Comptroller Dugan Is Wrong About the Causes of the Financial Crisis and the Scope of Federal Preemption

Arthur E. Wilmarth, Jr.*

In a speech on September 24, 2009, Comptroller of the Currency John Dugan advanced three key arguments concerning the causes of the financial crisis and proposed legislation that would provide increased protections for consumers of financial services. First, he claimed that mortgage brokers and nonbank mortgage lenders were primarily responsible for our current financial crisis, and that national banks did not play a significant role in causing the crisis.[1] Second, he contended that the proposed new Consumer Financial Protection Agency (CFPA) should not be given authority to enforce consumer protection laws against national banks, because the Office of the Comptroller of the Currency (OCC) has provided effective enforcement of such laws in the past.[2] Third, he argued that the National Bank Act (NBA) has generally preempted the application of state laws to national banks since its enactment in 1864, and the OCC should therefore be allowed to administer a system of “uniform set of federal rules” for national banks, free from interference from the states. [3]

As shown below, Comptroller Dugan is mistaken on all three points. In fact, federally-regulated institutions, including several of the largest national banks, were the primary private-sector catalysts for the current financial crisis. Moreover, the OCC and other federal regulators failed to protect consumers from predatory lending practices and also failed to control excessive risk-taking by their regulated constituents. Finally, Congress and the Supreme Court have repeatedly upheld the general application of state laws to national banks. Contrary to Mr. Dugan’s claim, the NBA does not create a system of “uniform federal rules” that shields national banks from compliance with state law. While the OCC attempted to create a regime of de facto field preemption by issuing sweeping preemption rules in 2004, the validity of those rules is now in grave doubt due to the Supreme Court’s recent decision in Cuomo v. Clearing House Assn., L.L.C.[4]

1. Large Federally-Regulated Financial Institutions, including National Banks, Bear Primary Responsibility for the Financial Crisis

In his speech on September 24, Comptroller Dugan argued that “the worst subprime loans that have caused the most foreclosures were originated by nonbank lenders and brokers regulated exclusively by the states.” He also claimed that “nothing in federal law precluded states from effectively regulating their own nonbank mortgage lenders and brokers.”[5] Mr. Dugan thus suggested that most of the blame for the current financial crisis to should be assigned to nonbank mortgage lenders and brokers and the states.

Nonbank lenders and brokers did play a supporting role in precipitating the financial crisis by originating subprime and Alt-A mortgages. However, preemptive actions by the OCC and the Office of Thrift Supervision (OTS) significantly impaired the states’ ability to take effective enforcement measures against nonbank lenders and brokers. The OCC and OTS issued regulations and orders that barred the states from regulating nonbank lenders and brokers that were affiliated with national banks.[6] For example, the OCC declared that Georgia officials were preempted from applying the Georgia Fair Lending Act not only to national banks and their operating subsidiaries, but also to mortgage brokers who arranged loans funded at closing by national banks or their subsidiaries. The OTS issued similar rulings. [7]

In addition, national banks and federal thrifts acquired several of the largest nonbank mortgage lenders between 1999 and 2007. For example, HSBC bought Household, Citigroup purchased both Associates First Capital and Argent (the parent of Ameriquest), National City acquired First Franklin, and Washington Mutual (Wamu) bought Long Beach Mortgage. Household and Ameriquest had been the subjects of landmark state enforcement actions, but their purchases by HSBC and Citigroup gave both nonbank lenders substantial immunity from further state enforcement. [8] In a similar example with a smaller institution, Okoboji Mortgage sold itself to Wells Fargo in August 2006, after being sued by the Iowa Division of Banking. Okoboji then claimed immunity from further state enforcement proceedings. [9]

A recent Federal Reserve study found that depository institutions (together with their subsidiaries and other affiliates) accounted for about half of nonprime (i.e., subprime and Alt-A) mortgages originated in 2004 and 2005, 54% of nonprime mortgages in 2006, and 79% of nonprime mortgages in 2007.[10] The increasing shift in nonprime loan originations toward national banks and federal thrifts reflected the growing impact of the OCC’s and OTS’s preemption rules. Those preemption rules shielded federally-chartered institutions and their operating subsidiaries from state predatory lending laws, while unaffiliated nonbank lenders remained subject to state laws. [11]

Comptroller Dugan’s claim that national banks played a relatively minor role in the nonprime lending debacle is incorrect. A recent study by the National Consumer Law Center (NCLC) found that national banks, federal thrifts, and their operating subsidiaries accounted for 31.5% of subprime mortgage loans, 40.1% of Alt-A loans, and 51.0% of payment-option and interest-only adjustable-rate mortgage (ARM) loans in 2006. [12]

