78 th Legislature – Interim Charges Regulatory Briefing

1. House Financial InstitutionsCommittee 78th Legislature – Interim ChargesRegulatory Briefing 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. House Financial Institutions Committee

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 OCC’s 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. House Financial Institutions Committee

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. House Financial Institutions Committee

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 OCC’s rules. House Financial Institutions Committee

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 driver’s 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. House Financial Institutions Committee

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. House Financial Institutions Committee

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. House Financial Institutions Committee

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. House Financial Institutions Committee