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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

states’ efforts to regulate those national banks and thrifts. The companies claimed that
without one uniform set of rules, they could not easily do business across the country,
and the regulators agreed. In August , as the market for riskier subprime and Alt-
A loans grew, and as lenders piled on more risk with smaller down payments, reduced
documentation requirements, interest-only loans, and payment-option loans, the
OCC fired a salvo. The OCC proposed strong preemption rules for national banks,
nearly identical to earlier OTS rules that empowered nationally chartered thrifts to
disregard state consumer laws. 
Back in  the OTS had issued rules saying federal law preempted state preda-

tory lending laws for federally regulated thrifts. In , the OTS referred to these
rules in issuing four opinion letters declaring that laws in Georgia, New York, New
Jersey, and New Mexico did not apply to national thrifts. In the New Mexico opinion,
the regulator pronounced invalid New Mexico’s bans on balloon payments, negative
amortization, prepayment penalties, loan flipping, and lending without regard to the
borrower’s ability to repay.
The Comptroller of the Currency took the same line on the national banks that it
regulated, offering preemption as an inducement to use a national bank charter. In a
 speech, before the final OCC rules were passed, Comptroller John D. Hawke Jr.
pointed to “national banks’ immunity from many state laws” as “a significant benefit
of the national charter—a benefit that the OCC has fought hard over the years to pre-
serve.” In an interview that year, Hawke explained that the potential loss of regula-

tory market share for the OCC “was a matter of concern.” 
In August  the OCC issued its first preemptive order, aimed at Georgia’s
mini-HOEPA statute, and in January  the OCC adopted a sweeping preemption
rule applying to all state laws that interfered with or placed conditions on national
banks’ ability to lend. Shortly afterward, three large banks with combined assets of
more than  trillion said they would convert from state charters to national charters,
which increased OCC’s annual budget . 
State-chartered operating subsidiaries were another point of contention in the
preemption battle. In  the OCC had adopted a regulation preempting state law
regarding state-chartered operating subsidiaries of national banks. In response, sev-
eral large national banks moved their mortgage-lending operations into subsidiaries
and asserted that the subsidiaries were exempt from state mortgage lending laws.
Four states challenged the regulation, but the Supreme Court ruled against them in
. 
Once OCC and OTS preemption was in place, the two federal agencies were the
only regulators with the power to prohibit abusive lending practices by national
banks and thrifts and their direct subsidiaries. Comptroller John Dugan, who suc-
ceeded Hawke, defended preemption, noting that “ of all nonprime mortgages
were made by lenders that were subject to state law. Well over half were made by

mortgage lenders that were exclusively subject to state law.” Lisa Madigan, the attor-
ney general of Illinois, flipped the argument around, noting that national banks and
thrifts, and their subsidiaries, were heavily involved in subprime lending. Using dif-
ferent data, she contended: “National banks and federal thrifts and . . . their sub-