and discussion of comments on the rule, as
we discuss later in this report. The visitorial powers proposal was
published in the Federal Register on February 7, 2003, and OCC
requested receipt of comments by April 8, 2003. The banking activities
proposal was published on August 5, 2003, and OCC requested receipt of
comments by October 6, 2003. Final drafts of both rules were published
on January 13, 2004, with an effective date of February 12, 2004.
OCC Followed Other Laws:
OCC also followed the provisions of CRA, RFA, and UMRA. Pursuant to the
CRA, OCC sent copies of the final preemption rules to both houses of
Congress and to our Office of General Counsel on January 7, 2004, prior
to their effective date of February 12, 2004. Further, OMB did not make
a determination that the rules were major rules for purposes of the
CRA. It based its decision on OCC's determination that neither rule
would have a significant impact on the economy.
As described previously, the purposes of CRA include providing Members
of Congress with an opportunity to disapprove of an agency rulemaking
by enacting a joint resolution. In the 108TH Congress, one senator and
one representative introduced such a resolution to disapprove OCC's
preemption rules. More specifically, House of Representatives bill 4236
and Senate Joint Resolution 31 provided for congressional disapproval
of certain regulations issued by OCC. The House resolution with 35 co-
sponsors, was referred to the Subcommittee on Financial Institutions
and Consumer Credit of the House Financial Services Committee. The
Senate resolution, with three co-sponsors, was referred to the Senate
Committee on Banking, Housing and Urban Affairs. However, neither
resolution garnered enough support to pass out of the respective
committees.
OCC staff determined that the preemption rulemakings were not subject
to the regulatory flexibility analysis (essentially, potential economic
impact on small entities) required by RFA. OCC certified that no such
impact would result from its rulemakings and provided the required
statement in the preamble to its rules. We reviewed memorandums
contained in the files that discussed OCC's consideration of RFA
requirements. In an initial memorandum on each proposal, OCC's Policy
Analysis Division concluded that the preemption proposals did not
impose any new requirements or burdens on small entities and that the
proposal would not have a significant economic impact on a substantial
number of small entities. In a memorandum prepared on each proposal
after the public comment period, Policy Analysis Division staff
concluded that neither individual consumers nor state governments could
be considered to be small businesses, small organizations, or small
governmental jurisdictions under RFA and, therefore, OCC need not
consider the impact of its final rule on consumers or state governments
under RFA.
Similarly, OCC determined that, under UMRA, it did not need to prepare
a written statement during rulemaking, because neither rule would
result in expenditures by state, local, or tribal governments (in the
aggregate), or by the private sector, of $100 million or more in any
year. OCC also stated this position in the preamble of each rule. In a
memorandum related to the visitorial powers proposal that was written
before the comment period, an OCC official wrote that the rule "would
be permissive rather than restrictive and certain provisions permit
banks to reorganize in more cost-effective ways than is currently the
case." The memorandum concluded that private-sector costs associated
with the proposed rule would be below the $100 million threshold in
UMRA. In a memorandum on the banking activities proposal, drafted both
before and after the public comment period, OCC staff concluded that
analyses for purposes of UMRA were not necessary because the rules
would not result in expenditures totaling $100 million or more.
OCC Appears to Have Followed Some Provisions of the Executive Orders,
but Its Consultation with the States, a Provision of the Order on
Federalism, Appears Limited:
Two executive orders pertained to OCC's preemption rules. E.O. 12866
directs federal agencies to determine whether rules would be
"significant" and thus require OMB review. OCC sent a notice to OMB
regarding the proposed preemption rules stating that the rules did not
constitute significant regulatory actions under this executive order.
OCC officials told us that almost all of OCC's rules are designated as
nonsignificant. Further, OCC stated that because the preemption rules
would clarify already existing standards under the National Bank Act,
the regulations were nonsignificant for purposes of E.O. 12866. While
we do not necessarily dispute this determination, we found little
support for the underlying rationale the agency followed in making its
decision.
Executive Order 13132, entitled "Federalism," which was issued in 1999,
establishes principles and criteria for agencies to follow when
formulating regulatory policies with federalism implications.[Footnote
25] The order defines these policies as including regulations that have
"substantial direct effects on the States, on the relationship between
the national government and the States, or on the distribution of power
and responsibilities among the various levels of government."[Footnote
26] Under the order, agencies must have an "accountable process to
ensure meaningful and timely input by state and local officials in the
development of [such] regulatory policies."[Footnote 27] The head of
each agency is to designate an official, who will have primary
responsibility for ensuring that the agency implements the order, and
the official is to submit to OMB a description of the agency's
consultation process.[Footnote 28]
E.O. 13132 creates special requirements for rules with federalism
implications that preempt state law. When an agency foresees the
possibility of a conflict between state law and federally protected
interests within its area of regulatory responsibility, the agency is
to "consult, to the extent practicable with appropriate state and local
officials in an effort to avoid such a conflict."[Footnote 29] If an
agency proposes to act through rulemaking to preempt state law, the
agency "shall provide all affected state and local officials notice and
an opportunity for appropriate participation in the
proceedings."[Footnote 30] "To the extent practicable and permitted by
law, no agency shall promulgate any regulation that has federalism
implications and that preempts state law, unless the agency, prior to
the formal promulgation of the regulation, . . . consulted with state
and local officials early in the process of developing the proposed
regulation."[Footnote 31] The order also requires agencies to submit to
OMB a federalism summary impact statement in a separately identified
portion of the preamble to the regulation, as it is to be published in
the Federal Register. The federalism summary impact statement is to
include a description of the agency's prior consultation with state and
local officials, a summary of the nature of their concerns, the
agency's position supporting the need to issue the regulation, and a
statement of the extent to which the concerns of state and local
officials have been met.[Footnote 32] In addition, the agency is to
make available to OMB any written communications submitted to the
agency by state and local officials.[Footnote 33] Finally, in
transmitting any draft regulation to OMB, the agency is to include a
certification from the designated federalism official stating that the
requirements of the order have been met in a meaningful and timely
manner.[Footnote 34]
General guidance exists to aid agencies in interpretation of the
requirements of the order, including the consultation requirement and
the special requirements for preemption. OMB issued guidance for heads
of agencies in implementing E.O. 13132, describing what agencies should
do to comply with E.O. 13132 and how they should document that
compliance for OMB.[Footnote 35] In connection with the consultation
requirement, the guidance provides that agencies "should seek comment
on . . . preemption as appropriate to the nature of the rulemaking
under development. The timing, nature, and detail of the consultation
should also be appropriate to the nature of the regulation
involved."[Footnote 36]
After the issuance of E.O. 13132, OCC sent a letter on September 17,
1999, to the Conference of State Bank Supervisors (CSBS) proposing a
process by which it would consult with the state bank
regulators.[Footnote 37] First, OCC asked that CSBS serve as the
primary channel for communicating with state banking officials when OCC
proposed a regulation that had federalism implications. Secondly, it
proposed to send CSBS the draft of a proposed regulation shortly before
the document was sent to the Federal Register for publication.
According to OCC, CSBS would still have sufficient time within a
rulemaking comment period to distribute the draft to its members and
receive comments. OCC stated that these comments would receive special
review in the context of the federalism implications of the proposal in
question. In response, the CSBS President agreed to act as an
intermediary between OCC and various state banking departments on
policy issues that might affect state rulemaking and supervisory
authority.
Although OCC did send the drafts of the proposed rules to CSBS, the
extent to which it consulted with state officials appeared limited.
Following publication of the proposed rules, OCC indicated it met twice
with CSBS representatives. OCC officials offered several reasons why,
in their view, additional consultation with the states was unnecessary
or impracticable. They told us that OCC maintained a channel of
informal communication with CSBS during the period leading up to the
rules and, through this mechanism, was informed about state concerns,
as contemplated by the order. In attempting to verify OCC's established
consultation process with CSBS, we found that OCC sent letters to CSBS
regarding both the visitorial powers and the banking activities rules,
in which OCC advised CSBS of the publication of the proposals. For both
proposals, OCC sent the letters a few days before their publication in
the Federal Register. OCC advised CSBS of the visitorial powers
proposal on January 31, 2003, and the proposal was published on
February 7, 2003. For the banking activities proposal, CSBS received
notification on July 30, 2003, before the proposal was published in the
Federal Register on August 5, 2003. OCC officials stated that because
the rules codify preemption precedents, they generally did not impose
new or different standards and as a result, further consultation with
the states was not necessary. Finally, OCC officials noted that because
the rules reflect the agency's understanding of congressional intent
about the preemptive effect of the National Bank Act, dialogue with the
states about their role in regulating national banks and their
subsidiaries would not have raised issues about which OCC was not
already aware.
The OMB guidance strongly recommends that, to the extent that an agency
has carried out intergovernmental consultations prior to publication of
the Notice of Proposed Rulemaking, the agency help state and local
governments, and the public as a whole, by including a "federalism
summary impact statement" in the preamble to the Notice of Proposed
Rulemaking.[Footnote 38] Although OCC itself has issued no guidance to
assist in determining whether a proposed regulation has sufficient
federalism implications to warrant preparation of a federalism summary
impact statement, OCC drafted and provided to the Director of OMB the
federalism summary impact statements. The impact statements included
information on OCC's consultation efforts with the states on both
rules, the concerns of the states, and the extent to which the concerns
were addressed. As required by the executive order, OCC included the
impact statements, as part of the preambles of the preemption rules.
The content of the two impact statements was similar. In providing
these materials to OMB, OCC certified its compliance with the order.
However, we found minimal documentation in OCC files related to the
federalism summary impact statement provision of E.O. 13132. We could
determine that OCC sent the federalism summary impact statement to OMB
because OMB staff provided us with the documentation.
