Preemption Monitor / ATM Surcharge Bulletin -August 2002

II. RESOURCES

• -- Fed Finds Bank Fees Still Rising; Biggest Banks Charge the Most

RULE CHANGE WOULD EMPOWER STATES AGAINST PREDATORY LENDERS

More than 200 advocacy organizations and 44 state attorneys general are supporting a federal regulatory change that would give states more power to eradicate predatory lending.

The new rules were proposed in April by the Office of Thrift Supervision (OTS), the federal agency that oversees savings institutions (thrifts) and housing creditors. The agency took comments through June and is expected to issue a final rule later this year.

The new regulation would once again allow states to limit or ban pre-payment penalties and late fees imposed by state-chartered thrifts and mortgage companies.

A 1982 federal law, the Alternative Mortgage Transaction Parity Act, allowed state-chartered housing creditors to ignore certain state laws and offer "alternative" mortgages, such as those with adjustable rates or balloon payments, so long as they followed the regulations that govern federal thrifts.

In 1996, the OTS greatly expanded the scope of the Parity Act through new rules that preempted state laws restricting pre-payment penalties and late fees.

This change unleashed a wave of predatory lending. Predatory loans are high-cost mortgages, loaded with excessive fees, that harm the financial well-being of borrowers and often force them to relinquish their homes. A recent study estimated that American families lose $1.3 billion in equity every year due to predatory lending.

A key feature of predatory loans are stiff pre-payment penalties that trap borrowers and prevent re-financing. "Prepayment penalties are one of the most potent tools that predatory lenders use to strip equity from unsuspecting and vulnerable borrowers," contends Josh Silver of the National Community Reinvestment Coalition.

Thirty-five states prohibit or restrict pre-payment penalties, but their laws have been irrelevant since the OTS preemption in 1996. The current proposed rule change would reverse the 1996 regulation.

As part of the proposal, the OTS also urges Congress to "revisit the Parity Act" and possibly repeal it, noting that some believe it has been used by housing creditors "to defeat states' attempts to impose reasonable consumer protection laws."

Two trade associations, the American Community Bankers and the Independent Community Bankers of America, oppose the rule change on the grounds that it gives federally chartered thrifts, which are not required to comply with state laws, an unfair advantage. The two groups believe there should be a uniform federal regulation governing prepayment penalties and late fees.

Others argue that federal thrifts should be required to comply with the laws of the states where they make loans.

-- To read public comments on the rule change
-- Coalition for Responsible Lending

BANKS AND FEDERAL REGULATORS ATTACK CALIFORNIA DISCLOSURE LAW

National financial institutions, their trade associations, and several federal regulatory agencies have sued to overturn California's new credit card disclosure law.

The law requires that credit card issuers include a warning in customers' bills that says that making only the minimum payment will increase the amount of interest paid and the time it takes to pay off the balance. They must also include a chart showing how long it would take the customer to pay his or her balance with only minimum payments, or include a generic chart showing hypothetical balances with a toll-free number customers can call for specific information on paying off their actual balances. Card issuers that require minimum payments of at least 10 percent of the balance are not required to make the disclosures.

With the urging of the banking industry, Governor Gray Davis vetoed a stronger version of the bill passed by the legislature in 2000. Last year, banks and credit card companies worked with state lawmakers to draft the current law, which mirrors an industry memo titled "Citigroup Amended Proposal." The financial industry raised no objections to the law as it moved through the legislature and was signed by the governor in October.

In May, five weeks before the law was to take effect, Citigroup, JP Morgan Chase, MNBA, Household Bank, the American Bankers Association, the Consumer Bankers Association, the Independent Community Bankers of America, America's Community Bankers, and the National Association of Federal Credit Unions challenged the law in federal court. They contend it is preempted by three federal statutes---the National Bank Act (NBA), the Federal Credit Union Act, and the Home Owners' Loan Act---and that it violates the Constitution's dormant commerce clause. Visa is paying the plaintiffs' court costs.

The industry argues that the law restricts bank operations by imposing considerable costs in terms of adding information to bills and staffing call centers. These costs, the banks and credit unions argue, are an impediment to exercising their full powers as federally chartered institutions.

The Office of the Comptroller of the Currency (OCC), the federal agency charged with regulating national banks, has submitted a amicus brief supporting the banks' claim that California's law is preempted by the NBA. The National Credit Union Administration has likewise issued a letter stating that the law is preempted by federal credit union regulations because it specifies terms of repayment.

