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DEPARTMENT OF THE TREASURY

Comptroller of the Currency

CFR Citation: 12 CFR Parts 7 and 34

Docket ID: [Docket No. 03-16]

RIN ID: RIN 1557-AC73

NOTICE: PROPOSED RULES

ACTION: Bank activities and operations and real estate lending and appraisals:

DOCUMENT ACTION: Notice of proposed rulemaking.

SUBJECT CATEGORY: Bank Activities and Operations; Real Estate Lending and Appraisals

DATES: Comments must be received by October 6, 2003.

DOCUMENT SUMMARY: The Office of the Comptroller of the Currency (OCC) proposes to amend parts 7 and 34 of our regulations to add provisions clarifying the applicability of state law to national banks. These provisions would identify types of state laws that are preempted, as well as types of state laws that generally are not preempted, in the context of national bank lending, deposittaking, and other authorized activities.

SUMMARY: National banks; State law applicability,

SUPPLEMENTAL INFORMATION

Scope of National Bank Preemption

A. Introduction

In recent years, the OCC has received numerous inquiries concerning the applicability of state law to national banks,\1\ and the extent to which state law applies to a national bank's exercise of powers authorized by Federal law has been the subject of litigation in different contexts.\2\ The number and variety of
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these questions reflect a need for clarification of the circumstances when state laws or regulations apply to activities and operations of national banks. Without further clarification, national banks, particularly those with customers in multiple states, face uncertain compliance risks and substantial additional compliance burdens and expense that, for practical purposes, materially impact their ability to offer particular products and services.
\1\ In response to such requests, the OCC has issued a number of interpretive opinions providing our views with respect to the applicability to national banks of various state laws. See, e.g., 67 FR 13405 (Mar. 22, 2002) (Massachusetts insurance sales law); 66 FR 51502 (Oct. 9, 2001) (West Virginia insurance sales law); see also Cline v. Hawke, No. 022100, 2002 WL 31557392 (4th Cir. Nov. 19, 2002), petition for review dismissed (upholding OCC opinion on the merits); 66 FR 28593 (May 23, 2001) (Michigan motor vehicle sales law); 66 FR 23977 (May 10, 2001) (Ohio automobile dealer licensing law); 65 FR 15037 (Mar. 20, 2000) (Pennsylvania law governing auctioneers and the conduct of auctions); OCC Interpretive Letter No. 866 (Oct. 8, 1999) (multistate fiduciary operations); OCC Interpretive Letter No. 872 (Oct. 28, 1999) (California restrictions on the exercise of fiduciary powers); and OCC Interpretive Letter No. 695 (Dec. 8, 1995) (multistate fiduciary operations).
\2\ See, e.g., Bank of America v. City & County of San Francisco, 309 F.3d 551 (9th Cir. 2002), cert. denied, 123 S.Ct. 2220 (2003), 2003 U.S. LEXIS 4253 (May 27, 2003) (the National Bank Act and OCC regulations together preempt conflicting state limitations on the authority of national banks to collect fees for the provision of electronic services through ATMs; municipal ordinances prohibiting such fees are invalid under the Supremacy Clause); Wells Fargo Bank, Texas, N.A. v. James, 321 F.3d 488 (5th Cir. 2003) (Texas statute prohibiting certain check cashing fees is preempted by the National Bank Act); Metrobank v. Foster, 193 F. Supp. 2d 1156 (S.D. Iowa 2002) (national bank authority to charge fees for ATM use preempted Iowa prohibition on such fees). See also Bank One, Utah v. Guttau, 190 F.3d 844 (8th Cir. 1999), cert. denied sub nom Foster v. Bank One, Utah, 529 U.S. 1087 (2000) (holding that Federal law preempted Iowa restrictions on ATM operation, location, and advertising).

A recent inquiry by National City Bank, National City Bank of Indiana, and two operating subsidiaries of these banks (collectively, National City) concerning the Georgia Fair Lending Act (GFLA)\3\ illustrates the impact that state laws can have on a national bank's lending activities. Our analysis of the issues raised by National City in the response to the bank, which is discussed below and published in full elsewhere in this edition of the Federal Register (National City Order), underscores the need for clarity and more predictability in our regulations concerning the extent to which state laws apply to national banks' real estate lending activities as well as other aspects of national bank activities.

\3\ GA Code Ann. Sec. Sec. 76A1 et seq.

Due to the number and significance of the questions that continue to arise with respect to the preemption of state laws in these areas, we believe it is now timely to provide more comprehensive standards regarding the applicability of state laws to lending, deposittaking, and other authorized activities of national banks. Accordingly, we are proposing to amend our regulations to provide such standards. B. Principles of Preemption in the National Bank Context

Preemption is not a new concept. It is a doctrine, based on Constitutional principles, that has been recognized by the Supreme Court since the earliest years of our Nation's history. In 1819, in the landmark case of McCulloch v. Maryland, the Court held that under the Supremacy Clause of the U.S. Constitution, states ``have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control, the operations'' of an entity created under Federal law.\4\ Notably, the entity involved in that case was a bank chartered under Federal law, the Second Bank of the United States. As discussed below, since the creation of the national banking system in 1863, courts have applied comparable principles of Federal preemption in connection with many aspects of national banks' operations, and have repeatedly found that the exercise by Federallychartered national banks of their Federallyauthorized powers is ordinarily not subject to state law. \4\ McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 436 (1819). 1. Legislative History of the National Banking Laws

Congress enacted the National Currency Act (Currency Act) in 1863 and modified it with the National Bank Act a year thereafter for the purpose of establishing a new national banking system that would operate distinctly and separately from the existing system of state banks. The Currency Act and the National Bank Act were intended to create a uniform and secure national currency and a system of national banks designed to help stabilize and support the national economy both during and after the Civil War.