We note that there are no court decisions or other precedents
applicable in determining what the executive order requires;
nevertheless, OCC might have considered additional consultative actions
to help ensure the meaningful and timely input by state and local
officials. For example, as discussed more fully later in this report,
OCC might have considered holding additional meetings with interested
parties and providing further opportunities for input by entities such
as trade groups, state attorneys general, and state bank regulators.
OCC also might have solicited this input by asking for written comments
on policy proposals and conducting additional outreach to state
officials.
While We Could Describe the General Process, All of OCC's Actions Were
Not Fully Documented; Additionally, OCC Lacks Formal Guidance on
Rulemaking:
We could not verify all of the actions OCC took to complete its
preemption rulemaking because OCC did not always document its actions
and lacked written guidance or procedures detailing the rulemaking
process. According to Standards for Internal Control in the Federal
Government, agencies should follow written procedures in making
important decisions. Absent such documentation, it may not be clear
that an agency followed applicable requirements and made its decision
without bias. The agency also needs operating information to determine
whether it has met requirements under various laws and
regulations.[Footnote 39] Moreover, the former Administrative
Conference of the United States noted, "Rulemaking is not just a
product of external constraints. The agency's own processes for
developing rules and reviewing them internally affect the rulemaking
environment. Thus, agency management initiatives can have a significant
impact on the effectiveness and efficiency of rulemaking."[Footnote 40]
We were able to ascertain OCC's general process for conducting a
rulemaking, but had to augment our review of the docket files for the
preemption rules with interviews of OCC officials. Figure 1 illustrates
the various stages of approval by OCC management and actions taken by
OCC staff to promulgate regulations. More specifically, the staff of
the Legislative and Regulatory Activities Division (LRA) is primarily
responsible for drafting and managing OCC's rulemaking. The process
includes various levels of internal review and approval; additionally,
OCC submits draft proposals to Treasury for informational purposes and
to OMB to fulfill their responsibility under the executive order.
Figure 1: OCC Informal Rulemaking Procedures:
[See PDF for image]
[A]The Legislative and Regulatory Activities Division's
responsibilities include developing and drafting OCC's regulations and
ensuring the agency's compliance with the various federal statutes and
executive orders that govern the rulemaking process.
[B]In the case of the preemption rules, OCC sent the Conference of
State Bank Supervisors the drafts of the banking activities and
visitorial powers proposals on July 30, 2003, and January 31, 2003,
respectively.
[C] The visitorial powers proposal was published in the Federal
Register on February 7, 2003 (68 Fed. Reg. 6363), and the banking
activities proposal was published on August 5, 2003 (68 Fed. Reg.
46119). Both proposals incorporated a 60-day comment period.
[End of figure]
However, OCC does not have written guidance, policies, or procedures
detailing the rulemaking process. As part of its general agency
Policies and Procedures Manual, OCC includes guidance on its internal
approval process for its policymaking and rulemaking. Much of the
guidance focused on administrative and routing actions of OCC staff.
For example, it included instructions on staff practices, such as
preparing an initiation memorandum, an issues memorandum that discusses
the project and summarizes the issues for OCC staff, and staff actions
required for a gold border review. The guidance for the gold border
review described how staff should prepare the reviewers' memorandum,
identify the appropriate reviewers, and secure the required approval
signatures. During our review of the rulemaking process, OCC revised
this guidance. The revised guidance, issued on April 26, 2005, provides
a more in-depth discussion of the gold and red border approval
processes. However, neither the previous nor revised guidance discussed
how OCC staff should implement relevant rulemaking laws and executive
orders when they are conducting a rulemaking.
OCC did retain some documentation related to the rulemaking in the
official file, known as a "docket," for each of the rules. In addition,
the dockets contained what officials called "a rulemaking checklist."
The checklist served as a guide for completing the required reviews and
the routing of documents (see fig. 2). However, based on our review,
the checklist did not record the substance of any decisions made during
the development and the promulgation of the rules.
Figure 2: Sample OCC Rulemaking Checklist:
[See PDF for image]
[End of figure]
As discussed previously, E.O. 12866 directs federal agencies to
determine whether rules would be "significant" and thus require OMB
review, but staff memorandums in the rulemaking files did not
articulate the analysis underlying the determination--although the
agency stated in the preambles to the final regulations that the rules
did not constitute significant regulatory actions under this executive
order. Also, with respect to E.O. 13132, "Federalism," OCC stated that
it "consulted with state and local officials . . . through the
rulemaking process" and met with representatives of CSBS to clarify
their understanding of the proposals.[Footnote 41] But we found no
documents detailing OCC's consultation with CSBS officials or the state
attorneys general, and without documentation, we could not verify the
extent or nature of the discussions. According to CSBS officials, they
met twice with OCC officials regarding the banking activities proposal
after its publication in the Federal Register; however, in their view,
nothing of substance was discussed in the meetings. For example, the
CSBS officials noted that in the second meeting, credit card issues
were discussed more than anything else. We note that OCC officials
described the subject matter discussed at these meetings as including
the banking activities rule. A state attorney general told us that he
and several other state attorneys general had met with the Comptroller
and OCC's Chief Counsel prior to the banking activities rule being
issued, but the OCC docket files did not contain any documentation of
these meetings.[Footnote 42] Further, we found minimal documentation in
OCC files related to the federalism summary impact statement provision
of E.O. 13132.
In addition to the lack of documentation related to consultation and
impact statement provisions in the executive order, according to OCC
officials, OCC does not have any written policies about communications
with interested parties during a rulemaking. The officials added that
when OCC staff meets with interested parties on a rule proposal, it
urges them to draft a comment letter and include the issues discussed
at the meeting in their letter.
Finally, OCC officials told us that they conferred with other divisions
within OCC during the rulemaking. However, we did not find
documentation on staff coordination or input on issues related to the
rulemaking in the docket. For example, the officials told us that they
consulted with OCC's Community and Consumer Law staff about some of the
consumer protection issues being raised in the comment letters and the
Customer Assistance Group on whether OCC had sufficient resources to
handle any increase in consumer complaints. The docket files contained
no information that reflected this consultation. What information on
staff coordination the docket files did contain focused on routing
actions, such as preparing documents for publication in the Federal
Register. The dockets include memorandums between LRA and OCC's Policy
Analysis Division staff discussing the Policy Analysis Division staff's
assessment of RFA's and UMRA's applicability to the proposals. Other
than these memorandums, the OCC files did not include any additional
documentation of any analyses that were performed for CRA, RFA, and
UMRA purposes. For example, OCC officials stated in a memorandum that
these rules did not meet the criteria under the law without documenting
the rationale for their decisions.
FDIC, Treasury, and SEC Have Written Guidance for Conducting a
Rulemaking:
FDIC and Treasury have written guidance for their rulemaking and SEC
staff have also prepared written background materials, which the
agencies use to assist their respective staffs in the promulgation of
rules. Although the guidance differed in some cases, generally it
summarized the relevant laws on rulemaking; identified certain actions
that staff should take to comply with the laws; and discussed how
public comments should be handled. In addition, the guidance instructed
staff on coordinating with other staff members. However, because we did
not review the rulemaking files or dockets of the other regulators, we
could not determine how the agencies documented compliance with their
guidance.
FDIC's guidance for rulemaking is contained in FDIC Rules and
Statements of Policy: Development and Review Guide and Handbook, which
provides information on overall processes for developing and reviewing
FDIC rules and statements of policy, as well as specific procedures for
meeting the statutory and other requirements of rules and statements of
policy. The handbook also includes criteria and instructions on how to
comply with various laws.[Footnote 43]
The handbook has instructions that cover promulgation of regulations,
from project planning to finalizing the rule. For example, it describes
actions that FDIC staff should follow when preparing a regulatory
impact analysis, specifying that the analysis should include an
introduction, an analysis of the proposal, an analysis of an
alternative, a quantitative analysis, and a conclusion. It goes on to
provide more detailed guidance on how to prepare discussions of costs,
benefits, impacts, risks, and quantitative analyses. In addition to
procedures for complying with rulemaking laws, FDIC guidance outlined
steps for staff coordination.
Treasury has developed guidance for the issuance of regulations, review
of existing regulations, and preparation of regulatory agendas and
plans that are governed by various statutes, executive orders, and
other authorities. Treasury issued its guidance, "Preparation and
Review of Regulations," in the form of a directive, which provides
offices and bureaus with the guidance necessary to comply with the
statutory authorities and to obtain timely departmental and
administration review of regulatory documents. According to a Treasury
official, its individual offices and bureaus, with the exception of the
Internal Revenue Service, do not have separate rulemaking guidance. The
Internal Revenue Service has its own rulemaking guidance, but also
follows Treasury's guidance.
According to OCC officials, the procedures specified in the Treasury
directive do not apply to OCC because OCC's regulations are not subject
to clearance or approval by the department. The officials referred to a
provision of the National Bank Act (12 U.S.C. § 1) that describes the
Comptroller's authority and autonomy over matters within OCC's
jurisdiction.[Footnote 44] Thus, according to OCC officials, while
consultation between OCC and Treasury occurs on policy matters, the
OCC's regulations are not subject to clearance or approval by Treasury.
However, according to a Treasury official, the Treasury has the
opportunity to review and comment on each proposed and final regulation
prior to issuance.
We do not challenge the OCC officials' assertion about the
applicability of Treasury's directive, but we note that the directive
contains guidance useful for assessing the adequacy of opportunities
for public participation and directs offices and bureaus to allow not
less than 60 days for public comment on the notice for proposed
rulemakings that are designated "significant." The directive also
provides guidance on whether regulatory actions are significant as
defined in E.O. 12866. Treasury's directive also refers to implementing
orders on federalism, but refers to E.O. 12612, the predecessor of E.O.
