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Wednesday, January 28, 2004
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 10:10 a.m., in Room 2128, Rayburn House Office Building, Hon. Sue Kelly [chairwoman of the subcommittee] presiding.
    Present: Representatives Kelly, Garrett, Murphy, Oxley (ex officio), Barrett, Gutierrez, Inslee, Moore, Crowley, Maloney, Davis, and Frank. Also present was Mr. Ney
    Chairwoman KELLY. [Presiding.] The Subcommittee on Oversight and Investigations will come to order.
    Today the Subcommittee on Oversight and Investigations will conduct a review of two regulations that were finalized earlier this month by the Office of the Comptroller of the Currency. The regulations preempt State laws that currently apply to national banks and they restrict the authority of States and other agencies to examine or take actions against these entities. When they take effect on February 12, these regulations will effectively prevent a State from determining and enforcing its own banking laws.
    Preemption of any State law is an extremely serious issue, with significant consequences for all Americans. The preemption of state banking regulation is even more serious because it has critical implications for consumer protections and the overall dual banking system which has served our country very well for decades. A decision of this magnitude requires considerable review by Congress to ensure that consumer protections are not being undermined and that the balance of the dual banking system is not disrupted. The OCC is tasked with interpreting congressional intent. In terms of these regulations, the intent of Congress is unclear.
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    The correspondence of several dozen Members of Congress from both sides of the aisle, however, demonstrates that Congress has many unanswered questions and concerns that need to be thoroughly reviewed before these changes are implemented. As the Chairwoman of the Financial Services Committee on Oversight and Investigations, I wrote to the OCC on December 1, 2003 asking the agency to delay the rules being finalized until Congress can hold hearings to review the agency's proposal and signal our intent. The OCC went ahead and finalized the rules without the necessary review. This was an action that I believe demonstrates a lack of respect for Congress and for this committee.
    I am concerned that an agency tasked with interpreting the laws passed by Congress has strayed from its obligation to protect consumers. The OCC is supposed to be an independent agency. Its actions have led many of us to question whether or not they are also independent of the people's best interests. Unfortunately, this is not the first time that Congress has had difficulty working with the OCC, which indicates to me that there may be a larger systemic problem at that agency. Congress must and will take all necessary steps to ensure that the interests of the American people come first, even if it means a culture of change at the OCC.
    The American people expect and deserve real leadership and accountability when an action which could potentially jeopardize crucial consumer protections goes forward. We are going to see to it that consumers get these assurances. It may have been the agency's decision to move forward without congressional review, but this committee's ability to protect consumers and to provide oversight will not be inhibited.
    We will begin the investigation today, and it will continue until all questions are answered, and the committee determines an appropriate course of action. I have personally spoken with Comptroller Hawke and he has promised to testify before the committee when he returns from his medical leave. I have also asked Mr. Hawke to take the necessary steps to delay the implementation of these regulations until we complete our review. The Comptroller of the Currency is a Presidential appointed and Senate confirmed position, and these regulations should not be implemented without a direct explanation from the Comptroller himself.
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    This request presents the OCC with a tremendous opportunity to display to Congress and the consumers that this is an agency that takes the review seriously and is willing to address concerns with the regulations. In terms of the substance of these new regulations, my colleagues and I hope many questions can be answered today. I recognize that we live in a different world today, with an advanced financial services sector in which companies utilize technology and other resources to offer better and less costly products and services.
    In principle, I also understand that there is need for more uniformity in regulation, and that we need to investigate whether a patchwork of laws may impede progress that is beneficial to consumers. In fact, this committee has held several hearings on reforms in insurance and securities regulation, with the intent that changes could be made by Congress through a legislative process. However, for a regulator to single-handedly preempt a State's ability to both determine and enforce laws without public debate or explicit direction from Congress is not only troublesome, but I believe it is careless. The American people deserve better. The American people deserve a voice in these decisions.
    I am certain that many Members have questions today specifically on the issue of predatory lending. While this is one of the significant laws preempted, I caution that we not focus solely on this issue. Given the overreaching nature of these regulations, which appears to be much larger than just this one issue, I hope my colleagues in the Subcommittee on Housing and Financial Institutions will continue their own investigations into predatory lending to address these specific concerns.
    I want to remind Members this hearing is to collect facts to see if Congress needs to further clarify its intent to the OCC. As usual, the committee's 5-minute rule will be observed, and I ask staff to remind their Members of that if the Members are not here at this time. I would like to thank the witnesses for their attendance here today, and I look forward to working with you on these important issues.
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    The Chair notes the presence of Members of the full committee and welcomes all of you. I ask unanimous consent that all Members present today will have their statements, questions and the answers to those questions included in the record. Without objection, so ordered.
    One of our first opening statements will come from my Ranking Member, Mr. Gutierrez.
    [The prepared statement of Hon. Sue W. Kelly can be found on page 52 in the appendix.]
    Mr. GUTIERREZ. Thank you very much, Madam Chair, for holding this timely hearing. These rules were issued on January 7 before we returned from recess. I commend you for arranging this meeting as quickly as you have.
    I share a number of your procedural and substantive concerns about the OCC's proposed rules. As most of us are aware, Federal preemption occurs in one of three ways: Congress expressly preempts State law; Congress establishes a framework of regulation that occupies the field and leaves no room for much state action or any state action; or State law conflicts with Federal law. For as long as I have served here, and for sometime before that, it has been clearly the intent of Congress that State laws should apply to national banks in a number of areas, including consumer protection and fair lending, unless Congress expressly preempts those State laws.
    Congress never intended the OCC to preempt the field of lending. In response to the OCC's overreaching in the past, the Riegle-Neal interstate banking law sought to clarify the limits of the OCC's authority and establish certain notice and comment procedures to be observed on the rare occasion when State laws impede the ability of national banks to conduct the business assigned to them by Congress. The OCC's standard of ''obstruct, impair or condition,'' articulated in this rule is a major departure from congressional intent and established precedent, inconsistent with some of the OCC's previously articulated preemption positions and at the very least of fair-weather Federalism.
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    State legislatures have long functioned as incubators of innovation because they have been able to act quickly and creatively to respond to changes locally in the marketplace. Frequently, their excellent product proves its merit beyond its borders and becomes the basis for a change in Federal law. I am deeply troubled that the OCC's action could stifle this innovation. In other instances, State law improves upon Federal laws. In fact, a number of laws written by this committee indicate that State laws are not inconsistent with Federal laws if they provide greater protection to consumers. If the consumer does better at a State level, this committee and this Congress on many occasions, as many of us have articulated in many times past, that those are the laws.
    I am particularly concerned about the area of predatory lending and its disproportionate effect on minorities. As you are likely aware, two recent studies showed that African Americans were four times more likely to receive a subprime loan, and Latinos 2.2 times more likely than their white counterparts. That disparity between whites and minority actually grows at upper-income levels. There is currently only minimal Federal protection in terms of predatory lending, minimal, at the Federal level, but the primary protectors of the consumer, the States, have enacted a number of laws in the area to regulate and curtail many predatory practices. These State laws should not be preempted unless and until Congress enacts a comprehensive Federal law that provides greater protection to consumers.
    The OCC's mission and primary enforcement goal is to ensure the safety and the soundness of financial institutions under its purview, which can directly conflict with the goal of consumer protection because unconscionably high points and fees and inadequate and deceptive disclosures and unfair practices can be extremely profitable to banks. Furthermore, the OCC's wholesale preemption of state consumer protection statutes will deprive consumers of the private rights of action currently available to them.
    I want to thank you again, Madam Chair, for calling this hearing because I think it is going to be very, very critical to how we proceed with protections for our consumers across this country. Thank you so much.
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    Chairwoman KELLY. Thank you very much, Mr. Gutierrez.
    We go now to the chairman of the full committee, Mr. Oxley.
    Mr. OXLEY. I want to thank you, Madam Chairwoman, for holding the first congressional oversight hearing on the OCC's recently issued regulations setting forth standards for determining when State laws can be applied to the operations of national banks, an ongoing issue, all of us I think would agree. Our dual system of national and state bank chartering is a unique feature of the U.S. financial marketplace and has served the American economy and American consumers well for almost 200 years. Since the inception of the dual banking system, tension has periodically flared between Federal and State authorities over the proper allocation of responsibility for overseeing the activities of national banks.
    The regulations issued in final form by the Comptroller earlier this month, after a period for notice and comment, are the latest chapter in that long-running debate. While most of the attention in the media and elsewhere is focused on OCC's preemption of predatory lending laws that an increasing number of States and municipalities have enacted in recent years, the regulations are in fact much broader in scope and raise issues that go to the heart of the dual banking system, including the following:
    Should institutions that are chartered by the Federal government and operate on a nationwide basis be required to comply with laws passed by state or local governments that address core bank functions such as lending and deposit-taking?
    Should the authority to enforce Federal and State laws against national banks reside exclusively with the OCC, except as otherwise provided by Federal law, or do state attorneys general and other state agencies have a role to play?
    Does the application of uniform Federal standards to lending and deposit-taking and the centralization of authority for enforcing those standards promote the safety and soundness of national banks and yield benefits for their customers?
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    In my view, the OCC regulations represent a thoughtful attempt to codify and harmonize past legal precedents—and there are many—and regulatory guidance into a coherent framework for resolving conflicts between Federal and State laws as they apply to national banks. The regulations largely conform the preemption standards applicable to national banks to those that have long been applied to Federally chartered thrifts by the Office of Thrift Supervision and to Federal credit unions by the National Credit Union Administration.
    With respect to the charge that the OCC's regulations leave customers of national banks exposed to abusive lending practices, it should be noted that there is a decided lack of evidence that national banks have engaged in such practices, which tend to be centered instead in non-Federally regulated mortgage and finance companies that remain fully subject to state and local anti-predatory lending laws. Moreover, for those national banks that do engage in abusive or unscrupulous tactics, the OCC's regulations contain new standards prohibiting institutions from making loans based predominantly on the foreclosure value of the collateral and without regard to the borrower's ability to repay, and from engaging in unfair and deceptive trade practices as defined by the FTC.
    We will hear from opponents of the OCC's regulations at today's hearing who question the agency's commitment to enforcing its new anti-predatory lending standards and argue that consumers are better served by a regime in which national banks must answer to both Federal and State authorities.
    In closing, let me again commend Chairwoman Kelly for tackling this difficult issue and for rigorously asserting this committee's oversight prerogatives to ensure that the Federal agencies within our jurisdiction act in the public interest. Let me also welcome all of our witnesses to today's hearing, particularly OCC Chief Counsel Julie Williams, who has been here before, to pinch-hit for Comptroller Jerry Hawke as he prepares to undergo surgery later this week in New York. We wish him a speedy recovery and look forward to continuing this committee's dialogue with him on this and other issues of concern upon his return to duty in March.
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    I yield back the balance of my time.
    [The prepared statement of Hon. Michael G. Oxley can be found on page 54 in the appendix.]
    Chairwoman KELLY. Thank you, Mr. Chairman.
    We go now to our Ranking Member, Mr. Frank.
    Mr. FRANK. Madam Chair, your initiative in calling this hearing is something that we all very much appreciate. This is an extremely important issue, so important that I must say that there is both a procedural and a substantive argument here. The procedural one is that this is a very far-reaching change in the way in which the banking system has been run, and the Comptroller acknowledges this. I do not think it is appropriate for this to be done entirely by an executive fiat, particularly an executive for whom I have a great deal of respect, Mr. Hawke, and his operation, but who even as an executive is somewhat insulated from the process. The Comptroller is a somewhat protected individual.
    I say that because I do not think we should be arguing primarily legally here. This will go to court. But just because something is legal does not make it right. There are a lot of legal things to do that are kind of stupid. I would not say this one was stupid, but I think it is counter-productive. What we have here is a fundamental policy question about how banking authority ought to be divided and I think we in Congress ought to deal with it.
    Now, I want to also note that many of us on our side, and I believe some on the other side as well, are very much opposed to this, not because of any hostility to the notion of national banking. Overwhelmingly, the Members of the committee on this side of the aisle supported within a month or two legislation that extended preemption in the field of credit. We are not reflexively against preemption. What we felt then was that there was a national issue there in terms of credit reporting. People do not apply for credit from their neighborhood. Credit is given nationally.
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    Real estate lending, on the other hand, is a more local operation. What I believe we should be doing is a policy area by policy area decision about preemption. I think there was a strong argument for preemption with regard to the reporting of credit. I do not believe it is with regard to real estate lending. One of the arguments we give as well, if Georgia or this state or that state passes a law, then the rating agencies will be mad at them and they will not be able to participate in the secondary market. Why can't they make that choice under our constitutional system? It does not hurt me in Massachusetts. If Georgia chooses to draw the line on this side rather than that side, why is that inherently violative?
    I do agree with regard to credit. Some national laws had to be there. But with regard to real estate, I am always told by people in the business, location, location, location. That is local. It seems to me there is a strong argument there. The premise ought to be that we leave to the States what they can do, unless there is good reason to the contrary.
    Beyond that, I am particularly disturbed, and I would hope Ms. Williams will be able to address this. I may not be able to stay because I have a meeting of the homeland security committee, and that is a problem when we only meet a couple of days a week. You have to be in about nine places at once. The part of it that particularly bothers me is the assumption of enforcement powers even where it is conceded that the State has the right to make laws. Let me say in particular, I note, and I was glad to see Ms. Williams point out that any discrimination laws will be valid; that States can pass any discrimination laws that could presumably be tougher than the Federal laws and they will still be valid, but the State will have no power to enforce those.
    Now, what we have here, it seems to me, is an assertion by the Comptroller of greatly increased enforcement powers. I hope Ms. Williams will tell us what new enforcement resources you are bringing to bear on this. You are knocking out of the box 50 States which have their own enforcement mechanisms, and you would take on the enforcement. We are not talking now about some of the argument about whether or not the State laws apply. But in those areas where you concede that State laws apply, including discrimination, which is something, frankly, which seems to me under-enforced in this country, discrimination in lending, you are now saying to the States, you can pass the law, but we will enforce it.
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    Frankly, I do not think we at the Federal level have the capacity to do that. I see no sign that anybody has taken that into account. I think what we are going to see as a result of this is a diminution of enforcement even in those areas where it is conceded that the States have power.
    So I look forward to our continuing to deal with this, and I thank the Chair.
    Chairwoman KELLY. Thank you very much, Mr. Frank.
    Mr. Garrett?
    Mr. GARRETT. Thank you, Madam Chair.
    Just very briefly, first of all let me thank you for holding this hearing. It rises to the level of importance on the two areas, and I join with my colleagues on the other side of the aisle inasmuch not only is it a question that I am interested in on the merit side of the equation, but the fundamental procedural aspect as to exactly how we get to this where the fundamental States rights issues are addressed through an agency's approach as opposed to a directive coming directly from Congress.
