WASHINGTON - Federal Deposit Insurance Corp. Chairman Don Powell won unexpected support from fellow Republicans to move forward on a plan to grant limited exemptions for state-chartered banks from state consumer laws.
Thursday's 3-2 vote to issue the proposal, which will be open for comment for 60 days, was a reversal from three months ago, when the board voted 4-1 to table a similar plan.
The Financial Services Roundtable petitioned in December for the FDIC to assert that host-state laws do not apply to state-chartered banks' out-of-state branches, operating subsidiaries, and loan offices.
The FDIC ultimately issued a proposal that said host-state laws would not apply to state-chartered banks' out-of-state branches where a federal court or the OCC has concluded that the law is preempted for national banks. Under the plan, state banks' operating subsidiaries and loan offices also might not have to comply with host-state laws under certain circumstances.
Whether the FDIC would even vote to release that proposal was uncertain until the very last moment. FDIC Vice Chairman Martin Gruenberg, a Democrat, and Thomas Curry, an independent FDIC board member, said they could not support the plan.
The proposal "continues to employ creative or stretched legal arguments," Mr. Curry said. "I do not believe this approach is appropriate especially when it would effectively establish a new activist policy of aggressive preemptive action by the FDIC."
Mr. Gruenberg said the proposal, if adopted, would undermine state consumer protections.
Citing a May hearing on the issue, Mr. Gruenberg said, "I would note that the public interest groups which testified were united in their view that the position would not be in the interest of consumer protection."
But Mr. Reich unexpectedly supported the proposal despite having voted against a similar move at the FDIC's July 19 meeting. Though Mr. Reich continued to express reservations about the plan, he said "something needs to be done" to resolve inequities between state-chartered banks and national banks.
"This may not be the solution," Mr. Reich said. "Congress does, I believe, need to weigh in, but I don't see that happening in the near term, and if this action will help to precipitate a congressional solution, a congressional resolution, then so be it."
In the end, it was Mr. Dugan who broke the tie in favor of the proposal. He said he would support the plan if the FDIC added an amendment clarifying that host-state laws would only be preempted in situations where a federal court or the OCC had concluded in writing that the law is preempted for national banks. Mr. Dugan said the amendment was an attempt to assure parity between national and state-chartered institutions. Mr. Powell agreed to except the amendment.
"I would not have supported … [the proposal] without that provision," Mr. Dugan said after the vote.
"Our concern had been that the way that the language was drafted, it would permit the FDIC or a state bank to adopt a position that went beyond what we the OCC had issued in writing for a national bank and therefore could result in a lack of parity," he said.
Mr. Dugan's support was all the more surprising because Julie Williams, who was the acting comptroller at the July 13 meeting, had argued such a proposal would be illegal.
Mr. Powell said the vote was a "step, not a 'victory' " in his quest to preserve the dual banking system.
But others were more pleased. John Ryan, the senior vice president for policy and legislation of the Council of State Bank Supervisors, praised Mr. Dugan's role in helping the FDIC to pass the proposal.
"I'm sure some people will be reading between the lines and trying to find little traps in there that maintain advantages for national banks, but I really don't think that was John's intent," he said. "I really think he was trying to broker some sort of compromise and move things forward."
Rep. Barney Frank, the lead Democrat on the House Financial Services Committee, objected to the proposal and blamed the OCC for issuing a rule in January 2004 that said most state consumer protection laws are preempted by the National Bank Act.
"It is becoming increasingly important that Congress intervene and fix this problem," Rep. Frank said in a press release. "We are now adding more ambiguity into the banking system by trying to bootstrap on the OCC's overly broad preemption and visitorial rules. This has to be changed."
The proposal will be out for comment 60 days after it is published in the Federal Register.