13132; thus, we did not use it for comparative or illustrative purposes
in this report. According to a Treasury official, the department is
currently updating the directive.
An overview of regulatory requirements is included in the SEC
Compliance Handbook, which was revised by its Office of the General
Counsel in October 1999.[Footnote 45] Based on our review, the handbook
provides an overview of the relevant rulemaking statutes, such as the
CRA and RFA, and other suggested steps that SEC staff should consider
using in conducting a rulemaking. For example, staff should consider
consulting with the General Counsel and the Office of Economic Analysis
and circulating the draft to other potentially affected divisions as
early as possible.
Based on our review, the handbook also describes what type of records
generally should be kept for a rulemaking. It suggests that SEC staff
not only include among other things internal memorandums and research,
but also comment letters, a summary of comments, and Office of Economic
Analysis data. Finally, SEC's handbook also discusses the regulations
relevant for determining whether the commission should treat a rule as
major or "nonmajor" for purposes of CRA. It notes a number of
documentation and coordination tasks that staff could undertake before
making the designation. For example, staff members could consider: (1)
preparing a short memorandum for OMB that briefly describes the rule
and the reasons why the rule is not major and (2) keeping background
information supporting the basis for the recommended determination.
OCC Considered All Comments on Its Banking Activities Rule, and
Strongly Disagreed with Those Challenging Its Authority, but Made Some
Changes in Response to Others:
While OCC considered all public comments, it strongly disagreed with
those questioning its preemption authority or the rule's negative
effects on consumers; however, it did make changes to the rule in
response to some comments. OCC reviewed and considered approximately
2,700 comment letters submitted by a variety of consumer groups, public
officials, businesspeople, and others in response to its banking
activities proposal. Our analysis of the comment letters revealed that
commenters, among other things, focused on what they believed would be
the rule's effect to diminish enforcement of state consumer protection
laws, questions about OCC's legal analysis, and conclusions justifying
preemption and the rule's effect on the dual banking system. OCC's
consideration of the comments is reflected in a number of sources,
including the final rule. While OCC considered the comments, it
strongly disagreed with those that challenged its ability to protect
consumers and its authority to promulgate its rule. For example, OCC
maintained that its banking activities rule does not affect a state's
ability to protect consumers from institutions that might engage in
predatory practices but rather upholds its responsibility of ensuring
the efficient operation of the national banking system as authorized by
Congress, and preserves the dual banking system. However, OCC agreed
with some of the comments it received and made changes to its proposed
rule, including adding some information to clarify parts of the rule,
such as its anti-predatory lending standard.
A Variety of Commenters Responded to the Proposed Banking Activities
Rule:
OCC received approximately 2,700 comments on the proposal from a
variety of consumer groups, public officials, businesspeople, and other
individuals. The majority of comments (83 percent) were form letters
written in opposition to the proposal and submitted by Realtors and
other individuals.[Footnote 46] Figure 3, which is based on our
analysis of 373 nonform comment letters, illustrates the composition of
commenters by group and position (that is, opponent, proponent, or
other). Our analysis of the content of the nonform letters indicated
that 85 percent of these commenters were opposed to the proposal and
expressed a variety of concerns. We found that 10 percent of the
commenters favored the proposal. The remaining 5 percent of commenters
neither opposed nor supported the proposal--rather, in some instances
these commenters requested additional information to clarify certain
aspects of the proposal.
Figure 3: Composition of Commenters, Based on Our Analysis of 373
Nonform Letters:
[See PDF for image]
[End of figure]
The Majority of the Commenters Raised Concerns about Potentially
Weakening of Consumer Protections:
Based on our analysis of the comment letters, we found that most
commenters opposed to the proposed rule cited concerns about weakened
consumer protections. These and other concerns raised in comment
letters in opposition to OCC's banking activities proposal are
summarized in figure 4. They also contended that because national
banks, with their considerable presence in the lending market, would no
longer be subject to certain state consumer protection laws, consumers
would be vulnerable to various forms of predatory lending. Comments
from state officials argued that a lack of state regulation would
create "an enormous vacuum of consumer protection without adequate
federal regulation to fill the gap." Many of these commenters suggested
that OCC needed to do more, not less, to protect consumers. They
believed that some state-enacted fair lending legislation addressed
certain predatory lending practices and cited as an example legislative
efforts that mirrored the federal Home Ownership Equity Protection Act,
yet provided stronger consumer protections. According to these
commenters, these state laws defined and restricted high-cost loans
that were more likely to be abusive or predatory and characteristic of
trade practices, such as loan flipping, fee packing, and equity
stripping. However, they maintained that the banking activities rule
would eliminate the protections afforded by these state laws. They
concluded that OCC should have refrained from preempting these state
laws or, at the very least, incorporated principles from its 2003
guidance on predatory lending and abusive practices, which they argued
cites some of the same fraudulent trade practices defined by these
state laws and were determined by OCC to be unfair, deceptive, and
likely violate the Federal Trade Commission Act. Commenters also urged
OCC to affirmatively articulate that a national bank's lending
practices must be conducted in conformance with section 5 of the
Federal Trade Commission Act, which makes unlawful "unfair or
deceptive acts or practices.":
Figure 4: Frequently Cited Concerns of Selected Commenters Opposed to
OCC's Banking Activities Proposal:
[See PDF for image]
Note: We based our analysis on 373 comment letters (nonform letters)
submitted to OCC during the public comment period for the banking
activities proposal.
[End of figure]
Consumer groups and state officials commented that OCC's rule would
cripple states' ability to regulate national banks and their operating
subsidiaries, and in the process potentially increase the number of
consumer complaints sent to OCC regarding national banks and their
operating subsidiaries. They asserted that OCC did not have the
capacity to adequately handle an increased volume of complaints, and
argued that "with an already fully engaged staff of national bank
examiners and OCC employees, the Comptroller cannot match the resources
of state banking departments, consumer credit divisions, and offices of
state attorneys general that currently work to identify fraudulent and
abusive practices."
The issues cited next most frequently (by commenters opposed to the
rule) dealt with the legal basis for preempting state regulation of
national banks' operating subsidiaries. The commenters questioned OCC's
legal authority to promulgate the rule, asserting that OCC did not
properly apply the legal standard for preemption and did not have a
legal basis for preempting state laws with respect to national bank
operating subsidiaries. These commenters stated that preempting the
application of state laws to operating subsidiaries would infringe on
states' rights to regulate entities that they license. They asserted
that OCC's preemption proposal would "federalize" national bank
operating subsidiaries, many of which are state-licensed.[Footnote 47]
Additionally, commenters noted that if finalized, OCC's preemption rule
would prevent states from regulating these entities and would diminish
the states' ability to protect their citizens. State officials
contended that federal banking statutes and state corporate laws
establish a clear separation between national banks and their
"affiliates," including their operating subsidiaries. Accordingly,
these commenters believed that OCC did not have the power to bar states
from licensing, examining, and otherwise regulating state-licensed
corporations, including those affiliated with national banks. This
issue was of particular concern to commenters who believed that certain
national bank operating subsidiaries engaged in predatory and abusive
practices. Another commenter suggested that OCC's rule would encourage
lenders to "restructure as operating subsidiaries of national banks to
avoid certain consumer protection restrictions."
Commenters also expressed concerns about the effect of the rule on the
dual banking system and contended that OCC's rule would promote a "race
to the bottom" in consumer protection. Consumer groups and state
officials held that the banking activities rule could put national
banks at an advantage over other financial institutions and blur the
well-established competitive marketplaces of each state. They argued
that the result would be a reduction in regulatory oversight in the
banking industry because other bank regulators would be encouraged to
reduce their regulatory efforts to match what some considered "subpar"
standards being set for national banks. State officials believed that
this result would be inevitable because regulatory control of the
banking industry would be concentrated in OCC.
State officials and consumer group commenters asserted that OCC took a
sweeping approach to preemption in its proposal. They noted that a
state law generally would apply to a national bank only if the state
law fit into one of a few limited categories or if OCC decided that the
particular state law has "only incidentally affected" the exercise of
national bank powers or is otherwise consistent with the rule itself.
Commenters contended that absent specific consent from OCC, the only
types of state laws that would ordinarily apply to national banks are
those enumerated in the proposal (such as those pertaining to
contracts, torts, and criminal law). They stated that national banks
could even be exempted from these types of laws if OCC decided that one
of these types of state law marginally affected the exercise of
national bank power. These commenters concluded that the national bank
charter could become a "get out of jail free" card.
Generally, proponents of OCC's preemption proposal, largely national
banks and others representing the banking industry, stated that the
rule promoted a uniform national regulatory standard, which they viewed
as a significant benefit to national banks and argued that field
preemption would allow national banks to provide services on a
multistate basis without being subject to a patchwork of conflicting
and inconsistent state laws. According to these groups, without a
national standard, national banks operating under varied state laws
faced increased costs, compliance burdens, and possible litigation
because of not being able to comply with each and every requirement.
Further, they contended that some national banks could be forced to
limit certain products and services in jurisdictions where state and
local laws imposed different standards, thus harming consumers. They
suggested that these state laws would ultimately harm the national bank
system and therefore urged OCC to adopt an "occupation of the field"
preemption standard concerning national bank real estate lending.
National bank industry commenters also expressed concern that the
proposed anti-predatory lending standard prevented national banks from
making loans based predominantly on the foreclosure value of a
borrower's collateral--that is, without regard to the borrower's
repayment ability. These commenters contended that this new standard
would prevent national banks from making legitimate loans, for example,
to high net worth individuals whose ongoing cash flow could be
sufficient to repay the loan. These commenters noted that reverse
mortgage, small business, and high net worth loans are often made based
on the value of the collateral.