    At the outset, I am a little bit troubled by the Chairlady's opening comments with regard to the lack of responsiveness to the inquiries that you have made of the OCC. I would have hoped that you would have received a better response than you did. Secondly, I will be interested to learn as we go forward with the testimony with regard to the extent of what we going to hear as far as the authority that the OCC is now establishing. I have been told by folks who are here a lot longer than I, so that is why I will look to you for the information, that the OCC has a history of trying to over-extend its authority in certain areas, and specifically reaching out in the area of insurance regulation. So one of the questions or interesting areas I would like to know and hear about is whether the OCC will be trying to extend through the regulations, or have any impact whatsoever with regard to the State regulation thereafter of national banks with regard to their insurance activities.
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    Additionally, and maybe this goes back to the first issue of the lack of responsiveness that you cited, was what is it that prompted this activity now. We know all about the activity in Georgia, of course. I come from the great State of New Jersey and we know what is going on there. I am told that the OCC in the past has had more of an incremental approach to dealing with these types of problems. Here, however, if I am understanding you all correctly, it is a much broader and blanket approach. I could understand that if I was reading in the paper what was happening in Georgia and New Jersey, what is happening everyplace overnight in that there was immediacy to the problem, but I just do not see it, and why you are changing from an incremental approach of dealing on a case-by-case basis.
    Finally, I am just curious also to look into the aspect of the impact it has on the State regulation of the State things vis-a-vis the national bank, and is this an effort by the OCC in a way simply to say that we are going to try to lure even more so the States over to the national charters so that at the end of the day when I go back to my state legislators, their responsibility in the entire field of banking and insurance and consumer protections has been relegated to absolutely nothing because it has always been lured out and taken away from them.
    Thank you, Madam Chair.
    Chairwoman KELLY. Thank you very much, Mr. Garrett.
    Ms. Maloney?
    Mrs. MALONEY. First of all, thank you, Madam Chair. I would like to take the liberty of welcoming one of my constituents from the great State of New York and New York City, Superintendent Taylor; and also welcome Attorney General Miller and Comptroller Williams.
    Just very briefly, I believe the preemption of state banking supervisors, attorneys general, legislatures, chief executives and voters is a very dangerous blow to both the dual banking system and our country's Federalist tradition. For 150 years, this country has been well served by the dual banking system. Today where technology allows a single national bank to serve our constituents from coast to coast, it is even more important to retain a role for localities to have some input into the large institutions that dominate financial services.
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    The OCC argues that its actions are merely an incremental step forward, codifying judicial decisions that were decided on existing statutes. While I have great respect for the Comptroller and I wish him very well in his treatment and his recovery, and I have great respect for his staff, I think they are understating the magnitude of their actions.
    My fear for the future of the dual banking system is based on two points. First, States play an incredibly important role in the regulatory framework. Across the country, hundreds of state employees work on consumer protection issues. They live in our home States and have much closer ties to the community than is possible for a national regulator no matter how capable. State regulators and attorneys general have proven records of service in protecting consumers.
    Secondly, in the eyes of the industry, the national bank charter is greatly enhanced by the OCC's actions. I certainly support the national charter, but I am concerned about the ramifications of such a major change without congressional hearings and approval. It is my understanding that more than a dozen of large national bank operating subsidiaries are planning to leave the State system once the regulations go into effect on February 12. This trend alone could be the beginning of a stampede and it demonstrates the magnitude of the OCC's regulatory ruling.
    While I oppose the decision to preempt the States, I want to add that the OCC does a very good job regulating the national banks for which it is responsible. I have always enjoyed working with the agency and I appreciate the fact that national banks are not the practitioners of widespread predatory lending. On this committee, we are often asked to balance the efficiency required for national markets to operate seamlessly, versus the rights of States and cities to enact and enforce local laws. Last year, I worked closely with the Ranking Member of this committee and in a bipartisan manner to pass FCRA reauthorization preempting State laws governing credit reporting. I was convinced that on credit that we needed a uniform national standard. Here, I believe the national regulator has gone too far.
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    Thank you.
    Chairwoman KELLY. Thank you very much, Ms. Maloney.
    Mr. Murphy, do you have an opening statement?
    Mr. MURPHY. No.
    Chairwoman KELLY. Mr. Crowley?
    Mr. CROWLEY. Thank you, Madam Chair.
    I want to thank my New York colleague, Chairwoman Sue Kelly, and Ranking Member Luis Gutierrez for conducting this important hearing today on OCC and their recent regulations. I would also like to thank one of our witnesses as well, who is not a constituent of mine, but certainly a well-known individual in our city and our State, Diana Taylor, who is the New York State Supervisor of Banking. She is a pro, and someone I have been pleased to get to know more closely over the last few years. Welcome to all our panelists today.
    The issue of today's hearing is bigger than that of national versus state-chartered banks, in my opinion, or the presumed powers of the OCC. The real question here deals with ensuring the greatest protections of all American banking consumers with respect to stopping abusive lending practices. While I welcome the approach undertaken by the OCC of creating one uniform Federal standard for all national banks and their operating subsidiaries with respect to predatory lending as a way of creating a level playing field for all national banking customers and consumers, I also do believe the regulations they are putting in place on this front are weak at best.
    Our constituents have no idea where their bank is chartered and, quite frankly, they really do not care. But they do care about protecting their money and their investments and keeping access to capital free and flowing. The establishment of this national, albeit weak standard by OCC drives home the need for real action by Congress this year to address predatory lending with a strong national law that governs lending at all financial institutions and their operating subsidiaries regardless of where they are chartered. These are issues we need to address in this Congress.
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    Hopefully, this action by OCC will lead my colleagues to work together in a bipartisan way to create a new uniform Federal standard in lending practices that crushes predatory lending, but allows subprime to continue to thrive and put money into the hands of people that need it and to communities that I quite frankly represent as well, minority communities that my good friend from Chicago so ably has been defending.
    I look forward to today's hearing and hope for a good back and forth volley on questions and answers, not only to the issue of OCC regulations, but more importantly on the larger issue of the need for congressional action to address lending abuses this year, to protect all banking consumers regardless of where their bank is chartered. Additionally, at this hearing, because it is so important, it is my hope that if time permits we will be able to ask additional questions.
    I once again want to thank the Chair and the Ranking Member for calling this hearing.
    Chairwoman KELLY. Thank you very much, Mr. Crowley.
    Mr. Barrett has indicated he does not have an opening statement, so I am going directly to Mr. Ney.
    Mr. NEY. Thank you, Madam Chairwoman. I appreciate you and Ranking Member Gutierrez for holding this very important hearing.
    There can be no doubt about the importance of both the housing markets to our nation's economy and the importance of the dual banking system to our nation's financial markets. I want to applaud the hard work of the Comptroller of the Currency in putting together what I think is both a fair and necessary rule for how state and local abuse of lending laws affect national banks. I think that this rule highlights the evolving nature of our nation's housing finance market.
    Twenty years ago when I was in the State legislature, I would have never said that I support a national standard for mortgage lending, but the world has changed since I was in a State legislature, and since this issue is being addressed here. Now we have an intensely competitive marketplace with lenders, frankly, from all over the nation competing to make loans to consumers. Consumers can go on the Internet and apply for loans, or they can call a 1-800 number to apply for credit. When they are doing this, they do not worry about where that lender is located; just that they are getting the best rate and terms possible. This environment has ensured that there is a strong supply of credit at very affordable prices.
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    Furthermore, many of today's loans are securitized and sold in the secondary market all over the world. Over 30 percent of mortgage-backed securities are now held by foreign investors. Unfortunately, a growing patchwork of state and local laws are threatening the viability of this national marketplace. I do not have time today, but I can give you countless examples, including in our own State of Ohio. A lot of times, those have not benefited, frankly, are the consumers. They threaten to restrict the availability of credit and raise the cost of borrowing for consumers across the nation.
    In the past few years, we have seen how important the housing market has been to our nation's economy. The strength of the housing market made the past recession one of the least severe in our nation's history. The growing patchwork of state and local laws could severely damage our nation's economy and weaken the recovery that we have been experiencing. Comptroller Hawke recognized this and took decisive action to make it clear that Congress created the national bank charter with the intention of creating a national bank charter to provide a uniform banking system of regulation for national banks.
    The OCC rule published earlier this year makes it clear that our credit markets need a uniform system of regulation. It also makes it clear that we cannot tolerate bad actors in the mortgage business, and we shouldn't. The OCC also has acknowledged that some lenders engage in abusive credit practices and that those practices should be outlawed. While national banks have rarely been found to be engaged in abusive practices, the regulation still includes an important new anti-predatory lending standard. This standard prevents any national bank from making a loan based upon the foreclosure value of the collateral associated with that loan. This means, of course, that a national bank must thoroughly assess a borrower's ability to repay the loan before making it. It also means that national banks cannot unfairly place a borrower's home under the threat of foreclosure. This is good.
    While this regulation is a good first step, it only applies to national banks and leaves many institutions untouched, which comes to my punchline, if you want to call it that. I have a predatory lending bill. We need to protect consumers. I am working bipartisanly with Members of the Financial Services Committee also to look at counseling and many, many other important issues. I think it is time for a national standard. I think this rule in no way conflicts with what we are trying to do. In fact, I think a follow-up with a predatory lending bill that is aimed at protecting consumers and still having subprime loans available is going to close that loophole because this will apply only, of course, to certain banks.
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    With that, I want to thank you, Madam Chair.
    Chairwoman KELLY. Thank you, Mr. Ney.
    Mr. Moore?
    Mr. MOORE. Thank you, Madam Chair and Ranking Member Gutierrez. Thank you for holding this oversight hearing on the OCC's state banking oversight preemption regulations.
    Our nation's dual banking system has served the country well for over 140 years, but there is an inherent tension in the dual banking system and it is appropriate that this subcommittee examine the impact of these regulations on both the banking industry, and more importantly, the consumers of the banking products and services.
    It appears that some of the issues raised in our debate over the Fair Credit Reporting Act may be relevant here. At the end of last year, this Congress permanently extended the Federal preemption provisions in the Fair Credit Reporting Act after concluding, on a bipartisan basis, that uniform national standards were essential for our national credit system. In that case, we realized that uniform national standards helped consumers because they expanded the availability of credit and improved the efficiency of our financial services system.
    In this case, I suspect that similar arguments will be made in support of the regulations issued by the OCC. Like FCRA, it will be suggested that the OCC's actions permit national banks to offer products and services to consumers on a consistent basis, regardless of where the consumer resides. I expect the OCC and the industry to suggest that these rules will allow banks to operate more efficiently and effectively, and these efficiencies can be passed along to the consumer in the form of better products and services at lower prices.
    On the other hand, I know that some consumer groups are concerned about the impact of the regulations on consumers and the State banking regulators, including the Kansas Banking Commissioner, are concerned about the impact of the regulations on their agencies's ability to service the public interest. I practiced law for 28 years before I came to Congress and I learned that there are at least two sides to every story most of the time, sometimes many more. Often, the truth, and sometimes even the best policy, is not found at either extreme but somewhere in the middle. For this reason, I look forward to the testimony of the witnesses at this timely hearing. I hope that they will be able to speak to the similarities or differences between what we did with FCRA and what the proposal is by the OCC in these regulations.
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    Thank you.
    Chairwoman KELLY. Thank you very much, Mr. Moore.
    Mr. Davis?
    Mr. DAVIS. Thank you, Madam Chairwoman. Let me thank you and the Ranking Member for convening this hearing. Given the time, I will try to be as brief as I can and just make a few observations at the outset.
    One of the things that really lingers in my mind from my first year in Congress, the first part of the 108th, was an observation that someone made from one of those chairs about 3 months ago. It involves the fact that the frequency of subprime lending is frankly twice as high in the affluent African American community as it is in the non-affluent Caucasian community. We tried to talk about why that exists. I am not sure that we ever got a good solid answer that day, but it strikes me that that ought to be somewhere near the backdrop of this whole analysis.
    I agree with my very able colleague from Kansas that there are some superficial parallels with the debate over FCRA and I am certainly sensitive to the idea of a nationalized standard because of the predictability benefits, or the gains in predictability. At the same time, I have yet, in all the many times I have come to this room, to hear a really good explanation of why predatory lending has taken on, frankly, a racially discriminatory character. On its face, there is no reason to think that it would, but for whatever reason, again, the subprime rate is twice as high in the affluent black community.
    I am very interested in hearing your perspective today on another question, which is exactly how the patchwork is going to work between state and nationally chartered banks. On its face, I can understand why the States have an interest in enforcing laws against banks that have chosen to take out a State charter on their own. I have some vague memory from civil procedure of the whole purposeful availment theory, and I am certainly interested in hearing your perspective on that.
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    I hope that the backdrop that we have, as Chairman Ney said, is to try to find some way to, if we can, have a strong standard across this country, but to make sure that we are also addressing some very obvious mortgage practices that certainly do not need to a strong economic foundation, and I think are certainly reprehensible to a lot of people on this committee.
    I will yield back my time, Madam Chairwoman.
    Chairwoman KELLY. Thank you very much.
    If there are no other opening statements, then the Chair will continue on here with our first panel introductions. On this first panel today, I am pleased to have with us three excellent witnesses. First is the Honorable Julie L. Williams. She is First Senior Deputy Comptroller and Chief Counsel representing the Office of the Comptroller of the Currency. Also with us is the Honorable Thomas J. Miller, Attorney General, State of Iowa, testifying on behalf of the National Association of Attorneys General. I discussed this issue with Attorney General Miller at another hearing last November. It is good to see you again today, Attorney General, and we do thank you for coming back.
    And finally, I am honored to have the opportunity to introduce Ms. Diana L. Taylor. She is the New York Superintendent of Banking. She will be testifying on behalf of the Conference of State Bank Supervisors. There are many important issues that we are going to discuss today, but none more significant than protecting consumers, something Ms. Taylor takes very seriously as the head of the New York banking department.
    I thank you all for your appearance today. I know that it was not easy to travel and plan to be here, so I appreciate your spending time with us this morning. Thank you very much. Without objection, your written statements will be made part of the record and you will be each recognized for 5 minutes. If you have not testified before, the box on the table in front of you has three lights. Red means stop. Yellow means you have 1 minute. Green, of course, means go.
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    So we are going to start with you. You may go first, Ms. Williams.
