This post summarizes the federal preemption standard that will apply to national banks and federal thrifts as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The new preemption rules are included in Title X of the Dodd-Frank Act, also referred to as the Consumer Financial Protection Act of 2010.

The Preemption Standards Before The Act

Understanding the new preemption standard requires an understanding of the historical preemption standards.  Until 2004, federal thrifts operated under one standard and national banks under another.

The OTS (and before them, the FHLBB) took the position that federal thrift regulation “occupied the field” of regulation for federal thrifts.  This broad preemption basically meant that only the most incidental of State laws would apply to federal thrifts.

In contrast, the OCC traditionally claimed federal preemption only on a case-by-case basis and only if the State law in question interfered with a national bank in the exercise of its federally-authorized powers.  In 1996, the U.S. Supreme Court in the Barnett decision upheld this approach when it held that State laws can regulate national banks where doing so does not “prevent or significantly interfere with” a national bank’s exercise of its powers.

In 2004, the OCC issued new regulations that stated the OCC’s preemption authority more broadly.  While the OCC refrained from claiming occupation of the field, the broad preemptive language of the regulation was otherwise very similar to the OTS’ preemption regulation.  Given that the OCC announced this new standard while States, counties and cities were aggressively regulating “predatory lending,” it is perhaps not surprising that the OCC was widely criticized by consumer advocacy groups for preempting consumer protection laws.

The New Preemption Standard

The Consumer Financial Protection Act restores the Barnett standard for national banks, or something close to it, and applies that standard also to federal thrifts.  Occupation of the field is expressly eliminated  Under the Act, consumer financial laws are preempted only in three instances:

  • if the State consumer financial law discriminates against national banks as compared to banks chartered by that State;
  • if the State consumer financial law is preempted by a Federal law other than title 12 of the United States Code; or
  • “in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank of Marion County, N. A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996), the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers.”

Given that federal thrifts will be subject to the standards that apply to national banks, references in the Act to laws that discriminate against national banks or otherwise regulate financial transactions of national banks presumably would be read by substituting “federal savings association” for “national bank” each time the phrase appears.

Under the Act, the OCC will be able to preempt only on a case-by-case basis.  If the OCC wants to make a determination that the law of another State has substantively equivalent terms as one that the OCC has already preempted, the OCC must first consult with the new Consumer Financial Protection Bureau and take the Bureau’s views into account.

No OCC regulation or order can be applied to invalidate a State law under the Barnett standard unless substantial evidence, made on the record of the proceeding, supports the specific finding regarding preemption.  In addition, a reviewing court must assess the thoroughness of the OCC’s consideration, the validity of its reasoning, the consistency of its determination with other valid determinations made by the OCC, and “other factors which the court finds persuasive and relevant to its decision.”  This is arguably a more searching standard of review than the prevailing Chevron and Skidmore frameworks for deference to agency decision-making.

The Act’s new preemption standard takes effect on the date the various consumer protection functions are transferred to the Bureau, which can be no sooner than 180 days and no more than 18 months after the date the Dodd-Frank Act is enacted.

Applying The New Standard

During the period after the Barnett decision and before the OCC announced its expanded preemption authority, the Supreme Court and many other courts applied the Barnett standard.  It seems likely that those court decisions would continue to apply, at least so long as they were decided consistently with the Barnett decision.  Likewise, many or most of the OCC interpretive opinions issued prior to 2004 should continue to apply.

Those court decisions and OCC interpretations made after the OCC released its broader preemption regulation likely will not apply in all cases.  However, to the extent those decisions or interpretations were consistent with the Barnett standard, they also should continue to apply.

What all of this means is that banks and thrifts will need to review those prior decisions and interpretations to determine the extent to which they continue to apply.

It should be noted that the new preemption standard appears to apply only to State consumer financial laws.  The rule states that “State consumer financial laws are preempted, only if” the various conditions are satisfied.  The Act defines “State consumer financial law” as a State law that does not directly or indirectly discriminate against national banks and that directly and specifically regulates the manner, content, or terms and conditions of any financial transaction (as may be authorized for national bank to engage in), or any account related thereto, with respect to a consumer.

If only State consumer financial laws are subject to the new standard, that leaves open the possibility of more aggressive preemption determinations with respect to other State laws.  For example, many State unfair and deceptive practices laws might be excluded from the definition of consumer financial law and thus subject to a different preemption standard.  It seems unlikely that the OCC will be taking any aggressive preemption positions in the near future, but the OCC’s prior preemption opinions on laws that are not consumer financial laws might continue to be valid.  In any case, it seems likely that this gap between consumer financial laws and other consumer protection laws will be the basis for many preemption disputes in the courts.

Roll Up Your Subsidiaries

Subsidiaries of national banks or federal thrifts will no longer be able to preempt State law, unless a Federal law expressly provides for such preemption or the subsidiary is itself a bank or thrift.  If your banking organization will want the benefit of preemption for the business conducted by a bank subsidiary, it will be necessary to roll its business operations into the bank.

Exportation Survived

The Act specifically preserves the exportation laws and doctrine.  Banks and thrifts, whether State or federally chartered, will still be able to export interest rates and related fees from the State in which the bank or thrift is located.