Supporting commenters also asked OCC to clarify particular parts of its
proposal. For example, several commenters noted that section 34.4(a) of
the banking activities preemption proposal lists "categories" of state
laws that are preempted, but did not specifically enumerate which state
laws would be preempted. A number of these commenters asked OCC to list
in its final rule specific state laws imposing various limitations on
mortgage underwriting and servicing and those state laws pertaining to
debt collection, which were not determined to be preempted in the
proposal.
In Response to Comments, OCC Reasserted Its Preemption Authority but
Made Some Changes in the Final Rule:
We analyzed a variety of sources and determined that while OCC
considered all of the comments it received during the banking
activities rulemaking, they strongly disagreed with commenters that
doubted their ability to protect consumers as well as those that
questioned their preemption authority. OCC stated in the preamble to
the final rule that national banks and their operating subsidiaries
would be regulated by strong federal standards and any abusive
practices would not be tolerated. Moreover, OCC maintained that
national banks were not the source of predatory and abusive lending
practices. The Comptroller also suggested that the banking activities
rule did not affect a state's ability to protect vulnerable consumers
from other types of lending institutions that might engage in predatory
practices. The Comptroller emphatically suggested that the banking
activities preemption standards "are comprehensive and apply
nationwide, to all national banks. The rules apply strong protections
for national bank customers in every state--including the majority of
states that do not have their own anti-predatory lending standards."
According to OCC officials, the agency has a comprehensive consumer
protection effort focused on national banks and operating subsidiaries
(consisting of its supervisory and enforcement functions, the Customer
Assistance Group, and the Community and Consumer Law and Enforcement
and Compliance divisions of the Law Department). According to OCC, this
effort includes enforcement of applicable state laws and a
comprehensive array of federal consumer protection laws. This consumer
protection effort will be the focus of one of our forthcoming reports.
OCC also maintained that states increasingly face budget constraints,
and their insistence on adding national bank supervision to an ever-
increasing list of responsibilities would likely detract from "the
availability of state resources to protect consumers in other areas--
other areas where there is evidence of abusive lending--other areas
that are not as highly regulated as the banking business."
OCC restated its authority to promulgate its banking activities rule
throughout the preamble to the final banking activities rule,
maintaining that it is charged with the primary responsibility of
making certain that national banks operate efficiently and to the full
extent of their powers under federal law.[Footnote 48] Moreover, OCC
contended that its regulation codifies existing determinations and
prior Supreme Court decisions regarding national bank operations and
had no effect on regulations previously established to govern the
activities of national bank operating subsidiaries. Pursuant to OCC
regulation, national bank operating subsidiaries conduct their
activities subject to the same terms and conditions that apply to the
parent banks, except where federal law provides otherwise.[Footnote 49]
OCC noted in the preamble to the final banking activities rule that
differences between state-chartered banks and federally chartered banks
and the supervision of each were the "defining characteristics" of the
dual banking system and that its final rule would preserve, not
undermine, this system. The preamble concluded that OCC fundamentally
disagreed with state and local officials on this issue and asserted
that the rule was a necessary component to "enable national banks to
operate to the full extent of their powers under federal law, and
without interference from inconsistent state laws; consistent with the
national character of the national banks; and in furtherance of their
safe and sound operations."[Footnote 50] However, OCC acknowledged the
concerns of both opponents and supporters of the proposal and made some
changes based on their comments. For instance, OCC added an express
reference to section 5 of the Federal Trade Commission Act, which makes
unlawful "unfair or deceptive acts or practices," in response to
commenters who urged OCC to declare that this federal standard indeed
applied to national banks. OCC viewed this as a fitting addition to its
rule. OCC also stated that its anti-predatory lending standard augments
prior standards such as those contained in OCC's Advisory Letters on
predatory lending. According to the Comptroller, OCC pioneered the use
of section 5 as a basis for enforcement actions against banks that have
engaged in such conduct. In contrast, in response to commenters who
suggested that OCC specifically articulate what activities constitute
unfair and deceptive practices, OCC noted in the preamble to the final
banking activities rule that it does not have authority to specify by
regulation specific practices as unfair or deceptive under the Federal
Trade Commission Act. In February 2005, OCC issued new guidance
pursuant to the enforcement scheme of section 39 of the Federal Deposit
Insurance Act, "as a further step to protect against national bank
involvement in predatory, abusive, unfair, or deceptive residential
mortgage lending practices."[Footnote 51] This guidance describes
practices that OCC deems inconsistent with sound residential mortgage
lending practices. It also describes other terms and practices that may
be conducive to predatory, abusive, unfair, or deceptive lending
practices, depending on the circumstances. OCC noted in the guidance
that it has the discretion to take action to enforce the guidelines.
In response to comments arguing that the banking activities rule would
at some point preempt categories of state law that the proposal
declared would not be preempted, OCC stated that it "refined" some
language in the final rule and further explained in the preamble the
standards to be used in determining when preemption would occur and the
criteria for when state laws would not be preempted. OCC further
explained that (1) state statutes and standards that federal law makes
applicable or incorporates and (2) state laws that relate to the daily
course of business of national banks and their operating subsidiaries,
but only incidentally affect the bank's exercise of its federally
authorized powers or otherwise are consistent with federal law, would
not be preempted.[Footnote 52] The latter category includes laws
pertaining to contracts, rights to collect debts, the acquisition and
transfer of property, taxation, zoning, crimes, and torts.
Additionally, in response to comments that OCC solicited on whether it
should "occupy the field" of real estate lending, OCC determined that
it would not do so based on comments it received pertaining to this
issue and prior judicial decisions.[Footnote 53]
With respect to its new anti-predatory lending standard, OCC agreed
with comments that suggested that there are instances where loans are
legitimately underwritten on the basis of the value of the borrower's
collateral and revised the anti-predatory lending standard to clarify
that it would apply only to consumer loans secured by real estate. OCC
characterized consumer loans as loans for personal, family, or
household purposes and stressed that this standard was intended to
prevent borrowers from being unwittingly placed in a situation where
repayment would be unlikely without the lender seizing the collateral
and that it would permit national banks to use a variety of methods to
determine a borrower's ability to repay.
OCC acknowledged supporting comments requesting that it specifically
list additional categories of state law that these commenters believed
should be preempted, but chose not to do so. Instead, OCC included
language in the rule's preamble asserting that the list of the types of
preempted state laws enumerated in the rule were not intended to be
exhaustive, that it would retain the ability to address other types of
state laws on a case-by-case basis, and make determinations on
preemption under applicable standards. Further, in a clarification
concerning debt collection activities, OCC officials explained that it
was difficult to establish a standard that would capture all of the
concerns raised regarding national bank debt collection activities. As
a result, OCC changed the description of this type of non-preempted
state law from laws concerning "debt collection" to laws affecting a
national bank's "rights to collect debts" (making all phrasing
consistent with that used in a Supreme Court decision). OCC officials
told us that they ultimately decided to leave the interpretation of
this term open to the possibilities of subsequent OCC action or
interpretation by the courts.
Stakeholders Raised Issues Regarding the Process OCC Used to Promulgate
Its Preemption Rules:
Some Members of Congress, state officials, and consumer groups
criticized how OCC promulgated the banking activities rules. For
example, some members requested a delay in the finalization of the
rules so that they could hold additional hearings to discuss the rules'
potential impacts on consumer protection. According to OCC officials,
they could not determine the length of the delay that some members were
requesting, and a lengthy delay would have created more uncertainty for
national banks regarding the applicability of state or local laws and
could have led some lenders to leave certain markets. Moreover,
according to OCC, while some members sought a delay, other members did
not endorse a delay. Additionally, some representatives of consumer
groups and state organizations criticized OCC for not employing
additional mechanisms for soliciting public input in the rulemaking.
Other regulators told us they have used additional mechanisms for
public comment during rulemakings they deemed controversial.
Congressional Members Requested a Delay in the Finalization of the OCC
Rules:
Some Members of Congress requested that OCC delay finalization of its
rules so that they could further study its potential impact. However,
congressional members and staff did receive information on the rules
prior to this request. According to a chronology provided to us by OCC
staff, OCC officials briefed a number of congressional members and
their staff starting in October 2002 and ending in October 2003. In
several of these briefings, the then-Comptroller of the Currency and
OCC's Chief Counsel briefed majority and minority staff from the
Committee on Financial Services, House of Representatives, and the
Senate Committee on Banking, Housing, and Urban Affairs.
Some Members of Congress wanted OCC to delay the finalization of the
rules so that they could hold hearings on the proposed rules. According
to a letter from members of the House Financial Services Committee from
the state of New York to OCC, the focus of the hearings would be the
potential impact of the rules on consumer protection and the dual
banking system. The Acting Comptroller of the Currency described that
OCC staff received mixed views from within Congress and that some
members of the House Financial Services Committee wanted a hearing
while others did not endorse a delay or hearing. Since the OCC staff
did not receive any information on a specific date for the hearing,
they were uncertain about the length of the delay that the members were
requesting.
In congressional testimony (in late January 2004), the Acting
Comptroller provided reasons for why the agency finalized the rules
when it did.[Footnote 54] First, the rules were not creating any "new
law" because the rules were entirely consistent with existing laws,
such as the National Bank Act. Second, the continuing uncertainty about
the applicability of state laws had affected national banks' ability to
lend in certain markets and access the secondary market. Third, the
Acting Comptroller asserted that state and local governments were
accelerating enactment of anti-predatory lending legislation.