Both proponents and opponents of the new national banking system expected that it would replace the existing system of state banks.\5\ Given this anticipated impact on state banks and the resulting diminution of control by the states over banking in general,\6\ proponents of the national banking system were concerned that states would attempt to undermine it. Remarks of Senator Sumner illustrate the sentiment of many legislators of the time: ``Clearly, the [national] bank must not be subjected to any local government, State or municipal; it must be kept absolutely and exclusively under that Government from which it derives its functions.''\7\
\5\ Representative Samuel Hooper, who reported the bill to the House, stated in support of the legislation that one of its purposes was ``to render the law [i.e., the Currency Act] so perfect that the State banks may be induced to organize under it, in preference to continuing under their State charters.'' Cong. Globe, 38th Cong. 1st Sess. 1256 (Mar. 23, 1864). While he did not believe that the legislation was necessarily harmful to the state bank system, Rep. Hooper did ``look upon the system of State banks as having outlived its usefulness.'' Id. Opponents of the legislation believed that it was intended to ``take from the States * * * all authority whatsoever over their own State banks, and to vest that authority * * * in Washington.'' Cong. Globe, 38th Cong., 1st Sess. 1267 (Mar. 24, 1864) (statement of Rep. Brooks). Rep. Brooks made that statement to support the idea that the legislation was intended to transfer control over banking from the states to the Federal government. Given that the legislation's objective was to replace state banks with national banks, its passage would, in Rep. Brooks's opinion, mean that there would be no state banks left over which the states would have authority. Thus, by observing that the legislation was intended to take authority over state banks from the states, Rep. Brooks was not suggesting that the Federal government would have authority over state banks; rather, he was explaining the bill in a context that assumed the demise of state banks. Rep. Pruyn opposed the bill stating that the legislation would ``be the greatest blow yet inflicted upon the States.'' Cong. Globe, 38th Cong., 1st Sess. 1271 (Mar. 24, 1864). See also John Wilson Million, The Debate on the National Bank Act of 1863, 2 J. Pol. Econ. 251, 267 (189394) regarding the Currency Act (``Nothing can be more obvious from the debates than that the national system was to supersede the system of state banks.'').
\6\ See, e.g., Tiffany v. Nat'l Bank of Missouri, 85 U.S. 409, 412413 (1874) (``It cannot be doubted, in view of the purpose of Congress in providing for the organization of National banking associations, that it was intended to give them a firm footing in the different States where they might be located. It was expected they would come into competition with State banks, and it was intended to give them at least equal advantages in such competition. * * * National banks have been National favorites. They were established for the purpose, in part, of providing a currency for the whole country, and in part to create a market for the loans of the General government. It could not have been intended, therefore, to expose them to the hazard of unfriendly legislation by the States, or to ruinous competition with State banks.''). See also B. Hammond, Banks and Politics in America from the Revolution to the Civil War 72534 (1957); P. Studenski & H. Krooss, Financial History of the United States 155 (1st ed. 1952).
\7\ Cong. Globe, 38th Cong., 1st Sess., at 1893 (Apr. 27, 1864). See also Beneficial Nat'l Bank v. Anderson, 123 S.Ct. 2058, 2064 (2003) (``[T]his Court has also recognized the special nature of Federally chartered banks. Uniform rules limiting the liability of national banks and prescribing exclusive remedies for their overcharges are an integral part of a banking system that needed protection from `possible unfriendly State legislation.' '') (citations omitted.).

The allocation of any supervisory responsibility for the new national banking system to the states would have been inconsistent with this need to protect national banks from state interference. Congress, accordingly, established a Federal supervisory regime and created a Federal agency within the Department of Treasurythe OCCto carry it out. Congress granted the OCC the broad authority ``to make a thorough examination of all the affairs of [a national bank],''\8\ and solidified this Federal supervisory authority by vesting the OCC with exclusive visitorial powers over national banks, except where Federal law provided otherwise. These provisions assured, among other things, that the OCC would have comprehensive authority to examine all the affairs of a national bank and protect national banks from potentially hostile state interference by establishing that the authority to examine, supervise, and regulate
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national banks is vested only in the OCC, unless otherwise provided by Federal law.\9\
\8\ Act of June 3, 1864, c. 106, Sec. 54, 13 Stat. 116, codified at 12 U.S.C. 481.
\9\ Writing shortly after the Currency Act and the National Bank Act were enacted, thenSecretary of the Treasury, and formerly the first Comptroller of the Currency, Hugh McCulloch observed that ``Congress has assumed entire control of the currency of the country, and, to a very considerable extent, of its banking interests, prohibiting the interference of State governments.'' Cong. Globe, 39th Cong., 1st Sess., Misc. Doc. No. 100, at 2 (Apr. 23, 1866).
2. The Supremacy Clause and the Federal Preemption Standards Articulated by the Supreme Court

A state law may be preempted by Federal law and thus rendered invalid by operation of the Supremacy Clause of the Constitution.\10\ The Supreme Court has identified three ways in which this may occur. First, Congress can adopt express language setting forth the existence and scope of preemption.\11\ Second, Congress can adopt a framework for regulation that ``occupies the field'' and leaves no room for states to adopt supplemental laws.\12\ Third, preemption may be found when state law actually conflicts with Federal law. Conflict will be found when either: (i) compliance with both laws is a ``physical impossibility;'' \13\ or (ii) when the state law stands ``as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.''\14\
\10\ ``This Constitution, and the Laws of the United States which shall be made in Pursuance thereof . . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.'' U.S. Const. Art. VI, cl. 2.
\11\ See Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977). \12\ See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947).
\13\ Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 14243 (1963).
\14\ Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Barnett Bank of Marion County v. Nelson, 517 U.S. 25, 31 (1996) (quoting Hines).

Because the origins of Federal preemption are Constitutional, the underlying purpose of the state legislation, no matter how salutary, does not determine the essential issue of preemption. As explained in Association of Banks in Insurance, Inc. v. Duryee,\15\ ``[w]here state and federal laws are inconsistent, the state law is preempted even if it was enacted by the state to protect its citizens or consumers.''\16\ \15\ 55 F. Supp. 2d 799 (S.D. Ohio 1999).
\16\ Id. at 802. Agreeing with this conclusion, the Sixth Circuit stated that ``the fact that the state legislature enacted the [state law at issue] to protect general insurance agents and consumers does not, for that reason alone, preclude federal preemption.'' Ass'n of Banks in Ins., Inc. v. Duryee, 270 F.3d 397, 408 (6th Cir. 2001); see also Franklin Nat'l Bank of Franklin Square v. New York, 347 U.S. 373, 378 (1954).

3. Supreme Court Precedents Leading to Barnett

From the earliest years of the national banking system, up to and including a decision rendered just months ago, the Supreme Court has consistently recognized the unique status of the national banking system and the limits placed on states by the National Bank Act.\17\ In one of the first cases to address the role of the national banking system, the Supreme Court stated that ``[t]he national banks organized under the [National Bank Act] are instruments designed to be used to aid the government in the administration of an important branch of the public service. They are means appropriate to that end.''\18\ \17\ See Beneficial Nat'l Bank, 123 S.Ct. at 2064.
\18\ Farmers' & Mechanics' Nat'l Bank v. Dearing, 91 U.S. 29, 33 (1875).

Subsequent opinions of the Supreme Court have been equally clear about national banks' unique role and status. See Marquette Nat'l Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299, 314315 (1978) (``Close examination of the National Bank Act of 1864, its legislative history, and its historical context makes clear that, . . . Congress intended to facilitate . . . a `national banking system'.'') (citation omitted); Franklin Nat'l Bank, 347 U.S. at 375 (``The United States has set up a system of national banks as Federal
instrumentalities to perform various functions such as providing circulating medium and government credit, as well as financing commerce and acting as private depositories.''); Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896) (``National banks are instrumentalities of the federal government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States.''); Guthrie v. Harkness, 199 U.S. 148, 159 (1905) (``It was the intention that this statute should contain a full code of provisions upon the subject, and that no state law or enactment should undertake to exercise the right of visitation over a national corporation.'').

