Special Alert: OCC Articulates Interpretation of Dodd-Frank Act Federal Preemption Provisions
May 16, 2011
On May 12, the Office of the Comptroller of the Currency ("OCC") sent a letter (the "May 12 letter") to Senator Thomas R. Carper to articulate the OCC’s interpretation of the federal preemption provisions that were added to the National Bank Act by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"). The OCC explained that it issued the May 12 letter in response to an April 4 letter from Senators Carper and Mark Warner, the authors of the Act’s preemption provisions, requesting that the OCC clarify its interpretation of such provisions.
The Act’s Preemption Provisions
As previously reported in InfoBytes (InfoBytes Regulatory Restructuring Report, Issue 20.1, July 20, 2010), Title X of the Act includes new rules regarding federal preemption standards for federally-chartered banks and thrifts and their operating subsidiaries, agents, and affiliates. Such rules become effective on the designated transfer date, July 21, 2011. Following is a brief summary of the Act’s preemption provisions:
- The Act effectively repeals the decision in Watters v. Wachovia Bank, 550 U.S. 1 (2007), by removing preemption protection for subsidiaries, agents and affiliates of national banks and thrifts.
- A state consumer financial law (as defined in the Act) is preempted only if (i) its application would have a discriminatory effect on national banks in comparison with its effect on state-chartered banks, (ii) in accordance with the legal standard for preemption provided by the U.S. Supreme Court in Barnett Bank of Marion County, N. A. v. Nelson, 517 U.S. 25 (1996) ("Barnett"), the state consumer financial law prevents or significantly interferes with the execution by a national bank of its powers; or (iii) the state law is preempted by a federal consumer financial law other than Title LXII. With respect to the Barnett standard, a preemption determination may be made by a court, by regulation or order on a case-by-case basis or in accordance with applicable law. When making a case-by-case determination, the OCC must first consult the Consumer Financial Protection Bureau ("CFPB").
- The OCC is charged with making determinations regarding preemption of state laws, but is entitled to less deference than the deference to which agencies are entitled under the Chevron U.S.A v. NRDC, 467 U.S. 837 (1984) ("Chevron") standard. Specifically, courts are directed to assess the validity of the OCC’s preemption determinations based on the thoroughness of the OCC’s consideration, the validity of the reasoning, the consistency with other valid determinations and other relevant factors, making the judicial review more like the standard enunciated in Skidmore v. Swift & Co., 323 U.S. 134 (1944).
- The Act specifies that interest rate exportation of national banks (Section 85 of the National Bank Act) and federal thrifts (Section 4(g) of the Home Owners Loan Act) is not affected.
- The Act clarifies that a state law is not inconsistent with federal law if it provides greater protection than what is provided under federal law. A determination as to whether the state law is inconsistent with the Act may be made by the CFPB on it own motion or upon petition by an interested person.
- The Act clarifies that contracts already in place as of July 21, 2010 that rely on then-existing preemption rules or guidance are unaffected by the Act.
- The Act attempts to clarify the ability of states to enforce laws against national banks and thrifts, including (among other things) by expressly codifying the holding in Cuomo v. Clearing House Ass’n., 129 S.Ct. 2710 (2009), and providing that nothing in the Title is intended to limit or restrict "the authority of any attorney general (or other chief law enforcement officer) of any State to bring an action against a national bank in a court of appropriate jurisdiction to enforce an applicable law and to seek relief as authorized by such law." The majority in Cuomo held that "visitorial powers" preempted by the National Bank Act do not extend to the ability of a state attorney general to enforce a state law against a national bank.
May 12 Letter
The May 12 letter set forth the following OCC interpretations and plans in response to the Act’s preemption provisions:
- The OCC plans to rescind 12 C.F.R § 7.4006 - which is the OCC’s regulation concerning the application of state laws to national bank operating subsidiaries - because of the Act’s elimination of preemption protections for the subsidiaries, agents, and affiliates of national banks and federal thrifts.
- In response to the Act’s change of the preemption standards under the Home Owners’ Loan Act to conform to those applicable to national banks, the OCC plans to amend its regulations to make clear that federal savings associations and their subsidiaries are subject to the same preemption standards as national banks and their subsidiaries, respectively.
- In response to the Act’s language regarding preemption being "in accordance with the legal standard for preemption provided by the U.S. Supreme Court in Barnett," the OCC expressed its view that such language is a directive to apply the conflict preemption standard articulated in Barnett. Under the OCC’s interpretation, this means that the "prevent or significantly interfere" standard is the starting point for the analysis, but the analysis must also consider the whole of the conflict preemption analysis in the Barnett decision.
- The OCC noted the 11th Circuit Court of Appeals’ recent decision in Baptista v. JPMorgan Chase, N.A., No. 10-13105 (11th Cir. May 11, 2011) (to be published), in which the court cited other formulations of conflict preemption used in the Barnett decision to arrive at the conclusion that, under the Act, the proper preemption test is conflict preemption.
- The OCC also noted that the Act’s preemption provision used language virtually identical to that used in section 104(d)(2)(A) of the Gramm-Leach-Bliley Act of 1999 ("GLBA"), and that the leading case applying that standard, Association of Banks in Insurance Inc. v. Duryee, 270 F.3d 397 (6th Cir. 2001), similarly treated the phrase "prevents or significantly interferes" as referencing the entire Barnett preemption analysis.
- The OCC postulated that the Act’s inclusion of the "prevent or significantly interfere" standard may signal Congress’s dissatisfaction with the OCC’s attempt to distill the Barnett standard in its regulations through the use of the term "obstruct, impair, or condition." In order to eliminate any ambiguity regarding the OCC’s reliance on Barnett, the OCC plans to remove the "obstruct, impair, or condition" language from its regulations.
- In the OCC’s view, preemption determinations that are consistent with the Barnett conflict preemption analysis are preserved, including judicial determinations, interpretations, and OCC rules based on Barnett’s analysis. The case-by-case analysis of preemption questions required by Dodd-Frank would only apply to prospective preemption questions. Existing regulations, to the extent based on the Barnett analysis, remain operative.
- In the OCC’s view, the statutory provision’s recitation of the "prevent or significantly interfere" standard from Barnett, in addition to the direct reference to Barnett, affirms Barnett without creating a new emphasis or gloss on what state laws may meet the "significantly interfere" standard.
- The May 12 letter also summarizes the OCC’s interpretation of the Act’s requirements regarding consultations with the CFPB, the evidentiary standard for a preemption determination, and review of prior preemption determinations every 5 years.
In addition, the May 12 letter states the OCC’s plan to incorporate the Act’s codification of Cuomo by revising 12 C.F.R. § 7.4000 to provide that an action by a state attorney general, or other chief law enforcement officer, in a court of appropriate jurisdiction to enforce a non-preempted state law against and national bank and seek relief as authorized under such law is not an exercise of visitorial powers pursuant to 12 U.S.C. § 484.