The Acting Comptroller provided us with a similar explanation, saying
that OCC was receiving inquiries at the time from national banks
requesting a clarification on whether state laws on anti-predatory
lending would be applicable to them and advising OCC that these state
laws were creating market impacts. A lengthy delay would have resulted
in more uncertainty for the banks because more states would have
continued enacting anti-predatory lending laws, which would have
adversely affected the U.S. mortgage market. Moreover, she noted that a
number of state anti-predatory lending laws were to come into effect
during 2004, and OCC anticipated that additional states were planning
to enact such laws. OCC officials also noted that the former
Comptroller of the Currency became ill during the final stages of the
banking activities and visitorial powers rulemaking. Because OCC did
not have a date for the potential congressional hearing and the
Comptroller wanted to take part in the finalization of the rules, OCC
staff worked to be in a position to complete the rulemaking process by
late January 2004.
Some Groups Criticized OCC's Efforts to Solicit Public Input:
Consumer and state groups wanted OCC to provide additional mechanisms
beyond written comments for soliciting public input. Some consumer
groups told us that OCC should have held "public meeting type" hearings
and extended the length of the 60-day comment period to obtain public
comments on the banking activities rule. In their view, the banking
activities rule was a controversial proposal that required OCC to
obtain sufficient input from groups across the country. According to
these groups, it has been a standard practice at other federal agencies
to hold these types of meetings when the agencies deem that proposed
rules would be controversial. Some consumer groups considered that
public meetings were an important part of an educational, democratic
process.
According to OCC officials, it was not OCC's standard procedure to hold
"public meeting type" hearings on proposed rulemakings. The Acting
Comptroller of the Currency told us that she personally conducts
outreach to consumer groups and the banking industry on a variety of
issues, including preemption; also, she did not foresee that she would
have heard anything different in a public hearing than in her outreach
sessions. OCC also has staff in the Community Affairs Department and a
Banking Relations Senior Advisor, who, according to OCC staff, host
outreach efforts with consumer and banking groups, respectively, on a
frequent basis. These efforts provide these groups with an opportunity
to comment on issues.
Some Federal Regulators Have Used Additional Mechanisms for Obtaining
Public Comments on Controversial Rulemakings:
Based on our interviews with FDIC, Federal Reserve, OTS, and SEC, staff
employ additional mechanisms for soliciting public input for
rulemakings. According to its Deputy General Counsel, FDIC will take
steps in addition to accepting written comments to alleviate some of
the controversy associated with certain rulemakings. For example, from
the mid-1980s to 2005, FDIC held approximately seven "public meeting
type" hearings on its rulemakings. The most recent concerned a request
from a bank industry group that FDIC issue rules that would allow a
state bank's home state laws to govern the interstate activities of
state banks and their subsidiaries to the same extent that the National
Bank Act governs a national bank's interstate activities. In announcing
the public hearing on March 21, 2005, FDIC stated that if it agreed to
conduct a rulemaking on preemption, the rulemaking proposal would be
published in the Federal Register and an opportunity for public comment
would be provided. On May 24, 2005, FDIC held the hearing on the
preemption request; participants were an attorney representing the
Financial Services Roundtable, the CSBS Chairman, five state banking
regulators, an organization representing community bankers, the
National Association of Realtors, and representatives from the three
community groups and four banks. After each panel presented its views,
FDIC staff asked questions of the panelists regarding the merits of the
request and discussed issues with them. Additional parties chose not to
appear at the hearing, but submitted written views on the petition. On
July 19, 2005, in a meeting open to the public, the FDIC Board voted to
table the preemption request from the bank industry trade group but
directed its staff to develop a more thorough notice of proposed
rulemaking on the issue.
OTS has rarely held "public meeting type" hearings on proposed
rulemaking proceedings, but according to OTS officials, OTS has held
what the officials called "town meetings" on a regular basis at its
field offices and has used them as an opportunity to identify emerging
issues. Similar to OCC, OTS will forward advance copies of rulemaking
proposals that may have federalism implications under E.O. 13132 to
CSBS officials about 1 week before the proposal is published in the
Federal Register. But, on occasion, OTS will contact other
organizations representing state officials and regulators, including
the National Association of Attorneys General and the American
Association of Residential Mortgage Regulators, for input on OTS's
rulemaking proposals. OTS officials told us that they may meet
occasionally with groups during the public comment stage of a
rulemaking, but if they did, then staff would include a transcript of
the discussion in the rulemaking file.
Federal Reserve policy provides that the usual method for the public to
provide input on a rulemaking is through written comments. According to
Federal Reserve staff, the Federal Reserve has not held a formal
"public meeting type" hearing for a rulemaking in the last 5 years.
However, according to Federal Reserve staff, the agency often conducts
a substantial amount of outreach activity with interested parties
before the rulemaking process starts or a proposal is published in the
Federal Register. Even after a rulemaking has commenced, Federal
Reserve officials or staff may hold meetings with interested parties.
According to Federal Reserve staff, written summaries of these meetings
typically are prepared and placed on the Federal Reserve Web site and
in the public comment file for the particular rulemaking. Although OCC
officials told us that they held outreach meetings, they did not
document the meetings and submit summaries to the public comment file
or document outreach meetings with consumer groups. In addition, the
Federal Reserve has considered ideas for consumer regulations from
participants who have made presentations to the Consumer Advisory
Council and have brought the topics of possible or ongoing rulemakings
before the Consumer Advisory Council to obtain the views of council
members.[Footnote 55]
SEC has held special public meetings, such as roundtables, to solicit
additional input from outside parties. According to SEC staff, the
agency uses the meetings to allow commenters to elaborate on their
comments and discuss their comments with others. SEC staff told us that
special public meetings have been held for rule proposals that raise
particular public interest or are technically complex.
Finally, in contrast to OCC, all of the regulators place the comments
they receive on their proposed rulemaking on their Web sites. Posting
the comments on the Internet allows organizations and individuals who
are planning to submit comments to read the comments already received
by the agencies. The objective of the governmentwide E-Gov rulemaking
initiative pilot is to require federal agencies to place public
comments on a centralized Web site to make them easily accessible to
the public, and OCC concluded that it would be inefficient to devote
resources to establish a public comment posting system that would
quickly be rendered obsolete by the E-Gov centralized system.
Observations:
The preemption of state law relating to the business of banking has
long been a controversial issue. It seems to have become more so with
consolidation in the financial services industry, which has resulted in
large national banks' presence in virtually every state in the country.
As the regulator of national banks--including some of the nation's
largest--OCC's decisions can be far reaching. OCC can help mitigate
some of the controversy that inevitably will ensue from its preemption
decisions by ensuring that its proposals are thoroughly aired with all
relevant stakeholders.
In OCC's recent preemption rulemakings, controversy focused both on the
agency's legal analysis justifying preemption and on the possible
effects of its rules on state-chartered banks and consumers. Federal
law and executive orders requiring agency accountability and
stakeholder involvement drove public input on these matters. Following
requirements in the APA and 12 U.S.C. § 43, OCC provided public notice
of the proposed rules and sought public comment. The agency extended
the opportunity for public comment to 60 days rather than the more
typical 30 days, and it considered all of the comments and made changes
it deemed appropriate. With respect to agency rulemakings that preempt
state law, the "Federalism" executive order calls for an "accountable
process to ensure meaningful and timely input by state and local
officials" and, because of the possibility of a conflict between state
law and federal interests, requires agencies to "consult, to the extent
practicable and permitted by law, with appropriate state and local
officials in an effort to avoid such a conflict." Beyond the
consideration of comments required by statute, OCC arranged for formal
meetings with CSBS and followed the consultative process set forth in
the letters exchanged by OCC and CSBS in 1999. In the face of an
executive order specifically calling for state and local consultation
on preemption rules, OCC's limited additional effort may have
contributed to an impression that it did not genuinely seek or consider
input from this community. Stakeholders representing such diverse
interests as consumer protection advocates, state bank regulators,
state attorneys general, and some Members of Congress continue to
maintain that the agency did not genuinely seek their input.
Executive Order 13132, entitled "Federalism," affords agencies
flexibility in determining precisely how much input is appropriate in
any given circumstance, and we do not assert that OCC did not follow
these requirements. As a practical matter, however, the agency's own
interests in developing workable regulations and in reaching acceptable
resolutions might have been better served in this case by providing
more opportunity for discussion by those most directly affected. We
note that even where preemption was not an issue, other federal
financial institution regulators took additional actions, such as
holding public meetings, to ensure wider involvement in the public
review and comment on proposed regulations they deemed controversial.
Finally, OCC's rulemaking process would benefit from better
documentation--both written guidance for the process itself and more
thorough documentation that the process is followed in specific
rulemakings. Other financial institution regulators use written
procedures that provide a framework for ensuring their compliance with
applicable requirements. Such procedures can help agency officials
ensure that appropriate criteria for rulemaking--whether in the APA,
other laws, or executive orders--are followed and documented. We were
able to determine the process OCC followed for the preemption
rulemakings only by pulling together information from multiple sources,
including the rulemaking dockets, other OCC documents, and officials
and stakeholders we interviewed. OCC's rulemaking files alone did not
contain much of this information--the files omitted details on both the
fact and substance of OCC communications with key stakeholders. Given
the controversial circumstances surrounding these rulemakings, it might
have been in the agency's best interest to have created better
documentation of its actions and decisions. Moreover, federal internal
control standards stress the importance of such documentation for
verifying that management directives and guidance have been carried out
and that the agency has complied with applicable laws and regulations.
Without documentation about matters such as how decisions were reached,
who was consulted, and what their views were, we were not able to
present information in this report that might have contributed to a
better understanding of OCC's process.