The Supreme Court also has recognized the clear intent on the part of Congress to limit the authority of states over national banks precisely so that the nationwide system of banking that was created in the Currency Act could develop and flourish. For instance, in Easton v. Iowa,\19\ the Court stated that Federal legislation affecting national banks
has in view the erection of a system extending throughout the country, and independent, so far as powers conferred are concerned, of state legislation which, if permitted to be applicable, might impose limitations and restrictions as various and as numerous as the States. * * * It thus appears that Congress has provided a symmetrical and complete scheme for the banks to be organized under the provisions of the statute. * * * [W]e are unable to perceive that Congress intended to leave the field open for the States to attempt to promote the welfare and stability of national banks by direct legislation. If they had such power it would have to be exercised and limited by their own discretion, and confusion would necessarily result from control possessed and exercised by two independent authorities.\20\
\19\ 188 U.S. 220 (1903).

\20\ Id. at 229, 231232 (emphasis added).

The Court in Farmers' & Mechanics' National Bank, after observing that national banks are means to aid the government, stated

Being such means, brought into existence for this purpose, and intended to be so employed, the States can exercise no control over them, nor in any wise affect their operation, except in so far as Congress may see proper to permit. Any thing beyond this is ``an abuse, because it is the usurpation of power which a single State cannot give.'' \21\
\21\ Farmers' & Mechanics' Nat'l Bank, 91 U.S. at 34 (citation omitted).

Thus, as recognized by the Supreme Court in Barnett, the history of national bank powers is one of ``interpreting grants of both enumerated and incidental `powers' to national banks as grants of authority not normally limited by, but rather ordinarily preempting, contrary state law.''\22\ ``[W]here Congress has not expressly conditioned the grant of 'power' upon a grant of state permission, the Court has ordinarily found that no such condition applies.''\23\
\22\ Barnett, 517 U.S. at 32 (1996). The Supreme Court has recognized that the ``business of banking'' is not limited to the powers enumerated in section 24 (Seventh). See NationsBank v. Variable Annuity Life Ins. Co., 513 U.S. 251, 258 n.2 (1995). As the scope of the underlying national bank power may evolve, the OCC ``may authorize additional activities if encompassed by a reasonable interpretation of Sec. 24 (Seventh).'' Indep. Ins. Agents of Am., Inc. v. Hawke, 211 F.3d 638, 640 (D.C. Cir. 2000). Thus, the effect of a state law on the exercise of a Federal power may change as the character of the power changes.
\23\ Barnett, 517 U.S. at 34.
4. Recent Lower Federal Court Decisions Concluding that State Laws Are Preempted

These principles have been recognized and applied in a series of recent cases invalidating state and local restrictions upon national bank activities that are authorized under Federal law. In each case, the court determined that the state or local restriction obstructed, in whole or in part, the exercise of an authorized
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national bank power and therefore was preempted by operation of the Supremacy Clause.

For example, ordinances passed by four municipalities in California and New Jersey specifically to prohibit ATM access fees were enjoined by district court order on grounds that included National Bank Act preemption. In California, the district court entered a preliminary injunction against the fee prohibition ordinances adopted by San Francisco and Santa Monica, and the Ninth Circuit affirmed. On remand, the district court entered a permanent injunction against the ordinances, and the Ninth Circuit once again affirmed.\24\ Similarly, a Federal district court in New Jersey entered temporary restraining orders preventing fee prohibition ordinances adopted by Newark and Woodbridge from becoming effective. The combined case was ultimately settled by each city's consent to a permanent injunction against its ordinance.\25\ A Federal district court in Des Moines declared a longstanding Iowa prohibition on ATM access fees to be in conflict with the national bank power to charge fees and therefore preempted.\26\ For similar reasons, the Fifth Circuit upheld a Federal district court ruling that Federal law displaced a Texas statute that prohibited the charging of fees for cashing checks drawn upon accounts at the payor bank.\27\ A Federal district court in Georgia reached the same conclusion with respect to a Georgia law that similarly attempted to restrict the authority of national banks under Federal law to charge such fees.\28\
\24\ See Bank of America, N.A. v. City & County of San Francisco, 2000 WL 33376673 (N.D. Cal. June 30, 2000), aff'd, Bank of America, 309 F.3d 551.
\25\ See New Jersey Bankers Ass'n v. Township of Woodbridge, No. CV00702 (JAG) (D.N.J. Nov. 8, 2000).
\26\ See Metrobank, 193 F. Supp. 2d 1156.
\27\ See Wells Fargo Bank Texas, 321 F.3d 488.
\28\ See Bank of America, N.A. v. Sorrell, 248 F. Supp. 2d 1196 (N.D. Ga. 2002).

Restrictions on national bank activities other than the charging of fees have also been held preempted. Deferring to the OCC's interpretations of the National Bank Act, the Eighth Circuit held that Federal law preempted Iowa restrictions on ATM location, operation, and advertising as applied to national banks.\29\ More recently, a Federal district court in California permanently enjoined the California Attorney General and Director of the Department of Consumer Affairs from enforcing a California statute requiring that certain language and information be placed on the billing statements credit card issuers provide their cardholders.\30\ In so doing, the Court held that there is ``no indication in the NBA that Congress intended to subject that power [to loan money on personal security] to local restriction.'' Thus, the court applied ``the ordinary rule * * * of preemption of contrary state law.''\31\ Contrary state law also may be preempted by Federal regulation. ``Federal regulations have no less preemptive effect than federal statutes.''\32\
\29\ See Bank One, Utah, 190 F.3d 844.
\30\ See American Bankers Ass'n v. Lockyer, 239 F. Supp. 2d 1000 (E.D. Cal. 2002).
\31\ Id. at 1016; see also Wells Fargo Bank, N.A. v. Boutris, 2003 WL 21277203 at *3 (E.D. Cal. May 9, 2003) (Wells Fargo Bank II) (The National Bank Act ``was enacted to `facilitate * * * a national banking system,' and `to protect national banks against intrusive regulation by the States.''') (citations omitted).
\32\ Fid. Fed. Sav. & Loan Ass'n. v. de la Cuesta, 458 U.S. 141, 153 (1982).
5. Limited Circumstances Under Which State Laws Apply to National Banks

Federal courts apply no general presumption that state laws are applicable to national banks. As explained recently by the Supreme Court, a presumption against preemption is ``not triggered when the States regulate in an area where there has been a history of significant federal presence.''\33\ As further explained by the Ninth Circuit in Bank of America, ``because there has been a ``history of significant federal presence'' in national banking, the presumption against preemption of state law is inapplicable.''\34\
\33\ United States v. Locke, 529 U.S. 89, 108 (2000).

