Most knowledgeable observers are likely to agree that the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") has had and will continue to have a major impact on financial institutions operating in the United States. To compete effectively, financial institutions must continue to assess and address their various lines of business, products and services and operations and evaluate the impact Dodd-Frank and its implementing regulations will have on their lines of business, products and services, operations, internal controls and risk management and compliance functions. One of the Dodd-Frank requirements that has caused confusion for both federally chartered and state chartered banks and savings associations is whether certain Federal banking laws would still preempt certain state laws. For Federal savings associations, there is an added layer of complexity because Federal savings associations must not only determine what Dodd-Frank provisions are applicable to them and what state laws are applicable to them, but they must also determine how the Office of the Comptroller of the Currency (the "OCC") will examine, regulate and supervise them beginning July 21, 2011.

Effective on that date, Dodd-Frank eliminates the Office of Thrift Supervision (the "OTS") and transfers its functions to other Federal banking agencies, including the OCC, the Federal Deposit Insurance Corporation (the "FDIC") and the Board of Governors of the Federal Reserve System (the "Federal Reserve"). For instance, Dodd-Frank requires the OCC to integrate the OTS into the OCC and requires the OCC to examine, regulate and supervise Federal savings associations. Likewise, Dodd-Frank requires the FDIC to examine, regulate and supervise state licensed savings associations and the Federal Reserve to examine, regulate and supervise savings and loan holding companies.

Dodd-Frank also provides that all rulemaking authority of the OTS and the Director of the OTS under Section 11 of the Home Owners’ Loan Act ("HOLA") relating to transactions with affiliates and extensions of credit to executive officers, directors and principal shareholders, and under Section 5 (q) of HOPA relating to tying arrangements is transferred to the Federal Reserve. Similarly, all rulemaking authority of the OTS and the Director of the OTS relating to Federal savings associations is transferred to the OCC. The OCC must designate a Deputy Comptroller responsible for the supervision and examination of Federal savings associations. All regulations of the OTS remain in effect and will transfer to the Federal Reserve, the OCC and the FDIC, as appropriate, on July 21st, and the Federal Reserve, the OCC and the FDIC, as appropriate, in consultation with one another, will determine the existing OTS regulations that will be enforced by each agency. Finally, under Dodd-Frank, a savings association that becomes a bank may continue to operate any branch or agency the savings association operated immediately before becoming a bank and may establish, acquire and operate additional branches and agencies immediately before becoming a bank as long as the law of the branch’s state would permit the branch to be opened if the bank were state chartered.

To commence the process of providing clarity to Federal savings associations, on May 19th, the OCC issued a notice of proposed rulemaking ("NPR") seeking comments on changes it proposes to make to regulations applicable to national banks and Federal savings associations. The Federal Reserve also provided guidance to savings and loan holding companies in a Notice of Intent to Require Reporting Forms For Savings and Loan Holding Companies issued on February 2, 2011 and a Notice of Intent to Apply Certain Supervisory Guidance to Savings and Loan Holding Companies on April 15, 2011. In the April 15th notice, which was published in the Federal Register on April 22, 2011, the Federal Reserve indicated its intent to use the approach it uses with bank holding companies to the fullest extent possible taking into account the unique characteristics of savings and loan holding companies.

The OCC’s NPR on preemption also focuses on issues related to the Federal preemption of state law and is the first step in providing clarity on how the OCC will apply Dodd-Frank and its implementing regulations to Federal savings associations. Some commentators have already criticized the NPR and argued that the OCC’s post-Dodd-Frank position on preemption is inconsistent with Dodd-Frank and will not hold up in court or be accepted by state regulators. Dodd-Frank added a new section to the HOLA which requires the OTS (and the OCC as its successor agency) and any court to make federal preemption determinations in accordance with the laws and legal standards applicable to national banks regarding the preemption of state law. Further, Dodd-Frank specially provides that, "notwithstanding the authorities granted under section 4 and 5, [The HOLA] does not occupy the field in any area of State law." The language is significant because the broad field preemption authority that Federal savings associations have enjoyed in the past derives directly from section 5(a) of the HOLA. By doing so Dodd-Frank effectively "leveled the playing field" between Federal savings associations and national banks on the preemption issue so that both are subject to the preemption principles set forth in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996) ("Barnett"). The NPR reflects the OCC’s initial proposal to implement the Dodd-Frank provisions and could profoundly affect Federal savings associations in the following ways.

First, the OCC proposes to amend its regulations (primarily, 12 C.F.R. 7) to clarify that state laws apply to Federal savings associations and their subsidiaries to the same extent and in the same manner that those state laws apply to national banks. Specifically, in response to a Dodd-Frank provision that effectively reverses Watters, Commissioner, Michigan Office of Insurance and Financial Services, et al. v. Wachovia Bank, N.A., et al., 550 U.S. 1 (2007), which held that operating subsidiaries of national banks were not required to comply with certain state law requirements such as state licensing law requirements, the OCC proposes to repeal 12 C.F.R. 7.4006 and eliminate preemption of state law for subsidiaries, agents and affiliates of national banks and Federal savings associations.

