78th Legislature Interim Charges Regulatory Briefing

1
78th Legislature Interim Charges Regulatory
Briefing
House Financial InstitutionsCommittee

• Texas Department of Banking
• Testimony of
• Commissioner Randall S. James
• April 20, 2004

2
OCC Preemption of State Laws

• Background Information
• On January 6, 2004, the Comptroller of the
  Currency (OCC) adopted final rules that
  effectively preempt all state laws that apply to
  activities of national banks and their operating
  subsidiaries, unless (i) Congress has expressly
  incorporated state-law standards into federal
  statutes, or (ii) particular state laws have only
  an incidental effect on national banks. And,
  the OCC preempted any state visitorial rights
  as well.
• This occurred in spite of requests from
  Congressional leaders to delay implementation.
  The following groups also expressed opposition
• Previously, the OCC would occasionally preempt
  state law, but on a case-by-case basis after
  performing an analysis of the state law and its
  impact on national banks. The practical effect of
  the new rules is to accomplish sweeping
  preemptions, or field preemption, of state laws
  similar to that of the Office of Thrift
  Supervision.

3
OCC Preemption of State Laws

• Why is OCC preemption detrimental to Texas?
• OCC is attempting to establish field preemption
  by expressing its preemption rules as general
  principles, without providing clear guidance on
  what banks are expected to do. This will create
  enormous uncertainty in the industry.
• Severely limits the ability of the Texas
  Legislature to pass laws that affect financial
  service providers in Texas.
• National banks operating in Texas can refuse to
  comply with laws designed to protect Texas
  citizens. And, due to a Constitutional parity
  provision, state-chartered banks are due equal
  treatment.
• Simply by organizing as a subsidiary of a
  national bank, any financial service provider
  will be able to fall under the OCCs preemption
  umbrella.
• OCC preemption affects more than just banks.
  Most financial service companies finance
  companies, mortgage lenders, check cashers,
  securities firms, etc. - that are chartered,
  licensed, and regulated in Texas can organize as
  a subsidiary of a national bank and claim that
  they are not required to comply with Texas laws.

4
OCC Preemption of State Laws

• Why is OCC preemption detrimental to Texas?
  (Continued)

• State agencies and law enforcement officials have
  a good history of protecting consumers often
  through regulatory programs or laws that would
  now be preempted by the OCC. CSBS reports that
  state banking agencies returned 500 million to
  consumers after investigations uncovered fraud
  and deceptive practices. (See the attached press
  release on state regulators role in Household
  Finance settlement.)
• Though the OCC asserts otherwise, removing
  nonbank subsidiaries from state oversight will
  not be replaced by OCC enforcement.
• OCC preemption will create an incentive to
  organize as a national charter, thus eroding the
  foundation of the dual banking system.

• The dual state and federal system has provided a
  safety valve against out-dated and inflexible
  regulatory controls.
• Acting as laboratories for innovation, the states
  have frequently developed new products and
  services, some of which include checking
  accounts, NOW accounts, and branch banking.
  These have limited national risk implications.

5
OCC Preemption of State Laws

• Possible Considerations
• State laws regarding consumer protections and
  lending that exempt financial institutions.
  (Example Indiana, see included article)
• Continued pursuit of Congressional and / or court
  action against the OCCs rules.

6
OCC Preemption of State Laws

• State Laws That Might be Preempted
• These are current Texas statutes to which
  preemption could apply. The list is not intended
  to be all-inclusive.
• Property Code 73.003 prohibits an inactive
  account being reduced by the imposition of fees.
•  
• A nonuniform UCC provision in Business Commerce
  Code 4.406(b) requires a bank that does not
  return items in a statement to provide at least
  two items per statement cycle at no charge.
•  
• Transportation Code 521.126 requires a specific
  disclosure to be given to and consent obtained
  from a customer before information from the
  customer's drivers license can be retained in an
  electronic database.
•  
• Texas Constitution, Article XVI, Section 50, in
  its requirements for home equity loans, contains
  very explicit requirements regarding terms of
  credit, including schedule for repayment, minimum
  payments, loan-to-value ratios, circumstances
  under which a loan may called, etc. In addition,
  the section requires very explicit disclosures
  for home equity loans.
•  
• Finance Code Title 4 includes requirements
  relating to collateral on insurance and credit
  life and other products. For example, a lender
  may not require credit life and similar products
  for a consumer installment loan. An entire
  chapter of the Credit Title deals with the
  methodology for notifying customers with regard
  to collateral protection insurance, but provides
  a safe harbor for banks that comply.
•  
• Finance Code Title 4 also contains very explicit
  requirements regarding terms of credit and
  disclosures with respect to certain consumer
  loans, and perhaps imposes some of these
  requirements on certain types of commercial loans
  in specific contexts. Texas law also has specific
  requirements or limitations relating to private
  mortgage insurance, acceptance of a binder for
  collateral and other rules relating to insurance
  protecting collateral.
•  