\34\ 309 F.3d at 559.

Moreover, no Federal statute endorses the presumptive application of state laws to national banks. Although the national bank branching statute makes applicable the laws of the host state regarding community reinvestment, consumer protection, and fair lending to branches of an outofstate national bank located in the host state to the same extent as those laws apply to a bank chartered by that state, the statute expressly excepts any case where Federal law preempts the application of state law to national banks.\35\
\35\ See 12 U.S.C. 36(f)(1)(A). This provision was added to the branching statute by the RiegleNeal Interstate Banking and Branching Efficiency Act of 1994, Pub. L. 103328, 108 Stat. 2338, 2350 (1994).

In a few situations, Federal law has incorporated provisions of state law for specific purposes,\36\ and Congress may more generally establish standards that govern when state law will apply to national banks' activities.\37\ In such cases, the OCC applies the law or the standards that Congress has required or established.
\36\ See, e.g., 12 U.S.C. 92a(a) (the extent of a national bank's fiduciary powers is determined by reference to the law of the state where the national bank is located).
\37\ See, e.g., 15 U.S.C. 6701 (codification of section 104 of the GrammLeachBliley Act, Public Law 106102, 113 Stat. 1338, 1352 (1999), which establishes standards for determining the
applicability of state law to different types of activities conducted by national banks, other insured depository institutions, and their affiliates).

State laws also may apply to national banks' activities under circumstances that have been described variously by the courts as not altering or conditioning a national bank's ability to exercise a power that Federal law grants to it.\38\ ``Thus, states retain some power to regulate national banks in areas such as contracts, debt collection, acquisition and transfer of property, and taxation, zoning, criminal, and tort law.''\39\ Notably, these types of laws typically do not regulate the manner or content of the business of banking authorized for national banks under Federal law, but rather establish the legal infrastructure that surrounds and supports the conduct of that business. In other words, they promote a national bank's ability to conduct business; they do not obstruct a national bank's exercise of powers granted under Federal law.\40\
\38\ See Barnett, 517 U.S. at 33.
\39\ Bank of America, 309 F.3d at 559. As stated in 12 U.S.C. 548, for the purposes of state tax laws, ``a national bank shall be treated as a bank organized and existing under the laws of the State * * * within which its principal office is located.'' With regard to state criminal laws, it is important to recognize the distinction drawn by the Supreme Court in Easton between ``crimes defined and punishable at common law or by the general statutes of a State'' and ``crimes and offences cognizable under the authority of the United States.'' 188 U.S. at 238. The Court stated that ``[u]ndoubtedly a State has the legitimate power to define and punish crimes by general laws applicable to all persons within its jurisdiction. * * * But it is without lawful power to make such special laws applicable to banks organized and operating under the laws of the United States.'' Id. at 239 (holding that Federal law governing the operations of national banks preempted a state criminal law prohibiting insolvent banks from accepting deposits). Further, as we note infra in footnote 86, we will look to the substance and effect of a state law in determining whether a particular state law falls into a category of state laws that are not preempted; a state may not immunize a law from preemption simply by applying a criminal penalty to it. Also, notably, ``[c]onsumer protection is not reflected in the case law as an area in which the states have traditionally been permitted to regulate national banks.'' Lockyer, 239 F. Supp. 2d at 1016.
\40\ See Barnett, 517 U.S. at 3334.