    Ms. WILLIAMS. Chairwoman Kelly, Ranking Member Gutierrez, Ranking Member Frank, and Members of the subcommittee, I appreciate the invitation to discuss the OCC's recently issued preemption rules. I will begin by describing what our new rules do and what they do not do. Then I will explain why we took the actions we did and why we acted when we did. Then I will address one of the misperceptions, one of many, unfortunately, that surround the new rules. There have been some rather extreme characterizations of these new rules, so let me begin by explaining exactly what they do.
    The first regulation, I will call it the preemption rule, clarifies the extent to which national banks's lending, deposit-taking and other Federally authorized activities are subject to State laws. The rule provides that a State law does not apply to a national bank if the State law obstructs, impairs or conditions the bank's ability to exercise the power granted to it under Federal law by Congress, unless Congress has provided that the State law does apply. This approach reflects fundamental constitutional supremacy clause doctrine. The regulation carefully follows standards established by the U.S. Supreme Court.
    Our rulemaking authority is based on several sources in Federal law. The types of State laws the rule preempts is substantially nearer those already preempted by the Office of Thrift Supervision in its preemption regulations for Federally chartered savings associations.
    It is also important to recognize what the OCC's preemption regulation does not change. It does not immunize national banks from complying with a host of State laws that form the infrastructure of doing the business of banking; contract law, tort law, public safety laws, generally applicable criminal law. It does not preempt anti-discrimination laws, nor, Mr. Frank's issue, enforcement of those laws. It does not change the allowable rates of interest a national bank may charge on a loan. It does not authorize any new national bank powers or activities, and it makes no changes to our existing rules governing the activities of operating subsidiaries.
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    Our second new regulation interprets a provision of the National Bank Act that grants the OCC exclusive authority to supervise, examine and regulate national banks. In this, what we call our visitorial powers rule. We clarify that the scope of the OCC's exclusive authority focuses on the content and conduct of the banking business that is authorized to national banks under Federal law. We also interpreted a portion of the statute that refers to powers of courts of justice as not grant to State officials any additional authority beyond what they might otherwise possess to examine, supervise or regulate the banking business of national banks. That is what we did.
    The second point I want to address is why we took these actions and why we took them now. We have recently seen an unprecedented number and variety of state and local enactments intended to limit and control the ability of national banks to engage in banking activities that have been authorized for them by Congress. These state and local enactments prevent national banks from operating to the full extent lawful under their Federal charters. They also undermine the vitality of the dual banking system, which is predicated on distinctions between state and Federal bank powers and regulations.
    These laws, many with laudable goals, also have real practical daily consequences. They have unsettled mortgage markets, reduced the availability of legitimate subprime loans to some consumers, increased regulatory burden, added operational costs, created unpredictable standards of operation, and uncertain risk exposures. My written statement discusses these issues in more detail.
    The OCC's new rules were designed to supply urgently needed clarification of the standards applicable to national banks's activities and to restore predictability to their operations. Our process, and I am sensitive to the Chairwoman's comments here, was neither sudden nor secret. Our rules are based on existing law and we acted as the circumstances became compelling. In developing these rules over a period of many months, now dating back to approaching almost two years, we solicited comments from all concerned parties. We consulted widely with representatives of the financial industry, public interest groups, other regulatory agencies and State officials. From the very beginning of our consideration of these issues, we briefed House and Senate Members and their staffs on both sides of the aisle, and we made ourselves available to answer any and all questions.
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    The Chairwoman has expressed a concern about whether we waited for Congress to signal its intent. This was a long, broadly inclusive, open process that resulted in these regulations. To depart from my script here and on a personal note, I very much regret if the Chairwoman or Members of the committee feel that that process was inadequate. That was certainly not our intent.
    Finally, let me address one of the misperceptions that has arisen around our rules, namely its impact on predatory lending. We have zero tolerance for unfair, deceptive, abusive or predatory lending. We know its tragic consequences. We rigorously supervise national banks and their lending subsidiaries and there is scant evidence that they are the source of the predatory lending problem in this country. Our track record demonstrates that we will act vigorously if problems arise.
    Two new provisions that we included in our regulation will make it even less likely that predators will find refuge in any national bank. The regulation first provides that national banks may not make consumer loans based predominantly on the foreclosure or liquidation of a borrower's collateral. This will target the most egregious aspect of predatory lending, where a lender extends credit not based on a reasonable determination of a borrower's ability to repay, but on the lender's calculation of its ability to seize the borrower's accumulated equity in his or her home.
    The regulation also recognizes that other practices are also associated with predatory lending. Some may not realize that the OCC does not have the authority under the Federal Trade Commission Act to adopt rules defining particular acts or practices as unfair or deceptive under the Act. However, we can take enforcement actions in specific cases where we find unfair or deceptive practices. Our new regulation therefore specifically provides that national banks shall not engage in unfair or deceptive practices within the meaning of section five of the FTC Act in connection with their lending activities.
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    In conclusion, Madam Chairwoman, we believe our new rules protect as well as benefit national bank customers. We believe they are entirely consistent with the fundamentals of the dual banking system, and with Congress's design of the national banking system. I thank you for this opportunity to testify. I will be happy to answer any questions the subcommittee may have. Thank you.
    [The prepared statement of Julie L. Williams can be found on page 195 in the appendix.]
    Chairwoman KELLY. Thank you, Ms. Williams.
    Mr. Miller?
    Mr. MILLER. Thank you, Congresswoman Kelly and Members of the committee, for having this hearing. This is a very important hearing. I say so because of what is at stake. Let me outline what I believe is at stake.
    The regulations that have been adopted are breathtaking in their effect on States, on banks, and most importantly on consumers. Let me explain why I say that. One regulation changes the thrust of state preemption. It makes it much more expansive than traditionally has been interpreted by the courts and certainly has been discussed by this committee. One view of preemption is if there is a conflict between Federal law or Federal regulation with the State law, the State law, of course, has to yield. Sometimes the standard has been used whether there is a substantial impairment of the Federal purpose, the State law fails. But what is here is any condition that affects the ability of a national bank to fully exercise its authority, any condition, any condition on a national bank, small large, good or bad, just about any regulation can be a violation of the OCC rule and therefore be prohibited.
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    I talked to you a few months ago about the enormous success of the North Carolina statute on predatory lending. It would appear to be preempted, and just about any other form of consumer protection. The step that has been taken here is dramatically different than has been taken before and is overwhelming in effect.
    If that is not enough, whatever remains of State law as it applies to national banks, state authorities cannot enforce it as a result of one of the other regulations. This almost boggles my mind about why you would strike a balance, especially an extreme balance, and then go further and say the State authorities cannot even enforce State law, whatever remains. This is truly significant. In addition, it should be seen in the context that if they are subsidiaries of national banks, all of this applies. So subsidiaries that we are used to dealing with all the time, mortgage companies, finance companies, they enjoy the same preemption both as to the law and as to the enforcement that the national bank does.
    What are the consequences of this? I say they are very significant. They are most significant for consumers. To take the States out of any kind of consumer protection with national banks I think would be a terrible mistake. The States are the laboratories of democracy. The States are the foot soldiers. Real estate transactions are local in nature. What about a routine credit card complaint that we get all the time? Against a subsidiary of a national bank, under the scheme proposed by the OCC, all of those complaints have to go to Houston. You have to call Houston.
    What about the expertise that has been developed by States in this area, predatory lending for instance? It is gone as to national banks. One of the effects is this look at the standard on predatory lending in the OCC regulations. The standard is making a loan to ultimately foreclosure upon. Well, as a standard that is a misunderstanding of what happens in predatory lending. Most of predatory lending is premised on people staying in the houses and paying and paying and paying. They miss the boat, not because they are not smart, they are brilliant, but because they are not experienced. They have not dealt with this.
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    To take the States out of consumer protection as to national banks just does not make any sense at all. Only 3 years ago did the OCC even discover consumer protection in terms of use of the FCC Act. It was ignored for 25 years. They do not have the expertise. They do not have the experience that we have.
    What about Congress? I was here 2 1/2 months ago testifying about the preemption question in a predatory lending environment. What the OCC has done has made that day for you and for me and the other witnesses meaningless. They have taken the authority away from the Congress. And the Congress, more so than the OCC, is able to deal with these questions. You are the experts. You have the experience in dealing with balancing interests of consumers and lenders, balancing the Federalism concerns of States and the Federal government, not the OCC.
    This is a decision that cries out for Congress, not the OCC, to make the decision, particularly in light of one aspect of the environment, and that is there is enormous competition for banking charters between the OCC and the States. If you want a good idea of the competitive spirit, go read Comptroller Hawke's speech on September 9 of last year to Women in Housing and Finance. He is really engaged in competing with States for charters. To allow him in that competition environment to make these very important and extremely far-reaching decisions, rather than Congress, just does not make sense and it has enormous affect on States.
    As I have said in another context, this is the kind of preemption where most State law is preempted, and then what is left, there is a preemption of state authority to enforce. It is a dagger in the heart of Federalism. It ignores the legitimate interest of States and the work that has been done by the banking superintendents and by the attorneys general and the rest. That is why I say this is an important hearing. This is your decision, not the decision of a single bureaucrat.
    Thank you.
    [The prepared statement of Hon. Thomas J. Miller can be found on page 86 in the appendix.]
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    Chairwoman KELLY. Thank you very much, Mr. Miller.
    Ms. Taylor?
    Ms. TAYLOR. Thank you very much, Congresswoman Kelly and Congressman Gutierrez and Members of the subcommittee. I am Diana Taylor, Superintendent of Banks of the State of New York. I am here today on behalf of the Conference of State Bank Supervisors. Thank you for inviting us to discuss our concerns about the Comptroller of the Currency's recent preemption of state consumer protection laws and enforcement authority.
    From the start, I want to say that our system of financial regulation is confusing. But remember, we have the strongest financial system in the world. We have a virtual alphabet soup of rules, regulations and regulators that oversee banks operating in States, across state lines, internationally, and in ways and in businesses they have never operated in before, that were not even contemplated 10 or 20 years ago.
    The situation we find ourselves in sitting here today is an outgrowth of a changing industry, and changing technology has allowed banks to conduct business in ways and areas they never could before. It is confusing, but this is a good thing. It is competition and capitalism at its best. Banking law has changed. Glass-Steagall has been changed. We have Gramm-Leach-Bliley and Riegle-Neal.
    Chairwoman KELLY. Ms. Taylor, I am sorry to interrupt you, and we will give you the extra time. It is difficult for some people to hear you. Is it possible for you to pull those microphones a little more closely and perhaps raise your voice a bit?
    Ms. TAYLOR. I apologize. I have never done this before, and I am also finding that 5 minutes is a very short period.
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    Chairwoman KELLY. Pick up where you were. I know it is tough, but we will give you the extra time. Don't worry about the time. We are here to hear what you have to say, but we want to hear it.
    Ms. TAYLOR. Okay. Can you hear me now? Great. Okay.
    From the start, I want to say that our system of financial regulation is confusing, but remember we have the strongest financial system in the world. We have an alphabet soup of rules, regulations and regulators that oversee banks operating in States, across state lines, internationally and in ways and in businesses they have never operated in before. The situation we find ourselves in sitting here today is an outgrowth of a changing industry and changing technology, which has allowed banks to conduct business in ways and in areas that they never could have before, never even contemplated before. It is confusing, but it is good. It is competition and capitalism at its best.
    Banking law has changed. Glass-Steagall has changed. We have the Gramm-Leach-Bliley and Riegle-Neal now. Unfortunately, regulation has not always evolved at the same rate as the financial industry. We need to fix that. We have under-regulation. We have overlapping regulation and we have complete lack of regulation in some areas. But we need to fix this in a way where everyone has input, not just the constituencies of one agency, the OCC.
    What brings us here today is neither helpful nor part of the solution. The Comptroller of the Currency has promulgated a series of regulations clarifying rules that they claim are already in effect. They have preempted lending and deposit laws for national banks. They have exempted them from the enforcement of any consumer protection laws by any entity other than itself, and they have granted operating subsidiaries the same preemption rights and visitorial immunity as the parent banks.
    This means that a national bank and its operating subsidiaries no longer have to obey state consumer protection laws and no one other than the OCC has the right to go into a nationally chartered bank or, importantly, its operating subsidiaries to enforce any of these laws.
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    If all of this seems confusing to us, put yourself in the shoes of the consumer. Who here knows whether the bank you use yourself is a thrift chartered by the OTS, a national bank, or a State-chartered bank? I have been asking this question of financially sophisticated people in the financial capital of the world, New York, this question on a regular basis over the last few weeks, and I have to admit the result is decidedly mixed. Most people do not have any idea what charter their bank uses. Imagine a consumer going in for a loan.
    If they go to a State-chartered bank, they enjoy all the protections that State laws can give. If, however, they go to a national bank, they lose all those protections. Rather, what they are due in the way of protection is limited to the view of a single entity and the opinion of a Comptroller who is accountable to no one but himself to determine if that consumer has been wronged and further if that consumer has any remedy.
    If there is a problem at that national bank, the consumer may be out of luck. State regulators and attorneys general can no longer investigate consumer complaints against national banks and their operating subsidiaries. We have to tell our citizens to call the OCC and hope that the OCC will take care of the problem. Two consumers with identical facts who go to two different banks with different charters will be protected to different standards.
    The Comptroller insists that national banks do not engage in predatory lending. To that point, I urge you to look at my written testimony. You will read some horrifying stories there. Here are some other things that the OCC wants you to believe: one, that the new rules are no big deal; they do not really change a thing, and merely do what Congress and the Supreme Court intended all along; two, that you should pay no mind to the erosion of the dual banking system which these new rules will foster; three, that you should not worry that national banks that hold over 55 percent of all banking assets in the United States can now ignore virtually all state consumer protection laws and devices, including the rights of state attorneys general to bring actions for deceptive practices; and four, that the OCC has standards that they hold their banks to in order to prevent any predatory or deceptive practices. But look at those standards, and that should give you pause. The OCC prohibits lending based predominantly on the value of the borrower's home and it prevents or prohibits deceptive practices. There is nothing in there that is more specific than that.
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    Conversely, State laws such as New York State's law, give guidance as to what is unaffordable. We mandate that income be verified. We prohibit flipping and equity stripping and we proscribe the financing of single-premium credit insurance, which is an extraordinarily abusive product when it is financed. You should be concerned. Congress and only Congress has the authority to fundamentally change the rules. If Congress intended that States should have no say over what banks do in their respective States, then it is up to Congress to say so.
    The last time Congress spoke, it clearly reaffirmed that state consumer protection laws apply to all banks, not just state-chartered banks. Please carefully consider whether you still believe the dual banking system is worth preserving. If the answer is yes, and I believe that that is the correct answer, then I urge you, do not allow the Comptroller's rules to stand.