Agency Comments and Our Evaluation:
We provided a draft of this report to OCC for review and comment. In
written comments, the Comptroller of the Currency (see app. II)
concurred with our observation that its rulemaking process could
benefit from more detailed written rulemaking procedures. OCC has begun
a project to develop such procedures and expects to complete them by
the end of 2005. OCC expressed concerns about the draft report's
observation that staff memorandums in OCC's rulemaking files did not
articulate the analysis underlying OCC's conclusion that the rules were
not "significant" for purposes of E.O. 12866. OCC commented that the
files contained seven memorandums prepared by OCC's legal and economic
policy staff describing their analysis and conclusions under E.O.
12866. OCC believes the agency satisfied the requirements of the
executive order. During our review, we examined the staff memorandums
for both the visitorial powers and the banking activities rules.
However, the analyses in the memorandums consisted of stating that the
rule was not a "significant regulatory action," as defined by E.O.
12866 because the annual effect on the economy was less than $100
million and did not address the other criteria set forth in the order
for determining whether an action is significant.[Footnote 56] The
memorandums did not include or refer to any analysis to support the
conclusion stated. Thus, we continue to maintain that OCC's
documentation did not articulate the analysis underlying its conclusion
that the rules were not "significant" for purposes of E.O. 12866.
Finally, although OCC disagreed with the draft report's observation
that the extent of OCC's consultation with state officials appeared
limited, it intends to make improvements in this area. In OCC's view,
its consultation with state officials complied with the "Federalism"
executive order and was appropriate in view of the nature of the
preemption rulemakings. However, OCC stated that it is committed to
enhancing its efforts in "continuous, open and candid dialogue" with
state and federal regulators on issues such as assuring consumer
protection. The Comptroller stated that he had already had several
meetings to further this goal. OCC also provided technical comments
that we incorporated, as appropriate.
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the GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact me at (202) 512-8678 or [Hyperlink, hillmanr@gao.gov]. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. Key contributors are
acknowledged in appendix III.
Signed by:
Richard J. Hillman:
Managing:
Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
The Office of the Comptroller of the Currency (OCC) recently issued two
final rules to clarify the applicability of state law to certain
national bank operations, commonly known as the bank activities or
"preemption" rule and OCC's authority to examine, supervise, and
regulate activities authorized for federally chartered or national
banks under federal law, known as the "visitorial powers" rule. The
proposed rules and OCC's rulemaking process drew strong reactions of
either support or opposition from the banking industry, state
officials, consumer group representatives, and some Members of
Congress. In our report, we (1) assess OCC's rulemaking process within
the framework of applicable laws and executive orders, (2) determine
the issues raised in the comment letters on the substance of the
preemption rule and describe if and how the OCC responded to these
issues, and (3) identify issues stakeholders raised about the process
OCC used to promulgate both the banking activities and the visitorial
powers rules and determine OCC's response.
To assess OCC's rulemaking process within the framework of applicable
laws and executive orders, we focused on the process OCC used to
promulgate its rules on banking activities and visitorial powers. We
reviewed the laws and executive orders relevant to the two rules:
section 553 of the Administrative Procedure Act, the Regulatory
Flexibility Act, the Congressional Review Act, Executive Order 12866 on
Regulatory Review, and Executive Order 13132, "Federalism." To
determine OCC actions in conducting its rulemaking, we interviewed
officials from OCC's Legislative and Regulatory Activities Division who
were responsible for the initial drafting of the banking activities and
visitorial powers proposals and final rules. In addition, we reviewed
OCC's internal files for both rulemakings, including materials from the
dockets.[Footnote 57] The documents we reviewed included correspondence
between OCC officials discussing the status of the rules, staff
memorandums sent to the Chief Counsel and the Comptroller of the
Currency, OCC's written communications to staff from the Office of
Management and Budget (OMB) and the Department of Treasury (Treasury),
and a list of the public commenters for both rulemakings. Using
information from OCC files and the proposed rule in the Federal
Register, we compared OCC's actions related to the rulemakings with the
provisions we identified in relevant laws and executive orders. We
interviewed officials from OMB's Office of Information and Regulatory
Affairs and Treasury's Office of General Counsel. In addition, we
interviewed staff from other federal financial regulatory organizations
(the Federal Deposit Insurance Corporation, the Board of Governors of
the Federal Reserve System, the Office of Thrift Supervision, and the
Securities and Exchange Commission) to obtain information on their
rulemaking processes.
To identify the issues raised in comment letters concerning the banking
activities rule, we conducted a content analysis of 373 comment letters
received by OCC on its bank activities preemption proposal.[Footnote
58] While OCC received 2,706 comment letters, we identified 2,250 as
form letters, most of which expressed identical concerns about
financial subsidiaries of national banks possibly conducting real
estate brokerage activities without complying with state real estate
brokerage licensing laws.[Footnote 59] However, financial subsidiaries
currently are not allowed to conduct real estate brokerage activities,
and OCC concluded that these letters were not relevant to its review of
the public comments because the bank activities preemption proposal did
not apply to financial subsidiaries of national banks.[Footnote 60]
Therefore, we decided it was not appropriate to include these form
letters in our content analysis for identifying issues related to the
banking activities rulemaking. Additionally, we identified 83 duplicate
letters (more specifically, copies of letters received in more than one
medium, such as fax, mail and e-mail), which we also excluded from our
content analysis.
To analyze the comments, we first separating the letters into three
categories: letters that supported the banking activities ruling (37),
letters that opposed the ruling (316), and letters that neither
supported nor opposed the ruling (20)--that is, the commenters
requested clarification of certain parts of the proposal. We then
randomly selected and reviewed a "developmental" set of letters from
each category and established an initial set of codes that would
further characterize comments within each category. We applied these
codes to a test set of letters and made refinements. We then applied
the refined codes to a second test set of letters, made more
adjustments, and established the final codes for each category of
letter. We distributed letters from each category among three pairs of
trained coders, who independently coded their set of letters and
resolved discrepancies to 100 percent agreement. The coders regularly
performed reliability checks throughout the coding process. To further
ensure consistency across coding pairs, one reporting team member met
regularly with each coding pair while they performed their reliability
checks to help resolve any conflicts across the pairs. The coders
recorded their results on a standardized data collection instrument,
and one coder from each pair entered the results into an electronic
data file, and 100 percent of the entered data was verified for
accuracy. Descriptive statistics for the codes were computed using SAS
statistical software. A second independent analyst reviewed the data
analysis.
To determine the extent to which OCC considered and addressed the
comments, we identified any changes between OCC's proposed and final
version of the rule. We analyzed the preamble to the final rule in
which OCC acknowledged the public comments it received and discussed
its responses. We then identified the rule changes that OCC attributed
to public comments and the public comments OCC acknowledged it did not
address. We verified our analysis with OCC officials from the Division
of Legislative and Regulatory Activities. In addition, we reviewed
OCC's internal memorandums on the banking activities rule to identify
OCC's views on the issues arising from the public comments and its
assessment of the comments.
To identify issues stakeholders raised about the process OCC used to
promulgate the banking activities rule and the visitorial powers rule,
we identified and interviewed interested parties that may be impacted
by the banking activities and visitorial powers rules. We interviewed
representatives of organizations of state officials (Conference of
State Bank Supervisors, National Association of Attorneys General,
National Governors Association, and National Conference of State
Legislatures). In addition, we interviewed officials from consumer
organizations (Center for Responsible Lending, Consumer Federation of
America, National Community Reinvestment Coalition, and National
Consumer Law Center). We also analyzed correspondence from
congressional members to OCC that questioned OCC's rulemaking process
and congressional hearing transcripts and testimonies. To obtain
information on OCC's response to the criticisms regarding its
rulemaking process, we interviewed the Acting Comptroller of the
Currency and officials from OCC's Division of Legislative and
Regulatory Activities. Finally, we interviewed staff from the Board of
Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Office of Thrift Supervision, and Securities and Exchange
Commission on additional mechanisms that they used to solicit public
comments in connection with informal rulemakings they considered
controversial.
[End of section]
Appendix II: Comments from the Office of the Comptroller of the
Currency:
Comptroller of the Currency:
Administrator of National Banks:
Washington, DC 20219:
September 23, 2005:
Mr. Richard J. Hillman:
Managing Director, Financial Markets and Community Investment:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Hillman:
Thank you for the opportunity to review the draft report prepared by
the United States Government Accountability Office (GAO) concerning the
OCC's rulemaking processes with respect to the preemption and
visitorial powers rules that we issued in January, 2004. [NOTE 1] We
are gratified by the GAO's finding that the OCC "followed the statutory
framework for rulemaking" in issuing these rules. The integrity of our
rulemaking process is critically important to the public, to the banks
we supervise, and to us. Your conclusion that the OCC followed the law
confirms our view that our process for issuing the rulemakings that you
reviewed was both open and thorough, in conformity with the applicable
legal requirements.
Although the OCC has issued internal guidance describing the procedures
we use for developing positions and reaching decisions on matters
addressed through a rulemaking, [NOTE 2] the draft report observes that
our process would benefit from more detailed written rulemaking
procedures. We concur. Accordingly, we have initiated a project to
augment our current Polices and Procedures Manual with more detailed
written rulemaking procedures. I have directed that this work be
completed by year-end 2005.
We have concerns, however, regarding observations in the draft report
about certain aspects of the OCC's documentation of its compliance with
executive orders that pertain to rulemaking by executive agencies.
