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.


Isn't This How We Got Into This Mess in the First Place?

CFPB logoConsumers and advocates had better beware. Last year, in response to the harmful financial practices that caused unforgettable pain to millions of families across the country, Congress passed comprehensive financial reform and consumer protection legislation.

Central among these reforms was the creation of a new agency, the Consumer Financial Protection Bureau (CFPB). Previously, enacting consumer protections rules, performing compliance reviews, and enforcement activities were conducted by multiple federal agencies, each of whom failed horribly at their jobs. Under the CFPB, all consumer protections laws would, for the first time, be the sole focus of one federal agency with the power to actually make consumer protection a priority.  

The CFPB is supposed to be up and running by July 1st, but Congress, in its infinite attempts to please and protect Wall Street, is attempting to eviscerate the CFPB before it even becomes functional. Specifically, several bills have been introduced that, if passed, would substantially undermine the CFPB’s ability to stop abusive financial practices. 

H.R. 1315, which was approved in the House Financial Services Committee by a vote of 35-22, would allow a simple majority of bank regulators and others on the Financial Services Oversight Council (FSOC) to veto CFPB rules they deem to be “inconsistent with safe and sound operations of financial institutions.” In other words, the very banking regulators who failed to fulfill their roles as consumer advocates before would have the ability to stop the CFPB from doing the same job that they refused to do. This vague “deemed to be inconsistent” standard will certainly be used by these agencies to stop any consumer protection measures that might affect the profitability of financial institutions.

H.R. 1121, which also passed in the House by a vote of 33-24, would alter the leadership structure of the CFPB from that of a single director to a five-member commission. Thus, instead of one agency solely focused on consumers, there would be multiple agencies whose priorities are split between protecting consumers and pleasing financial institutions. The CFPB already faces unprecedented restrictions on its powers. For instance, nowhere else in federal law can one set of regulators—in this case two-thirds of the members of the FSOC—veto the actions of another agency. The amount of funding provided to the CFPB is capped, a statutory limit imposed on no other financial regulator, and the CFPB is the only financial regulator that must comply with the federal Regulatory Flexibility Act, which allows small businesses to see proposed rules before the public does, adding months to the already lengthy rulemaking process.


Finally, H.R. 1667, approved by a 32-26 House vote, would require that the CFPB’s Director be confirmed by the Senate before the CFPB could exercise its authorities. This follows a letter from 44 Senate Republicans stating their intent not to confirm any CFPB director until the legislative reforms weakening the CFPB have been adopted.


As the Consumer Federation of America’s press statement in response to the Republican senators’ letter stated: “Enactment of these measures would virtually guarantee that the CFPB would be a weak and timid agency without the will or ability to curb the kind of financial abuses that caused the nation’s worst financial crisis since the Great Depression.”


To prevent another economic disaster and stop banking regulators from throwing consumers under the bus once again, the CFPB’s authority and autonomy must be safeguarded. Attempts to weaken it will just return us to the status quo. And isn’t that how we got into this mess in the first place?


Call or send a message to your legislators today urging them not to support these bills. The Switchboard's number is 202.224.3121. The operator can connect you to your legislator's office.


This blog post was coauthored by Ji Won Kim.



The Good, the Bad, and the Predatory: Not All Payday Loan Alternatives Are Created Equal

Payday lenderThe key to limiting the damage caused by payday lenders is tough regulations. Yet, the reason that payday lenders have proliferated in the first place is that there is a large need for small dollar loans. So, in addition to regulating payday lending we also need to increase access to safe, affordable alternatives. Expanding and promoting such alternatives will help to alleviate the financial burden on low-income and low-asset families.

Alternative small dollar loans need to be more than just payday loans lite. Instead they must be structured to ensure that they are safe and affordable. Not all payday loan alternatives are created equal. A new study from the National Consumer Law Center, which evaluated over one hundred existing products, found that there is a wide range of product quality from genuine alternatives and ones that come close to products that are merely payday loans disguised in a different name. Credit unions dominate the genuine alternatives, but some banks are also offering beneficial products.

The authors argue for a real alternative to payday loans that will fill a need for convenient, emergency credit without leaving consumers in worse financial shape than they began. The study clarifies several myths regarding alternative payday loans:

  • Just because a product is slightly cheaper does not make it good. A real alternative must be truly affordable.
  • A small profit margin does not equal a good product. Loans should be judged by their impact on the borrower.
  • An alternative does not need to be structured like a payday loan. In fact, the classic high fee structure and short repayment period cannot be replicated if we are to create a genuine alternative.
  • Expensive loans should not be tolerated because there is consumer demand. In many cases payday loans delay tough choices needed to get one’s personal finances back on track and instead can serve to make a bad situation worse.

Instead the report suggests that alternatives should contain the following characteristics:

  • A genuine payday loan alternative must have no greater than a 36% annual rate, including interest and fees.
  • A minimum of 90 days loan repayment term in manageable installments.
  • Must not employ a security method such as electronic access to a bank account that puts money for food and rent at risk. 

Hannah Weinberger-Divack coauthored this post.


The Biggest Loser: The New Financial Crisis Reality TV Show

The most recent season of NBC’s Biggest Loser just ended. Rather than waiting for next season, viewing audiences can watch a rip-off of the show right now. The new show, The Biggest Loser: American Consumers, features real Americans who have lost their financial security due to the current economic meltdown.

In the real Biggest Loser contestants vie to see who can lose the most weight, but in the American Consumer version the contestants have already lost their money.

The real Biggest Loser season always begins with contestants’ previous unhealthy diet and lifestyles being replaced with healthy foods and reduced portion sizes. The American Consumer version is the same. Instead of being force feed diets of huge portions of subprime mortgages, mortgage-backed securities, credit default swaps and predatory loans that were sautéed in a reduction of regulatory oversight sauce and served with a side of wilted consumer protection laws, consumers will receive solid financial products garnished with pro-consumer policies. They’ll even get dessert – a sundae bar from which the consumers can create their own sundaes of jobs, savings, investments and retirement accounts, complete with whipped cream and a cherry on top.

While real Biggest Loser contestants are forced to endure grueling, back-breaking, marathon workout sessions designed by their trainers, American consumer contestants will be the ones conducting “workout sessions.” During these workout sessions, or interrogations, the contestants will question the financial regulators, such as the Federal Reserve Board, the Office of the Comptroller of Currency, the Office of Thrift Supervision, the Federal Finance Agency, and the Securities and Exchange Commission, whose job it was to ensure consumer protections. Instead of the contestants being kicked off because they are below the yellow line in weight loss, regulators who failed to do their consumer protection duties will be eliminated each week.

Since we already know that none of the regulators actually protected consumers, and therefore will be kicked off, the last few shows will be special episodes. The most anticipated of these final episodes is the “Financial Products Safety Commission.” In this special episode the American consumers get to create a plan for a new federal agency committed to ensuring that the financial system places people before profits. Viewers call-in votes, rallies, support letters and voices will help determine the winning plan. Numerous guest stars are already scheduled to appear including: Elizabeth Warren, the chair of the TARP task force who first noted that Americans toasters have more consumer protections than their mortgages; Illinois Sen. Dick Durbin who already drafted proposed legislation that would create such a financial product safety commission; and a myriad of former bankers singing “Bye Bye American Pie.”

At the end of this star studded spectacular finale, the Biggest Loser: American Consumer’s grand prize will be awarded: financial stability for all Americans.

So check your local TV listings and don’t miss an episode of what will be the most exciting reality TV series yet.