    I believe the U.S. banking system is as strong as it is today because of the dual banking system, in large part. We have avoided the trap of one monopolistic regulator up until now. It is not a perfect system. It needs change, but we need to change it only after due deliberation and consideration. Like Churchill said about democracy, it is the worst system, except for all the other ones. I do not doubt the sincerity of the OCC's belief that it can handle all consumer banking issues nationwide alone, without help from anyone, but I believe they are wrong. State banking agencies and attorneys general are valuable allies, not adversaries of the OCC in the fight to protect consumers.
    Preemption traditionally involves a Federal law supplanting a conflicting State law, which the Attorney General said. Here, in the absence of a conflicting Federal law, the OCC seeks to brush away all State laws, all state consumer protection laws, supervision and enforcement because they impose conditions on the conduct of national banks and their subsidiaries. The result is an entire industry that is now exempt from compliance with state consumer protection statues and bound to good behavior by the slim tether of nebulous regulation. It is not only consumer protection that concerns us.
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    Chairwoman KELLY. Ms. Taylor, I am sorry but I am going to have to ask you to summarize quickly please.
    Ms. TAYLOR. Okay. This is more about the method the Comptroller is using to sweep aside the State consumer protection laws. This preemption is not necessary. Congress gave the OCC a tool to use if a State law exerted too great a constraint on national banks. It is a process that involves public notice and public hearings. The Comptroller does not trust in this process, neither market-driven corrections nor the process set up by Congress. You, Congress, gave him a tool, with hearings. He has preempted the State laws of 50 States and the mission of 50 state attorneys general. If this is what you intended, we will live with it. If it is not, please do something.
    Thank you very much.
    [The prepared statement of Diana L. Taylor can be found on page 145 in the appendix.]
    Chairwoman KELLY. Thank you very much.
    Ms. Williams, I was interested that you said that the OCC acted because of compelling circumstances. I would like to know what those compelling circumstances were that forced you to finalize the rule 2 weeks prior to Congress reassembling, and if there was something that was important enough that forced you to do that 2 weeks prior to coming and testifying.
    Ms. WILLIAMS. Chairwoman Kelly, I explained in some detail in my written statement, particular circumstances included the impact on the mortgage markets and credit availability of some of the State predatory lending laws. What we were seeing were situations where national banks were pulling out of markets. They were pulling out of markets because of the uncertain exposure that they would be subject to, the additional costs. They were pulling out because of the inability to sell loans from jurisdictions, both state and local, that had enacted predatory lending laws. These laws were coming into effect on certain timetables, so we were hearing that there were things happening in the marketplace. The timetables were kicking in. So we felt that it was appropriate to go ahead.
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    We felt that against a backdrop, though, as I said in my oral presentation, of an effort where we tried to be very open and inclusive of all interested parties in this process.
    Chairwoman KELLY. Ms. Williams, I would like to know how many letters you received during the comment period. I would like to know how many Members of Congress actually wrote to the OCC during the rulemaking process, and what was the nature of the comments in both the letters from the Congress and from other people.
    Ms. WILLIAMS. The precise numbers, Madam Chairwoman, I would have to get back to you on. I know of your letter. I know we got comment letters from some other Members. Your letter focused on the timing of the agency moving ahead. We had some letters that expressed concerns about the impact of the proposal on predatory lending. We had some letters that forwarded concerns that were constituent concerns about our proposal.
    Chairwoman KELLY. I am aware of several dozen lawmakers who wrote in opposition to your finalizing the rules, including the Ranking Member and all of the Democrats on the Senate Banking Committee.
    Ms. WILLIAMS. Yes.
    Chairwoman KELLY. The Ranking Member and 16 other Democrats on Financial Services Committee, the vice chairman and two subcommittee chairmen of Financial Services Committee, as well as other senior Members of this committee, not to mention a bipartisan group of other Members in the House and Senate not on either committee of jurisdiction. If I am aware of all of those letters, I am interested still in what was the compelling reason why you needed to act before Congress could listen to what you had to say?
    Ms. WILLIAMS. Again, Madam Chairwoman, there were events occurring that were having a real practical impact on the ability of banks to engage in certain activities.
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    Chairwoman KELLY. Could you give me a specific example of that?
    Ms. WILLIAMS. There were particular State laws that began to kick in, one in New Mexico on the first of January. I believe that New Jersey went into effect on the first of December. There were other initiatives underway in other jurisdictions. There were consequences of the enactments of these particular State laws. The secondary market was being impacted. Institutions that made loans in some of these jurisdictions were finding that they could not securitize them. They could not gain additional funds in order to re-lend. There was a credit availability impact as these laws became effective.
    Chairwoman KELLY. It seems to me there might have been an option to have Congress, or for you to declare a moratorium on State laws until the Congress could complete a thoughtful approach to these rules.
    Mr. Miller, I know you would like to respond to that. I would like to ask both you and Ms. Taylor. I am particularly interested in getting answers to the questions, Mr. Miller, that you put in your opening statement. When I read it, I was interested that you had some very specific questions with regard to the implementation of the rules. Where will a State's anti-deficiency laws fall? And where will State laws mandating judicial foreclosure fall? I would like you to elaborate on your concerns and the implications of these rules.
    Mr. MILLER. I would be very happy to, but let me just respond to your colloquy with Julie Williams, as well, briefly.
    The market and the States could have taken care of the problems that she was just referring to. There is a good example cited in Diana Taylor's statement, when Georgia really pushed the envelope, probably further than anybody else, there were some real consequences in the market, including the secondary markets. It looked like there would be unavailability of credit. The Georgia legislature then went back and changed the law. The same thing could have happened to New Mexico. The same thing could have happened to New Jersey. These rules were not necessary on January 7 to deal with those problems. Those States could have dealt with those problems.
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    As to the questions that you raised, the broad, broad nature of the preemption here, that I mentioned before, any condition that affects the ability to fully exercise the authority is preempted. All those things posed in the questions, basic consumer issues, basic consumer protections and consumer functions, could well be preempted by this far-reaching preemption by the OCC.
    Chairwoman KELLY. Ms. Taylor, would you like to respond to that?
    Ms. TAYLOR. Actually, I want to add one additional thing. I think that market forces will have a lot to say about this, too. This is a capitalistic country. One of the objections to the predatory lending laws, especially in Georgia and also in New York State is that the secondary market, the consequences in the secondary market of the secondary market buying a loan that was deemed to be a predatory loan. I just heard this morning that Fannie Mae had said that they will not buy mortgage loans made by national banks that do not comply with State laws, which I think is a very interesting thing to have happened. It shows that we have total confusion now. Where the OCC has tried to clear up something, more confusion is reigning now than did before.
    Chairwoman KELLY. I just want to follow up on another piece of what you touched on, Mr. Miller. The OCC preemption rules really adopted for loans, but where do you think that leaves the consumer if a national bank engages in unfair or deceptive non-lending practices? Whose laws are going to govern there? Do we know?
    Mr. MILLER. We do not know for sure, but it is very possible, very likely that the State laws have been preempted. It is pretty clear that the State authority to enforce those laws, if they have not been preempted, is taken away. So it all comes back to the OCC, which does not have the resources, cannot have the resources to do what 50 state attorneys general have done, what Diane and 49 of her colleagues are able to do, and does not have the expertise.
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    Look at what the final conclusion of all this is. If the OCC can decide massive preemption of State laws, eliminate state authorities in enforcing what is left, and set itself up as really the sole enforcement agency on consumer protection and related issues for national banks, and describe what those rules are, then really you are going to have a level playing field problem with state banks. They are going to say, those are much better rules; we want to play by those rules. There is going to be a force to have those be the rules, then, at the State level as well.
    So what you would have is the OCC setting the basic consumer protection rules for state and national banks, and the agency having all this authority having the very least experience in these kinds of rules. That is why I think that this committee and this Congress really needs to look at the public policy questions here and balance the appropriate interests between banks and consumers and between States and Federal authorities.
    Chairwoman KELLY. Thank you. I have gone over my time.
    Mr. Gutierrez?
    Mr. GUTIERREZ. Thank you very much.
    I just want to go quickly back to Ms. Williams. When the Chair asked you about correspondence and letters from Congress, I was very surprised that you did not mention that on April 3 of 2003, nearly 9 months ago, you did receive a letter directed to the Director of Currency well before you promulgated these rules, in which we said we believe that such action would violate a clear congressional directive that States be permitted to augment Federal law; that said in that letter that we wrote, too, the OCC appears to be pursuing a conscious strategy of preemption that increasingly permits national banks, as well as national banks operating subsidiaries, whether a bank or not, to disregard most State laws, ignore virtually any request or directive of a State banking regulator; and that ended by saying we urge the OCC at a minimum to return to the presumption analysis standards of Barnett.
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    We wrote this letter and your office did exactly what we asked you, we gave you an opinion you should not do it. So it should be very clear that you did not do this in a void. It was not as though you did not hear from those of us that are at least elected, elected to do this kind of policy work. We gave you our opinion, and this was a bipartisan letter. Former Chairman Leach of the Banking Committee signed it, along with others, so I was pretty surprised.
    When New York State legislators sent you a letter, they said, listen, can't you wait for us to get back together? Can't you wait for us to get back to Washington, DC so that we can be there, so that we can talk? It seems to me that you could have waited. The seventh, our schedule is pretty clear about when we are coming back to Congress and what the first date is, the State of the Union. I am sure Mr. Hawke follows when it is the President is going to be here and when he calls Congress to session. That was the first day we were back, for the State of the Union address.
    Ms. WILLIAMS. Could I respond a little bit on the process point?
    Mr. GUTIERREZ. Sure. Unlike the Chair of the committee, I am going to try to keep to the 5 minutes because then she will bang that gavel over my head. I am just kidding, but I will allow you to respond, please.
    Ms. WILLIAMS. Maybe you will not count this against him?
    Mr. GUTIERREZ. Sure.
    Ms. WILLIAMS. We tried very hard to be very inclusive and to talk to everybody that had issues and concerns about what we were thinking about doing. As I said, I very much regret if we have created an impression that we were trying to get something out while Congress was out. In fact, the regulation appeared in the Federal Register I think about a week, just a week before you were back in.
    Mr. GUTIERREZ. I understand. I just did not want the perception to be given at this hearing that, (A), Members of Congress did not fulfill their due diligence, and did not give an opinion 9 months prior to the OCC's opinion directives being issued. We did give you an opinion on where we stand.
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    Ms. WILLIAMS. We got a variety of opinions.
    Mr. GUTIERREZ. I understand, but it seems as though since here before this committee, and there were Members of this committee that wrote that letter, you might have remembered that, but I understand.
    And secondly, while we understand you did it on January 7, we did simply ask, at least the New York State legislators did ask to wait. I don't know what was so urgent about doing it on that day. I think in the future maybe if you wait for us to get back, we can all work together.
    Let me just ask a question, because I think instead of asking you some of the technical questions, I want to ask you a general question on operating procedures under the new regulations. Mr. Rickoff, New York State, he took out a mortgage for $27,000; should have been paid off in 1999. He did not discover it until 2003 that he had paid another $10,000. But he kept paying his monthly bill each and every month. Mr. Hall called the bank. The bank, which is First Tennessee, explained that he had been undercharged $16 a month from his original lender, and that despite the fact that his loan had been sold twice, that has happened to me and I am sure everybody in this room, the oversight was not discovered until recently.
    So the bank, the Third Bank I think in this case, it was finally sold to, said, you know what we are going to do because of that oversight of $16? We are not going to call the consumer and tell him, hey, you underpaid $16 or maybe go back to the other two banks and say, maybe there is some law here that says that you kind of screwed up on this. What we are going to do is we are going to unilaterally extend your mortgage from 30 to 41 years, just on our own. We are not going to tell you about it.
    I think the story has been very well published. Here is what I would like you to respond to in terms of this issue, of a consumer. So the consumer goes to the Attorney General of the State of New York. I would like to put in the record the transcript. We have the original tape, Madam Chair, but this is a transcript.
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    Chairwoman KELLY. So moved.
    [The following information can be found on page 232 in the appendix.]
    Mr. GUTIERREZ. This is what the bank called back, an assistant Attorney General of the State of New York, says, Mr. Fleischer, who is the assistant Attorney General, this is Barbara Brown Eddy from First Horizon Home Loan Corporation returning your call, regarding the Richard Hall matter. You mentioned that you sent a letter to us. I am located in Texas. I do not know if that letter was sent to our Texas location or not, but it has not made it to the legal department. I need to advise you, assistant Attorney General in New York, right, that as an operating subsidiary of a national bank and pursuant to an advisory letter from the Office of the Comptroller of Currency, as an operating subsidiary of a national bank, we are governed by the OCC.
    I am not going to read the whole letter for the purposes of time. She goes on to say she is not at liberty to discuss this any further with the assistant Attorney General. Basically, she is blowing him off, saying, I do not have to talk to you. The OCC says I do not have to deal with you, Attorney General, on this issue, and she called him back. We have the tape. And then she says, but again, we would have to respond to any inquiry that is directed through the OCC, and not through a State agency. She leaves her number, which I am not going to repeat because then, who know, maybe she will receive thousands of phone calls and that would be unfair to her.
    It really concerns me that if I, as a Congressman, I have someone come to my office, which I have all of the time and I hope they continue to come, what I usually do is I call my Attorney General, Lisa Madigan, because she has a consumer office. I cannot call the Mayor. He is a good guy, but is not really equipped. The county is really not equipped. The people that are really equipped are my state guys. They have a consumer fraud division. That is all they do, so I call them up. Are you saying that if I call her up and she tries to deal with the case, that I should really call you and your legal department, and not call my Attorney General? And that no one in the State of Illinois should ever bother again with the Attorney General when it comes to a nationally chartered bank?
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    Ms. WILLIAMS. No, sir.
    Mr. GUTIERREZ. Well, you better tell this woman that, at the bank.
    Ms. WILLIAMS. What we have said to national banks is if they are contacted by State officials concerning issues about enforcement of State law by the State officials, we want the national banks to tell us of those contacts. We have not told national banks you cannot talk to State officials.
    Mr. GUTIERREZ. That is what she said. We will give you the tape.
    Ms. WILLIAMS. I am not disputing what you got.
    Mr. GUTIERREZ. But since you oversee them, I hope you reprimand them and tell them do not say that. That was the implication; that they did not have to deal with us.
    Ms. WILLIAMS. Let me just say, what we have said. The second and larger issue here really is one of cooperation between the OCC and the States. It is something that we have been trying to work hard on and have not made as much progress as we wish we had.
    We found out about this particular situation when we got a call from a reporter. When we learned about it, we called the bank. The bank got in touch with the people that handled the mortgage operation. It percolated up to senior management. People looked at it and said, there has been a mistake. There was a mistake made in 1974 when the monthly payments for this gentleman were calculated.
