Household HSBC Watch

TESTIMONY OF

ELIOT SPITZER
NEW YORK ATTORNEY GENERAL

BEFORE THE ASSEMBLY STANDING COMMITTEE ON BANKS
REGARDING THE
OFFICE OF THE COMPTROLLER OF THE CURRENCY’S
PREEMPTION OF STATE CONSUMER PROTECTION LAWS

New York, New York
April 16, 2004

Good morning.

I want to thank Chairwoman Nolan and the other members of the Banking Committee for convening this hearing on a topic that is of vital concern to New York’s—and the nation’s—consumers.

Access to credit is one of the most important issues facing consumers today. Securing a loan is essential to realizing the American dream of home-ownership, and the use of credit to finance everyday living is more common today than ever before. Yet, African Americans at all income levels are three times more likely to be denied loans from conventional banks, and Black and Latino neighborhoods are six times more likely to rely on financing from sub-prime lenders. Moreover, although the median income in many minority neighborhoods is well above the national average, financial institutions have little or no presence in many of those communities.

Unfortunately, a relatively obscure federal agency, the Office of the Comptroller of the Currency (”OCC”), is actively engaged in undercutting the role of state regulators in ensuring that banks fairly serve the needs of all customers.

For 140 years state officials have routinely enforced consumer protection laws against national banks that mistreat or deceive their residents, a role unequivocally affirmed by the Supreme Court over 100 years ago and reconfirmed by the Supreme Court as recently as 1996.

This role has been affirmed by Congress, as well. When passing the Riegle-Neal Interstate Bank Act in 1994, Congress declined to expand preemption to the extent now asserted by the OCC. Instead, in a joint report, the House and Senate specifically confirmed that States have a particular, legitimate interest in protecting the rights of their consumers, businesses and communities in their dealings with national banks.

The OCC, established to charter federal banks and to ensure their soundness, exercises exclusive power under the National Bank Act, known as “visitorial power,” to conduct examinations of banks’ books and records. Recently, to entice state chartered banks to seek a federal charter, the OCC developed a radical, and legally unsupportable, interpretation of its “visitorial powers” and the preemptive effects of the National Bank Act.

This new interpretation, which has the intent and effect of stripping away state protections for customers of national banks, asserts that the National Bank Act preempts nearly all state laws that affect the way a national bank, or a subsidiary, does business. The new interpretation also assumes OCC’s sole jurisdiction over national banks, even with respect to the enforcement of states’ consumer protection laws.

The OCC’s anti-consumer agenda was first manifested a few years ago, through increasing intervention in consumer protection cases brought by the states against national banks, interference with settlement discussions between state attorneys general and national banks, and formal opinions intended to strike down consumer protection laws.

The OCC’s anti-consumer agenda entered a dramatic phase in November 2002, when it issued an advisory letter to all nationally chartered banks claiming that the National Bank Act preempts the application of state laws, and directing banks to consult immediately with the OCC if contacted by state officials. Over the past two years, OCC proposed regulations to formally exempt national banks from nearly all state consumer protection laws and to prevent enforcement by state officials.

The OCC’s proposed regulations engendered immediate bipartisan public outcry. All fifty state attorneys general and all fifty state banking superintendents submitted comments in opposition to the proposed rules. The American Association of Retired Persons and numerous other citizen groups also voiced their strong opposition, pointing out that the OCC’s new interpretation of the National Bank Act was inconsistent with existing law, as well as bad public policy. Members of Congress, including New York Congresswoman Sue Kelly, who chairs the House Financial Services Subcommittee on Oversight and Investigations, were deeply troubled by the OCC’s intention to nullify state consumer lending laws and pre-empt the states’ right to take enforcement action against national banks and their subsidiaries. Representative Kelly requested that the OCC defer further action on the rules pending her committee’s hearing on the issue.

Not surprisingly, the national banking industry strongly supported the proposed rules. Despite the outcry of opposition, the OCC adopted the rules as final in January 2004.

Near universal criticism of the OCC continues. Members of Congress questioned the legality and utility of the OCC’s regulations during hearings held by the House of Representatives’ Financial Services Committee. The Committee submitted a budgetary amendment that expressed concern that the OCC will be forced to utilize funds designated for other purposes to engage in consumer law-enforcement activities that typically have been undertaken by the states. Just last week, United States Senator John Edwards introduced resolutions to void the OCC’s recent regulations.

Although in a minor concession, the OCC recently reversed its earlier directive that national banks ignore state government inquires on behalf of consumers, the OCC continues to insist that national banks are exempt from most state consumer protection laws, arguing that, even in this modern technological age, it is difficult for banks to understand and comply with a patchwork of differing state laws and regulations. Yet, many other commercial entities do so successfully.