Similarly, a recent study by the Center for Public Integrity determined that large national banks and federal thrifts (along with their affiliates) ranked among the biggest funding sources for nonprime mortgages between 2005 and 2007. The largest subprime lender during that period was Countrywide. Countrywide operated as a national bank from 2001 to 2007 and as a federal thrift from 2007 to 2008, at which point it was forced – on the brink of insolvency – to enter into an emergency merger with Bank of America (BofA).[13] In addition to Countrywide, the top 25 sources of funding for subprime mortgages between 2005 and 2007 included seven big national banks (Citigroup, JP Morgan Chase (Chase), HSBC, Wachovia, Wells Fargo, National City, and Capital One), two large federal thrifts (Wamu and IndyMac), three major Wall Street firms, which each controlled a federal thrift (Merrill Lynch, Lehman Brothers, and Bear Stearns), and a big insurance company that also controlled a federal thrift (American International Group (AIG)).[14] The three Wall Street firms and AIG were subject to consolidated supervision by the OTS because of their ownership of federal thrifts.[15]

Many large national banks, federal thrifts, and Wall Street firms were also leading providers of Alt-A loans. [16] In addition to their direct nonprime lending activities, major national banks, federal thrifts, and Wall Street firms provided indirect funding for subprime and Alt-A loans by furnishing wholesale lines of credit to nonbank lenders such as Ameriquest, New Century, and Option One. When the major wholesale lenders cut off their lines of credit in 2007, many nonbank mortgage lenders and mortgage brokers quickly went out of business. The rapid disappearance of nonbank lenders and brokers confirmed that they were acting as conduits for big federally-regulated financial institutions.[17]

The largest federally-regulated financial institutions also created and marketed complex financial instruments, including residential mortgage-backed securities (RMBS), collateralized debt obligations (CDOs) and credit default swaps (CDS), whose performance was linked to nonprime mortgages. Financial giants used CDOs and CDS to place multiple bets on nonprime mortgages and to facilitate the worldwide marketing of investment-grade securities derived from pools of nonprime mortgages. RMBS, CDOs, and CDS magnified the impact of defaults on nonprime mortgages and triggered a global contagion of losses when the U.S. housing market collapsed. The OCC and the OTS, along with other federal regulators (including the Federal Reserve Board (FRB) and the Securities and Exchange Commission (SEC)), failed to control the risks inherent in nonprime mortgage lending as well as the intensification of those risks through the proliferation of RMBS, CDOs, and CDS.[18]

The failures or federally-financed bailouts of several large national banks, federal thrifts, and Wall Street firms demonstrate (i) the deep involvement of those institutions in the nonprime mortgage debacle and (ii) serious regulatory failures by the OCC, the OTS, the FRB, and the SEC. On the OCC’s side of the regulatory ledger, four of the sixteen largest national banks would have failed absent costly federal bailouts. The largest and third-largest national banks (BofA and Citigroup) suffered huge losses from nonprime-related activities and received mammoth bailout packages from the federal government, including $90 billion of capital infusions and more than $400 billion of asset price guarantees. [19]

Similarly, the fourth-largest and sixteenth-largest national banks (Wachovia and National City) were pushed to the brink of failure by heavy losses resulting from high-risk nonprime lending. Federal regulators arranged a “hasty sale” of Wachovia to Wells Fargo and supported the transaction by subsequently infusing $25 billion of capital into Wells Fargo. National City was forced into a similar “shotgun marriage” with PNC, assisted by a federal infusion of $7.7 billion of capital into PNC.[20] It was ironic – but almost certainly not coincidental – that Wachovia and National City filed the lawsuits that ultimately led to the Supreme Court’s decision in Watters v. Wachovia Bank, N.A.,[21] in order to stop the states from regulating their mortgage operating subsidiaries.[22] The foregoing disasters occurred despite the fact that the OCC maintained permanent teams of on-site examiners at each of the 17 largest national banks.[23]

On the OTS’ side of the regulatory ledger, two of the largest thrifts (Wamu and IndyMac) failed after suffering devastating losses from reckless nonprime lending. Similar debacles occurred at AIG and three big Wall Street firms, all of which owned thrifts and were subject to shared oversight by the OTS. AIG was saved from bankruptcy by a huge federal bailout that grew to $182.5 billion by March 2009. Lehman Brothers collapsed and filed for bankruptcy. To avoid a similar fate, Bear Stearns and Merrill Lynch were forced into federally-assisted mergers with JP Morgan Chase and BofA. The OTS received heavy criticism for its shortcomings in regulating all six of the foregoing entities, while the SEC was also at fault for its ineffective supervision of the Wall Street firms.[24]

The foregoing disasters establish, beyond any reasonable doubt, that (i) large national banks, federal thrifts, and Wall Street firms were the primary private-sector catalysts for the subprime financial crisis, and (ii) the worst supervisory lapses occurred among federal regulators. Attempts by the OCC, the OTS, and representatives of big financial institutions to blame the states for the crisis are unfounded and should stop.

2. The OCC Failed to Protect Consumers during the Credit Boom that Led to the Current Crisis

In his speech of September 24, Comptroller Dugan declared that “Preemption Has Not Harmed Consumers.” [25] In fact, however, federal preemption engineered by the OCC and the OTS did harm consumers by preventing state officials from enforcing state consumer protection laws against national banks, federal thrifts, and their operating subsidiaries and agents.