    Mr. GUTIERREZ. You know something, we understand there was a mistake and we, most seriously, thank you that it was finally resolved and the gentleman got the situation corrected.
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    Ms. WILLIAMS. The situation is resolved.
    Mr. GUTIERREZ. We understand that the situation is resolved. I understand that you guys took action when you learned about it. All I am saying is that clearly there are institutions out there, financial institutions out there like this one in this case that said to an Attorney General of a State and his office, elected official law enforcement officials. I mean, can you imagine a bank robber saying that? That was an FDIC-insured bank. I crossed state lines. If the FBI does not call me, Chicago Police Department, I do not have to talk to you.
    Start thinking about the ramifications. I do not know if the analogy is the best one, but it is what comes to mind. I am not trying to accuse the bank of being criminal in their intent, but they certainly hurt this consumer because in the end, the situation was rectified. I just want to say that we need to sit down. I know I am going to ask the Chairwoman and the Members of the committee to review this situation to see what we have to do legislatively, because the last time I checked, we could still pass laws here that do govern the OCC just in case there is some area of ambiguity here, so that we can clear that up.
    Lastly, if you could send us in writing all of the times the OCC has sued and what damages the OCC has collected in civil court proceedings against financial institutions for fraud, predatory lending and other consumer violations. Please tell us how many staff people you have and how many are for each State of the 50 States, and whether you have developed a coordinated effort in each of the 50 States so that just in case we lose and you win, I know where to send my consumers.
    Thank you.
    Ms. WILLIAMS. Congressman, you always win ultimately because you make the laws. If I could make, just to clarify a point on process.
    Mr. GUTIERREZ. But the bank has a lot of people here, too.
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    Ms. WILLIAMS. The issue about where the complaints come in is a very legitimate issue. What we have asked is that if a complaint concerning a national bank or a national bank operating subsidiary is received by a State agency, that they refer those to our consumer assistance group. We also get hundreds of referrals from States. We get referrals from New York. We get referrals from the New York AG's office. We get referrals from the New York AG's office concerning operating subsidiaries. We get referrals from Mr. Miller's office. We get literally thousands of complaints that come to our consumer complaint office that are misdirected. They do not concern national banks or the institutions that we supervise. We try to refer them to the agencies that have jurisdiction over the particular entities.
    So I would second Superintendent Taylor's point that consumers do not always know the regulator of the institution that they are dealing with. What we try to do is to get the complaint to the regulator that is going to be in the position to act quickly and most effectively for the consumer. That is what we are about. We are not about trying to deprive the States of a role. We are not about trying to cut them out of a cooperative process. We are not against having a dialogue with them about what we are doing and whether what we have done has been adequate.
    So it is not a question of eliminating the States from having a role in protecting their consumers. We have resources to do this. We are prepared to do it. We think it is our responsibility to do it. States have resource issues. Let them devote those resources to problems in other areas where there is not a regulator that is saying, we will try to deal with this. Don't consumers benefit more if you spread the resources more widely?
    Mr. GUTIERREZ. I beg leave of the committee. I have an 11:30 meeting and I am going to try to get back here, Madam Chair, as quickly as I can.
    Thank you.
    Chairwoman KELLY. Thank you very much, Mr. Gutierrez.
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    Mr. GUTIERREZ. Thank you to all the witnesses.
    Mr. MILLER. Thank you.
    Chairwoman KELLY. Ms. Williams, when you get your response written for Mr. Gutierrez, he has asked you about the civil complaints. I would like you also to include what jurisdiction you have over criminal complaints, please.
    Ms. WILLIAMS. We do not have the ability to bring criminal charges. It would be the Department of Justice.
    Chairwoman KELLY. So it would not be state attorneys general?
    Ms. WILLIAMS. A state Attorney General can bring criminal charges against a national bank.
    Mr. MILLER. Wasn't that preempted?
    Ms. WILLIAMS. No. It does not say that.
    Mr. MILLER. Doesn't it say non-banking criminal cases?
    Ms. WILLIAMS. No. It says criminal laws. Generally applicable criminal laws are not preempted. In fact, we have worked very cooperatively, believe it or not, with Attorney General Spitzer on some matters. So generally applicable criminal laws are not preempted.
    Chairwoman KELLY. It sounds to me, from Mr. Miller's question, there is a bit of confusion here that perhaps we need to discuss.
    Ms. WILLIAMS. I would be happy to.
    Chairwoman KELLY. I think there is confusion in general about this finalized rule. I am going to once again call on the OCC to not implement this rule until we have some clarity. It is not clear.
    Mr. Garrett?
    Mr. GARRETT. Thank you.
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    Just two general questions. The first question is to either Mr. Miller or Ms. Taylor. You will find no one on this panel, I believe, that is a stronger advocate for States's rights. I sit here thinking of the arguments that you are making and the regular phrase of States being the laboratory for experiments and new approaches, and what have you.
    This committee also recently just was successful with FCRA and the benefit to the nation of having uniformity in that area. I was not around years back when that was passed or authorized the very first time, but I wonder whether some of the same arguments may have been made at that time, as far as the States rights issues, as far as local regulation on those issues, and that we are depriving the States of those areas that they have the expertise in. When we did it this time, I must say there was unanimity in saying that it is a system that is working and the worst thing in the world would be if we had not succeeded in reauthorizing the legislation.
    So maybe we will find ourselves if this regulation stands, maybe we will find ourselves 20 years from now reauthorizing, and we will say we could never have done without this.
    Mr. MILLER. Maybe, but I sure don't think so. I think there are some big, big differences. One difference is that you, this committee, this Congress, looking at a particular area and balancing the interests of consumers and lenders, and looking at the Federalism question, and it becoming clear to you that the preemption in this setting makes sense. That is the process we think should happen. This was done not by you as elected officials, but by a single bureaucrat. And it is done in a broad, breathtaking way, inconsistent with what has happened in the past.
    What is being done here really goes to the core of the dual banking system. It will alter substantially the dual banking system that Diane Taylor described so well and has served us so well. So I think there are some real differences, both in terms of the process of the Congress weighing all these interests, and the scope of what is being done here, and the effect therefore on the dual banking system which has served us very well.
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    Ms. TAYLOR. Thank you. The preemption that is contained in the Fair Credit Reporting Act was done by a legislative body of elected officials responsible to the citizens of their States, and after considerable debate. This was done according to the process, and we fully, fully supported that. In fact, I think that CSPS testified in favor of that.
    I just want to say from a regulatory standpoint, my philosophy as a regulator is that there are three things that we do. Number one, we are here to ensure the safety and soundness of the banking system. Number two, we are here to ensure that banks are allowed to make a profit and that there is a reasonable positive correlation between risk and return. The third leg of that stool is that we protect consumers. What is being done here is the regulatory bodies at the State level are being deprived of the third leg of that stool, which is to protect consumers. I think that is damaging to everybody.
    Mr. MILLER. I think if you let this go, 5 years from now you will say, how could we have done that. The consequences will be so wide-range and so negative.
    Mr. GARRETT. Thank you.
    Ms. Williams, if I may, one of your opening remarks I made note of. It touched me. You said that part of the authority that allows the agency to go forward with the regulation was something to the extent of that Congress was silent, I may be paraphrasing you wrong, as far as enabling the States to act in this matter. Do you remember that language?
    Ms. WILLIAMS. Yes. I think what I was trying to capsulize is the point that in the case of the preemption issue here, in essence, Congress has granted national banks a power under Federal law, and it has not conditioned those powers. You have States trying to say, no, you cannot do that, or you cannot do that except in these particular ways. Congress can say that State law is applicable to national bank activities and it has done that. There is, for example, intra-state branching. But it has not done that in the area of lending and deposit-taking, which are the areas specifically identified in our regulation. What you have is a Federal power that empowers the Federal entity to do a particular activity.
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    Mr. GARRETT. I guess I will just close on this. It seems that the arguments, where it turns the Federal idea upside down, and I am thinking of the Tenth Amendment that says all rights not specifically delegated to the Federal government are retained by the people and the States respectively. This, in essence, puts the onus on Congress, then, to know every single thing that the States are going to possibly do in the future, or might want to do in the future, and be specific in our legislation when we pass giving that authority, and say A through Z is what the States may do 5 years down the road and we have to think about that.
    I would think the Constitution is the other way around, that the States can do anything they want to do unless we are specific and we have a constitutional authority, first and foremost, that allows us to pass that legislation to say they cannot.
    Ms. WILLIAMS. Forgive me for sounding like a legal techie here, but the essential point is that Congress has acted here. It has given national banks certain powers. It has given those banks power without restriction. The basic Supremacy Clause argument is that if there is a Federal power or the Federal government has acted, then the States may not restrict the exercise of that power. That is a much, much distilled version, but that is the essence of the argument.
    One thing I would add, there has been reference to what Congress did recently in connection with the Riegle-Neal legislation. I think it is very important to look, again forgive me for sounding like a legal techie here, but look at exactly what Congress said in Riegle-Neal. It identified certain types of State laws, including consumer protection laws, that would apply to branches of an interstate bank, but then the law says unless that State law is preempted by Federal law. And then Riegle-Neal further says that to the extent that any State law is applicable to the interstate branches of national banks, that State law shall be enforced by the Comptroller of the Currency.
    So if you are looking for the most recent congressional enactment that reflects congressional intent, I would point you to that.
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    Chairwoman KELLY. Thank you very much, Mr. Garrett.
    Ms. Maloney?
    Mrs. MALONEY. Thank you, Madam Chairwoman. I think you and many others have raised many important concerns.
    I would like to ask Ms. Williams, and following your argument, I would like to bring up the North Carolina State statute, which has been in effect for 3 years and many people say it is a very effective law in comparison to the Georgia law, which was too restrictive, and the rating agencies raised concerns and therefore it was struck and modified.
    I think this gives an example of how Federalism or state actions help define and come up with solutions to the challenges before us. Do you know of any loan that was not given because of the North Carolina law? Or do you know any problem with the North Carolina law? This was cited several times in other hearings that we have had.
    Ms. WILLIAMS. Congresswoman, I know of institutions that we regulate that have decided not to do subprime lending in North Carolina and other States because of concern about triggering some of the——
    Mrs. MALONEY. In North Carolina? Really?
    Ms. WILLIAMS. Yes. There is a vigorous debate in the economic academic literature going on right now about whether the North Carolina law has had an effect on reducing legitimate subprime credit availability in North Carolina.
    Mrs. MALONEY. I would request that in writing, because we have had several North Carolina bankers and consumer groups testify that it was a fine law and was working well. So if you have some examples where loans were not permitted in North Carolina because of the State law, I would really like to see that.
    Ms. WILLIAMS. What I have is anecdotal, but I will be happy to provide you with copies of these economic analyses.
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    Mrs. MALONEY. No, I would like a factual example, not a think tank, but a consumer that did not get a loan because of that.
    But I want to very importantly go back to the comparison or the Statement that Mr. Gutierrez used earlier. I found that very interesting. Most importantly, it seemed to me, the point of his example was that the consumer who was definitely wronged would never have known to call the OCC. In that particular case, and I would say in every case, a consumer would call people they know, the State Attorney General.
    So my question to you, if this goes into effect, which I hope it does not, I think we need more debate and I think we need to have hearings. We had many, many hearings on credit. It absolutely dominated the agenda for this committee for 2 years. I would like to know, how are you going to reach out to consumers? Consumers do not even know who the OCC is. Are you going to have a massive public awareness campaign of ads on TV? If you have a problem with a loan, call the OCC, or if you cannot get information, call us?
    I would like to hear from Superintendent Taylor and Attorney General Miller. I know that you have vigorous constituent services departments, because my office works with them on constituent challenges all the time. How many people in your divisions are now working in consumer protection agencies on a State level? Would their jobs then be preempted? Therefore, how many people do you have now in consumer-related assistance? How many more people would you have to hire if 50 state attorneys were then shifting their whole staff away from constituent service in this particular area to other areas? Do you understand what I am saying?
    The bottom line that I hear in my office is what Mr. Gutierrez was talking about. If a consumer has a problem, they call us or they call the Attorney General. How are you going to help these consumers? No one knows who the OCC is except for those of us on the Financial Services Committee. How are you going to reach out and let the public know about this?
    And can you respond, too, Ms. Taylor, on how many people in your office are working on this challenge now? What would happen to them?
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    Ms. TAYLOR. Actually, we have 18 people, I think it is, in our consumer protection bureau itself, but I would say that everybody in management at the banking department also works in consumer protection. I take several calls at least a day from legislators and congresspeople and constituents with complaints. Everybody is involved in it to some extent.
    Mr. MILLER. We have about 18 people as well in consumer protection, a broad-range of activity. But just think about the foolishness of it. If one of our investigators gets a call about a banking problem, the first thing they have to say, are you a State or a Federal bank, or a national bank? It is much more efficient for that person to just handle the complaint, particularly if it is a credit card complaint or something like that. There is no way that the OCC at the national level can handle these individual complaints.
    One of the things we asked when we met with the Comptroller and Julie on this issue, what about the do-not-call list? Isn't what you are saying, doesn't that point to you having to do the do-not-call work for national banks? He said yes, we will do that. I mean, it just does not make sense in terms of efficiency and in terms of state and Federal relations; no sense at all.
    Ms. TAYLOR. Congresswoman, could I just add something?
    Mrs. MALONEY. Certainly.
    Ms. TAYLOR. At the banking department, we get about at least 500 calls a day. That is one stat.
    Ms. WILLIAMS. If I could wrap up on that particular point? As to numbers, we have between 100 and 200 compliance examiners. We have roughly 50 people that work in our consumer assistance group. All told, we have about 1,800 examiners. We have hundreds of examiners who are resident in our largest banks and who are on-site able to deal immediately with issues that are brought to their attention.
    One of the important things to bear in mind here is that all we do is national banks and their subsidiaries. Mr. Miller has very broad responsibilities. Superintendent Taylor has responsibilities that go beyond just state-chartered banks. Our resources are directed at the safety and soundness and the business practices of national banks and the entities that they control. So we think we have sufficient resources to handle the issues. We are getting referrals from the States, as I mentioned earlier.
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    The issue here probably ought to be, how can we most efficiently work together with the States to get prompt resolution of customer problems. I have to tell you that when the national banks get a call from the OCC, they will respond very promptly. So what we ask the State AGs and the State banking departments is that if they get a complaint that concerns a national bank or a subsidiary of a national bank, to please refer it to us. We will try to resolve it. We are willing to collaborate with the State agencies to make sure that they know what we have done with it. We are willing to have a dialogue with them if they do not think we have done enough.
