The State of Preemption and the Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 encompasses many types of financial regulatory reforms, including the issue of preemption of state consumer protection laws.
Protecting consumers’ rights has traditionally been a state duty and in fact, for most of the nation’s history, consumers have depended on states, not the federal government, for protection. For most of the nearly 150 years since national banks were created, such banks have complied with state consumer protection laws. During the past two decades, however, there has been a major expansion of federal preemption of state consumer protection laws in the banking sector lead by the Office of the Comptroller of Currency (OCC), the main regulator for national banks.
The recent trend began in 1994 when Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act, dramatically expanding the scale of banking activities national banks could engage in across state lines. After its passage, the OCC asserted that Riegle-Neal gave national banks the power to export the interest rates of both the state where the bank was headquartered and the state in which a branch was located, allowing banks to take advantage of the most favorable interest rates (known as the “most favored lender doctrine”). The most favored lender doctrine has become one of the hallmarks of federal preemption.
Two years later, in 1996, the Supreme Court, in Barnett Bank of Marion, N.A. v. Nelson, invalidated a state insurance law that prohibited national banks from selling insurance in small towns in Florida, holding it was preempted by a federal law permitting national banks to sell insurance in towns with populations of not more than 5,000 people. The Court held that a state law that “prevents or significantly interferes” with a national bank’s exercise of its powers is preempted. The Barnett Bank case set a new standard for preemption decisions and provided the OCC with the basis for a vast expansion of its preemption powers, and for the past 14 years courts have interpreted the Barnett Bank standard to preempt the majority of state laws aimed at regulating national banks’ activities.
In 2004, the OCC issued two sweeping rules—a preemption regulation providing that national banks and their operating subsidiaries were not subject to state laws that “obstruct, impair or condition” a bank’s exercise of its federally authorized powers to make loans or take deposits, and a visitorial powers regulation that restricted the authority of states to examine and supervise national banks, making such examination and supervision the exclusive province of the OCC. This aggressive preemption of state consumer protection oversight and enforcement figured prominently in the recent economic crisis and led to the loss of millions of dollars by consumers due to abusive lending and other financial practices.
The preemption reforms contained in Section 1044 of the Dodd-Frank Act recognize that states are closer to where abuses are occurring and that states can often act more quickly than the federal government to stop such abuses. The law makes clear that state laws that provide greater protection than federal law are not necessarily preempted. According to the statute, the OCC may only preempt laws if (1) they discriminate against national banks; (2) a given law “prevents or significantly interferes with the exercise by the national bank of its powers,” as stated in the Barnett Bank case; or (3) the state law is preempted by another federal law. Additionally, the law requires that preemption determinations must be made on a case-by-case basis with respect to particular state laws and can no longer rely on blanket preemption determinations like the OCC’s 2004 regulations. Also, prior to making a preemption decision the OCC must consult with the Consumer Financial Protection Bureau (CFPB) and take its views into account.
Furthermore, the standard for judicial review of OCC rulings was also changed by the new law. Previously, courts accorded a high level of deference to OCC rulings under the Chevron v. National Resources Defense Council case, which held that courts must defer to an agency’s reasonable construction of statutes administered by that agency. Under the Dodd-Frank Act, however, courts must now apply the standard from Skidmore v. Swift & Co., assessing the thoroughness of the OCC’s consideration, the validity of the OCC’s reasoning, the consistency with other determinations made by the OCC, and any other factors that the court finds persuasive and relevant to its decision.
Finally, the Dodd-Frank statute upholds the Supreme Court’s decision in Cuomo v. Clearing House Association. allowing states to sue national banks and federal thrifts to enforce non-preempted state laws. This may result in more activity from state attorneys general and a dramatic increase in enforcement actions by state agencies. In short, the Dodd-Frank preemption provisions explicitly and deliberately overturned the OCC’s previous regulations and limited its ability to continue to preempt state consumer protection laws.
Yet, when the OCC released its new proposed preemption rules in May, it merely re-adopted its broadly written 2004 regulations, completely ignoring both the substantive and procedural changes required under Dodd-Frank. Specifically, the OCC’s proposed rules evade the statute by allowing the OCC to preempt state laws that merely “obstruct, impair or condition” bank operations. Also, rather than make determinations on a case-by-case basis as required under the law, the OCC proposes to keep the across-the-board preemptions in the 2004 regulations in place.
The Dodd-Frank preemption reforms will be meaningless if they merely preserve the status quo. By specifying the limited circumstances under which existing OCC preemptions can occur, Dodd-Frank ensures improved consumer protections. Tell Congress that you support preemption reforms and join the growing list of advocates, such as the Shriver Center, that are fighting for stronger consumer protections.