Second, the OCC plans to amend its regulations to clarify that Federal savings associations and their subsidiaries are subject to the same visitorial powers as national banks and their subsidiaries. The OCC is making this change to its regulations to reflect a Dodd-Frank provision and the decision of the United States Supreme Court in Cuomo, Attorney General of New York v. Clearing House Association, L.L.C., et al., 129 S. Ct. 2710 (June 29, 2009) ("Cuomo"), which held that a state attorney general could enforce a non-preempted state law against a national bank in the appropriate forum. The NPR clarifies that an action by a state attorney general (or other chief law enforcement officer) in a court of appropriate jurisdiction to enforce a non-preempted state law against a national bank or a Federal savings association that seeks relief as authorized under the law is not an exercise of visitorial powers. Accordingly, rather than preventing the state attorney general from moving forward, the national bank or Federal savings association will have to resolve the matter with the state attorney general.

Third, the NPR, like Dodd-Frank, recognizes the Cuomo holding that the OCC enjoys a "regime of administrative oversight" when exercising visitorial powers over national banks and Federal savings associations. Perhaps more importantly, the NPR recognizes that nonjudicial investigations generally constitute an exercise of visitorial powers that are reserved only for the OCC, and national banks and Federal savings associations should continue to view those actions as preempted by the OCC.

Fourth, the OCC proposes to amend its regulations to clarify that the preemption standard that will be used for national banks and Federal savings associations will be the Barnett conflict preemption principles. The NPR, and a letter dated May 12, 2011, from the OCC to United States Senator Thomas R. Carper, indicate that the preemption standard applicable to national banks and Federal savings associations will not be limited to whether the state law "prevents or significantly interferes" with the activities or operations of national banks or Federal savings associations. Rather, the preemption standard will be based upon a reading of the entire Barnett decision, and the "prevent or significantly interferes" principle should be seen as only one of a number of principles of the conflict preemption principles articulated in Barnett. This interpretation enables the OCC to preserve its existing regulations and precedents that are consistent with Barnett’s broader conflict preemption principles and, in doing so, cast a wider preemption net than some commentators assumed possible based upon their understanding of the language of Dodd-Frank. Moreover, the NPR notes that none of the Dodd-Frank changes to preemption have retroactive effect. To clarify this point, the NPR indicates that "To the extent any existing precedent cited those terms in our regulations, that precedent remains valid, since the regulations were premised on principles drawn from the Barnett case... Accordingly, because the Dodd-Frank Act preserves the Barnett conflict preemption standard, OCC’s rules and existing precedents (including judicial decisions and interpretations) consistent with that analysis are also preserved."

Fifth, the NPR clarifies that Dodd-Frank only applies to preemption of "state consumer financial laws," but not OCC regulations that do not come within that definition. A "state consumer financial law" is a state law that does not directly or indirectly discriminate against a national bank or a Federal savings association and that directly and specifically regulates the manner, content, or terms and conditions of any financial transaction or related account with respect to a consumer. According to the NPR, even "state consumer financial laws" are preempted if (1) application of the state law would have a "discriminatory effect" on national banks or Federal savings associations compared with state-chartered banks in the particular state; or (2) in accordance with the legal standard for preemption in Barnett, the state law "prevents or significantly interferes" with the exercise by national banks or Federal savings associations of their powers; or (3) the state law is preempted by a provision of Federal law other than Section 1044(a) of Dodd-Frank.

Sixth, the NPR acknowledges that the preemption process will change. After July 21, 2011, the OCC’s preemption decisions (whether by regulation or order) must be made on a case-by-case basis, which is defined as a determination by the OCC as to the impact of a particular state consumer financial law on any national bank or Federal savings association that is subject to that law or the law of any other state with substantially equivalent terms. In this regard, the OCC must consult with and take into account the views of the Consumer Financial Protection Bureau (the "CFPB") in making a determination that a state consumer financial law has substantially equivalent terms as the law the OCC is preempting. Some commentators believe that the requirements to consult with the CFPB and to make preemption decisions on a case-by-case basis are likely to make it difficult for the OCC to preempt state laws going forward. Other commentators believe it will merely slow down the preemption determination. The NPR also clarifies that the OCC must have substantial evidence, made on the record of the proceeding, to support its order or regulation preempting a state consumer financial law. Further, the NPR notes that Dodd-Frank requires the OCC to conduct a periodic review, subject to notice and comment, every five years after issuing a preemption determination relating to a state consumer financial law and to publish a list of preemption determinations quarterly.

Seventh, the OCC will examine, supervise and regulate Federal savings associations using the same internal organizational structure that the OCC uses for national banks (e.g., Washington will examine, regulate and supervise certain Federal savings associations and other Federal savings associations will be examined, regulated and supervised out of one of the four OCC District Offices located in New York (the Northeastern District Office), Chicago (the Central District Office), Dallas (the Southern District Office) and Denver (the Western District Office). The OCC has already commenced the process of transferring examiners from the OTS to the OCC so that in the short term Federal savings associations will likely have many of the same examiners that they would have had before the elimination of OTS. The OTS examiners, however, will likely have to adjust their examination approach and process to be consistent with the OCC’s examination approach and process. It is also likely that the OCC will include some OCC examiners on the examination team to work with former OTS examiners in order to provide cross training of the examination team. This cross training and movement to the OCC’s approach is likely to mean that in the short term Federal savings associations will have to endure uncertainty, misunderstandings and inconsistencies from past examinations. It is also possible that the initial OCC examination will be perceived to be more rigorous, more comprehensive and more confrontational than past OTS examinations.