    There is a legitimate issue with consumers of not being sure who is the regulator of the financial institution that they are doing business with. As I mentioned earlier, we literally get thousands of complaints that we refer to other regulators because those are the appropriate entities to handle the issue with that particular institution. So there is a lot of potential here to work together and to try to maximize prompt resolution of consumer issues. That is what we need to do.
    Chairwoman KELLY. Thank you, Ms. Maloney. I am sorry.
    Mrs. MALONEY. If I could place in the record an article in the New York Sun on the number of complaints that come into the OCC with Comptroller Hawke.
    Chairwoman KELLY. So moved, without objection.
    Actually, without objection, we have several statements that Members have asked to include in the record. They are letters of correspondence from Members to the OCC. There is a comment letter signed by all 50 state attorneys general, and statements from the National Association of Realtors, the Mortgage Bankers Association of America, and the Financial Services Roundtable. Without objection, they will be added to the record. So moved. Thank you.
    Mr. Davis?
    [The following information can be found on page 274, 367, 386, and 354 in the appendix.]
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    Mr. DAVIS. Thank you, Madam Chairwoman.
    Let me say, Ms. Williams, if I can get a better understanding of exactly what is the scope of these regulations that we have been talking about today. Let's say that against all odds, that tomorrow the Alabama legislature passes some kind of venturesome new law that deals with discriminatory practices in the lending market. Is that law going to be preempted under the OCC regulations?
    Ms. WILLIAMS. When you say ''discriminatory,'' discriminating against an individual in getting a loan?
    Mr. DAVIS. Yes.
    Ms. WILLIAMS. No. It is not preempted.
    Mr. DAVIS. All right. Now, let us say that the day after that the State of Alabama passed some kind of an unfair lending practices act and they did not refer to it as an anti-discrimination act, but they described it in terms of unfair lending practices. Would that be preempted?
    Ms. WILLIAMS. If what they were passing is a law that says essentially do not engage in unfair and deceptive practices, that would not be preempted.
    Mr. DAVIS. Let me try to put that in the context, though, of something that you said at the outset. One of the things that you said in your opening statement is that the OCC lacks the power to really define what constitutes a deceptive practice. One of the concerns you have heard from several Members on the committee is whether or not we have a strong enough national framework in place right now and whether the OCC has adequate power right now to address predatory lending and to address problems of deceptive practices.
    If the OCC does not have the power to define what constitutes a deceptive practice, doesn't it seems fairly obvious that there is some congressional intent for the States by definition to pick up some of that slack and have a fair amount of leeway in that area?
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    Ms. WILLIAMS. Congressman, this relates to how the rulemaking authority under the Federal Trade Commission Act is allocated. What Congress did, and you can certainly change this, is to provide that with respect to banks, that the rulemaking authority is vested solely in the Federal Reserve Board to define particular acts or practices as unfair or deceptive.
    Mr. DAVIS. Let me ask this follow-up, then. Mr. Miller, do you agree with Ms. Williams's observations that if Alabama or your State of Iowa were to pass an anti-discrimination law tomorrow with respect to lending practices that it would not be preempted?
    Mr. MILLER. I think that is correct.
    Mr. DAVIS. Do you agree with her characterization that if there were to be some kind of an unfair lending practices act it would also not be preempted?
    Mr. MILLER. I think there is a great likelihood that that would be preempted.
    Mr. DAVIS. That is would be preempted?
    Mr. MILLER. It would be preempted because it would impose conditions on their ability to make loans.
    Mr. DAVIS. Okay.
    Mr. MILLER. That just fits this broad, broad prohibition; this broad, broad preemption that I just talked about. It is hard to imagine anything in the consumer protection area that would not be preempted by this. That is why this is so revolutionary.
    Mr. DAVIS. So Ms. Williams, your argument would be, if I understand it, that there is something unique about discrimination laws? I recognize we are not talking about that in a normal Title VII context, but you are saying there is something unique about the use of the phrase ''discrimination'' that somehow takes it out of the preemption zone. Is that your position?
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    Ms. WILLIAMS. Let me explain it in a different way and clarify the point that Attorney General Miller was raising in response to your question and my earlier answer. If you have a State law that says do not engage in unfair and deceptive practices; do not discriminate in your lending practices; of course, we do not argue that it would interfere with a national bank's Federal powers that it has to be allowed to engage in unfair or deceptive practices or discriminatory practices. That type of law protects against practices that are fundamentally inconsistent, abhorrent, to national banks and the way we want to see the national banking system operate.
    If you have a State law, and it may be labeled a fair lending law, that says you can only make loans with these terms, not that you cannot make loans that are unfair or deceptive, but you can only make loans with these terms, that kind of law comes in conflict with the authority under Federal law that national banks have to make loans. That lending authority is not subject to that kind of state-imposed condition.
    Mr. DAVIS. Let me make this one observation, Ms. Williams, and I suspect the Attorney General might agree with this. I understand as a practical matter how the nomenclature works, but in terms of how policy is made in this area obviously the State's ability to attack all of the problems that make up the whole culture of predatory lending now, it might be, if I have time to finish this observation, it might very well be that that attack is pursued just as aggressively under one type of claim, some kind of a fair lending claim, that does not purport on its face to address discrimination.
    It may be the that one could raise some kind of anti-discrimination claim, but I think the Attorney General's concern is that given the relative lack of enforcement power the OCC has, if we truly view this as a national problem, if we think it is affecting the fairness of the market, don't we want to provide at least enough opportunity for the States and for regulators to use whatever tools are available and not have to just crowd them under one particular label?
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    Ms. WILLIAMS. What I would take issue with you on is your Statement about our relative lack of enforcement authority. We have a tremendous arsenal of enforcement tools, informal supervisory actions and a number of types of remedies and enforcement actions we can take. We can take action against unfair and deceptive practices. I would point you to probably the most notable situation which involved a bank out in California that was engaged in some inappropriate credit card marketing practices. We took an enforcement action against that institution. We took that action under Federal law and we also enforced the California Unfair and Deceptive Practices Act, and we got over $300 million in restitution for the customers of that institution.
    So we have a tremendous arsenal of tools that we can use to deal with these issues. We have the ability to use them in all different levels and to get very quick response from the institutions we supervise.
    Chairwoman KELLY. Thank you very much, Mr. Davis.
    Mr. Crowley, have you questions for this panel?
    Mr. CROWLEY. Thank you, Madam Chair.
    Just for Ms. Williams, there is no question if one examines the recent history in New York State and the success rate of our Attorney General, Mr. Spitzer, especially as it pertains to use of the Martin Act in New York state in going after ill-practices on Wall Street. We may also have a situation here, and I will use for example the one case that I know of with First Tennessee in which on behalf of an upstate New Yorker who had a loan dating back to the 1970s ended up paying his loan and then some, only to find out that he had overpaid by almost $10,000 to First Tennessee, that was not the original bank. He could not get any justice, basically. He needed to find a way to do that and went to the Attorney General's office. In the interim, I understand that OCC got involved.
    What can be done to help, because he had the opportunity of a perfect storm again. You have this one individual that Mr. Spitzer can come in and really do the right thing by and bring the proper pressure to bear. What mechanism exists right now between OCC and attorneys general like Mr. Miller, like Mr. Spitzer? And what can be done to better those relationships? What penalty, for instance in First Tennessee, was brought to bear upon them for this outrageous act? And what will be done in the future to help stymie that, outside even from criminal? I am talking about this from the monetary point of view.
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    Ms. WILLIAMS. Congressman, you missed a little bit of my discussion of the processes of referrals between the OCC and the States. We have processes where when we get consumer complaints that pertain to institutions that we do not supervise, we refer those to the appropriate state agencies or other Federal agencies. We also get referrals from the States, the State banking departments, from state AGs. We get referrals from Mr. Miller's office. We get referrals from Mr. Spitzer's office. We get referrals from Superintendent Taylor's office.
    What happened here is that once the AG's office became aware of this particular issue, rather then calling us or referring the matter to us, the AG filed a lawsuit.
    Mr. CROWLEY. That is one way of getting your attention, I guess.
    Ms. WILLIAMS. It did. I heard about it from a reporter. We followed up immediately with the institution. They got the issue up to a level of management that looked at the situation and said, this is not the customer's mistake. This was a mistake that occurred in 1974 when somebody miscalculated what the monthly payment should have been. Their immediate reaction was, we want to fix this for the customer, and they have. It has been resolved. It was not necessary to file a lawsuit. We could have resolved this much more quickly.
    Mr. CROWLEY. What was the resolution?
    Ms. WILLIAMS. As of the date that the customer originally thought that he had paid off the loan, everything that he paid beyond that has been re-funded, and a certain amount of attorney's fees are being paid to his attorney for her time in handling the matter.
    Mr. CROWLEY. I appreciate that, Ms. Williams, but I think also, from reading the press clips that I have read, that apparently the communication between OCC apparently, and Mr. Spitzer's office, were maybe not as good as they ought to have been.
    Ms. WILLIAMS. It was nonexistent in this case, and that is unfortunate.
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    Mr. CROWLEY. Even after you resolved the problem, is what I am saying.
    Ms. WILLIAMS. That I cannot speak to.
    Mr. CROWLEY. There is this one article I will bring to your attention.
    Ms. WILLIAMS. Okay, thank you.
    Mr. CROWLEY. Because in my opening statement, I have already said I am somewhat sympathetic toward what you are trying to do, and at the same time cases like this make my job much more difficult. So I would appreciate in the future, as was mentioned before, the Chair also had some difficulty in terms of the communication between her office and OCC. Those kind of things do not help us in our daily lives.
    Ms. WILLIAMS. I understand.
    Mr. CROWLEY. I appreciate it. I yield back.
    Chairwoman KELLY. Thank you, Mr. Crowley.
    The Chair notes that there are Members who may have additional questions for this panel which they will submit in writing. Without objection, this hearing record will remain open for 30 days for Members to submit written questions and for witnesses to place their answers in the record.
    We thank you for your time and your patience this morning. With that, this first panel is dismissed.
    Mr. MILLER. Thank you, Madam Chairman.
    Chairwoman KELLY. We thank you, Mr. Miller.
    While the second panel is taking their seats, the Chair will introduce them. The first person is Mr. Edward L. Yingling, an Executive Vice President at the American Bankers Association; Mr. John Taylor, President and CEO of the National Community Reinvestment Coalition; Ms. Karen M. Thomas, the Director of Regulatory Affairs at Independent Community Bankers of America; Mr. Joe Belew, President of the Consumer Bankers Association; Mr. W. Lee Hammond, a member of the board of directors at AARP; and Mr. Hilary O. Shelton, Director of the Washington Bureau for the National Association for the Advancement of Colored People.
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    While this panel is being seated, let me just remind the panelists that there is a box at both ends of the table indicating the lights. The red light means stop; the yellow light means you have 1 minute left; and the green light means it is time for you to begin.
    I appreciate your testimony and your appearance here before the subcommittee. If the panel is ready, let us begin with you, Mr. Yingling.
    Mr. YINGLING. Thank you, Madam Chairwoman. We appreciate your holding hearings on the recent OCC rule.
    The ABA strongly supports this rule. We believe it is firmly based in law. I have been involved in banking law for 30 years. In the last 20 years on my office wall I have had replicas of the signature pages from two banking acts dated February 25, 1863 and June 3, 1864. The signatures are Abraham Lincoln's. While Lincoln is obviously better known for other great accomplishments, these two acts together represent his great contribution to financial regulation. That contribution is the creation of the national banking system, and therefore the dual banking system.
    In creating the national banking system, Congress explicitly gave to the OCC exclusive powers to regulate national banks. Congress also gave the Comptroller the authority to preempt state and local laws that would conflict with those powers. This is a key point. One hundred and forty years ago, Congress clearly gave the OCC the authority that is used in this rule. Previous Comptrollers have used that power in many instances over the last 140 years. Furthermore, court after court, including the Supreme Court many, many times, has upheld that authority, as shown in the list of cases attached to my testimony.
    Despite the controversy, to a very large degree the OCC rule does not break new ground. The areas covered in the rule have in many cases already been subject to preemption by the OCC. In the past, these preemptive rulings went forward generally on a case-by-case basis. That approach worked when state and local actions that were preempted occurred infrequently. Recently, however, we have seen a proliferation of such state and local actions. These actions often ended up in the courts, where preemption was always upheld.
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    We believe, therefore, that it was very important that the OCC issue this rule in order to make it clear to all parties where the line on preemption is. While most legal experts in this arena know that state and local laws that impinge on the fundamental activities of national banks are preempted, state and local officials have often proceeded despite the virtual certainty that their efforts will be struck down by the courts.
    In the meantime, national banks face costly uncertainty as to how to proceed with the affected businesses. Banks, the OCC and the taxpayers of those state and local governments end up wasting resources in litigation. This OCC rule will help avoid that uncertainty and litigation costs by bringing together in one place what was in fact occurring on a case-by-case basis in any event.
    A second key point, what many of the opponents of the rule are advocating would in fact render the dual banking system virtually meaningless. The areas addressed by the OCC rule, lending and deposit-taking, are fundamental to the business of banking. If state and local laws can regulate these most basic of national bank activities, and if States can examine national banks, what is left of the national banking system? Simply put, for a national banking system to exist, state and local governments must not be able to impose material restrictions on the fundamental banking activities of national banks.
    Finally, much of the debate over the rule has been in the context of the need to address the terrible problem of predatory lending. There are two approaches to predatory lending that we believe would work well, without undermining the dual banking system. The first involves cooperation between the OCC and state and local officials. State and local governments should work with the OCC to identify any problems and recommend changes in the regulation of national banks that may be necessary to address those problems. The OCC has indicated strong interest in this type of cooperation.
    In addition, should state and local authorities find specific situations in which national banks may be engaging in unethical or illegal activities, they should forward this information directly to the OCC for action. We are confident that the OCC would take strong action and has the authority to do so. Under this approach, state and local governments would not try to regulate the fundamental activities of national banks, and therefore the dual banking system would be maintained.
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    A second approach, not inconsistent with the first, is the passage of targeted Federal legislation to address predatory lending. There are a number of areas where Congress has determined that a Federal approach to a given consumer protection issue is warranted. As noted earlier, this approach was recently taken by this committee with respect to the Fair Credit Reporting Act. We recommend that the Congress actively consider proposals for a national approach to predatory lending, such as that contained in the Responsible Lending Act introduced by Congressman Ney and others.
    Thank you for allowing us to testify this morning.
    [The prepared statement of Edward L. Yingling can be found on page 214 in the appendix.]
    Chairwoman KELLY. I thank you, Mr. Yingling, for staying within the time frame.
    Mr. Taylor?
