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Abolish the OCC?

posted by Adam Levitin

I've been saying for quite a while that the OCC is a "problem agency" that is seriously in need of reform. An article in Politico today underscores the problem. The OCC—under a civil servant acting Comptroller—has begun an active lobbying campaign to protect its so-called "True Lender" Rule. Not only is this highly irregular, but it also suggests that the OCC just doesn't "get it." As I explain below, this isn't a one off flub by the agency, but it is part of the agency's DNA, and isn't likely to be changed simply by putting in a good Comptroller. Fixing the OCC may require something more than a personnel change at the top. 

The background for the rule is that while nonbanks are subject to state usury laws, banks are largely exempt from state usury laws. Nonbank lenders sometimes partner with banks and then claim to shelter in the bank's exemption from state usury laws. The issue has been hotly contested in litigation, and lenders have often relied on claims about historical legal doctrine that are simply malarkey. (For more than you ever wanted to know about the background, see here.) 

The True Lender Rule provides that for purposes of application of usury laws that the "lender"--that is the party subject to the usury limit—is whatever party's name is on the loan documentation, full stop. It doesn't matter if that party is nothing more than a nominal lender. The nonbank could design, market, underwrite, and service the loan and purchase a 100% interest in the loan a minute after it is made, and under the OCC rule, the nonbank could still shelter in the bank's exemption from state usury laws. In other words, the OCC is blessing patently sham transactions simply because it disagrees with the policy encapsulated in state usury laws. (The True Lender rule is layered on top of the OCC's equally suspect "Valid-When-Made" rule that is currently facing a litigation challenge from state attorneys general.)  

Besides just being crazy policy, the True Lender Rule represents a complete break with centuries Anglo-American law. Courts have long made clear that they will not tolerate transactional devices designed to evade usury laws. The US Supreme Court has on numerous occasions held that the law requires looking to substance, not form, when dealing with issues of usury, and state supreme courts have similar rulings. Anti-evasion doctrine is a core--and noncontroversial--part of usury laws.  

So what are we to do with a wayward agency like the OCC? A couple of months ago Carter Dougherty published a carefully researched article calling for the abolition of the Office of the Comptroller of the Currency. He argued that the OCC was too friendly with the industry it regulated and as a result it was frequently failing to do its job. 

Abolishing a federal agency is an extreme step, but I think in this case it really needs to be given serious consideration. For starters, the dual banking system is a chimera—part lion, part goat, part snake—that no one would ever design from scratch. It's the path dependent outcome of historical compromises. But that doesn't mean we have to maintain it. 

Obviously, a first step is putting in place a good Senate-confirmed Comptroller. But I'm increasingly skeptical that such reform can be achieved simply with the right person heading the agency. The real problem with the agency isn't about who is its head, but the fundamental outlook of many of the civil servants in the front-office. It's not a partisan issue, but a capture problem:  too many of the OCC's front office career employees truly believe that the OCC is supposed to advocate for banks rather than regulate them in the public's interest.

The proof of this is Tom Curry's tenure as Comptroller. Curry was on the right side of policy issues, but he did not have the ability to fight the staff regarding a repeal of the OCC's patently illegal 2011 preemption regulations. It would take a Comptroller with a very firm hand—and an incredible knowledge of both administrative process and banking regulation details—to keep the front-office staff in line and prevent them from sabotaging a progressive policy agenda. And even then, I'm skeptical that it will be possible to overcome the intellectual capture of the career front office employees. That's why I think Carter Dougherty's right and abolishing the OCC—and ending the dual banking system—should start to get serious policy consideration. 

If this seems drastic, consider what an anomaly the OCC is. It exists because there is federal chartering of banks. The federal government is not generally in the business of giving out corporate charters. Yes, it does so on a one-off kind of basis for entities like the Boy Scouts and Howard and Gaulladet Universities, etc., but it doesn't charter general business entities—other than banks.

The federal government got into the bank chartering business as a way of financing the Civil War:  national banks were given the privilege of issuing national bank notes, which were legal tender currency accepted by the federal government for taxes (and used for paying government obligations), but they could only issue those notes in proportion to their holdings of government debt. In other words, the national banking system was created to monetize the federal debt. In that sense, the national banking system was very much a federal instrumentality and fell squarely within Congress's "necessary and proper" power under M'Culloch v. Maryland. National banks, however, haven't issued notes since 1935. They are no longer tools for monetizing the federal debt. Today it is hard to see how national banking charters fall within "necessary and proper." National banks no longer serve any federal purpose. They are not federal instrumentalities in any sense, and it's been decades since the Supreme Court has referred to them as such. All of which is to say that besides the policy desirability of having a separate national bank charter, I think it is of dubious constitutionality.  



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