On July 20, 2011, the Comptroller of the Currency (OCC) adopted changes to its preemption regulations to conform them to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Despite the objection of the Administration1, which had argued for a much more limited federal preemption over state consumer protection laws, the OCC reaffirmed virtually all of its existing preemption determinations. The OCC reasoned that Dodd-Frank mandates that its rules must conform to the Supreme Court's decision in Barnett Bank v. Nelson, 417 U.S. 25 (1996). The OCC determined that its existing preemption rules conformed with Barnett Bank. The OCC did make modifications to its rules to clarify that Barnett Bank is controlling. Specifically:

Deposit-taking2 - Under revised/retained § 7.4007: "A national bank may exercise its deposit-taking power without regard to state law limitations concerning":

  • Abandoned and dormant accounts [but see Anderson Nat'l Bank v. Luckett, 321 U.S. 233 (1944)]
  • Checking accounts
  • Disclosure requirements3
  • Funds availability
  • Savings accounts orders of withdrawal
  • State licensing or registration requirements (except for purpose of service of process)

State laws that are not preempted, "to the extent consistent with" [Barnett Bank, 517 U.S. 25]:

  • Contracts
  • Torts
  • Criminal law
  • Right to collect debts
  • Acquisition and transfer of property
  • Taxation
  • Zoning
  • Any other law that the OCC determines to be applicable to national banks in accordance with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996) or that is made applicable by federal law.

Deposit Fees - The OCC stated in its rulemaking that 12 CFR 7-4002, the regulation which requires and authorizes a national bank to set non-interest charges based on the so-called "four-factor" test, remains in effect. Footnote 4 to revised § 7.4007 was retained ("state laws purporting to regulate national bank fees and charges are addressed in 12 C.F.R. § 7.4002"). The OCC discussion states: "...we agree with commenters that these rules [7.4002, 34.21 and 37.1] remain in effect."

7.4002 provides: "The OCC applies preemption principles derived from the United States Constitution, as interpreted through judicial precedent, when determining whether state laws apply that purport to limit or prohibit charges and fees described in this section."

7.4002 also provides that the establishment and amount of non-interest charges and fees "are business decisions to be made by each bank, in its discretion, according to sound banking judgment and safe and sound banking principles." 7.4002 provides four factors that must form the basis for the bank's decision:

  • cost of the service
  • deterrence of misuse
  • enhancement of the competitive position of the bank in accordance with the bank's business plan and marketing strategy
  • safety and soundness

Non-real Estate Lending4 - Under revised/retained § 7.4008, Lending: "A national bank may make non-real estate loans without regard to state law limitations concerning":

  • licensing, registration (except for purposes of service of process), filings, or reports by creditors;
  • ability of a creditor to require or obtain insurance for collateral or other credit enhancements or risk mitigants, in furtherance of safe and sound banking practices;
  • loan-to-value ratios;
  • terms of credit, including the schedule for repayment of principal and interest, amortization of loans, balance, payments due, minimum payments, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan;
  • escrow accounts, impound accounts, and similar accounts;
  • security property, including leaseholds;
  • access to, and use of, credit reports;
  • disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents;
  • disbursements and repayments; and
  • rates of interest on loans.

Non-interest Loan Fees and Charges - As with non-interest charges on deposits, non-interest charges on loans continue to be governed by the four-factor test of § 7.4002, by virtue of retention of footnote 6 to § 7.4008: "State laws purporting to regulate national bank fees and charges that do not constitute interest are addressed in 12 CFR § 7.4002."

Laws that are not preempted and which apply "to the extent consistent with [Barnett Bank]":

  • Contracts
  • Torts
  • Criminal law
  • Rights to collect debts
  • Acquisition and transfer of property
  • Taxation
  • Zoning
  • Any other law that the OCC determines to be applicable to national banks in accordance with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996) or that is made applicable by federal law.

Real Estate Loans - Under revised/retained § 34.4, "A national bank may make real estate loans under 12 U.S.C. 371 and § 34.3, without regard to state law limitations concerning":

  • licensing, registration (except for purposes of service of process), filings, or reports by creditors;
  • the ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements or risk mitigants, in furtherance of safe and sound banking practices;
  • loan-to-value ratios;
  • terms of credit, including schedule for repayment of principal and interest, amortization of loan, balance, payments due, minimum payments, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan;
  • aggregate amount of funds that may be loaned upon the security of real estate;
  • escrow accounts, impound accounts, and similar accounts;
  • security property, including leaseholds;
  • access to, and use of, credit reports;
  • disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents;
  • processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages, disbursements and repayments;
  • rates of interest on loans;
  • due-on-sale clauses except to the extent provided in 12 U.S.C. 1701j-3 and 12 CFR part 591; and
  • covenants and restrictions that must be contained in a lease to qualify the leasehold as acceptable security for a real estate loan.