What does all this mean for New Yorkers? If the OCC’s rules are allowed to stand, state legislatures and officials will be powerless to protect their citizens from even the most egregious conduct engaged in by a federally charted bank or its subsidiary. New York would be powerless to protect our citizens from predatory lending engaged in by national banks or their subsidiaries - practices that cause substantial injury to some of the state’s most vulnerable citizens, including low income, elderly and minority homeowners. By some estimates, predatory lending costs American consumers over a billion dollars a year.

The states identified the problems caused by predatory lending several years ago, and they took immediate action. In 1999, my office’s Civil Rights Bureau sued Delta Funding Corporation for engaging in a variety of illegal practices that defrauded minority borrowers. These practices included making loans without regard to the consumer’s ability to repay, and paying illegal kickbacks under the guise of yield spread premiums. As a remedy, Delta agreed to pay $ 12 million to consumers, and change the way they do business.

In addition, my office and the State Banking Department took a joint lead role in negotiating the nationwide settlement with the parent company of Household Finance Corporation and Beneficial Finance Corporation, which required that Household pay almost $37 million to New York consumers, and reform its lending practices on a nationwide basis.

Under this Committee’s leadership, two years ago the legislature enacted tough anti-predatory lending laws that increased penalties for violations, made violations of the law a defense to foreclosure proceedings, and made subsequent purchasers of high cost loans liable for the predatory practices of the original mortgagee.

Upon enactment of our anti-predatory lending law, and similar laws in other states, the national banks sought a sympathetic ear at OCC, which compliantly, and quickly, issued opinions purporting to completely preempt such laws, in one case even before the general preemption regulations were finalized.

If left to stand, the OCC rules also may prevent New York officials from protecting our citizens in routine banking matters. Let me give you one small example. Recently, my office assisted an individual who had originally entered into a mortgage with a state chartered bank, which was eventually acquired by a subsidiary of a national bank. The monthly payments automatically deducted from his checking account continued for almost four years after the loan was satisfied. By that time, the consumer had overpaid more than $9,000. When this was brought to the bank’s attention, it notified him that an error had been made by the original lender that resulted in a $16 per month mortgage underpayment, and that the maturity date of his mortgage would be unilaterally extended to 2010, thus requiring him to pay an additional $25,000.

Several efforts by the consumer’s attorney to resolve the dispute amicably were unsuccessful, and the bank continued to threaten foreclosure. The bank informed my office that it did not have to deal with the Attorney General; that its sole regulator is the OCC.

We filed a lawsuit to restrain foreclosure on the consumer’s home and in response, the bank discharged the mortgage lien and provided a full refund to the consumer. However, we hope to pursue this case for penalties, and for a ruling that the bank is not exempt from New York’s laws.

The OCC’s assertion that it is capable of protecting consumers without assistance from the states is pure fantasy. The OCC cannot do an effective job alone. It does not have the experience, expertise, and locally focused resources that are available to the states. In addition, the OCC has repeatedly demonstrated that it is more responsive to the interests of the powerful industry it regulates than to consumers.

Despite the longest period of economic prosperity in history, economic injustice still thrives. Law enforcement is not the remedy for all of the inequalities that we see in housing, employment and education. But it is an important part of the solution offering vital civil rights protection to some of society’s most vulnerable citizens. People who are poor, elderly or minorities should not be victimized by predatory banking practices that leave them homeless and hopeless. Access to capital for all is today’s challenging frontier in the civil rights landscape. Unfortunately, the amendments diminishing Community Reinvestment Act compliance criteria recently proposed by the OCC and other federal financial regulators may impede achievement of that goal. We must be more, not less, vigilant in enforcing these laws.

I invite the federal government to join our efforts to protect New Yorkers from predatory lenders, and achieve economic justice. Indeed, the complexities of banking in today’s world make it imperative that the federal government and the states work together to protect bank customers’ interests. We need more cops on the beat, not fewer.

But we will not be passive if the administration chooses not to enforce these laws, as it has chosen not to enforce so many laws that protect consumers against special interests. And we will not permit the administration to assert that states may not enforce consumer protections that Washington has chosen to abandon.

New York has for years played a vital role in the protection of its citizens from unlawful, fraudulent and discriminatory practices in all areas of commerce, including banking. It is a role in which we are eager to continue, and for which we are extremely well-equipped. More importantly it is a role that we are not willing to cede without a fight—-a fight I urge you to join—a fight that I am confident we will win.

Thank you.

Household Watch addendum:

HSBC didn’t waste any time seeking the protection of a national charter under the OCC. HSBC is the parent company of Household and Beneficial. After Household’s multi-state settlement and resulting acquisition by HSBC, HSBC made specific guarantees regarding Household and compliance issues.

Household Watch is reviewing HSBC’s statements and will report on progress or lack of progress by HSBC. Of specific interest are indicators that lead one to believe that from 2002 until 2004 HSBC simply waited for the OCC to remove state and local regulations while allowing federally chartered banks to once again become predatory in nature.

John Hawke is the head of the Office of the Comptroller of the Currency (OCC)

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