September 24, 2009
Comptroller Dugan Defends Strong National Standards for Financial Providers
WASHINGTON — Comptroller of the Currency John C. Dugan said today that uniform national standards have proved to be a powerful engine for prosperity and growth, and urged Congress to strengthen federal consumer protection rules and ensure they are applied to all providers of the same financial products.
While many parts of the Treasury Department's regulatory reform proposal would enhance consumer protection, provisions that would repeal preemption should be rejected, Mr. Dugan said in a speech to Women in Housing and Finance.
"This radical change is fundamentally at odds with the concept of efficient national standards for national products and services offered across state lines in national markets – a concept that has been central to the economic prosperity of the United States since the adoption of our Constitution, and one that has been critical to the flourishing of our national banking system since 1863," he said.
Mr. Dugan noted that key parts of the Treasury plan promote the concept of uniform national standards, and said that one of the critical benefits of the proposed Consumer Financial Protection Agency would be to ensure that consistent federal rules apply to all financial providers, including the "shadow banking system" of nonbank lenders that was responsible for the largest share of the most abusive subprime loans that fueled the financial crisis.
However, the Treasury proposal would allow states to adopt and enforce different rules, which would result in a patchwork of federal and state laws that disadvantage consumers and give rise to significant uncertainty about which sets of standards apply to institutions conducting a multistate business.
"More fundamentally, we live in an era where the market for financial products and services is often national in scope," Mr. Dugan said. "In this context, regressing to a regulatory regime that fails to recognize the way retail financial services are now provided, and the need for a single set of rules for banks with customers in multiple states, would discard many benefits consumers reap from our modern financial product delivery system."
There are a number of areas in which complying with different standards set by individual states would require a bank to determine which state's law governs – the law of the state where the product or service is provided, the law of the home state of the bank, or the law of the state where the consumer is located, and "it is far from clear how a bank could do this based on objective analysis, and any conflicts could result in penalties and litigation in multiple jurisdictions," the Comptroller said.
In the case of checking accounts, he said, there could be differences in rules on the number and amount of withdrawals or deposits, permissible minimum balance requirements and ATM screen disclosures. States could assert that these requirements apply according to the law of the state in which the branch offering the account is located, the home state of the bank, the state where the customer resides, or someplace else.
"How would a bank advertise in the newspaper or on the radio to promote its checking accounts if it were located in a multistate region – such as the Washington DC area – if different states imposed different requirements regarding terms and disclosures?" he asked.
"Even if the bank figured all this out for a particular customer, that could all change if the customer moved, or if the bank merged with another bank located in a different state," he said. "Would that mean the customer would have to open a new account to incorporate the state's required terms? And even if Congress added language to address some of the questions we can think of today, there would only be more uncertainties tomorrow – and no realistic possibility of writing a fix into national law each time a new issue arose."
The Comptroller also noted that many arguments for abandoning preemption are simply wrong, including the notion that national banks were the source of predatory and unsafe mortgage loans, while state institutions were not.
"It is widely recognized that the worst subprime loans that have caused the most foreclosures were originated by nonbank lenders and brokers regulated exclusively by the states. Although the OCC has little rulewriting authority in this area, we have closely supervised national bank subprime lending practices. As a result, national banks originated a relatively smaller share of subprime loans and applied better standards, resulting in significantly fewer foreclosures – as demonstrated in an attachment to this speech prepared last year by OCC staff," he said.
"Meanwhile, nothing in federal law precluded states from effectively regulating their own nonbank mortgage lenders and brokers," he added. "Indeed, that's why the plan's grant of strong rulewriting and enforcement authority at the federal level over the shadow banking system of unregulated financial providers, through the CFPA, is such a good idea."