Dodd-Frank and Federal Preemption: The End Result

calendar.jpgThe Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Act) dramatically changed the financial regulatory landscape with broader and more stringent consumer financial protection laws. But one area that the Act does not appear to have changed is National Bank Act (NBA) preemption of state consumer financial laws.

Federal preemption of state laws is important because preemption allows national banks to adhere to one set of federal consumer protection standards instead of 50 state standards.  The Dodd-Frank Act provides that the NBA preempts specified state consumer financial laws only if the state law:

  • discriminates against national banks;
  • “prevents or significantly interferes” with the exercise of a national bank’s powers “in accordance with the legal standard for preemption” set forth by the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996); or
  • is preempted by other federal law.

The second provision worried banks and caused much debate in Congress because consumer advocates sought in the legislative process to establish a new, higher standard for NBA preemption than prior to the Dodd-Frank Act. These concerns have been eased in the year since the Dodd-Frank preemption provisions became effective. Instead of heightening the preemption standard, the Office of the Comptroller of the Currency (OCC) and federal courts have generally interpreted the Act’s “prevents or significantly interferes” provision as merely clarifying the pre-existing preemption standard. 

The OCC is the federal agency charged with interpreting the Dodd-Frank preemption provisions and supervising national banks.  In a final rule issued in July of 2011, the OCC concluded that, “the Dodd-Frank Act does not create a new, stand-alone ‘prevents or significantly interferes’ preemption standard, but rather incorporates the conflict preemption legal standard and the reasoning that supports it in the Supreme Court’s Barnett decision.”  In other words, the Act did not work any meaningful change in the standard for NBA preemption.   

Importantly, most courts have thus far reached the same conclusion as the OCC.* Two district court opinions have included brief statements suggesting that Dodd-Frank may somehow have changed the NBA preemption standard, but neither of these courts ultimately made a definitive ruling on this basis.

In short, while it is still too early to say conclusively that the OCC’s view of the Dodd-Frank preemption provisions will prevail in the courts, the early signs are positive and consistent with the view that the Dodd-Frank Act did not change the NBA preemption standard.

* See, e.g., Baptista v. JP Morgan Chase, N.A., 640 F.3d 1194, 1197 (11th Cir. 2011) (treating the Act as having no effect on NBA preemption standards); U.S. Bank , N.A. v. Schipper, 812 F. Supp. 2d 963, 968 n.1 (S.D. Iowa 2011) (concluding that the Act “did not materially alter the standard for preemption the Court must apply”); Parks v. MBNA America Bank, N.A., 2012 WL 2345006 (Cal. June 21, 2012) (“In 2010, the Dodd-Frank Act codified the significant impair test articulated in Barnett Bank.”)

Will National Banks Lose the Protection of Federal Preemption?

justice.jpgIf you are the director of a nationally chartered bank or thrift, there’s a date coming up real fast that you must pay attention to. 

One of the many changes mandated by the Dodd-Frank Act is a significant restriction in the protection that banks and thrifts with national charters have enjoyed from many state consumer protection laws. That protection—under a legal principle known as federal preemption—is set to change significantly on July 21. While much angst has been expressed over the disruptive impact that the new Consumer Financial Protection Agency could have on the banking industry, that agency is still getting organized and its impact at this point is—at best—speculative. The end of federal preemption, on the other hand, could have immediate ramifications for national banks and thrift.

The idea of federal preemption in banking is a creature of the National Bank Acts (there were actually two, one in 1863 and another in 1864 which superseded the original law), which among other things created a federal charter for commercial banks and placed them under the control of the Office of the Comptroller of the Currency (OCC). Preemption received a huge boost in 1996 when the U.S. Supreme Court issued a landmark ruling that invalidated a state law that prohibited national banks from selling insurance in small Florida towns. 

And in 2004, under former Comptroller John D. “Jerry” Hawk, the OCC issued rules that preempted national banks and their operating subsidiaries from state laws that “obstruct, impair or condition” their ability to make loans and take in deposits, and also granted sole authority to examine and supervise national banks to—itself!

An apt description of this royal doctrine might have been: “The divine right of the OCC,” and it comes as no surprise that legitimate state interests have railed against the agency’s protective stance ever since. Consider this one example: During the home mortgage boom some years back, national banks doing business in Georgia were exempted from that state’s robust anti-predatory lending law while state chartered banks were forced to comply. Needless to say, state attorneys general and legislatures have been among the most vocal opponents of the OCC’s stand on preemption.

Although Dodd-Frank does not invalidate federal preemption altogether, it does state that the OCC can no longer issue sweeping rulings like it did in 2004, but instead will have to make preemption decisions on a case-by-case basis. It’s also possible that the scope of protection under federal preemption will end up being more narrowly constructed under Dodd-Frank, although it might take years of litigation before national banks and thrifts know exactly how much protection they have against state laws.

Who should be most concerned about the Dodd-Frank restrictions on federal preemption, set to take effect on July 21? Logically, it would be large national banks and thrifts with multi-state operations that include branch banking, home mortgages and/or servicing, home equity lending, auto finance, student lending and credit cards–in short, practically any consumer lending or servicing business.

Being forced to comply with multiple—and differing—state laws will drive up operating and compliance costs for large multi-state banks. Worse yet, it will expose them to the wrath of state attorneys general who couldn’t touch them before. As Arthur J. Rotatori, a Cleveland, Ohio-based member at the McGlinchey Stafford law firm puts it, “The purpose of this provision in Dodd-Frank is to empower state attorneys general to go after national banks.”

And no doubt they will.