The California Attorney General presented several defenses of the law, arguing that the OCC's opinion should not be granted deference by the court, that the Truth in Lending Act specifically authorizes states to enact consumer disclosure laws, and that the costs of complying with the law equally burdened both in-state and out-of-state companies and therefore the law does not violate the commerce clause.

STATES ENACT STRONGER FINANCIAL PRIVACY LEGISLATION

The financial industry is beginning to talk seriously about federal legislation to preempt state privacy laws following the passage of a privacy referendum in North Dakota and prospects for a similar ballot initiative in California.

The 1999 Gramm-Leach-Bliley Act (GLBA) allows financial institutions to share or sell customer data to affiliated companies and third parties. Banks must send a written notice to customers, who can opt-out of having their information sold to third parties. They cannot opt-out of having their data sold to affiliated companies and to third parties that have joint marketing agreements with their bank, an enormous loophole, according to consumer advocates.

GLBA protects the right of states to enact stricter financial privacy rules.

The financial industry has been lobbying states to adopt uniform privacy laws that mimic GLBA. It has succeeded in several states, including North Dakota, which gutted its existing financial privacy law two years ago and adopted rules similar to GLBA.

A coalition of consumer advocates and other organizations gathered enough signatures to put the issue on the June ballot. Despite a massive campaign by the financial industry, voters overturned the weaker regulations by a landslide three-to-one margin and reinstalled North Dakota's original financial privacy law, which requires that customers "opt-in" in writing before their data may be shared or sold.

In California, a coalition called Californians for Privacy Now is working to place a similar initiative on the ballot in 2003. For three years, privacy advocates have tried to push legislation through the state Assembly, but have failed to overcome lobbying by the banking industry.

Five other states---Alaska, Connecticut, Illinois, Maryland, and Vermont---already have some form of opt-in legislation on the books.

Jim Pitts, executive director of the Financial Services Coordinating Council, an industry lobbying group, says that the recent grassroots activity on privacy has renewed interest among his group's members in pursuing a federal law that would preempt all state financial privacy rules. The Fair Credit Reporting Act must be reauthorized by Congress next year and financial privacy will likely be part of that debate.

-- Keep an eye on the Privacy section of US PIRG's web site for an upcoming report on federal and state financial privacy policies.
-- Privacy Rights Clearinghouse
-- Privacy News
-- Financial Services Coordinating Council

MASSACHUSETTS FILES SUIT AGAINST OCC

The state of Massachusetts filed a federal lawsuit in June challenging a recent preemption decision by the Office of the Comptroller of the Currency (OCC), which nullified portions of the state's insurance laws as they apply to national banks.

"This action is based on the right of Massachusetts and every other state to not have an unelected federal bureaucracy overturn provisions designed to protect consumers," said Massachusetts Governor Jane Swift.

Under an expedited procedure, the US First Circuit Court of Appeals in Boston is expected to rule on the case on August 22nd.

In March, the OCC issued a ruling voiding three Massachusetts statutes governing sales of insurance by banks. The laws prohibit unlicensed bank personnel from referring customers to licensed agents unless a customer specifically asks about insurance, ban compensation for unlicensed employees for making such referrals, and bar banks from attempting to sell insurance to home loan customers until after a mortgage is approved.

The OCC contends that the rules are preempted by the Gramm-Leach-Bliley Act (GLBA), the 1999 federal statutes that authorizes banks to sell insurance, because "they frustrate the authority of national banks to engage in insurance activities."

GLBA upholds the long-standing authority of states to establish laws governing insurance sales and establishes thirteen "safe harbors" or kinds of state laws that cannot be preempted.

GLBA also codified a 1996 Supreme Court ruling that state insurance laws are preempted only if they "prevent or significantly interfere with the ability of a depository institution. . . to engage. . . in any insurance sales, solicitation, or cross-marketing activity."

Massachusetts Attorney General Thomas Reilly says that two of the provisions at stake are protected as "safe harbors" under GLBA, and that the third does not significantly interfere with the ability of banks to sell insurance.

In its preemption decision, the OCC adopted a very narrow reading of the safe harbors, concluding that the state's laws are substantially more stringent than those allowed by GLBA.