    Mr. TAYLOR. Good afternoon, Madam Chairwoman and Representative Crowley and other Members of the committee. Thank you for the opportunity to testify. My name is John Taylor. I represent the National Community Reinvestment Coalition, which is a coalition of some 600 community organizations, local governments, and state-based institutions whose essential common interest in NCRC is to work together to promote fair and equal access to credit and prevent lending discrimination.
    I want to begin actually by answering a question that you asked, Madam Chairwoman, as well as some of the others, I think Representative Gutierrez and Representative Maloney, on how the process went for the OCC in getting public comment and how they listened to that comment both from Congress and from other people. The question was asked, how many comments did they receive and how did that break out. I am sorry that Ms. Williams did not have those figures, but I happen to have those for you. There were 2,100 comments received by the OCC on this rule. Only 5 percent supported the position they took. I think that is fairly significant in light of the questioning that you had earlier.
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    Let me also say I am glad to hear that my friend and colleague from the American Bankers Association had some quotes from Abe Lincoln on his wall, but I would be pretty shocked if President Lincoln were here that he would not indeed agree with the States rights positions to be able to prevent unfair lending practices on the State level, and also endorse a national bill that made sure that lending discrimination, or rather predatory lending, became a thing of the past.
    Unfortunately, it has surged in recent years, and now more than ever we do need these state anti-predatory lending laws, indeed, one on a Federal level. We need more consumer protections, not less, since the OCC has just boldly preempted state anti-predatory lending laws in nearly 25 States. NCRC, the National Community Reinvestment Coalition, recently issued a report called The Broken Credit System. I believe we gave all Members of the Banking Committee a copy of this report, and it was widely covered in the Wall Street Journal and New York Times, and many of the other major press. If anybody needs a copy, we will make sure you get it.
    The important thing to understand is that we have found that predominately African American and elderly communities, and I want to recognize my friends from the NAACP and AARP who endorsed and supported our study, that showed that African American and elderly consumers were in fact targets of the subprime market, even when controlling for credit scores, housing stock and income.
    We actually did this study in 10 of the large metropolitan areas including Atlanta, Baltimore, Cleveland, Detroit, Houston, Los Angeles, Milwaukee, New York, St. Louis and Washington, DC. After controlling for credit risk and housing market conditions, we found an increased amount of high cost subprime lending in elderly and minority neighborhoods. I can give you some examples about that, but I am going to move ahead to make sure I cover more substantive points in my testimony.
    While price discrimination is insidious of itself, it is often combined with abusive terms and conditions that compound the evils of predatory lending. Overpriced loans with abusive terms and conditions strip the equity out of borrowers's homes and often lead to foreclosure. NCRC operates a Consumer Rescue Fund initiative that has responded to numerous examples of predatory lending. Under the initiative, NCRC arranges affordable refinance loans for victims of predatory lending. I have heard some examples from Members of Congress. There probably is not a Member of Congress who has not heard from more than one constituent about these kinds of practices. So I am not going to bother to give you the examples because I think you know them well.
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    It does destroy affordable housing initiatives and community development initiatives, particularly in working poor communities and predominantly minority communities, when predatory lending and usurious subprime lending is able to be the law of the land in those neighborhoods. Lest you think that we are exaggerating about the impact of predatory lending in those neighborhoods, let me give you one example of a case that our rescue fund handled. It represented one neighborhood in New York City. There were 400 families impacted and victimized by predatory developers, appraisers, brokers and lenders.
    When the OCC preempted state anti-predatory laws a couple of weeks ago, 25 States suddenly lost their ability to protect their citizens from equity stripping, massive foreclosures and loss of wealth. By the way, the OCC is attempting to expand this preemption, and this committee should know it, via the new proposed CRA regulatory changes that were just announced where they are attempting to have this sort of standard also incorporated at the other agencies. I think this committee ought to be aware of that. They are looking for partners, is what I am suggesting.
    The OCC preempts comprehensive state anti-predatory lending law. Make no mistake about it. The OCC's regulation States that a national bank shall not make a loan predominantly on the foreclosure value of a borrower's collateral without regard to the borrower's repayment ability. The rule further prohibits national banks from engaging in practices that are unfair and deceptive under the Fair Trade Commission Act. So essentially, they say don't break the law, the Fair Trade Act, and do not predominantly make your decision based on foreclosure. So you can sort of still loan against the foreclosure value, but it should not be the predominant factor. By the way, in terms of when the OCC assesses them and regulates them, there has to be a pattern and practice of this. So you can do this some of the time and it can be part of your decision, so the OCC's regulation is not quite hard and fast.
    Let me say, that red button unless you inadvertently clicked on it, means my time is up. So I will close by suggesting that the key thing to understand here is that the OCC regulation does not explicitly prohibit many things that in fact are predatory practices, including loan flipping, lack of income verification, single premium credit insurance, steep prepayment penalties, fee packing, high balloon payments, and other forms of practices that are in fact quite clearly predatory lending practices. None of that is covered except by State law, and it gets preempted by this rule.
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    I would suggest to you, too, that the notion that the OCC banks do not participate in this kind of activity, when they do about 4.2 million mortgage loans per year, that is, the institutions they regulate are about 28 or 29 percent of the entire loans in this country is absurd. We need to look at what those banks are doing in purchasing those loans and what their activities are, and do not assume that they are not a part of the practice.
    I will conclude by saying that I agree with my colleague from the ABA and some of the Members on both sides of the aisle who have said that it is high time for a national standard, but only one that is as good as the strongest state standard, so that the way we deal with this problem and create parity and fairness across the land is to create a strong comprehensive anti-predatory lending legislation that drives all these usurious, unscrupulous kind of lenders out of the business.
    Thank you very much.
    [The prepared statement of John Taylor can be found on page 167 in the appendix.]
    Chairwoman KELLY. Thank you, Mr. Taylor. You have accomplished something very few people in front of my committees do. You have managed three endings, and that is okay. You did run over your time. I want to ask you one question here. That report is something of interest. I read pieces in your testimony from the report. Would you like to make that report a part of the record for this hearing? Or would you rather it just be available to our staffs? I think that is something that our staffs probably should have, if they do not have already.
    Mr. TAYLOR. I would like to make that as part of the congressional record, Madam Chairwoman, as well as our Statement to the OCC, along with Members of Congress and 2,100 others who wrote to them about this proposed rule.
    Chairwoman KELLY. Then the NCRC report and its statement to the OCC will become a part of the record. So moved. Thank you for your testimony.
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    [The following information can be found on page 290 and 347 in the appendix.]
    Mr. TAYLOR. Thank you.
    Chairwoman KELLY. Ms. Thomas?
    Ms. THOMAS. Good afternoon, Madam Chairwoman, Ranking Member Gutierrez and Members of the committee. I am Karen Thomas, Director of Regulatory Affairs and senior regulatory counsel for the Independent Community Bankers of America. I am pleased to share with you ICBA's views on the OCC preemption rule.
    When first proposed, OCC's preemption and visitorial powers rules engendered heated controversy and debate, pro and con. With issuance of the final preemption rule earlier this month, the controversy over the rules remains. Strong views and feelings have been expressed on both sides as to the legitimacy and appropriateness of the rule.
    In general, as expressed in our comment letter on the rule, the ICBA believes it would have been preferable for the OCC to continue to analyze how individual State laws impact national banks and make preemption determinations on a case-by-case basis, rather than adopt a broad, general preemption regulation. In our judgment, the importance of the Federal-state relationship mandates than whenever preemption is undertaken, it should be carefully considered in the context of an individual statute. Each case should be evaluated on its own particular merits.
    Overall, we are concerned that the scope of the OCC rule may not maintain the creative balance that characterizes our unique dual banking system. The issue is, does the OCC rule go too far? It may have, but for us it is not a clear-cut case. Our position is taken in the context of the increasing concern that community bankers have expressed about the growing trend among state legislatures to pass aggressive consumer protection measures that, although well intended, increase banks's regulatory burden and have negative unintended consequences for bank customers.
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    Consequently, ICBA has strongly supported on a number of occasions Federal preemption of State laws. For example, we have supported preemption of State laws such as the Georgia anti-predatory lending statute, laws banning ATM fees, and insurance sales laws that restrict how banks can sell insurance.
    The OCC notes it adopted the rules to assist national banks and their customers because overlaying state and local requirements on top of the Federal standards that already apply imposes excessively costly and unnecessary regulatory burden. This statement resonates well with community bankers facing an ever-growing mountain of regulation.
    To illustrate, secondary market investors stopped buying loans originated in Georgia because they were not willing to take the risk that they might purchase a loan considered predatory. Liquidity dried up as secondary market lending slowed significantly. Once the OCC preempted the law for national banks, a hard-fought for parity clause in the Georgia law meant that state-chartered banks were also exempt. Without preemption, Georgia consumers could have been seriously disadvantaged in their ability to secure mortgage loans.
    Consumers deserve accurate information about financial products and services and protection from unscrupulous providers and unfair or misleading practices. To analyze whether consumers are adequately protected under the OCC rule, several considerations must be kept in mind. First, the rule expressly affirms that national banks must treat all customers fairly and shall not engage in unfair or deceptive practices as defined under the Federal Trade Commission Act. The OCC has previously taken actions against national banks for unfair and deceptive practices, and affirms it will continue to do so.
    Second, the new rule's anti-predatory lending standard is intended to prevent national banks from making a consumer loan where repayment is unlikely and would result in the lender seizing the collateral. Finally, national banks are subject to a broad panoply of consumer protection statutes enacted by Congress, including Truth in Lending, RESPA, ECOA, HMDA, Truth in Savings and many others. Federal bank regulators ensure compliance with these requirements through regular rigorous examination and supervision.
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    The dual banking system has served our nation well for more than 100 years. While the lines of distinction between state and Federally chartered banks have blurred greatly, community bankers continue to value the productive tension between state and Federal regulators. However, many community bankers view one set of rules issued by one Federal bank regulator as an undue concentration of power. We do not know whether the OCC's preemption rule will disturb the balance of the dual banking system by giving national banks too much advantage over state-chartered banks. But OCC preemption of State laws is only one side of the coin. The other is state action that impinges on the powers of national banks or undermines appropriate Federal supervision and regulation. For example, as Chairman Greenspan has warned, state-chartered industrial loan companies have the potential to undermine holding company supervision and regulation, while breaching further the separation of banking and commerce.
    The principle of Federal preemption is a long and well-established one, but where the lines should be drawn continues to be debated. Preemption is a complex subject requiring a balancing of interests. While many community banks support some preemption, many are also uncomfortable with a policy of blanket preemption. A broad preemption regulation will not eliminate challenges to the OCC's authority, as we have already seen. The ICBA is concerned that a broad preemption may have unintended and unforeseen consequences. We would prefer an analysis of the unique elements of a particular State law before a decision to preempt is made.
    Thank you. I would be pleased to answer any questions.
    [The prepared statement of Karen M. Thomas can be found on page 181 in the appendix.]
    Chairwoman KELLY. Thank you, Ms. Thomas.
    Mr. Belew?
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    Mr. BELEW. Thank you, Madam Chairwoman. Thank you very much for convening these hearings. My name is Joe Belew. I am President of the Consumer Bankers Association. I will also keep my remarks brief.
    As indicated in my written testimony, CBA strongly supports the OCC in its recent rulemaking efforts to clarify the extent of its authority over national banks and their subsidiaries. Its actions are in accord with the letter and the spirit of the National Bank Act, as that law has been consistently interpreted by over a century of court opinions.
    The rules were issued against a backdrop of stringent OCC examinations on a very broad sweep of Federal consumer protection laws, as well as safety and soundness laws. We would call the committee's attention to the list we provided of these Federal statutes. They cover virtually every imaginable area of consumer protection. Further, the OCC has been forceful in its enforcement of these laws. National banks do strive to be the gold standard in their dealings with the public. The OCC is swift and sure in those rare instances where it discovers wrongdoing.
    The OCC's tough approach is not new. As far back as June of 2000, Counsel Julie Williams put the industry on notice at a CBA conference that the agency would use all its powers to anticipate and address any predatory lending concerns.
    As we note in our testimony, our members, which are predominantly national banks, are also going beyond the requirements of the law and promoting financial literacy programs. This is important since we have injected predatory lending into this debate. For 3 years, we have surveyed our member banks to determine how involved they are in financial literacy efforts, as a measure of their sense of responsibility to the communities they serve. The most recent survey showed that 98 percent of the respondents sponsor financial literacy programs or partner with others.
    Tough enforcement by the OCC, coupled with our industry's financial literacy efforts and a widespread understanding, which has been noted several times this morning, that problems are seldom being caused by national banks, they are not the majority cause, lead us to support the OCC rules as sound public policy.
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    To be sure, there is another reason, and that is banks' needs for predictability and uniformity across multiple States of operation. CBA's members, generally the country's larger financial institutions, typically operate in multiple States. Some are in over half the States of the Union, and many operate literally thousands of branches and have millions of customers. Increasingly in recent years, national banks have been facing the intrusion of state and local statutes and regulations. There was a need for clarity, greater uniformity, and predictability. These regulations will prove helpful.
    Thank you very much for the opportunity to appear today.
    [The prepared statement of Joe Belew can be found on page 58 in the appendix.]
    Chairwoman KELLY. Thank you, Mr. Belew.
    Mr. Hammond?
    Mr. HAMMOND. Good afternoon, Madam Chairwoman and Ranking Member Gutierrez and Members of the subcommittee. My name is Lee Hammond. I am a member of AARP's board of directors.
    I appreciate the opportunity to offer AARP's assessment of the Office of the Comptroller of Currency's recent action to preempt the application of State laws to national banks and their operating subsidiaries. Chairman Kelly, I also appreciate your including our written testimony in the record of the hearing.
    While the recent rulemaking by OCC broadly preempts State laws affecting virtually all aspects of national bank and operating subsidiary activities, my testimony is focused on the OCC rule's impact on State laws and enforcement actions designed to stop predatory mortgage lending. The number of victims of predatory mortgage lending, many of whom have come to AARP for assistance, continues to grow.
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    In 1998 and 2000, HUD, the Federal Reserve Board and the Treasury Department issued reports defining predatory lending, chronicling its established patterns and its growth. We are very concerned that the OCC has both exceeded its authority under the National Bank Act and has minimized the breadth of the problem of predatory lending rule in its new rule.
    We believe the OCC is attempting to substitute a single substantive regulatory provision for the broad range of consumer protections that currently exist under state anti-predatory mortgage lending and unfair deceptive acts and practices law, the latter referred to as the UDAP laws. Victims of misrepresentation, deception, fraud and unconscionable practices may be denied redress against the perpetrators of these offenses, if the perpetrators are national banks or their operating subsidiaries.
