Since their creation nearly 150 years ago, national banks have had to comply with state consumer protection laws. During the past two decades, however, an expansion of federal preemption of state consumer protection laws allowed banks to avoid state consumer protection laws.
In 2004, the Office of the Comptroller of the Currency (OCC) issued sweeping preemption rules 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. This aggressive preemption of state consumer protection oversight and enforcement figured prominently in the recent economic crisis. In response, Section 1044 of the Dodd-Frank Act included preemption reforms to clarify when state consumer protection laws can be preempted.
The law now 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 that regulators 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.
In 2011, the OCC’s released its final preemption rules, which completely ignored the changes required under Dodd-Frank. These rules permit the OCC to preempt state laws if they merely “obstruct, impair, or condition” bank operations—a standard that is clearly broader than Dodd-Frank allows. Following the rulemaking, many believed that the OCC would merely revert back to its previous broad interpretation of its preemption authority.
It was therefore surprising when in September 2012 the OCC ruled that stricter state consumer protection regulations were not preempted by more lenient federal banking regulations. The OCC found that the Urban Trust Bank (UTB) of Florida violated state usury caps in Ohio and Arizona and that these usury caps were not preempted by the National Banking Act. UTB was issuing prepaid cards, called Insight cards, to the payday lender CheckSmart, which CheckSmart then used to make payday loans in Arizona and Ohio that exceeded the usury rates in those states of 36% and 28% respectively. The rate on CheckSmart’s credit product was 401%, and its overdraft loan had a 390% annual interest rate. In a settlement agreement by and between UTB and the OCC, UTB agreed to correct these legal violations and to submit to the OCC an analysis of its prepaid card program that “fully assesses the risks and benefits of this line of business.”
At the time, it was hoped that this decision might signify a new willingness by the OCC and courts to take their consumer protection responsibilities seriously. Unfortunately this doesn’t seem to be the case. In December 2012, a federal appellate court ruled that Wells Fargo bank could skirt a California consumer protection law because it is preempted by federal law. Thus, due to preemption, it is legal for national banks to reorder transactions in order to maximize overdraft charges even though the state explicitly bans this practice.
In a somewhat similar situation, although North Carolina state law explicitly states that payday loans are illegal, Regions Bank began distributing payday loans in the state. As a national bank, Regions could offer such loans since the National Banking Act preempted North Carolina law’s prohibition against payday loans.
Consumer rights advocates in North Carolina, finding no success in overturning the assumption of preemption, turned to a different approach. With help from the North Carolina Attorney General Roy Cooper and other state leaders, consumer rights advocates were able to convince Regions Bank to voluntarily stop offering its payday loan product. While for the moment Regions has stopped offering its loans, it could begin selling them again at any time and it would be perfectly legal.
It is, therefore, important that the issue of federal preemption be addressed once and for all. The OCC and courts must be forced to comply with the Dodd-Frank preemption standard. Applying this standard to Regions Bank for instance, preemption should not apply. First, banning payday loans does not discriminate against Regions Bank since all financial entities in North Carolina are equally prohibited from offering payday loans. In fact, allowing certain entities to offer payday loans while banning others should constitute discrimination against local banks. Second, banning payday lending does not prevent or significantly interfere with the exercise by a national bank of its powers. Banning payday loans in North Carolina will not significantly diminish the banks’ overall business. Moreover, payday lending isn’t even Region Bank’s primary financial product. Third, North Carolina’s law is not preempted by another federal law so there is no other basis for preemption.
While it is great news for consumers that Regions Bank stopped offering payday loans on its own accord, it’s troubling that banks can maneuver around state laws so easily and that courts and the OCC allow them to do so despite Dodd-Frank’s clear test for preemption of state laws. Thus, while Regions Bank’s payday loans have ceased for the moment, as the recent Wells Fargo case shows, if Regions Bank elected to recommence its payday loan business in North Carolina, it is likely that a court would ignore Dodd-Frank’s preemption test. Since relying on banks to regulate themselves has never worked, we must work to ensure that state-specific consumer protection laws are not summarily preempted.