The OCC chose a very expansive reading of the "prevent or significantly interfere with" provision of GLBA, arguing that, by depriving banks of some opportunities to market their insurance products to banking and loan customers, Massachusetts was interfering with banks' ability to exercise their full powers under federal law.

Meanwhile, a second court case is also underway in federal court in Washington, DC, where two insurance industry trade associations have challenged the OCC's preemption of a similar West Virginia consumer protection law. Because the state of West Virginia is not a plaintiff in this case, the proceedings are not following an expedited schedule as they are in Massachusetts.

Most states have consumer protection laws that are at risk if the courts side with the OCC. The American Bankers Association has targeted laws in thirty-six states that it wants the OCC to preempt.

-- The ABA's chart of targeted state laws, and a legend for the chart, can be downloaded (See "OCC Preemption Requests" under "Issues").

TREASURY SECT. O'NEILL ASKS OCC TO EXPLAIN PREEMPTION PROCESS

US Treasury Secretary Paul O'Neill has asked the Office of the Comptroller of the Currency (OCC) to explain its process for deciding whether a state law is preempted by federal law.

The move came in response to a letter from Representative Michael Oxley, who chairs the House Financial Services Committee and objects to the OCC's recent preemption of a Massachusetts consumer protection law governing sales of insurance by banks. Oxley contends the OCC grossly misinterpreted and misapplied the Gramm-Leach-Bliley Act and the intent of Congress.

The OCC is a division of the Treasury Department. Secretary O'Neill is barred by law from interfering directly in preemption matters.

Sect. O'Neill also asked whether the OCC had sought to resolve the matter with Massachusetts officials before issuing the preemption ruling, and whether the OCC would object to a demand by Rep. Oxley that the Financial Services Committee be informed of any future preemption rulings by the OCC prior to publication.

OCC FINAL RULE ON ELECTRONIC BANKING SETS NEW STANDARD FOR PREEMPTION

Last year, the Office of the Comptroller of the Currency (OCC) issued a proposed rule on Internet banking and requested comments.

With regard to preemption of state laws, the proposed rule read: "State laws may be applicable to the provision of activities by a national bank through electronic means to the extent that they apply to the activity otherwise conducted by the national bank."

But the final rule contains a different standard: "State laws that stand as an obstacle to the ability of national banks to exercise uniformly their Federally authorized powers through electronic means or facilities, are not applicable to national banks."

According to Gregory A. Baer, partner with Wilmer, Cutler & Pickering in Washington DC and a former Treasury Department assistant secretary, the final rule implicitly says that standards for preemption are different for online banking than for offline banking.

Generally the OCC maintains that state laws are preempted only if they "significantly interfere" with a bank's powers. By saying that banks must be allowed to operate "uniformly," according to Baer, the new rule sets a much broader standard that gives national banks more leeway to ignore state laws.

The final rule also notes that a national bank shall not be considered located in a state---and thus potentially subject to the state's laws---solely because it maintains technology in that state, such as a server or automated loan center, or because customers in that state access the bank's products through the Internet.

-- To see the final and proposed rules, go to: http://www.occ.treas.gov/netbank/news.htm

II. RESOURCES

FED FINDS BANK FEES STILL RISING; BIGGEST BANKS CHARGE THE MOST

In June the Federal Reserve released its yearly survey of bank fees, "Annual Report to the Congress on Retail Fees and Services of Depository Institutions."

With regard to ATM surcharges, the report noted, "The incidence of this fee has risen sharply in the years since 1996... and the increase was particularly striking last year." The report found that 86 percent of all banks impose a surcharge, up from 75 percent the year before. The average surcharge amount rose 4.8 percent, from $1.26 to $1.32.

The Federal Reserve also found that multistate banks charge significantly higher fees than single-state banks. "Of the fifteen fees for which comparisons are available... multistate banks charged significantly higher fees in eight cases and in no case charged a significantly lower fee."

The same discrepancy emerged when comparing large (assets of more than $1 billion), medium (assets of $100 million to $1 billion), and small banks (assets under $100 million). Monthly fees on non-interest checking accounts, for example, were 31 percent higher at large banks compared to small banks. Fees for overdrafts likewise ranged from $18.56 at small banks to $25.10 at large banks. Fewer small banks impose surcharges and the amount of the surcharge averages 13 percent lower than at large banks. The survey also reported that the number of large banks charging an annual fee for ATM cards rose sharply, from 5 to 14 percent.

-- Federal Reserve 2002 Bank Fee Study