6. Examples of Types of State Laws Found to be Preempted

The OCC and Federal courts have thus far concluded that a wide variety of state laws are preempted, either because the state laws fit within the express preemption provisions of an OCC regulation or because the laws
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conflict with a Federal power vested in national banks. Types of state laws that have been addressed by the OCC or the courts include: [sbull] Licensing laws. State statutes that require national banks to obtain a license or to register with the state before exercising a Federallygranted authority have been found to be preempted.\41\ \41\ See First Nat'l Bank of Eastern Arkansas v. Taylor, 907 F.2d 775 (8th Cir. 1990) (the National Bank Act precludes a state regulator from prohibiting a national bank, through either enforcement action or a licensing requirement, from conducting an authorized activity); and Bank of America Nat'l Trust & Sav. Ass'n v. Lima, 103 F. Supp. 916 (D. Mass. 1952) (states have no authority to require national banks to obtain a license to engage in an activity permitted to them by Federal law). See also Wells Fargo Bank, N.A. v. Boutris, 252 F. Supp. 2d 1065, 1074 (E.D. Cal. 2003 (Wells Fargo Bank I) (bank becoming a state licensee does not affect its right to conduct Federally permissible banking activities authorized by the OCC); Nat'l City Bank of Indiana v. Boutris, Civ. No. S030655GEB JFM at 14 (May 7, 2003) (when banking activities are governed by Federal preemption, Federal law applies even where an instrumentality of a national bank has needlessly subjected itself to state licensing law); Letter dated May 15, 2001 from Julie L. Williams to Messrs. Thomas Plant and Daniel Morton (66 FR 28593, May 23, 2001) (regarding state license requirement in the sale of motor vehicles); Letter dated Mar. 7, 2000, from Julie L. Williams to Thomas P. Vartanian (65 FR 15037, Mar. 20, 2000) (regarding Pennsylvania auctioneer licensing law); OCC Interpretive Letter No. 866 (Oct. 8, 1999) (regarding state laws requiring national bank to obtain license before soliciting or engaging in proposed fiduciary arrangements); OCC Interpretive Letter No. 749 (Sept. 13, 1996) (regarding state law requiring national banks to be licensed to sell annuities); and OCC Interpretive Letter No. 644 (Mar. 24, 1994) (regarding state registration and fee requirements imposed on mortgage lenders). While several precedents cited address activities other than real estate lending, the principles articulated in the precedents apply to all national bank activities, including making real estate loans.
[sbull] Filing requirements. State statutes that require national banks to make filings with, or report to, states conflict with the OCC's exclusive visitorial powers over national banks.\42\
\42\ See OCC Interpretive Letter No. 616 (Feb. 26, 1993) (state statute requiring national banks to report quarterly to state banking commissioner would be preempted based upon OCC's exclusive visitorial powers); and OCC Interpretive Letter No. 614 (Jan. 15, 1993) (state statutes requiring national banks to keep records and file notifications and data with the state would be preempted because they purport to grant the state visitorial powers over national banks); See, e.g., Guthrie, 199 U.S. 148 (discussing OCC's exclusive visitorial powers).
[sbull] Terms of real estate loans. The OCC's current regulations in subpart A of part 34 address real estate lending generally. Section 34.4(a) expressly preempts state laws concerning five areas of fixed rate mortgage lending. Section 34.4(a)(1) preempts state laws concerning loantovalue ratios. Section 34.4(a)(2) preempts state laws concerning the schedule for repayment of principal and interest. In this regard, the key elements of any repayment schedule are: (1) the timing of the expected payments, and (2) the amount of expected payments.\43\ Section 34.4(a)(3) preempts state laws concerning the term to maturity of real estate loans.\44\ Subpart B of part 34, governing adjustable rate mortgages (ARMs), states that national banks may engage in ARM lending without regard to any state law
limitation.\45\
\43\ See Section III. A. 1. of the National City Order, in which we concluded that state laws governing balloon payments, negative amortization, limitations on advance payments, late fees, prepayment fees, and default rates of interest were preempted because they concerned the schedule for repayment of principal and interest in contravention of 12 CFR 34.4(a)(2).
\44\ See id. at Section III. A. 2., in which we concluded that state laws governing acceleration of indebtedness and rights to cure a default were preempted because they concerned the term to maturity in contravention of 12 CFR 34.4(a)(3).
\45\ See 12 CFR 34.21(a).
[sbull] Advertising. Courts have consistently held that state laws limiting the ability of a national bank to advertise are preempted.\46\ \46\ See Franklin Nat'l Bank, 347 U.S. 373 (state law
restricting national bank's ability to advertise its services held preempted); Bank One, Utah, 190 F.3d 844 (state law limiting the placement of advertising on ATMs held preempted). See also OCC Interpretive Letter No. 789 (June 27, 1997) (a state law that prohibited the use of a bank's name on ATMs unless the bank put the names of all other banks whose customers may use the ATM was preempted).
[sbull] Permissible rates of interest. Federal law establishes that national banks may charge interest (both the rate and amount \47\) permitted by the state where the bank is located without regard to the laws of the state where the borrower is located.\48\
\47\ See 12 U.S.C. 1735f7a; Wells Fargo Bank II, 2003 WL 21277203.
\48\ See 12 U.S.C. 85; 12 CFR 7.4001. See, e.g., Marquette Nat'l Bank, 439 U.S. 299; Tiffany, 85 U.S. 409 (construing 12 U.S.C. 85). See also Section III. B. of the National City Order.
[sbull] Permissible fees and noninterest charges. Section 7.4002 of the OCC's rules outlines the framework for national banks' ability to impose noninterest fees and charges; courts have consistently held that state laws limiting the ability of national banks to charge such fees are preempted.\49\
\49\ See Bank of America, 309 F.3d 551, Wells Fargo Bank, Texas, 321 F.3d 488, and Metrobank, 193 F. Supp. 2d 1156. See also Section III. C. of the National City Order.
[sbull] Management of credit accounts. The OCC has taken the position that state laws that interfere with a national bank's Federallygranted power to lend and to engage in activities incidental to its lending operations are preempted. For example, in our view, a state law that imposed restrictions or requirements that, under the Barnett standards, interfere with or burden a national bank's communication with its credit card holders, management of credit accounts, or terms of offers of credit was preempted. A Federal district court in California recently upheld this position.\50\ \50\ See Lockyer, 239 F. Supp. 2d 1000.
[sbull] Dueonsale clauses. Section 34.5 of the OCC's rules and 12 U.S.C. 1701j3 preempt state restrictions on dueonsale clauses. [sbull] Leaseholds as acceptable security. The provision set out in proposed Sec. 34.4(a)(14) preempting state laws governing covenants and restrictions that must be contained in a lease to qualify the leasehold as acceptable security for a real estate loan is a restatement of the provision in current Sec. 34.4(a)(5).
[sbull] Mandated statements and disclosures. State attempts to require national banks to make disclosures in connection with specified credit card repayment terms have been held preempted as an impermissible interference with the ability to extend credit.\51\ OCC regulations already address the applicability of state law to national bank activities in some of these areas,\52\ but to date, unlike the Office of Thrift Supervision (OTS),\53\ we have not adopted regulations that more broadly codify the application of principles of preemption according to major groupings of activities, such as lending, deposit taking, and other authorized bank activities. Our positions in some instances also have not clearly reflected whether we were employing an ``occupation of the field'' or ``conflicts'' approach, although our individual preemption decisions have more commonly reflected a ``conflict'' type approach to preemption analysis. The proposal clarifies the types of state law restrictions and requirements that do, and do not, apply to major types of activities and operations of national banks and, for those types of activities and operations, articulates the standards that determine whether particular types of state law restrictions and requirements are preempted.
\51\ See id.
\52\ See, e.g., 12 CFR 7.4001 (interest); 7.4002 (fees); 7.4006 (operating subsidiaries); 9.7 (fiduciary activities); 34.4 (real estate lending generally); 34.5 (dueonsale clauses); 34.21 (adjustablerate mortgage lending); and 34.23 (prepayment fees). \53\ See 12 CFR 557.11.13; 12 CFR 560.2; and 12 CFR 545.2. C. Revisions to Part 34Real Estate Lending

1. Current OCC Regulations

Part 34 of our rules implements 12 U.S.C. 371, which authorizes national banks to engage in real estate lending
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subject to ``such restrictions and requirements as the Comptroller of the Currency may prescribe by regulation or order.'' Under subpart A of part 34 (which sets forth the general authority for national banks to engage in real estate transactions), state laws concerning five enumerated areas already are explicitly preempted in their application to national banks and their operating subsidiaries. 12 CFR 34.1(b) and 34.4(a). Section 34.4(b) then states that the OCC will apply recognized principles of Federal preemption in considering whether state laws apply to other aspects of real estate lending by national banks. 2. Codification of Preemption

Pursuant to our authority under section 371, the proposal amends Sec. 34.4(a) and (b) to provide a more complete statement of the types of state law restrictions and requirements that do, and do not, apply to real estate lending activities of national banks. However, as recognized by the Supreme Court, Federal law may preempt state law expressly (by an express statement of preemption in the law) or implicitly (because the Federal law is so complete that it ``occupies the field'' or because the state law conflicts with a Federal power). Although the regulation proposed today would address state laws by type, for reasons discussed below, we invite comment on whether our regulations, like those of the OTS,\54\ should state explicitly that Federal law occupies the entire field of national banks' real estate lending activities.\55\
\54\ See 12 CFR 560.2.
\55\ This issue was raised by National City in its request concerning the GFLA. As explained in the National City Order, we deferred expressing any views on the field preemption issue until we could seek comment in connection with a rulemaking rather than a decision confined to the law of a single state.

Section 371 provides a broad grant of authority to national banks to engage in real estate lending. The only qualification in the statute is that these Federal powers are subject ``to section 1828(o) of this title [which requires the adoption of uniform Federal safety and soundness standards governing real estate lending] and such restrictions and requirements as the Comptroller of the Currency may prescribe by regulation or order.''\56\ On its face, section 371 does not condition the grant of authority to national banks to engage in real estate lending upon engaging in that activity only to the extent that a state permits it.