7
OCC Preemption of State Laws

• State Laws That Might be Preempted (Continued)
• Article 21.48A of the Insurance Code prohibits a
  lender from requiring a borrower to purchase home
  owners insurance in an amount that exceeds the
  replacement value of the dwelling and its
  contents (i.e., excluding the land), regardless
  of the amount of the mortgage or other financing
  arrangements.
•  
• Finance Code 307.051, 307.052 allows the
  collateral protection insurance on real property
  to be either the amount of the unpaid
  indebtedness or replacement cost of the
  improvements, which matches the law regarding
  practices of the secondary market mortgage
  servicers. A recent amendment requires the lender
  to add a statement to the notice to borrower
  relating to the FAIR plan.
•  
• Finance Code 347.254, relating to manufactured
  housing, requires a lender to establish an escrow
  account for taxes, although the escrow
  requirement does not apply to a federally insured
  financial institution that does not otherwise
  require the escrow of taxes, insurance premiums,
  fees, or other charges in connection with loans
  secured by residential real property.
•  
• With respect to third-party financing for the
  construction of improvements under a residential
  construction contract, Property Code 53.257
  requires the lender to meet certain documentation
  delivery requirements and make certain
  disclosures.
•  
• Finance Code 276.001 prohibits a bank from
  opening an account in the name of a candidate for
  public office unless it first obtains the
  candidate's consent and signature. The candidate
  is not required to be a signatory to the account.
•  
• Finance Code Chapter 277 requires a bank to
  obtain certain information from a business
  account holder and then make that information
  available to holders of dishonored checks on the
  account upon an appropriately documented request.
•  
•  

8
OCC Preemption of State Laws

• State Laws That Might be Preempted (Continued)
• Business Commerce Code Chapter 46, dealing with
  electronic mail solicitation, prohibits a person
  from sending an unsolicited commercial electronic
  mail message unless either (1) the recipient is
  an existing customer, or (2) "ADV" (or
  "ADULT-ADVERTISEMENT" for sexually explicit
  material) is in the beginning of the message
  line.
•  
• Business Commerce Code 35.57 requires
  truncation to the last five digits of the credit
  card account number for electronic credit card
  receipts.
• Property Code 93.012 requires that charges on
  commercial leases be reasonable and made by a
  method customarily used by landlords in
  commercial leases. This would apply to a bank as
  lessor of space in its office building.
•  
• Property Code 11.008 requires a Notice of
  Confidentiality Rights to be included in a deed,
  mortgage, or deed of trust presented for
  recording with the county clerk. The notice
  advises natural persons that they may remove or
  strike certain personal information in the
  document.
•  
• Business Commerce Code 20.06(h) requires a
  business offering check verification or check
  guarantee services, on request and with proper
  identification, to disclose to a consumer in
  writing all information pertaining to the
  consumer in its files.
•  
• Trust Code 113.059 prohibits a settlor of a
  trust from relieving a trustee of liability for
  certain actions or conditions and provides that
  the exculpatory provision in a trust instrument
  relieving the trustee of liability for a breach
  of trust is ineffective to the extent that the
  provision is inserted as an "abuse" by the
  trustee.

9
Profile of Texas Banking
CIT - Chartered in Texas COT - Chartered
outside Texas Information is from the FDIC
Summary of Deposits as of June 30, 2003 and the
NCUA Semi-annual report. Numbers are in
millions. State Chartered Banks, Savings Banks
and Credit Unions represent 22 of total deposits
in Texas.