Over the past decade, the OCC has issued a series of preemptive rules and orders that barred the states from enforcing a wide range of state laws – including state anti-predatory lending laws and other consumer protection laws – against national banks and their operating subsidiaries and agents. [26] The OCC’s rulings had the cumulative effect of “cancel[ing] out much state-level consumer protection law.”[27] The OCC’s preemptive actions closely paralleled regulations and orders that the OTS had issued between 1983 and 2004. Like the OCC’s rulings, the OTS regime preempted a broad range of state laws from applying to federal thrifts and their operating subsidiaries and agents.[28]

The OCC had powerful budgetary incentives to use preemption as a marketing tool to persuade the largest banks to operate under national charters. The OCC’s budget is funded almost entirely by assessments paid by national banks, and the biggest banks pay the highest assessments. [29] A former head of the OCC described preemption as “a significant benefit of the national [bank] charter – a benefit that the OCC has fought hard over the years to preserve.”[30] In response to the OCC’s preemption campaign, several large, multistate banks converted from state to national charters, thereby producing a significant increase in the OCC’s assessment revenues.[31]

Several studies have described the OCC’s record of enforcing consumer protection laws as a “long history of inaction,” “relatively lax,” “weak,” and “unimpressive.”[32] Publicly available information indicates that, during 1995-2007, the OCC issued only 13 public enforcement orders against national banks for violations of consumer protection laws.[33] Only one of those orders included a charge that the bank violated state laws. [34] In that one case, the OCC took action only after the public became aware that a California prosecutor was investigating the offending bank.[35]

The states’ record of protecting consumers presented a dramatic contrast with the OCC. Between 1999 and 2006, more than thirty states enacted laws to combat predatory lending.[36] A recent study found that state anti-predatory laws had beneficial effects in reducing the number of mortgages with unsound or abusive features such as prepayment penalties, balloon payments, and no- and low-documentation terms.[37] In addition, state officials vigorously used their enforcement powers to protect consumers and prosecute financial service providers for a wide range of unlawful practices.[38] In 2003 alone, “state bank supervisory agencies performed more than 20,000 investigations in response to consumer complaints about abusive lending practices, and those investigations produced more than 4,000 enforcement actions.”[39]

The OCC’s actions seriously obstructed the states’ efforts to protect consumers from predatory lending practices. In addition to adopting preemptive regulations, the OCC filed amicus briefs in many other cases to support efforts by national banks to obtain judicial decisions preempting state consumer protection laws.[40] In 2005, the OCC, acting in concert with the Clearing House Association (an organization representing several of the largest national banks), filed a lawsuit to enjoin a fair lending investigation by New York Attorney General Eliot Spitzer.[41] That lawsuit provided a particularly striking example of the OCC’s unrelenting efforts to support its regulated constituents and block efforts by state officials to enforce state laws against those constituents.

By preempting state laws and state enforcement proceedings, the OCC (i) undermined the effectiveness of state predatory lending laws, [42] and (ii) contributed to the severity of the current credit crisis by “stifling . . . prescient state enforcers and legislators” who tried to prevent irresponsible lending.[43] The preemptive actions of the OCC and OTS prevented state officials from responding to predatory lending problems with the same effectiveness they displayed in exposing a series of scandals on Wall Street between 2002 and 2006. During that period, state authorities took the lead in prosecuting securities firms (including securities affiliates of major national banks) for pressuring their research analysts to produce biased reports to investors, for engaging in corrupt practices related to initial public offerings, and for permitting hedge funds to carry out abusive market timing and late trading strategies that exploited mutual funds sponsored by securities firms. The Securities and Exchange Commission (SEC) cooperated with the states’ enforcement measures against Wall Street firms.[44] In contrast, as shown above, the OCC and OTS repeatedly issued preemptive rulings and intervened in lawsuits to block efforts by state officials to enforce state anti-predatory lending laws against federally-chartered depository institutions and their subsidiaries and agents.

A recent NCLC study found that late fees and over-the-limit fees on credit cards and overdraft charges on checking accounts skyrocketed after the OCC and OTS issued regulations and rulings that preempted state consumer protection laws.[45] The NCLC study concluded:

For consumers, the upshot of all these efforts to preempt state law has been the predictable failure of consumer protection. Consumer protections eliminated on the state level were never replaced with federal protections. . . . Preemption has played a role in every major consumer protection failure in recent years.

. . . .

The limited ability of states to address rate and fee abuses also fed the ever-present culture of deception in the credit marketplace. Substantive state consumer protections have been eliminated in favor of weak federal disclosures, and the true cost of various forms of credit – credit cards, overdraft loans, mortgages – is frequently obscured, made up of hidden fees and interest rate hikes. [46]

Another recent study, by Patricia McCoy, Andrey Pavlov, and Susan Wachter, analyzed data on delinquency rates on residential mortgage loans made by four categories of depository institutions between 2006 and 2008. The study found that loans made by federal thrifts had the highest delinquency rate and loans made by national banks had the second highest delinquency rate. In contrast, state banks had the lowest mortgage delinquency rate and state thrifts had the second lowest rate.[47] This study indicates that the states were much more successful than the OCC and OTS in preventing state-chartered depository institutions from engaging in unsound and predatory mortgage lending.

