Commissioner of Financial Regulation Charles Turnbaugh: Congress

Daily Record, The (Baltimore), Apr 19, 2007 by Andy Rosen

The state's top banking regulator says he is frustrated with a U.S. Supreme Court ruling that denied states the authority to supervise the subsidiaries of national banks, including mortgage lending companies.

"I think we have a major problem, and the only place we can go for a solution is Congress," Commissioner of Financial Regulation Charles Turnbaugh said in response to this week's decision by the high court.

The ruling tossed out a challenge to the authority of federal regulators to oversee the lending activities of national bank subsidiaries, affirming that federal laws give that power to the Office of the Comptroller of the Currency.

Turnbaugh said he is concerned because many banks that lend to consumers in the state are not subject to Maryland laws governing fees and interest rates. Still, supporters of the decision note that federal consumer protection laws continue to apply to national banks as well as their subsidiaries.

The case, Watters v. Wachovia Bank, N.A., dealt with a legal challenge by Michigan's financial regulators. However, the decision also ended an appeal by Turnbaugh's office that challenged federal authority on similar grounds.

Territorial disputes between federal and state financial regulators have been going on for many years, since national banks were created toward the end of the Civil War.

Proponents of state-level regulation believe that state legislatures are best-suited to make laws that protect their constituents. Supporters of federal oversight think it is better to have one system for national banks to follow, so they will not be subject to parallel systems with sometimes divergent regulations.

Kathleen Murphy, president and CEO of the Maryland Bankers Association, said the Supreme Court decision maintains a two-tiered banking system, where both banks and consumers can choose whether they are more comfortable with federal regulation.

She said banks that choose to be regulated in Maryland have the advantage of being "a bigger fish in a smaller pond," while national banks get to operate in a wider variety of markets without having to adapt to many different sets of rules.

"They choose their charter based on what their unique needs are for their organizations," Murphy said. She added that the decision was helpful to banks because it kept an existing system in place, instead of changing the rules.

National banks lending in Maryland have to answer only to their federal regulator, while the state oversees banks that are chartered here. Until Tuesday, there was disagreement about whether state regulators could supervise national banks' subsidiaries making loans for homes, automobiles and other properties in their states.

Kevin Mukri, spokesman for the Office of the Comptroller of the Currency, said the case was really about making a decision about whether the subsidiaries of national banks are part of the national banks. The court decided, as the OCC had held, that they are.

In a series of court battles, national banks have successfully bucked the authority of state regulators in recent years. Last August, the 4th U.S. Circuit Court of Appeals ruled against Turnbaugh's office in a case involving the National City Bank of Indiana. That bank's affiliate, called First Franklin Financial Corp., successfully challenged the state's ability to regulate prepayment penalties on adjustable rate mortgage loans it made in Maryland.

The state was appealing that decision, Turnbaugh said, but Tuesday's ruling put an end to that process. He said he was most concerned with the removal of state authority over the banking system. He said his office no longer has any meaningful power over what national banks can do in the state.

Turnbaugh said he believes subsidiary companies like mortgage lenders are not themselves banks and should be regulated by the state. It will take a change in federal banking law to address the issue, he said.

"Neither I nor the Maryland legislature has any practical control over what national banks or their subsidiaries can do to Maryland consumers," he said.

Mukri reiterated that federal legislators, who are accountable to their constituents, make consumer protection laws that apply to national banks and their subsidiaries.

"Consumers are entitled to all protections that they are under federal law and federal regulations, which are very extensive," he said.