The Dodd-Frank Wall Street Reform and Consumer Protection Act did not materially change the National Bank Act preemption standards, according to Iowa federal judge James E. Gritzner. In U.S. Bank National Association v. Schipper, the bank filed a declaratory judgment action against the Superintendent of the Iowa Division of Banking and other state officials in connection with their enforcement of the Iowa Electronic Transfer of Funds Act (“EFTA”). The issue centered around U.S. Bank’s provision of ATM services to certain Iowa state-chartered banks. U.S. Bank data processing centers handled Iowa state chartered bank “On-Us” transactions without Iowa regulatory interference. (“On Us” transactions are those where the bank’s customer is using his own bank’s ATM to withdraw funds.) However, U.S. Bank was not permitted to handle “Not-Us” transactions (customers using an ATM his bank does not own) because it had not registered as a central routing unit (“CRU”) with the State of Iowa.
Under Iowa law, an entity that seeks to operate a CRU must disclose certain information to the EFTA administrator, receive written approval from the administrator and include public representation on any board setting policy for the CRU. U.S. Bank had provided Farmers State Bank with EFTA services for On-Us transactions since 2006. However, because U.S. Bank was not an approved CRU, it could not process Not-Us transactions. Instead, U.S. Bank had to enlist the only state-approved CRU – SHAZAM – to process the transactions and pay it a fee.
In 2007, U.S. Bank sought clarification from the Iowa Superintendent of Banking about whether state-chartered banks, like Farmers State Bank, had to comply with the provisions of the EFTA when the entity providing services to it was a national bank. The administrator conceded that it had no power to regulate U.S. Bank directly, but contended it could require state-chartered banks to comply with the Iowa EFTA law. U.S. Bank made all the traditional National Bank Act (“NBA”) preemption arguments to the Court. It asserted that conflict preemption barred enforcement of the Iowa statute because the state law prevented or significantly interfered with the exercise of a National Bank power.
All the parties agreed that U.S. Bank’s provision of EFTA services fell within the scope of activities permissible for a National Bank. However, the State disputed whether the general OCC regulations authorizing U.S. Bank to engage in EFTA activities where sufficient to preempt the Iowa law because “nothing in the OCC regulations . . . addresses the method national banks must use in performing EFT services for customers.” Relying on the OCC’s broad preemption rules, the Court found that the NBA authorized national banks to “exercise ... all ... incidental powers ... necessary to carry on the business of banking.” Pursuant to OCC regulation, this included the development, operation, management and marketing of products and processing services for transactions conducting electronic terminal devices. 12 C.F.R. § 7.5007(d). The Court noted the Controller’s interpretation in the National Bank Act is entitled to great weight. In a footnote, it specifically said that Dodd-Frank did not materially change the standard of preemption the Court should apply.
Even though the Iowa EFTA did not expressly prohibit U.S. Bank’s ability to provide CRU services, the regulation prevented or significantly impaired its ability to exercise its federally-granted power, whether or not the regulation was enforced directly against U.S. Bank. In order for U.S. Bank to become an approved CRU, it had to appoint at least four members of board that sets policy to represent the interest of consumers and agricultural business. This was found to be in direct conflict with the NBA, which permitted shareholders to elect directors and required each director to work in the bank’s interest and not in anyone else’s. The Court said U.S. Bank did not have to comply with the Iowa law because it stands as an obstacle to the bank’s ability to provide CRU services, and because the certification provisions of the Iowa EFTA are in direct conflict with federal law. Accordingly, the Court found the Iowa statute to be preempted and issued a permanent injunction against its enforcement against U.S. Bank or any entity to which U.S. Bank provides correspondent data processing or electronic services.
This case appears to be one of the first to address the application of the OCC preemption rules and standards post the applicability of Dodd-Frank. It is significant because it supports the OCC’s recent rule that its Preemption Rules remain valid post-Dodd-Frank. The Department of Treasury and consumer advocates had vigorously disputed OCC’s interpretation. The case also sets the tone for future courts due to its thoughtful analysis.