3. The National Bank Act Does Not Preempt the General Application of State Laws to National Banks

In his speech of September 24, Comptroller Dugan criticized the Treasury Department’s regulatory reform plan with respect to its preservation of the states’ authority to apply their consumer protection laws on a nondiscriminatory basis to all financial institutions, including national banks. [48] Mr. Dugan alleged that “for the first time in the 146-year history of the national banking system, federally chartered banks would be subject to multiple state operating standards, because the [Treasury] plan would sweepingly repeal the ability of national banks to conduct retail banking business under uniform national standards.”[49] In fact, however, as shown below, the NBA does not give national banks the right to operate under “uniform national standards” without regard to state law.

In its recent decision in Cuomo v. Clearing House Assn., the Supreme Court observed that “[n]o one denies that the [NBA] leaves in place some state substantive law affecting banks.”[50] The Court further declared that “States . . . have always enforced their general laws against national banks – and have enforced their banking-related laws against national banks for at least 85 years, as evidenced by [First National Bank in St. Louis v. Missouri, 263 U.S. 640 (1924)].”[51]

Similarly, in Atherton v. FDIC, the Court affirmed that “federally chartered banks are subject to state law.” [52] As support for that principle, Atherton quoted Supreme Court decisions reaching back to an 1870 case – decided only six years after the NBA’s enactment – where the Court held that national banks

are subject to the laws of the State, and are governed in their daily course of business far more by the laws of the State than of the nation. All their contracts are governed and construed by State laws. Their acquisition and transfer of property, their right to collect their debts, and their liability to be sued for debts, are all based on State law. It is only when State law incapacitates the [national] banks from discharging their duties to the federal government that it becomes unconstitutional.[53]

In Barnett Bank of Marion County, N.A. v. Nelson, the Court held that “States [retain] the power to regulate national banks, where . . . doing so does not prevent or significantly interfere with the national bank’s exercise of its powers.”[54] In St. Louis, the Court declared that “the operation of general state laws upon the dealings and contracts of national banks” is the “rule,” while preemption is an “exception” that applies only when state laws “expressly conflict with the laws of the United States or frustrate the purpose for which national banks were created, or impair their efficiency to discharge the duties imposed upon them by the law of the United States.” [55]

In Lewis v. Fidelity & Deposit Co.,[56] the Court affirmed that the NBA embodies a congressional “policy of equalization” between the national and state banking systems.[57] As Lewis recognized, Congress has long sought to preserve the vitality of the dual banking system by maintaining a basic parity of competitive opportunities between state and national banks.[58] This congressional policy of equalization has been carried out in two ways – first, by “expressly incorporat[ing] state-law standards into several federal statutes,” and second, “through statutory silence [that] permits state laws to govern other aspects of the operations of national banks except in situations where a state law creates an irreconcilable conflict with federal law.”[59]

Thus, Comptroller Dugan’s claim that national banks have operated under “a uniform set of federal rules enforced by the OCC" for “nearly 150 years” [60] is contradicted by numerous Supreme Court decisions. Until 2004, national banks were required to comply with state laws in the absence of a direct conflict with a federal statute, like most other privately-owned business enterprises that operate within and across state lines. The change in 2004 came about because of aggressive, unauthorized preemption rules adopted by the OCC and has not been endorsed by Congress.

On the contrary, Congress expressed its strong support for the continued application of state laws to national banks when it passed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act).[61] The Riegle-Neal Act requires interstate branches of national banks to comply with host state laws in four broadly-defined areas – community reinvestment, consumer protection, fair lending and intrastate branching – unless such laws discriminate against national banks or are otherwise preempted by federal law. [62] In explaining why state laws should generally apply to national banks, the conference report on the Riegle-Neal Act declared:

States have a strong interest in the activities and operations of depository institutions doing business within their jurisdictions, regardless of the type of the charter an institution holds. In particular, States have a legitimate interest in protecting the rights of their consumers, businesses and communities. . . .

Under well-established judicial principles, national banks are subject to State law in many significant respects. . . . Courts generally use a rule of construction that avoids finding a conflict between the Federal and State law where possible. The [Riegle-Neal Act] does not change these judicially established principles.[63]

Thus, the Riegle-Neal conference report endorsed a judicial “rule of construction” that is the functional equivalent of a presumption against preemption under the NBA. The Riegle-Neal conference report – read in context with Cuomo, Atherton, and the other Supreme Court decisions discussed above – demonstrates that Congress has preserved a significant role for the states in regulating national banks.