Briefly, our concerns are the following:
Documentation of OCC Analysis under, executive Order 12866. The draft
report indicates that staff memoranda in the OCC's rulemaking files do
not articulate the analysis underlying the OCC's conclusion that the
rules were not "significant" for purposes of Executive Order 12866. The
rulemaking files for the visitorial and preemption rulemakings reviewed
by GAO staff contain seven memoranda, prepared by OCC legal and
economic policy staff, describing our analyses and conclusions under
Executive Order 12866, as well as the Regulatory Flexibility Act (RFA)
and the Unfunded Mandates Reform Act (UMRA). These seven memoranda
document our analyses and compliance with the applicable rulemaking
requirements, and, we believe, satisfy those requirements.
Compliance with Executive Order 13132 (Federalism). The draft report
acknowledges that the OCC has discretion and flexibility in determining
how to comply with executive orders pertaining to rulemaking, including
the Federalism executive order. It nevertheless contains the
observation that the extent of the OCC's consultation with state
officials appeared limited. We believe the consultation with state
officials carried out by the OCC in connection with the preemption and
visitorial powers rules complied with the Federalism executive order
and also was appropriate in view of the nature of the rulemakings.
However, we also agree that communication among state and Federal
regulators on issues such as these, with jurisdictional implications,
where both sides are committed to assuring consumer protection is not
compromised, benefit from continuous, open and candid dialogue among
the regulators. We are committed to enhancing our efforts in this area,
and I already have had several meetings to further that goal.
With respect to the rulemaking process itself, we received extensive,
thoughtful comments from a number of state officials and organizations,
including the Conference of State Bank Supervisors (CSBS), the National
Governors Association, the National Association of Attorneys General,
and the National Conference of State Legislators. As noted in the draft
report, our consideration of, and response to, those comments was
described in detail in the preambles to the final regulations. In this
regard, the OCC followed the consultation process to which the OCC and
CSBS had agreed in 1999, a process that, in essence, ensured that the
CSBS could alert state officials to rulemakings that might raise issues
under the Federalism executive order so that those officials could
prepare any comments accordingly. [NOTE 3]
Consultation that relied principally on written input was a form of
consultation particularly appropriate to the nature of these
rulemakings, which presented issues predominantly legal in nature.
Nevertheless, the OCC and the CSBS met twice during the rulemaking
process. And, as indicated in correspondence between then-Comptroller
Hawke and Thomas J. Miller, the Attorney General for the State of Iowa,
the OCC met with a number of attorneys general during the time frame
when the rules were under consideration. [NOTE 4] In sum, we believe
our reliance on the Administrative Procedure Act comment process,
supplemented by the informal discussions in which we participated, was
appropriate to the circumstances of these, rulemakings, [NOTE 5] and
the preambles to the final preemption and visitorial powers rules,
which are contained in our rulemaking files, included Federalism
summary impact statements (as prescribed by the Federalism executive
order) as well as detailed, substantive discussion of the Federalism
points raised by commenters.
I appreciate this opportunity to provide the OCC's comments on the
draft report, and I extend my thanks for the professionalism with which
you and your staff have conducted this review.
Sincerely,
Signed by:
John C. Dugan:
Comptroller of the Currency:
[1] 69 Fed. Reg. 1904 (January 13, 2004) (the preemption rule) (rule
clarifying the applicability of certain types of state law to national
bank operations) (codified at 12 C.F.R. §§ 7.4007, 7.4008, 7.4009,
34.3, and 34.4); 69 Fed. Reg. 1895) (January 13, 2004) (the visitorial
powers rule) (clarifying the scope of the exclusivity of the OCC's
visitorial powers) (codified at 12 C.F.R. § 7.4000).
[2] See OCC Policy and Procedures Manual PPM No. 1000-10 (Rev),
Internal OCC Review Processes or Policymaking, Rulemaking and Other
Significant Documents (April 26 2005). The OCC also uses a checklist to
ensure that key steps in the rulemaking process are completed. We have
provided these documents previously. While we agree, as described in
the text that our procedures should be improved, the PPM and checklist
do comprise written rulemaking procedures.
[3] As the report notes, after the issuance of Executive Order 13132,
the OCC and the CSBS agreed that: (1) CSBS would serve as the primary
channel for communicating with state banking officials when OCC
proposed a regulation that had Federalism implications; and (2) the OCC
would send CSBS the draft of such a regulation shortly before the
document was sent to the Federal Register for publication.
[4] See Letter from Thomas J. Miller to John D. Hawke, Jr. (October 7,
2003). We have provided this document previously.
[5] Legal issues substantially similar to those raised in the
preemption and visitorial powers rulemakings had been raised and
extensively commented upon by the states and the public in various
preemption matters in the months and years prior to the issuance of the
final rules. For example, the OCC received comments from state
officials and organizations prior to issuing our order and
determination regarding the applicability to national banks and their
operating subsidiaries of the Georgia Fair Lending Act. See 68 Fed.
Reg. 46264 (August 5, 2003).
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Richard J. Hillman, (202) 512-8678:
Staff Acknowledgments:
In addition to the individual named above, Katie Harris (Assistant
Director), Julianne Stephens Dieterich, Nancy Eibeck, Jamila Jones,
Landis Lindsey, Alison Martin, Kristeen McLain, Marc Molino, Barbara
Roesmann, Paul Thompson, and Mijo Vodopic made key contributions to
this report.
(250211):
FOOTNOTES
[1] In the 1830s, state banks became the primary source of paper
currency, issuing notes against their reserves. Congress enacted the
National Currency Act in 1863, which limited the power of state banks
to issue notes, established a national bank charter, and created OCC,
among other things. OCC is a bureau of the U.S. Department of the
Treasury. 12 Stat. 665 (1863). In 1864, Congress revised the National
Currency Act (renamed the National Bank Act) to provide for
comprehensive OCC regulation of national banks. Although OCC is a
bureau of the Treasury, it is an independent office within Treasury. In
1994, Congress amended the National Bank Act to describe OCC's autonomy
with respect to rulemaking. Pub. L. No. 103-325 § 331(b).
[2] 69 Fed. Reg. 1895 (visitorial powers); 69 Fed. Reg. 1904 (national
bank activities).
[3] 12 C.F.R. § 7.4000 (2005).
[4] 12 C.F.R. §§ 7.4007, 7.4008, 7.4009, 34.3, 34.4 (2005). These
regulations also contain an anti-predatory lending standard and discuss
OCC enforcement of section 5 of the Federal Trade Commission Act for
consumer protection purposes.
[5] 68 Fed. Reg. 46119, 46120 (Aug. 5, 2003).
[6] The complex system of federally and state-chartered banks is
generally referred to as the "dual banking system."
[7] "Small entities" includes small businesses, small governmental
jurisdictions, and certain not-for-profit organizations. 5 U.S.C. § 601-
612.
[8] OCC Advisory Letter 2003-2, ''Guidelines for National Banks to
Guard Against Predatory and Abusive Lending Practices'' (Feb. 21, 2003)
and OCC Advisory Letter 2003-3, ''Avoiding Predatory and Abusive
Lending Practices in Brokered and Purchased Loans'' (Feb. 21, 2003).
[9] 70 Fed. Reg. 6329 (Feb. 7, 2005).
[10] The APA also contains requirements for formal rulemaking, which is
used in rate-making proceedings and in other cases where statute
requires that rules be made "on the record." Formal rulemaking
incorporates evidentiary (or "trial type") hearings, in which
interested parties may present evidence, conduct cross-examinations of
other witnesses, and submit rebuttal evidence. However, few statutes
require such on-the-record hearings.
[11] 5 U.S.C. § 553 (2000). The notice is to contain (1) a statement of
the time, place, and nature of public rulemaking proceedings; (2)
reference to the legal authority under which the rule is proposed; and
(3) either the terms or substance of the proposed rule or a description
of the subjects and issues involved.
[12] 5 U.S.C. § 553 (c). As noted later in this report, by following
APA procedures and allowing for a comment period of more than 30 days,
OCC also followed the procedures for preemptive interpretative rules
contained in 12 U.S.C. § 43.
[13] The act states that the rule cannot become effective until at
least 30 days after its publication unless (1) the rule grants or
recognizes an exemption or relieves a restriction, (2) the rule is an
interpretative rule or a statement of federal rulemaking policy, or (3)
the agency determines that the rule should take effect sooner for good
cause and publish that determination with the rule.
[14] 5 U.S.C. §§ 801-808.
[15] A major rule is defined as a rule that will likely have an annual
effect on the economy of $100 million or more; increase costs or prices
for consumers, industries, or state and local governments; or have
significant adverse effects on the economy.
[16] On November 14, 2000, the Occupational and Safety Health
Administration promulgated an ergonomics standard. It would have
required employers to set up control programs for job categories where
"work-related musculoskeletal disorders" are reported. In the debate
over ergonomics, large monetary estimates have been cited for both the
benefits of a national standard and the costs thereof. After the final
standard was released in November 2000, opponents of the Occupational
Safety and Health Administration's approach introduced and quickly
passed a congressional resolution of disapproval that revoked the rule.
[17] 5 U.S.C. §§ 601-612.
[18] GAO, Rulemaking: OMB's Role in Reviews of Agencies' Draft Rules
and the Transparency of Those Reviews, GAO-03-929 (Washington, D.C.:
Sept. 22, 2003), 24. Before the issuance of E.O. 12866, OMB reviewed
all proposed federal rules. Subsequently, OMB reviewed only significant
rules and the number of regulations reviewed annually declined from
2,000-3,000 to 500-700.
[19] Jones v. Rath Packing Co., 430 U.S. 519, 525-526 (1977).