    AARP is particularly concerned about the OCC's decision to extend the preemption of State laws to operating subsidiaries of national banks. Our view is that national banking laws do not afford unrestricted preemption of state authority over activities of national banks or their operating subsidiaries. In part, we base our views on state predatory lending laws that are authorized by the Federally enacted Homeownership and Equity Protection Act, referred to as HOEPA. HOEPA establishes a category of high-cost real estate loans and restricts the activities of mortgage lenders in connection with those loans.
    Confronted with the growing complaints about abusive lending practices against their citizens, and with homeowners losing their homes to foreclosure, state legislatures and regulatory bodies seized upon the authority granted them by Congress under HOEPA to expand their consumer protections. Our view is that Congress, by enacting HOEPA, has made it clear that HOEPA and State laws modeled on HOEPA legitimately restrict the activities of any high-cost lender. We believe this includes national banks and their operating subsidiaries.
    AARP supports stronger Federal legislation to stem the tide of predatory mortgage lending. We also support State laws and regulations designed to avoid preemption problems by avoiding rate and fee setting, and by using HOEPA as a legislative model. AARP submits that OCC's broad preemption is not merely unauthorized, but that it undermines the Federalism principles to the deterrent of the public interest.
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    Beyond this, we believe that OCC's preemption action deprives the judiciary of the visitorial powers to regulate and supervise granted to it by Congress. We believe that under the new OCC rules, state authority to sue national banks to enforce state banking laws, including consumer protection laws, would effectively be eliminated. It leaves regulation of a large segment of the mortgage market to the limited enforcement resources of the OCC. In addition, the OCC's rules weaken state authority to enforce those few laws that the OCC does not preempt, thus enabling national banks to avoid those laws as well.
    The breadth of the OCC's preemption remains to be tested in litigation, but the harshest impact will likely be felt by those with the greatest need for State law protection, homeowners facing foreclosure. The OCC has likely deprived homeowners of the ability to raise State law defenses to foreclosure when the mortgage is originated on a national bank or one of its operating subsidiaries.
    AARP believes the activity of these entities must be subject to examination regulation by the States and to state-created private rights of action to provide redress to their consumers. We appreciate the purpose served by this hearing in raising congressional and public attention regarding the risks to consumer protections posed by the OCC rules.
    I will conclude by making two summary points. First, we believe that the OCC is undermining state efforts to protect consumers, and thereby taking action that is harmful to the public interest. Second, we believe that prompt and decisive congressional action is necessary to curb the OCC's exercise of powers that far exceed those delegated to it.
    I would be happy to answer any questions you may have.
    [The prepared statement of W. Lee Hammond can be found on page 73 in the appendix.]
    Chairwoman KELLY. Thank you, Mr. Hammond.
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    Mr. Shelton?
    Mr. SHELTON. Thank you, Chairwoman Kelly, Congressman Frank, Congressman Gutierrez and all the Members of the full committee and subcommittee, for inviting me here today. I appreciate the opportunity to provide you with the views of the NAACP on this very important matter.
    My name is Hilary Shelton and I am the Director of the Washington bureau of the NAACP. The Washington bureau is the Federal public policy arm of our nation's oldest, largest and most widely recognized grassroots civil rights organization. With more than 2,200 membership units in every state in our nation, the NAACP knows that predatory lending, which is rampant in our communities, hurts individuals, destroys neighborhoods and poses a real risk to our nation's future.
    Let me begin by saying that the NAACP is strongly opposed to the new regulations issued by the Office of the Comptroller of the Currency, as they will clearly eviscerate the limited protections that we currently have in place in a few States to address the scourge of predatory lending. Furthermore, as put forth by the OCC, the new regulation will in fact exacerbate a broken financial system which results in prolonged poverty and the targeting of individuals and neighborhoods because of their racial and ethnic makeup.
    Predatory lending is clearly a major civil rights issue. As several studies have shown, predatory lenders prey on African Americans and other racial and ethnic minorities in vastly disproportionate numbers. Two important reports from 2002 show that ''African Americans were 4.4 times more like to receive a subprime loan and Latinos were 2.2 times more likely to do so than their white counterparts,'' and that ''the disparity in subprime loans between whites and African Americans and other minorities actually grows at an upper-income level and is greater to higher income African American homeowners than are lower income white homeowners.''
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    Another more recent study from the National Community Reinvestment Coalition shows that the trends identified have not abated, and that, ''discrimination is widespread in America. African American and predominantly elderly communities receive a considerably high level of low-cost subprime loans than is justified based on the credit risk of neighborhood residents.''
    All of these studies bear out a fact that the NAACP has known for years through our grassroots effort at increasing homeownership in our communities and through personal experiences. African Americans are disproportionately targeted by predatory lenders for subprime loans, and the results are incredibly destructive. The problem appears to be getting worse. It is because of the disparate and frankly injurious manner in which some financial institutions continue to deal with African American communities that the NAACP has at the national, state and local levels pushed for stronger anti-predatory lending laws.
    In the interest of time, Madam Chairwoman, I am asking that two recent NAACP national resolutions dealing with predatory lending, which were included in my written testimony, be inserted into the record.
    [The following information can be found on page 140 and 143 in the appendix.]
    Chairwoman KELLY. So moved.
    Mr. SHELTON. Thank you very much. I would call special attention to the resolution passed in February of last year which specifically States the NAACP's opposition to Federal preemption of State laws.
    So why is the NAACP so opposed to the Federal preemption of State laws and specifically to the OCC's recent actions? Put simply, by preempting state and local anti-discriminatory lending laws, the OCC is effectively doing away with the all-too-few protections we have been able to put in place to address the scourge of predatory lending. The only way we can truly put a dent in the problems that result from predatory lending is to change the mortgage lending marketplace, so as to make predatory loans too risky, too expensive for lenders, and no longer good financial investments. We must take away the monetary incentives to make predatory loans.
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    It is true that historically national banks have been less likely to perpetuate predatory lending practices. This does not mean, however, that national banks and their subsidiaries do not participate in or profit from predatory lending. On the contrary, there are numerous cases in which national banks, their operating subsidiaries and their affiliates have clearly profited from predatory lending.
    National banks, their subsidiaries and their affiliates profit from predatory lending practices in numerous ways, including making direct loans, buying predatory loans from brokers, investing in loan portfolios that contain predatory loans, and providing securitization services for trusts which contain predatory loans.
    Because the Federal government has frankly done little to make it less profitable for banks to engage in predatory lending, or at least supporting predatory lending, several States have stepped in to protect their citizens. I must point out that all of these statutes were enacted only after research, intensive debate and negotiations, and many were made with local economic conditions and concerns in mind. Yet the OCC is exempting national banks and their subsidiaries from these protections, without offering any real alternative protections from predatory lending.
    While the regulations, as we understand it, do offer a few protections, they are incredibly weak and will clearly not even begin to be as effective against predatory lending as many of the State laws, including those in North Carolina, Georgia, New Jersey and New York, to name just a few.
    Furthermore, the list of State laws that will be preempted by this new regulation is long and, in many cases, very vague. When closely scrutinized, it is clear that under the new regulation, the OCC intends to preempt national banks and their operating subsidiaries from hundreds and particularly thousands of consumer protections and anti-predatory lending laws. This means that instead of all 50 state attorneys general, all 50 State offices of consumer protection, and all the private attorneys who are bringing suits against banks under State laws, enforcement of very vital and necessary consumer protections and anti-predatory lending laws will be left up to the OCC's consumer advisory group, an office of 22 people located in Texas.
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    Thus, 22 people located in one office in one city in one state will be responsible for monitoring and enforcing against the predatory lending actions of thousands of financial institutions across the nation. The exact number of financial institutions of which these 22 individuals will be responsible is unclear. Suffice it to say, however, that according to the OCC, there are 2,100 national banks, and one of the largest, Wells Fargo, has 76 operating subsidiaries that engaged in consumer mortgage lending in May of 2002, the most recent data that we have available to us now.
    In other words, rather than a multitude of regulators and watch dogs located throughout the nation in our communities monitoring the behavior of national banks and their subsidiaries, enforcement of anti-predatory lending laws will be left to a few individuals.
    Thus, not only does the NAACP decry the evisceration of many of the State laws that are protecting our members and our communities from predatory lending, but we are also extremely troubled by the practical impact of this new regulation. The few laws that are left that protect us will, frankly, not be enforceable.
    Predatory lending has ruined individual lives and communities and represents a real threat to our nation's continued economic well-being. As a result of predatory lending, millions of Americans across our nation have lost their homes and their primary source of savings. We should be taking more proactive steps to address this problem, and expanding on the initiatives advanced by the State laws, not exempting a whole class of financial institutions from state regulations that protect individual consumers.
    As I said in the beginning of my testimony, predatory lending is clearly a civil rights issue, given the egregious way in which racial and ethnic minorities are targeted by some financial institutions for predatory loans.
    Chairwoman KELLY. Mr. Shelton, could you please summarize it?
    Mr. SHELTON. In summation, by putting these regulations in place, the OCC is setting a precedent to allow some national banks to continue to target racial and ethnic minorities and the elderly for their own monetary gain. This is contrary to the long-held view of the NAACP that the primary responsibility of government is to protect its citizens, all of its citizens, and not to exploit them in the gains of a few.
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    [The prepared statement of Hilary O. Shelton can be found on page 136 in the appendix.]
    Chairwoman KELLY. Thank you very much.
    I want to say that I applaud the efforts of you, Mr. Shelton and the NAACP; you, Mr. Hamilton and the AARP; and you, Mr. Belew, for reaching out and attempting to create some financial literacy on the part of your members. It is extremely important that people gain financial literacy, probably at an early age, because some of this predatory lending can be stopped if people only understand and can see clearly what it is that they are being charged.
    If you graduate from high school and you cannot do percentages and you cannot figure out fractions, then you are not going to be able to understand if you get a housing loan. It is a serious problem and I really congratulate your three organizations for what you have done. I know that the ABA has done a lot of very good outreach in trying to educate people just on their own, and I know there are many other institutions, but you happen to be the people that are here in front of me today, and I do congratulate you for doing that kind of outreach.
    I am going to ask really just one question. Comptroller Hawke asserted, and again said something to me on the telephone in our telephone conversation, that in terms of predatory lending that it is not the national banks that are the problem, but it is the unregulated institutions that are not impacted by these rules. I am wondering if you think Congress should consider legislation that is broader in scope, to try to address that kind of concern. You can just answer this, if you will, just with a yes or no response. Let's start with you, Mr. Shelton.
    Mr. SHELTON. Yes, absolutely. As our banking institutions become much more complex, certainly broader, more protective policies need to be put in place for our consumers.
    Chairwoman KELLY. Mr. Hammond?
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    Mr. HAMMOND. Madam Chairwoman, I am not sure I understood your question exactly.
    Chairwoman KELLY. The question is that in terms of the predatory lending, it is really not the national banks that are a problem, but there are unregulated institutions out there that are not impacted by either the OCC rules or by some of the State rules. The questions now is do you think there should be a Federal effort to consider legislation that is broader than the OCC has actually done here to address these unregulated institutions.
    Mr. HAMMOND. I guess in answer to your question, there are two parts. First of all, I am not sure that the first premise is exactly correct, that no national banks have been involved in any of this.
    Chairwoman KELLY. I am basing this on what the Comptroller of the Currency said.
    Mr. HAMMOND. Secondly, I think AARP has always considered that there should be a strong floor of Federal legislation on consumer protections, so we would support that certainly, but only a floor.
    Chairwoman KELLY. Okay, thank you.
    Mr. Belew?
    Mr. BELEW. Ms. Kelly, it is difficult to say yes or no to that, and let me tell you why. I know around our tables we have debated this endlessly because it is a scourge of the land. It should not be out there. It is very difficult, as we have seen in these various States, to concretely define exactly what you are going to prohibit. You might say flipping is bad, but then are you going to prohibit refis? I do not think the middle class would like that very much.
    So my answer is, I understand that there will be some discussion. We have already had it from the Members today. We would like to be part of that discussion. I would simply urge caution that we not repeat on the Federal level the ''catastrophe'', my words, that happened in various States, because I do think harm was done to consumers when credit dried up.
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    Chairwoman KELLY. Thank you.
    Ms. Thomas?
    Ms. THOMAS. Yes, Madam Chairwoman, I think one point that needs to be made is that a lot of these lenders—it is not that they are not regulated, it is that they are not supervised or examined. They are subject to all the Federal laws that govern lending and protect consumers, but it may be difficult to find the resources to enforce those laws against those lenders. I think that needs to be one of the first steps, is to address better enforcement against those actors.
    Chairwoman KELLY. Thank you.
    Mr. Taylor?
    Mr. TAYLOR. The short answer is yes. I disagree. They are not all regulated, subjected to the same Federal laws. Large national credit unions, private mortgage companies have no CRA obligation. They do not have any obligation to serve working class Americans. I think it is time to level the playing field with banks to bring those people into the equation and expand CRA. I know there have been a couple of bills in Congress recently to consider that.
    The other thing, I would not accept the supposition that national banks are not part of the problem. You heard Ms. Williams note that they did a settlement recently in California with, I think, Providian Bank, in which they found some what would clearly be predatory lending practices. It was not the only institution they found. Furthermore, a number of the national banks are involved in purchasing these loans so they enable people who do the predatory lending loans by buying them and putting them on their books. That would be my answer.
    Chairwoman KELLY. Thank you.
    Mr. Yingling?
    Mr. YINGLING. Yes.
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    Chairwoman KELLY. That was a short answer. Your answer is yes.
    Well, I hope that the ABA will be interested in working with us, Mr. Taylor, Mr. Thomas and all of your groups. I hope that you will work with us if we consider legislation in that regard.
    Mr. Hammond, did you have something further you wanted to say?
    Mr. HAMMOND. Yes, ma'am, just a point of clarification. Did I understand you correctly at the beginning when you said that all written testimony would be included as a matter of record of this hearing?
    Chairwoman KELLY. Yes, you did.
    Mr. HAMMOND. Thank you.
    Chairwoman KELLY. All written testimony will be a part of the record. We have made a lot of other things part of this record. This is an important hearing and I think that its purpose is well-served by the testimony of all of you here today.
    The Chair notes that some Members will have additional questions. I certainly do. This panel will get those questions in writing, and the other Members may wish to submit their questions in writing. So without objection, the hearing record will remain open for 30 days for Members to submit written questions to the witnesses and to place the witnesses's responses in the record.
    With that, I thank you very much for your time, your patience, and I appreciate your appearing before us today.
    This hearing is adjourned.
    [Whereupon, at 12:57 p.m., the subcommittee was adjourned.]