National banks did not gain any type of general immunity from state laws until the OCC adopted sweeping preemption rules in 2004. The 2004 regulations purport to preempt state laws in four broadly-defined areas – real estate lending, other lending, deposit-taking, and other federally-authorized “activities.” In all four areas, the OCC’s rules (i) preempt state laws if they “obstruct, impair, or condition a national bank’s ability to fully exercise its powers to conduct activities authorized under Federal law,” and (ii) allow state laws to apply to national banks only if such laws “establish the legal infrastructure that makes [it] practicable” for national banks to conduct their federally-authorized activities. [64] The practical effect of the OCC’s “infrastructure” theory is to establish a regime of “de facto field preemption” in which “only those state laws that promote the ability of national banks to [conduct a banking business] will remain applicable.”[65]

The 2004 regulations are completely at odds with the history of the NBA, with applicable Supreme Court precedents, and with numerous expressions of congressional intent (including the Riegle-Neal conference report).[66] Moreover, in striking down a portion of the OCC’s visitorial powers rule (also adopted in 2004), and in upholding the states’ authority to enforce applicable state laws against national banks through judicial proceedings, Cuomo repudiated the central OCC rationale that underlies the 2004 preemption rules. In Cuomo, the Supreme Court emphatically rejected the OCC’s claim that it was entitled to exclusive enforcement authority over national banks because (i) the NBA allegedly preempts state laws that “affect the content or extent of the Federally-authorized business of banking,” and (ii) the NBA allegedly permits the application of state law only if it “establishes the legal infrastructure that surrounds and supports the ability of national banks . . . to do business.”[67] The Court declared in Cuomo that the OCC’s asserted “distinction between ‘implementation’ of ‘infrastructure’ and judicial enforcement of other [state] laws can be found nowhere within the text of the [NBA]. This passage . . . attempts to do what Congress declined to do: exempt national banks from all state banking laws, or at least enforcement of those laws.”[68]

Thus, Cuomo creates grave doubts about the validity of the OCC’s 2004 preemption rules, because those rules rely on the same purported distinction between state “infrastructure” laws and other state laws that the Supreme Court rejected in the context of the OCC’s visitorial powers rule.[69] Accordingly, there is no credible support for Comptroller Dugan’s claim that national banks are entitled to operate under “uniform national rules” without regard to state law. Indeed, Cuomo provides strong support for the view that the Treasury Department’s proposed legislation would represent a reasonable and proper congressional endorsement of the states’ longstanding and legitimate role in regulating financial institutions and protecting consumers.

* Professor of Law, George Washington University Law School

[1] Remarks by Comptroller of the Currency John C. Dugan before Women in Housing and Finance, Washington, DC, Sept. 24, 2009 [hereinafter Dugan Speech of Sept. 24, 2009], at 1-2 (“It is well established that this ‘shadow banking system’ of unregulated financial providers has been the source of the worst consumer protection and underwriting abuses, especially in the area of subprime mortgages”); id. at 11 (“national banks originated a relatively smaller share of subprime loans and applied better standards, resulting in significantly fewer foreclosures”), available at http://www.occ.treas.gov/ftp/release/2009-112a.pdf.

[2] Id. at 2, 11 (“[The Treasury Department’s regulatory reform] plan should not strip [consumer protection] authority from bank regulators, where I believe the current system has worked well. . . . [W]e have closely supervised national bank subprime lending standards”).

[3] Id. at 9 (“For nearly 150 years, national banks have been subject to a uniform set of federal rules enforced by the OCC”).

[4] 129 S. Ct. 2710 (2009). For my analysis of the Cuomo decision, see Arthur E. Wilmarth, Jr., Cuomo v. Clearing House: A Crucial Victory for the Dual Banking System and Consumer Protection, 1 Lombard Street No. 10, at 4-16 (Aug. 17, 2009).

[5] Dugan Speech of Sept. 24, 2009, supra note 1, at 11.

[6] Arthur E. Wilmarth, Jr., The Dark Side of Universal Banking: Financial Conglomerates and the Subprime Lending Crisis, 41 Conn. L. Rev. 963, 1012-15 (2009), available at http://ssrn.com/abstract=1403973.

[7] OCC Preemption Determination and Order, 68 Fed. Reg. 46, 264 (Aug. 5, 2003); OCC Interpretive Letter No. 1002, May 13, 2004, from Comptroller of the Currency John D. Hawke, Jr. to Georgia Banking Commissioner David G. Sorrell; State Farm Bank, FSB v. Reardon, 539 F.3d 336 (6thCir. 2008) (upholding an OTS ruling that permitted a federal thrift to offer mortgage loans through agents without complying with Ohio’s laws governing mortgage brokers).

[8] Wilmarth, supra note 6, at 1013-15, 1017-18 (2009).

[9] Robert Berner & Brian Grow, “They Warned Us: The Watchdogs Who Saw the Subprime Disaster Coming – and How They Were Thwarted by the Banks and Washington,” Business Week, Oct. 20, 2008, at 36, 41-42.

[10] Robert B. Avery et al., “The 2007 HMDA Data,” Federal Reserve Bulletin., Dec. 2008, at A107, 124-25, 124 (tbl. 11) (showing percentages of “[h]igher-priced loans” made in each year by depository institutions and their subsidiaries and other affiliates, and by independent mortgage companies); see also id. at A107 n.7 (explaining that the “higher-priced loans” covered by the study generally fell into the subprime and Alt-A categories).