[20] See, e.g., 1978 OCC Letter No. 61 (Sept. 11, 1978), Ref. No. L31,
1978 OCC Ltr. Lexis 57 (preemption under the National Bank Act involves
conflict analysis necessitating separate and individual review of all
provisions of state redlining law; provisions of state law spelling out
certain requirements with respect to national bank's credit terms and
policies not preempted, but related reporting and investigation
provisions preempted based on OCC visitorial powers authority); 1985
OCC Unpublished Interpretive Letter 122 (July 19, 1985) (because
national banks have specific and independent authority under federal
law to make real estate loans, licensing requirements of state law
governing secondary mortgage loans were preempted with respect to
national bank); 1993 OCC Ltr. No. 616 (February 26, 1993), 1993 OCC
Lexis 10 (state statute requiring credit card issuers to provide
information to state supervisor is a form of visitation preempted by
OCC visitorial powers authority).
[21] GAO, Role of the Office of Thrift Supervision and Office of the
Comptroller of the Currency in the Preemption of State Law, GAO/GGD/OGC-
00-51R (Washington, D.C.: Feb. 7, 2000).
[22] See, e.g., 12 C.F.R. § 34.4 (2003). The five areas of state law
specifically subjected to preemption related to: (1) the amount of a
loan in relation to the appraised value of the real estate, (2) the
schedule for the repayment of principal and interest, (3) the term to
maturity of the loan, (4) the aggregate amount of funds that may be
loaned upon the security of real estate, and (5) the covenants and
restrictions that must be contained in a lease to qualify the leasehold
as acceptable security for a real estate loan.
[23] The preemptive aspects of the rules express OCC's interpretation
of the National Bank Act. APA informal rulemaking requirements do not
apply to interpretative rules. Because OCC used APA rulemaking
procedures, we did not analyze whether those rules were interpretative
for purposes of the APA. OCC, by following APA procedures and allowing
a comment period of more than 30 days, also followed the requirements
for preemptive interpretive rules under 12 U.S.C. §43.
[24] 68 Fed. Reg. 6363, 6366-67 (Feb. 7, 2003) (Proposed visitorial
powers rules "interpret and implement 12 U.S.C. § 484. . . . This
rulemaking contains amendments to (OCC Regulation) § 7.400 to clarify
the application of section 484 to" questions about the scope of OCC's
visitorial powers in two broad categories.); 69 Fed. Reg. at 1895 - 96
(Jan. 13, 2004) (Final visitorial powers rule changes "serve to clarify
that Federal law commits the supervision of national banks' Federally
authorized banking business exclusively to OCC. . . . The regulatory
proposal and the final regulation would not have the effect of
preempting substantive state laws, but rather would clarify the
appropriate agency for enforcing those state laws that are applicable
to national banks. . . . The proposal and this final rule interpret the
text of a Federal statute, 12 U.S.C. § 484. . . ."); 68 Fed. Reg. 46119
(Jan. 13, 2004) (Final banking activities preemption rules "add
provisions clarifying the applicability of state law to national banks'
operations.").
[25] This executive order is the successor to E.O. 12612, issued in
1987. The Reagan administration's executive order was the first to
establish the policy of the Executive Branch on federalism. Former
President Clinton issued a new executive order on federalism in May
1998, but withdrew the order after it received criticism from state and
local interests. The 1999 order was issued after negotiations between
state leaders and the Clinton administration. See Jennie H. Blake,
Presidential Power Grab or Pure State Might? A Modern Debate Over
Executive Interpretations On Federalism, 2000 B.Y.U. L. Rev. 293
(2000).
[26] Exec. Order No. 13132.
[27] Id. at section 6(a).
[28] Id. at section 6(a).
[29] Id. at section 4(d).
[30] Id. at section 4(e).
[31] Id. at section 6(c)(1).
[32] Id. at section 6(c)(2).
[33] Id. at section 6(c)(3).
[34] Id. at section 8(a).
[35] See OMB, Memorandum for Heads of Executive Departments and
Agencies, and Independent Regulatory Agencies: Guidance for
Implementing E.O. 13132, from John T. Spotila, Administrator, Office of
Information and Regulatory Affairs (Washington, D.C., Oct. 28, 1999).
[36] Id. at section 8.
[37] The Conference of State Bank Supervisors is an umbrella
organization that represents the state bank regulators.
[38] See OMB's Guidance for Implementing E.O. 13132, 6.
[39] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C: November 1999), which was prepared
to fulfill our statutory requirement under the Federal Managers'
Financial Integrity Act of 1982, provides an overall framework for
establishing and maintaining internal control and for identifying and
addressing major performance and management challenges and areas at
greatest risk of fraud, waste, abuse, and mismanagement.
[40] Jeffrey Lubbers, "Administrative Conference of the United States
Recommendation 93-4: Improving the Environment for Agency Rulemaking,"
A Guide to Federal Agency Rulemaking (Chicago: American Bar
Association, 1999), 423.
[41] 69 Fed. Reg. 1903 (visitorial powers); 69 Fed. Reg. 1915 (bank
activities).
[42] After reviewing our draft, OCC staff provided us with
correspondence between OCC officials and the state attorneys general
that referred to the meeting.
[43] Executive Orders 12866 and 13132 apply to agencies defined under
44 U.S.C. § 3502(1), but not to those considered independent regulatory
agencies as defined in section 3502. Since FDIC is an independent
regulatory agency under section 3502 and is not subject to Executive
Orders 12866 and 13132, its handbook does not have any procedures on
carrying out these executive orders.
[44] See 12 U.S.C. § 1462a(b)(3). Among other things, the section
provides that the Secretary of the Treasury may not delay or prevent
the issuance of any rule or the promulgation of any regulation by the
Comptroller. It also gives to the Comptroller the same authority over
matters within OCC's jurisdiction as the OTS director has over matters
within OTS's jurisdiction. The same authority means that the Secretary
of the Treasury may not intervene in any matter or proceeding before
the Comptroller (including agency enforcement actions) unless otherwise
specifically provided by law.
[45] Like FDIC, SEC is an independent regulatory agency under 44 U.S.C.
§ 3502 and, therefore, is not subject to Executive Orders 12866 and
13132.
[46] We found that 2,250 comment letters submitted to OCC were form
letters from Realtors and other individuals. The Realtor form letters
expressed identical concerns: that national banks' financial
subsidiaries would be permitted to engage in real estate brokerage
activities without complying with state real estate brokerage licensing
laws if the Board of Governors of the Federal Reserve were to determine
that real estate brokerage is an activity permissible for qualified
bank holding companies. Some individual commenters who also submitted
essentially the same form letter expressed concerns about the effect of
the preemption regulation on state consumer protection laws.
[47] National banks are not subject to state chartering requirements or
laws governing the formation and conduct of business entities. National
bank operating subsidiaries, however, typically are formed under the
laws of a particular state.
[48] This responsibility includes helping to ensure that national banks
operate as authorized by Congress, in alignment with the essential
character of a national banking system and without undue constraint of
their powers. OCC also explained that federal law gives it broad
rulemaking authority to fulfill its regulatory responsibilities and
cited 12 U.S.C. 93a, which explains how OCC is authorized ''to
prescribe rules and regulations to carry out the responsibilities of
the office,'' and 12 U.S.C. 371, which authorizes OCC to ''prescribe by
regulation or order'' the ''restrictions and requirements'' on national
banks' real estate lending power.
[49] See 12 C.F.R. §§ 5.34 and 7.4006. See also 69 Fed. Reg. 1905,
1906.
[50] 69 Fed. Reg. 1915 (2004).
[51] 70 Fed. Reg. 6329 (2005).
[52] 69 Fed. Reg. 1911-12, 1913.
[53] OCC states in the final version of its banking activities rule
that upon further consideration (including careful review of comments
submitted pertaining to this point) of whether it should "occupy the
field" of real estate lending, it concluded, as the Supreme Court
recognized in Hines and reaffirmed in Barnett, that the effect of
labeling of this nature is largely immaterial in the present
circumstances. As a result, OCC declined to adopt the suggestion of
certain commenters that it declare that the regulations ''occupy the
field'' of national banks' real estate lending, other lending, and
deposit-taking activities and chose to rely on its authority under both
12 U.S.C. 93a and 371. To the extent that an issue arises concerning
the application of a state law not specifically addressed in the final
regulation, it would retain the ability to address those questions
through interpretation of the regulation, through issuance of orders
pursuant to its authority under 12 U.S.C. 371, or, if warranted by the
significance of the issue, by rulemaking to amend the regulation.
[54] See testimony of Julie L. Williams, First Senior Deputy
Comptroller and Chief Counsel, Office of the Comptroller of the
Currency, Subcommittee on Oversight and Investigations of the Committee
on Financial Services, U.S. House of Representatives, January 28, 2004.
Also see testimony of John Hawke Jr., Comptroller of the Currency,
Office of the Comptroller of the Currency, Committee on Banking,
Housing and Urban Affairs, U.S. Senate, April 7, 2004.
[55] The Federal Reserve's Consumer Advisory Council comprises
academics, state and local government officials, representatives of the
financial industry, and representatives of consumer and community
interests. It was established pursuant to the 1976 amendment to the
Equal Credit Opportunity Act to advise the Federal Reserve on consumer
financial services.
[56] In addition to the $100 million measure, the order sets forth
other criteria for determining whether a rule is significant. These
include whether a rule would have an adverse affect in a material way
on state, local, and tribal governments or communities.
[57] Public comments as well as other supporting materials (e.g.,
hearing records or agency regulatory studies but generally not internal
memorandums) are placed in a rulemaking "docket," which must be
available for public inspection.
[58] Our analysis focused on comments submitted in response to OCC's
bank activities proposal.
[59] Most of the public comments were from Realtors.
[60] The Board of Governors of the Federal Reserve System and the
Department of the Treasury are considering a proposal to permit
financial subsidiaries to do this activity, but have not finalized any
proposal as of the date of this report.
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