\56\ 12 U.S.C. 371(a).

The breadth of the Federal power and the OCC's rulemaking authority created by section 371 can be understood by comparing the text and structure of that section to that of 12 U.S.C. 92, a statute similar in both respects and one that vests comparably broad rulemaking authority in the OCC. In Barnett, the Supreme Court analyzed the extent to which section 92 leaves room for state regulation of the activities the statute authorizes, and is thus instructive for purposes of analyzing section 371. The Supreme Court stated that
[section 92's] language suggests a broad, not a limited, permission. That language says, without relevant qualification, that national banks ``may . . . act as the agent'' for insurance sales. 12 U.S.C. 92. It specifically refers to ``rules and regulations'' that will govern such sales, while citing as their source not state law, but the Federal Comptroller of the Currency.\57\

\57\ Barnett, 517 U.S. at 32.

The Court noted that ``[i]n defining the preemptive scope of statutes and regulations granting a power to national banks, [prior U.S. Supreme Court decisions] take the view that normally Congress would not want States to forbid, or to impair significantly, the exercise of a power that Congress explicitly granted.''\58\ The Supreme Court concluded that ``where Congress has not expressly conditioned the grant of `power' upon a grant of state permission, the Court has ordinarily found that no such condition applies.''\59\
\58\ Id. at 33.

\59\ Id. at 34.

This analysis of section 92 by the Supreme Court is instructive in addressing section 371 as well. Like section 92, section 371 creates a broad power for national banks. By its terms, section 371 also is not a limited permission, that is, it does not authorize national banks to engage in real estate lending only to the extent state law allows.\60\ Moreover, section 371 differs from section 92 in two respects that are even more telling. First, section 371 refers expressly and exclusively to the OCC as the entity possessing authority to set restrictions and requirements that apply to national banks' real estate lending activities. Second, unlike the activity to which section 92 pertains the sale of insurancewhich historically has been predominantly regulated at the state level, national bank real estate lending authority has been extensively regulated at the Federal level since the power first was codified.

\60\ See id. at 3132.

Beginning with the enactment of the Federal Reserve Act of 1913, national banks' real estate lending authority has been governed by the express terms of section 371. As originally enacted in 1913, section 371 contained a limited grant of authority to national banks to lend on the security of ``improved and unencumbered farm land, situated within its Federal reserve district.''\61\ In addition to the geographic limits inherent in this authorization, the Federal Reserve Act also imposed limits on the term and amount of each loan as well as an aggregate lending limit. Over the years, section 371 was repeatedly amended to broaden the types of real estate loans national banks were permitted to make, to expand geographic limits, and to modify loan term limits and perloan and aggregate lending limits.
\61\ Federal Reserve Act, ch. 6, section 24, 38 Stat. 251, 273 (1913).

In 1982, Congress removed these ``rigid statutory limitations'' \62\ in favor of a broad provision authorizing national banks to ``make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate, subject to such terms, conditions, and limitations as may be prescribed by the Comptroller of the Currency by order, rule, or regulation.''\63\ The purpose of the 1982 amendment was ``to provide national banks with the ability to engage in more creative and flexible financing, and to become stronger participants in the home financing market.''\64\ In 1991, Congress removed the term ``rule'' from this phrase and enacted an additional requirement, codified at 12 U.S.C. 1828(o), that national banks (and other insured depository institutions) conduct real estate lending pursuant to uniform standards adopted at the Federal level by regulation of the OCC and the other Federal banking agencies.\65\ Thus, the history of national banks' real estate lending activities under section 371 is one of extensive Congressional involvement gradually giving way to a streamlined approach in which Congress has delegated broad rulemaking authority to the Comptroller. The two versions of section 371namely, the lengthy and prescriptive approach prior to 1982 and the more recent statement of broad authority qualified only by reference to Federal lawmay be seen as evolving articulations of the same idea.
\62\ S. Rep. No. 97536, at 27 (1982).
\63\ GarnSt Germain Depository Institutions Act of 1982, Public Law 97320, Sec. 403, 96 Stat. 1469, 151011 (1982).
\64\ S. Rep. No. 97536, at 27 (1982).
\65\ See section 304 of the Federal Deposit Insurance
Corporation Improvement Act, codified at 12 U.S.C. 1828(o). These standards governing national banks' real estate lending are set forth in subpart D of part 34.

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Prior to 1982, the field of national bank real estate lending was pervasively regulated by the detailed statutory provisions of section 371. After the 1982 amendment, Congress left open the possibility that the OCC would occupy the field by regulation. The statute granted the Federal power and directed that not just ``requirements'' for the exercise of the power, but any ``restrictions'' on the power, would come from the OCC. In no respect does the statute express or imply that the power granted is limited, to some variable degree, by application of fifty different state laws.

Although this authority arguably enables the OCC to occupy the field of regulation of national banks' real estate lending, thus far we have not exercised the full authority inherent in section 371. Instead, in Sec. 34.4(a) we have provided that certain types of state requirements and restrictions are not applicable to national banks and have elected to address whether other types of laws are preempted based on the existence of a conflict between a particular state or local law and national banks' Federal power under section 371. Since section 371 conditions the exercise by a national bank of its Federal power to engage in real estate lending only on compliance with Federal law, however, our regulation is more conservative than what the statute arguably allows.

The regulation we propose today further implements our authority under section 371 to identify types of state law restrictions concerning real estate lending that are, and are not, applicable to national banks. We have chosen to identify additional types of state laws that, in various respects, obstruct or condition national banks' exercise of real estate lending powers granted under section 371. As noted above, many of these types of laws have previously been addressed in OCC interpretations or Federal court decisions. We note, however, that our authority under section 371 is not necessarily limited to specifying types of law restrictions that are applicable or inapplicable, nor does section 371 appear to necessitate that the state laws specified be only those that in some manner obstruct or condition national banks' exercise of their powers under section 371. Thus, we invite comment on whether our regulation should state expressly that Federal law occupies the entire field of national bank real estate lending.

3. Federal Safeguards

Preemption of state laws governing national banks' real estate lending does not mean that that activity would be unregulated. On the contrary, national banks' real estate lending is pervasively regulated under Federal standards and subject to comprehensive supervision.

This Federal framework includes standards governing, and oversight of, national banks' real estate lending activities to prevent abusive or predatory lending. In addition to the many Federal statutory standards that apply to national banks, the OCC recently issued comprehensive supervisory standards to address predatory and abusive lending practices. See OCC Advisory Letter 20032, ``Guidelines for National Banks To Guard Against Predatory and Abusive Lending Practices'' (Feb. 21, 2003) and OCC Advisory Letter 20033, ``Avoiding Predatory and Abusive Lending Practices in Brokered and Purchased Loans'' (Feb. 21, 2003). The OCC standards on predatory lending make clear that national banks should adoptand vigorously adhere to policies and procedures to prevent predatory lending practices in direct lending and in transactions involving brokered and purchased loans.