[11] Patricia A. McCoy et al., Systemic Risk through Securitization: The Result of Deregulation and Regulatory Failure, 41 Conn. L. Rev. 1327, 1348-55 (2009); Wilmarth, supra note 6, at 1013-19.

[12] National Consumer Law Center, “Preemption and Regulatory Reform: Restore the States’ Traditional Role as ‘First Responder,’” Sept. 2009 [hereinafter NCLC Study], at 11-13 and tbls. 1-3. The NCLC Study showed that in 2006 national banks and their operating subsidiaries accounted for 19.2% of subprime loans, 11.3% of Alt-A loans, and 31.2% of payment-option and interest-only ARM loans. Id.

[13] Paul Muolo & Mathew Padilla, Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis (Hoboken, NJ: John Wiley & Sons, Inc., 2008), 18-21, 111-25, 249-70, 300-03; McCoy et al., supra note 11, at 1351 & n.60; Wilmarth, supra note 6, at 1018-19, 1045.

[14] Center for Public Integrity, “The Subprime 25,” available at http://www.publicintegrity.org/investigations/economic_meltdown/the_subp... John Dunbar & David Donald, “The Roots of the Financial Crisis: Who Is to Blame?” Center for Public Integrity, May 6, 2009, available at http://www.publicintegrity.org/investigations/economic_meltdown/articles/entry/1286/; see also McCoy et al., supra note 11 at 1351-56 (describing leading roles of large federal thrifts and national banks in the subprime mortgage market); Wilmarth, supra note 6, at 1017-19 (describing growing presence of national banks and federal thrifts in the subprime mortgage market, and stating that “[a]fter 2000, large national banks and federal thrifts represented half or more of the top ten subprime lenders”).

[15] U.S. General Accountability Office, Financial Market Regulation: Agencies Engaged in Consolidated Supervision Can Strengthen Performance Measurement and Collaboration, GAO-07-154, Mar. 2007, 12-14, 27-29, 40-41; Remarks by OTS Director John M. Reich at a Special Seminar on International Banking and Finance (Tokyo, Japan), Nov. 15, 2006, 1-2, available at http://files.ots.treas.gov/87127.pdf.

[16] McCoy et al., supra note 11, at 1351-55; “Top Alt-A Lenders in 4Q 07,” Mortgage Line, April 30, 2008, 1 (listing HSBC, Chase, Flagstar, BB&T, Lehman (Aurora), First Horizon, SunTrust, Wells Fargo, M&T, Bear Stearns (EMC), and Fifth Third among the top 15 providers of Alt-A loans in the fourth quarter of 2007); “Top Alt-A Lenders in 3Q 07,” National Mortgage News, Dec. 17, 2007, 1 (listing Lehman (Aurora), Chase, Wamu, BofA, Bear Stearns (EMC), Flagstar, Wells Fargo, National City, First Horizon, Wachovia, and BB&T among the top 15 providers of Alt-A loans in the third quarter of 2007); “Top Alt-A Lenders in First Half of 2007,” National Mortgage News, Sept. 17, 2007, 1 (listing IndyMac, Countrywide, Lehman (Aurora), Wamu, Bear Stearns (EMC), Chase, Wells Fargo, Wachovia, and National City among the top 15 Alt-A lenders in the first half of 2007); “Top Alt-A Lenders in Q4 2005,” National Mortgage News, April 10, 2006, 1 (listing Bear Stearns (EMC), IndyMac, Lehman (Aurora), Wells Fargo, SunTrust, First Horizon, Wachovia, BB&T, and Chase among the top 15 Alt-A lenders in the fourth quarter of 2005).

[17] Dunbar & Donald, supra note 14; Wilmarth, supra note 6, at 1018-20. For example, Citigroup,

[18] McCoy et al., supra note 11, at 1344-66; Wilmarth, supra note 6, at 968-71, 1011-35, 1046-48.

[19] McCoy et al., supra note 11, at 1354; Wilmarth, supra note 6, at 1032-35, 1044.

[20] McCoy et al., supra note 11, at 1353-55; see also Wilmarth supra note 6, at 1044-45; Ari Levy, “Wells Fargo Chairman Prefers U.S. Plan to Buy Stakes (Update 2),” Bloomberg.com, Oct. 22, 2008; Dan Fitzpatrick et al., “PNC Buys National City in Bank Shakeout,” Wall Street Journal, Oct. 25, 2008, at B1; “The PNC Financial Services Group, Inc.,” Federal Reserve Bulletin, Mar. 2009, at B1, B7.

[21] 550 U.S. 1 (2007).

[22] Wachovia and its mortgage lending subsidiary were the plaintiffs in Watters and also in a Second Circuit case that came before the Supreme Court while Watters was pending. Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005), cert. denied, 550 U.S. 913 (2007). National City and its mortgage lending subsidiary were the plaintiffs in a Fourth Circuit case that reached the Supreme Court while Watters was pending. National City Bank of Indiana v. Turnbaugh, 463 F.3d 325 (4thCir. 2006), cert. denied, 550 U.S. 913 (2007).