As with non-real estate lending, § 7.4002 addresses state laws purporting to regulate non-interest fees and charges.

Laws which are not preempted and which apply "to the extent consistent with [Barnett Bank]”:

  • Contracts
  • Torts
  • Criminal law
  • Homestead laws specified in 12 U.S.C. 1462a (f)
  • Rights to collect debts
  • Acquisition and transfer of real property
  • Taxation
  • Zoning
  • Any other law that the OCC determines to be applicable to national banks in accordance with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996) or that is made applicable by federal law.

Future OCC Preemptive Determinations - The existing OCC preemption rules, as described above, apply to existing state laws and also to future state laws that fit within the enumerated categories ("state law that would affect the ability of national banks," "state laws that would alter standards.") To the extent that the OCC in the future feels compelled in the case of State Consumer Financial Laws5 to make new preemptive determinations, Section 1044 of Dodd-Frank requires a case-by-case determination (which the OCC believes permits ‘categorical determinations’), in accordance with applicable laws, that, in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996), the state consumer financial law "prevents or significantly interferes with the exercise by the national bank of its powers." And if the OCC is determining that a state consumer financial law of another state has "substantively equivalent terms" as the one the Comptroller is preempting, the OCC must first consult with the Consumer Financial Protection Bureau (CFPB) and take the CFPB's views into account.

Visitorial Powers -The OCC also amended its "visitorial" rules to conform to the decision in Cuomo v. Clearinghouse, 129 S.Ct. 271 0 (2009), allowing state attorney generals to bring actions against national banks to enforce "an applicable law." The OCC retained the visitorial powers provisions prohibiting the state attorney generals from investigating national banks and demanding documents from them (e.g., Civil Investigative Demands).

Legal Challenges - If a court is reviewing an OCC determination of preemption made "by this title" the court is required under Dodd-Frank Section 1044(b)(5) to assess:

  • validity of the determination, depending upon the thoroughness evidenced in the consideration of the agency;
  • validity of the reasoning of the agency;
  • consistency with other valid determinations of the agency; and
  • other facts that the court finds persuasive and relevant to its decision.

Moreover, no OCC regulations or rules can be interpreted or applied to invalidate or declare inapplicable to a national bank a state consumer financial law unless there is "substantial evidence, made on the record of the proceeding, supporting the specific finding of preemption, in accordance with the legal standard of [Barnett Bank]." Dodd-Frank Section 1044(c). We believe that the import of this provision is unclear in that "the proceeding" may be applied to the legal proceeding in which state law is asserted to be preempted and/or to the OCC's preemption rulemaking proceeding.

In its preemption rule revision of July 20, 2011 the OCC concluded that its pre-existing preemption rules were not subject to what the OCC referred to as the "procedural" case-by-case review requirements of Dodd-Frank Section 1044. The substantive preemption standard of Section 1044(b)(1), however, was found applicable to the OCC's pre-existing preemption rules.

Under Section 1043 of the Act, titled "Preservation of Existing Contracts," the changes made by Section 1044 of the Act are not to be constructed to alter or affect the applicability of any OCC (or Office of Thrift Supervision) regulation, order, guidance or interpretation regarding the applicability of state law under federal banking law "to any contract entered into on or before the date of enactment." [Note: not the designated transfer date] by a national bank or federal thrift.

What National Banks Should Do:

  • Thoroughly identify and review with counsel all state "consumer financial laws"
  • Determine which laws fall within the OCC's preempted categories, and which do not
  • Review compliance with and evidence of board decisions under the four-factor test of § 7.4002 which covers all non-interest deposit and loan charges
  • Carefully determine how far to push the "federal preemption" rules, and where it may be prudent to comply with state consumer financial laws (without admitting their application)

What Happens Next?

There are (and will be more) pending cases in which the OCC's federal preemption rules will be tested in the context of claims that a national bank has violated state law. Many insist the OCC rules are a "flagrant" disregard of Dodd-Frank (see July 19, 2011 testimony from Georgetown University Law Professor Adam J. Levitan in the Senate Banking Committee.) The General Counsel of the Treasury objects to three aspects of the OCC's rule. First, the adoption of Barnett Bank in its entirety as the touchstone and the rejection of the phrase in Section 1044, "prevent(s) or significantly interferes with a national bank's exercise of its powers," as an additional requirement (the G.C. apparently believes that a state law could be preempted under Barnett but fail the additional preemption test of "prevent or significantly interfere.") Second, the OCC's failure to apply the "case-by-case" rules in Section 1044 to the OCC's pre-existing preemption rule (the OCC intends to use "case-by-case" on a go forward basis.) Third, the OCC's conclusion that it can make categorical (i.e. an entire category of states' laws) determinations in the future with the "case-by-case" requirement. These developments must be followed closely in the coming months.