The global financial crisis that began in 2008 led to the passage in July 2010 of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (Dodd-Frank). During the debate before Dodd-Frank became law, the suggestion was made that Congress should do or say something in Dodd-Frank about the extent to which national banks, which operate under the National Bank Act (NBA) and are subject to the supervision of the Office of the Comptroller of the Currency (OCC), should be permitted to operate without giving effect to state law. What came out of the legislative process at the end of the day was Dodd-Frank Section 1044, which clarified that the standard for NBA preemption is whether the state law at issue “prevents or significantly interferes with the exercise by the national bank of its powers” in accordance with the Supreme Court’s decision in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) (Barnett Bank).1 This codification of the Barnett Bank “prevents or significantly interferes” standard was thought to be necessary because in 2004 the OCC issued preemption regulations that described the standard as whether the state law would “obstruct, condition, or impair” the exercise by a national bank of its powers. Some OCC critics contended that the 2004 regulation set a standard for NBA preemption that was different from and more preemptive of state law than the Barnett Bank standard.

The OCC recently rejoined the conversation on this issue when on May 26, 2011 it issued a notice of proposed rulemaking on a number of subjects, including federal preemption, to conform its regulations to Dodd-Frank. Comments on the proposed rule are due on or before June 27, 2011. This Alert summarizes the key aspects of the proposed rule as they relate to NBA preemption and related subjects.2 The main takeaway for the busy reader is that the OCC recognizes that, with the exception of the preemption standard for federal savings banks and the procedure for the OCC to make preemption determinations, Dodd-Frank changed very little about the law on these subjects. Also, the OCC takes the position that the “obstruct, condition, or impair” phrase used in its 2004 regulations is valid as just another formulation of the Barnett Bank standard, but it proposes to do away with this phrase in the regulations and replace it with the “prevents or significantly interferes” phrase simply to avoid ambiguity or misunderstanding on the subject.

NBA Preemption Standards

Perhaps the most important development to come out of the proposed rule is the OCC’s proposal regarding preemption of “state consumer financial laws.”3 The notice of proposed rule recognizes that under Dodd-Frank Section 1044 there are three ways federal law can preempt a state consumer financial law:

  • if “Application of such a law would have a ‘discriminatory effect’ on national banks compared with state-chartered banks in that state”
  • “[I]n accordance with the legal standard for preemption” in Barnett Bank, the state consumer financial law “prevents or significantly interferes with the exercise by the national bank of its powers”, or
  • the state consumer financial law is “preempted by a provision of Federal law other than Title LXII of the Revised Statutes.”

According to the OCC notice to the proposed rule, the legislative history of Dodd-Frank shows that the preemption language in Dodd-Frank was adopted to provide consistency and legal certainty by preserving the Barnett Bank standard. But the OCC also takes the position that the key phrase from Barnett Bank – “prevents or significantly interferes with” – is “one exemplary formulation of conflict preemption,” but not the only such formulation. The OCC defends the phrase used in its 2004 regulations – “obstruct, impair or condition” as yet another formulation of the same standard that was “drawn from an amalgam of prior precedents” relied upon by the Supreme Court in Barnett Bank. The OCC also noted, in support of its position that there are multiple formulations of the same Barnett Bank standard, that a recent federal appellate decision described “the proper preemption test” under Barnett Bank as “whether there is a significant conflict between the state and Federal statutes.”4

At the same time, the OCC noted that Dodd-Frank Section 1044 “could have been intended to clarify” the Barnett Bank standard “relative to how current OCC regulations have distilled principles” from Barnett Bank. It also acknowledged that the “obstruct, impair, or condition” formulation “has created ambiguities and misunderstandings regarding the preemption standard,” and therefore proposes to remove the language from its regulations. Nevertheless, according to the OCC, because the 2004 regulations “were premised in principles drawn from the Barnett case,” any existing precedent based on the 2004 regulations remain valid. The OCC even goes a step farther and states that the 2004 regulations are themselves “preserved.” In effect, the OCC is saying the 2004 regulations are consistent with Barnett Bank and therefore valid, but the phrasing of the preemption standard in the regulations is being changed simply for clarification.