[23] Office of the Comptroller of the Currency, Annual Report, Fiscal Year 2008, 13, available at http://www.occ.treas.gov/annrpt/1-2008AnnualReport.pdf.

[24] McCoy et al., supra note 11, at 1348-53, 1358-66; William K. Sjostrom, The AIG Bailout, 66 Wash. & Lee L. Rev. (2009) (forthcoming) (working paper version at 2-3, 26-29, 41), available at http://ssrn.com/abstract=1346552; Wilmarth, supra note 6, at 1045.

[25] Dugan Speech of Sept. 24, 2009, supra note 1, at 10 (heading).

[26] See, e.g., 66 Fed. Reg. 28,593 (2001) (preemption determination proclaiming that Michigan laws requiring car dealers to obtain licenses and comply with Michigan consumer protection laws were preempted by the NBA with respect to dealers who acted as agents of national banks in arranging car loans); 66 Federal Register 34,784 (2001) (adopting 12 C.F.R. § 7.4006; which preempted the application of state laws to operating subsidiaries of national banks); 68 Federal Register 46,264 (2003) (preemption determination declaring that the NBA completely preempted the Georgia Fair Lending Act with respect to national banks and their operating subsidiaries); 69 Federal Register 1904 (2004) (adopting 12 C.F.R. §§ 7.4007-7.4009 and 34.4, which preempted all state laws that “obstruct, impair, or condition a national bank’s ability to fully exercise its Federally authorized powers” in four broadly-defined areas – real estate lending, lending not secured by real estate, deposit-taking, and other “operations”); OCC Interpretive Letter No. 1002, May 13, 2004, from Comptroller of the Currency John D. Hawke, Jr. to Georgia Banking Commissioner David G. Sorrell (asserting that the NBA preempted Georgia’s ability to regulate mortgage brokers who arranged loans that were funded at closing by national banks or their operating subsidiaries).

[27] Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. Pa. L. Rev.1, 82 (2008).

[28] Arthur E. Wilmarth, Jr., The OCC’s Preemption Rules Exceed the Agency’s Authority and Present a Serious Threat to the Dual Banking System and Consumer Protection, 23 Ann. Rev. Banking & Fin. L. 225, 228, 233-35, 280-87 (2004) (describing OTS preemption rules), available at http://ssrn.com/abstract=577863; State Farm Bank, FSB v. Reardon, 539 F.3d 336 (6thCir. 2008) (upholding an OTS ruling that permitted a federal thrift to offer mortgage loans through agents without complying with Ohio’s laws governing mortgage brokers).

[29] Bar-Gill & Warren, supra note 27, at 93-94; Wilmarth, supra note 28, at 276. The OTS has similar budgetary incentives for its preemptive regime, since 95% of its budget is funded by assessments, examination fees and application fees paid by federal thrifts. Office of Thrift Supervision, Annual Report, Fiscal Year 2008, 43, available at http://files.ots.treas.gov/482008.pdf.

[30] Speech by Comptroller of the Currency John D. Hawke, Jr., Feb. 12, 2002, quoted in Wilmarth, supra note 28, at 236, 274.

[31] Bar-Gill & Warren, supra note 27, at 81-83, 93-94 (citing charter conversions by three large banks during 2004-05, which moved $1 trillion of assets from the state banking system to the national banking system and produced a 15% increase in the OCC’s budget); Wilmarth, supra note 28, at 233-36, 274-79, 289-93.

[32] Bar-Gill & Warren, supra note 27, at 90-95 (quote at 94); Christopher L. Peterson, Federalism and Predatory Lending: Unmasking the Deregulatory Agenda, 78 Temple L. Rev. 1, 77-81 (2005) (quote at 81); Amy Quester & Kathleen Keest, “Looking Ahead After Watters v. Wachovia Bank: Challenges for the Lower Courts, Congress, and the Comptroller of the Currency,” 27 Review of Banking & Financial Law 187, 195-97 (2008) (quote at 195); Wilmarth, supra note 28, at 232 (quote), 274-77, 289-93, 310-16, 351-56; see also McCoy et al., supra note 11, at 1353-56 (criticizing the OCC for its “’light touch’ regulation,” id. at 1353).

[33] See Bar-Gill & Warren, supra note 27, at 92-93; Wilmarth, supra note 28, at 353, 355-56; Stephanie Mencimer, “No Account,” New Republic, Aug. 27, 2007, at 14. Like the OCC, the OTS had a very weak record of enforcing consumer protection laws against federal thrifts during the past decade. McCoy, supra note 11, at 1348-57; Eric Nalder, “Mortgage System Crumbled While Regulators Jousted,” Seattle Post-Intelligencer, Oct. 11, 2008, at A1 (reporting that the OTS initiated only “five to six” enforcement actions against federal thrifts for unfair and deceptive practices between 2000 and 2008).

[34] In re Providian National Bank, June 28, 2000, available at 2000 OCC Enf. Dec. LEXIS 55, at *1 (alleging violations of California statutes prohibiting unfair business practices).