Significantly, AL 20032 provides that bank policies and procedures on direct lending should reflect the degree of care that is appropriate to the risk of a particular transaction. In some cases, this will entail making the determination that a loan is reasonably likely to meet the borrower's individual financial circumstances and needs. AL 20032 also emphasizes that if the OCC has evidence that a national bank has engaged in abusive lending practices, we will review those practices to determine whether they violate specific provisions of the Federal laws, including the Homeowners Equity Protection Act of 1994 (HOEPA), the Fair Housing Act, or the Equal Credit Opportunity Act. The OCC also will evaluate whether such practices involve unfair or deceptive practices in violation of the Federal Trade Commission Act (FTC Act). Indeed several practices cited in AL 20032, such as equity stripping, loan flipping, and the refinancing of special subsidized mortgage loans that originally contained terms favorable to the borrower, can be found to be unfair practices that violate the FTC Act.

The OCC's second advisory, AL 20033, addresses concerns that have been raised about the link between predatory lending and nonregulated lending intermediaries, and the risk that a national bank could indirectly and inadvertently facilitate predatory lending through the purchase of loans and mortgagebacked securities and in connection with broker transactions. Pursuant to our standards, a national bank needs to perform adequate due diligence prior to entering into any relationships with loan brokers, third party loan originators, and the issuers of mortgagebacked securities, to ensure that the bank does not do business with companies that fail to employ appropriate safeguards against predatory lending in connection with loans they arrange, sell, or pool for securitization. AL 20033 also advises national banks to take specific steps to address the risk of fraud and deception in brokered loan transactions relating to brokerimposed fees and other broker compensation vehicles.

Evidence that national banks are engaged in predatory lending practices is scant. Based on the dearth of such informationfrom third parties, our consumer complaint database, and our supervisory activitieswe have no reason to believe that national banks are engaged in such practices to any discernible degree. This observation is consistent with an extensive study of predatory lending conducted by HUD and the Treasury Department,\66\ and with comments submitted in connection with an OTS rulemaking concerning preemption of state lending standards by 46 State Attorneys General.\67\
\66\ A TreasuryHUD joint report issued in 2000 found that predatory lending practices in the subprime market are less likely to occur in lending by

Banks, thrifts, and credit unions that are subject to extensive oversight and regulation. * * * The subprime mortgage and finance companies that dominate mortgage lending in many lowincome and minority communities, while subject to the same consumer protection laws, are not subject to as much federal oversight as their prime market counterpartswho are largely federallysupervised banks, thrifts, and credit unions. The absence of such accountability may create an environment where predatory practices flourish because they are unlikely to be detected.

Departments of Housing and Urban Development and the Treasury, ``Curbing Predatory Home Mortgage Lending: A Joint Report'' 1718 (June 2000) (TreasuryHUD Joint Report).

In addition, the report found that a significant source of abusive lending practices is nonregulated mortgage brokers and similar intermediaries who, because they ``do not actually take on the credit risk of making the loan, . . . may be less concerned about the loan's ultimate repayment, and more concerned with the fee income they earn from the transaction.'' Id. at 40.
\67\ Cited in Nat'l Home Equity Mortgage Ass'n v. OTS, Civil Action No. 022506 (GK) (D.D.C. 2003) at 26.

More recently, a coalition of State Attorneys General repeated the same view in a brief filed earlier this year in connection with a challenge to that OTS rulemaking.\68\ In supporting the OTS's [[Page 46126]]
decision to distinguish between supervised depository institutions and unsupervised housing creditors and to retain preemption of state laws with respect to the former but not for the latter, the State Attorneys General stated:
\68\ The case involves a revised regulation issued by the OTS to implement the Alternative Mortgage Transaction Parity Act (AMTPA). The revised regulation distinguishes between Federallysupervised thrift institutions and nonbank mortgage lenders, making nonbank mortgage lenders subject to state law restrictions on prepayment penalties and late fees. See id.

Based on consumer complaints received, as well as investigations and enforcement actions undertaken by the Attorneys General, predatory lending abuses are largely confined to the subprime mortgage lending market and to nondepository institutions. Almost all of the leading subprime lenders are mortgage companies and finance companies, not banks or direct bank subsidiaries.
Brief for Amicus Curiae State Attorneys General, National Home Equity Mortgage Association v. OTS, Civil Action No. 022506 (GK) (D.D.C.) at 1011 (emphasis added).

Against this background, the OCC's approach to predatory lending, embodied in the antipredatory lending standards discussed above, implemented through the OCC's comprehensive supervision of national banks, minimizes the potential for harm from predatory or abusive lending without reducing the credit available to subprime borrowers. By focusing on lending practices rather than banning specific lending products, this approach reduces the likelihood of predatory lending rather than the availability of credit to subprime borrowers.

Notwithstanding the foregoing, there are certain principles that should be fundamental to all real estate lending by national banks. First is the principle that national banks should not make loans when they lack a reasonable basis to believe that the borrower has the capacity to repay the loan. This standard addresses a central characteristic of predatory lending, namely, lending based on the foreclosure value of the collateral rather than on the borrower's ability to make the scheduled payments under the terms of the loan, based on consideration of the borrower's current and expected income, current obligations, employment status, and other relevant financial resources. In such a situation, the lender is effectively relying on its ability to seize the equity in the borrower's collateraloften the borrower's hometo satisfy the outstanding debt.\69\
\69\ See, e.g., TreasuryHUD Joint Report, supra note 66. The report notes that while factors such as the overall size of the loan, the borrower's credit history, and the value of the collateral also play into the decision, ``[a] creditor's decision on whether to originate a mortgage loan should be guided by his/her assessment of the borrower's ability to repay the loan from liquid sources (e.g., income and nonhousing assets).'' Id. at 76. The report goes on to note that ``[t]here is widespread concern * * * that some
unscrupulous creditors are making loans to borrowers who clearly cannot afford to repay them.'' Id. The report notes further that the results of predatory lending are ``loans with onerous terms and conditions that the borrower often cannot repay, leading to foreclosure or bankruptcy.'' Id. at 17.

To prevent this, the proposal would prohibit a national bank from making a loan based predominantly on the foreclosure value of the borrower's collateral. Such practices are inconsistent with safe and sound banking and antithetical to the OCC's expectations concerning the prudence and integrity with which national banks do business. The proposal would establish a uniform, national standard, applicable to all national banks and their operating subsidiaries that, consistent with existing OCC guidance,\70\ would prohibit this essential characteristic of predatory lending.
\70\ See AL 20032, which, as explained above, provides supervisory guidance concerning predatory and abusive lending practices. AL 20032 contains a recommendation that national banks establish specific policies and procedures for underwriting to ensure that the appropriate determination has been made that each borrower has the capacity to repay his or her loan. See id. at 78.