The OCC also proposes to clarify provisions of its regulations regarding the types of state laws that would not be preempted (e.g., contracts, torts, criminal law, etc.). The OCC proposes to amend portions of its regulations describing the types of state laws that are not preempted by making specific reference to Barnett Bank as the proper standard.

OCC Preemption Determinations

Preemptions questions can be decided by a reviewing court or by the OCC itself. Dodd-Frank imposes procedures and consultation requirements for how the OCC can make preemption determinations after July 21, 2011. The OCC in its notice of the proposed rule recognizes these procedures and requirements: any preemption determination must be made under the Barnett Bank standard and then on a case-by-case and not a categorical basis; it must be supported by substantial evidence made on the record of the proceeding; the OCC must consult with the Consumer Financial Protection Bureau under certain circumstances; and the OCC must publish a list of preemption determinations every quarter and must conduct a periodic review of preemption determinations every five years. Note that the OCC in its notice to the proposed rule made no reference to and seemingly ignored the provision in Dodd-Frank Section 1044(a) that any preemption determination “shall be made by the Comptroller, and shall not be delegable to another officer or employee of the Comptroller of the Currency.” Note as well the OCC does not propose any new regulations to implement the process for making preemption determinations, possibly because it decided that the new requirements are so onerous that it is unlikely to make any preemption determinations.

Elimination of Preemption for National Bank Subsidiaries

Dodd-Frank eliminates preemption of state law for national bank subsidiaries, agents and affiliates. In accordance with Dodd-Frank, the OCC proposes to eliminate its regulation concerning the application of state laws to national bank subsidiaries. This proposal is directly in line with Dodd-Frank, which reverses the Supreme Court’s holding in Watters v. Wachovia, N.A., 550 U.S. 1 (2007). This will force national banks to either conduct the operations of subsidiaries, agents and affiliates at the bank level or have subsidiaries, agents and affiliates comply with applicable state law.

Preemption Standard Applicable to Thrifts

The proposed rule also addresses the issue of preemption with regard to federal savings associations. The OCC proposes amendments to its regulations to apply national bank standards on preemption and visitorial powers to Federal savings associations and their subsidiaries to the same extent and in the same manner as they apply to national banks and their subsidiaries. This complies with Dodd-Frank Section 1046, which provides that any preemption determinations made by a court or the OCC under the Home Owners’ Loan Act with respect to federal savings associations “shall be made in accordance with the laws and legal standards applicable to national banks regarding the preemption of State law.”

Visitorial Powers

The proposed rule also discusses the OCC’s proposal to revise its regulation addressing visitorial powers with respect to national banks. Dodd-Frank specifically codifies the decision in Cuomo v. Clearing House Association, L.L.C., 129 S. Ct. 2710 (1999), in which the Supreme Court held that when a state attorney general files a lawsuit to enforce a state law against a national bank, such lawsuit is not an exercise of visitorial powers. The Supreme Court held that the OCC erred by extending the definition of visitorial powers to include “prosecuting enforcement actions” in state courts. Accordingly, the OCC proposes to modify its visitorial powers regulation to provide that an action by a state attorney general to enforce a non-preempted state law against a national bank and seek relief thereunder is not an exercise of visitorial powers.

Conclusion – The More Things Change the More They Stay the Same

From the perspective of the OCC, nothing has really changed with regard to NBA preemption, except for new OCC procedural processes for preemption determinations and the elimination of “field preemption” for federal savings banks. The standard under which the OCC will make preemption determinations is and remains the Barnett Bank standard.

Please click here to review how the OCC preemption regulations would look if the proposed rule were finalized in its entirety. Text that would be deleted from the regulations is in brackets ( [ ] ) and text that would be added to the regulations is in bold. The proposed rule may not be finalized as proposed, so stay tuned to Pepper Client Alerts for developments as they arise.

Pepper Point: Certain consumer groups and Rep. Barney Frank (D- Mass) take the position that the "prevent or substantially interfere" standard of Barnett Bank is the sole standard for the courts to use and not the more than 150 years of judicial precedent on this issue. Who is correct in this interpretation will no doubt be answered by future court decisions.