[35] Wilmarth, supra note 28, at 316 & n.357; Stephanie Mencimer, “Correspondence,” New Republic, Oct. 8, 2007, at 7 (response by Ms. Mencimer to letter from Comptroller of the Currency John C. Dugan).

[36] Julia Patterson Forrester, Still Mortgaging the American Dream: Predatory Lending, Preemption, and Federally Supported Lenders, 74 U. Cincinnati. L. Rev. 1303, 1308-10, 1319-22, 1359-68 (2006); McCoy et al., supra note 11, at 1348.

[37] Raphael W. Bostic et al., “Mortgage Product Substitution and State Anti-Predatory Lending Laws: Better Loans and Better Borrowers?”, Univ. of Pa. Instit. for Law & Econ. Res. Paper 09-27, 19-24 (May 12, 2009), available at http://ssrn.com/abstract=1460871.

[38] Wilmarth, supra note 28, at 316, 348-52, 354-55; Amir Efrati & Aaron Lucchetti, “U.S. News: Cuomo Blazes Own Trail as Wall Street Cop,” Wall Street. Journal, Aug. 11, 2008, at A3; Brooke Masters, “In Spitzer’s Footsteps: Cuomo Trains his Sights on Financial Services,” Financial Times, June 5, 2007, at 1.

[39] Wilmarth, supra note 28, at 316 (quoting 2004 House budget committee document); see also Nalder, supra note 33 (reporting that “States . . . took 3,694 enforcement actions against mortgage lenders and brokers in 2006 alone, according to congressional testimony”).

[40] Bar-Gill & Warren, supra note 27, at 91; Quester & Keest, supra note 32, at 199; Wilmarth, supra note 28, at 289-93, 353-55; Mencimer, supra note 33 (citing an informal survey indicating that the OCC filed 60 amicus briefs in court cases from 1994 to 2006, “at least 58 of which were in support of [national] banks”).

[41] See Cuomo v. Clearing House Assn., L.L.C., 129 S. Ct. 2710, 2714 (2009).

[42] Bar-Gill & Warren, supra note 27, at 81-82, 90-95; Forrester, supra note 36, at 1339-42, 1349-53; Quester & Keest, supra note 32, at 223-37; Wilmarth, supra note 28, at 306-16, 348-52.

[43] Berner & Grow, supra note 9, at 38; see also Nicholas Bagley, “Subprime Safeguards We Needed,” Washington Post, Jan. 25, 2008, at A19; Nalder, supra note 33.

[44] Wilmarth, supra note 28, at 348-52; Wilmarth, supra note 6, at 1000-02.

[45] NCLC Study, supra note 12, at 6-10.

[46] Id. at 10, 15.

[47] McCoy et al., supra note 11, at 1356 & fig. 6.

[48] See U.S. Dept. of the Treasury, Financial Regulatory Reform: A New Foundation (June 2009), 60-61. Similarly, Subtitle D of H.R. 3126, as introduced on July 8, 2009, would preserve the states’ authority to enact laws that provide additional protections to consumers beyond those established by regulations issued by the proposed CFPA. Such supplemental state laws would be applicable on a nondiscriminatory basis to all financial service providers, including national banks, federal thrifts and their subsidiaries and agents. H.R. 3126, 111th Congress, 1st sess., §§ 141-48.

[49] Dugan Speech of Sept. 24, 2009, supra note 1, at 6.

[50] 129 S. Ct.. at 2717-18.

[51] Id. at 2720.

[52] 519 U.S. 213, 222 (1997).

[53] Id. at 222-23 (quoting National Bank v. Commonwealth, 76 U.S. (9 Wall.) 353, 362 (1870)).

[54] 517 U.S. 25, 33 (1996).

[55] 263 U.S. at 656 (quoting McClellan v. Chipman, 164 U.S. 347, 357 (1896)).

[56] 292 U.S. 559 (1934).

[57] Id. at 564-65.

[58] See Wilmarth, supra note 28, at 253-65.

[59] Id. at 266. See Lewis, 292 U.S. at 564-65, 566 (describing both methods for applying state laws to national banks).

[60] Dugan Speech of Sept. 24, 2009, supra note 1, at 9.

[61] 108 Stat. 2338

[62] 12 U.S.C. § 36(f)(1)(A).

[63] H.R. Rep. No. 103-651, at 53 (1994) (Conf. Rep.), reprinted in 1994 U.S. Code Congressional and Administrative News 2068, 2074.

[64] 12 C.F.R. §§ 7.4007- 7.4009 & 34.4; 69 Fed. Reg. 1904, 1912-13 (2004).

[65] Wilmarth, supra note 28, at 235-37, 298-99.

[66] See generally id.

[67] 69 Fed. Reg. 1895, 1896 (2004), quoted in Cuomo, 129 S. Ct. at 2719.

[68] Cuomo , 129 S. Ct. at 2720.

[69] See 69 Fed. Reg. at 1913 (asserting that state laws may apply to national banks if they “do not regulate the manner or content of the banking business authorized for national banks, but rather establish the legal infrastructure that makes practicable the conduct of that business”).