A second principle is that national banks should treat all their customers fairly and honestly. National banks' lending activities also are subject to provisions of section 5 of the FTC Act that prohibit unfair or deceptive practices in connection with real estate lending (as well as other activities authorized for national banks).\71\ Section 5 serves as a standard to ensure that national banks conduct all their activities free from unfair or deceptive practices. \71\ See 15 U.S.C. 45(a)(1). See also AL 20032. Courts recently have confirmed the application of the FTC Act to national banks. See, e.g., Minnesota v. Fleet Mortgage Corp., 181 F. Supp. 2d 995, 1002 (D.Minn. 2001); Roberts v. Fleet Bank, 2001 WL 1486226, *2 (E.D.Pa. 2001). The Federal Deposit Insurance Corporation (FDIC) and the Board of Governors of the Federal Reserve System recently issued statements recognizing the application of section 5 of the FTC Act to the state banks within each agency's respective jurisdiction. See FIL572002, issued by the FDIC May 30, 2002; Letter from Chairman Greenspan to the Hon. John J. LaFalce, May 30, 2002.

Practices may be found to be deceptive and thereby unlawful under section 5 of the FTC Act if three factors are present.\72\ First, practices will be deceptive if there is a representation, omission, act, or practice that is likely to mislead. Practices that can be misleading or deceptive include false oral and written representations; misleading claims about costs or benefits of services or products; use of baitandswitch techniques; and failure to provide promised services or products.
\72\ These principles are derived from the Policy Statement on Deception, issued by the Federal Trade Commission on October 14, 1983.

Second, a practice may be found to be deceptive if the act or practice would be deceptive from the perspective of a reasonable consumer. In this context, a reasonable consumer is a member of the group targeted by the acts or practices in question. The totality of the circumstances and the net impression that is made will be evaluated in making this determination. Failure to provide information also may be a deceptive act or practice and will be evaluated from the perspective of whether a reasonable consumer is likely to have been misled by the omission. In this regard, a consumer's reaction to an act or practice may be reasonable even if it is not the only reaction that a consumer might have.

Third, in order for a practice to be found to be deceptive, it must be material. A material misrepresentation or practice is one that is likely to affect a consumer's choice or conduct concerning a product or service. Consumer injury is likely if inaccurate or omitted information is important to the consumer's decision. Generally, information, or omission of information, about costs, benefits, purpose, and efficacy (including significant limitations) related to the product or service would be material.

A practice may be found to be unfair and thereby unlawful under section 5 of the FTC Act if the following factors are present.\73\ First, the practice causes substantial consumer injury. Generally, monetary harm, such as when a consumer pays a fee or interest charge, or incurs other similar costs to obtain a bank product or service as a result of an unfair practice, is deemed to involve substantial injury. Second, the injury is not outweighed by benefits to the consumer or to competition. To be unfair, a practice must be injurious in its net effects. Third, the injury caused by the practice is one that consumers could not reasonably have avoided. Consumer harm caused by a practice that is coercive or that otherwise effectively inhibits the consumer from making an informed choice would be considered not reasonably avoidable.
\73\ These principles are derived from the Policy Statement on Unfairness, issued by the Federal Trade Commission on December 17, 1980.

Credit practices commonly referred to as predatory, such as loan ``flipping,''
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equity ``stripping,'' and the refinancing of special subsidized mortgage loans, may well be indicative of practices that are unfair or deceptive practices that violate section 5 of the FTC Act.\74\ For example, loan flipping is generally understood to mean the refinancing of a loan, which results in little or no economic benefit to the borrower, for the primary or sole objective of generating additional loan points, loan fees, prepayment penalties, and fees from financing the sale of creditrelated products.\75\ Loan flipping can have particularly harmful results when it involves the practice of encouraging refinancing of special mortgage loans that contain nonstandard payment terms beneficial to the borrower, such as those originated in conjunction with a subsidized governmental or nonprofit organization program, when such refinancing entails the loss of one or more of the beneficial loan terms or is otherwise detrimental to the borrower.\76\ Home equity stripping typically involves making loans with excessively high, upfront fees that are financed and secured by the borrower's home, often with an excessively high penalty upon prepayment of the loan, for the sole or primary objective of stripping the borrower's home equity.\77\ Because the nature and impact of such practices are inherently highly factspecific, the application of the standards of section 5 and use of the OCC's authority to enforce compliance with those standards are a particularly appropriate approach to ensure that such practices are not occurring in the national banking system.\78\
\74\ AL 20032 contains guidance recommending the establishment by national banks of policies and procedures to specify whether and under what circumstances the banks will make loans involving features or circumstances that have been associated with abusive lending practices.
\75\ Federal law prohibits a creditor within one year of having extended credit subject to HOEPA from refinancing that loan to another loan subject to HOEPA, unless the refinancing is ``in the borrower's interest.'' 12 CFR 226.34(a)(3).
\76\ If a national bank engages in the practice of ``steering'' a borrower to a loan with higher costs instead of to a comparable loan offered by the bank with lower costs for which the borrower could qualify, and does this on the basis of the borrower's race, national origin, age, or gender, for example, the OCC will take appropriate enforcement action under the Federal fair lending laws. \77\ Frequently equity stripping occurs in connection with loan flipping. ``Lenders who flip loans tend to charge high origination fees with each successive refinancing, and may charge these fees based on the entire amount of the new loan. * * * In addition, each refinancing may trigger prepayment penalties, which could be financed as part of the total loan amount, adding to the borrower's debt burden. * * * Each time the loan is flipped, more equity is lost in the home.'' TreasuryHUD Joint Report, supra note 66, at 73 74.
\78\ Casebycase enforcement actions by the OCC to address such predatory lending practices also is particularly appropriate because such activities appear to be limited, if not rare, in the national banking system. See TreasuryHUD Joint Report, supra note 66, at 13 (``[T]here is a growing body of anecdotal evidence that an unscrupulous subset of * * * subprime actorslenders (often those not subject to federal banking supervision), as well as mortgage brokers, realtors, and home improvement contractorsengage in abusive lending practices that strip borrowers' home equity and place them at increased risk of foreclosure.'').

Section 8 of the Federal Deposit Insurance Act, 12 U.S.C. 1818, provides the OCC with the authority to bring enforcement actions against national banks and their subsidiaries for violations of any law or regulation, which necessarily includes section 5 of the FTC Act.\79\ The

FOR FURTHER INFORMATION CONTACT Andra Shuster, Counsel, or Mark Tenhundfeld, Assistant Director, Legislative and Regulatory Activities Division, (202) 8745090.