State Regulation of National Banks: The Case of Consumer Protection

Some observers claim federal preemption of state predatory lending laws disrupted the mortgage market and precipitated the 2008 financial crisis.  Efforts to reform the financial system emphasized preservation of States’ regulatory authority over state and national banks.  However, a federal agency recently proposed regulations that would continue to preempt state consumer financial protection laws, prompting criticism from the Treasury Department, members of Congress, and advocates of state bank supervision.        

On May 26, the Office of the Comptroller of the Currency (OCC), an independent agency within the Treasury Department, published a rule asserting its authority to exempt national banks from state consumer protection regulations.  Treasury officials criticized the rule.  In a letter, Chief Treasury Counsel George Madison claimed the OCC proposal broadens a federal preemption standard, fails to address preemption on a case by case basis, and misinterprets the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Members of Congress and a group representing state bank regulators also expressed concern.  In separate letters, Democrats on the House Financial Services Committee and the chairman of the Conference of State Bank Supervisors (CSBS) requested a comment period be extended to allow further review of the rule. 

Conflict can be attributed to three issues:

1.  The standard governing federal preemption of state banking law

Treasury and CSBS claim the proposed rule broadens a preemption standard laid out in the Dodd-Frank Act, allowing OCC to preempt state consumer financial laws in a manner inconsistent with the legislation’s intent.    

Section 1044 of Dodd-Frank says federal regulators may only preempt a state consumer financial regulation if it “prevents or significantly interferes with the exercise by the national bank of its powers.”  The Supreme Court established this standard in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner et al., 517 U.S. 25 (1996). 

Treasury and CSBS claim OCC acknowledges the “prevents or significantly interferes” standard, but does not deem it the standard governing federal preemption per the intent of Dodd-Frank.  Instead, the proposed rule suggests Dodd-Frank “codifies the whole of Barnett.” Therefore, “prevents or significantly interferes” constitutes a starting point only.  OCC may use the whole Barnett decision as guide in determining preemption. 

By implication, prior preemption determinations would remain valid, even if made under a standard other than “prevents or significantly interferes.”  For example, preemption determinations could be made based on a broader “obscure, obstruct or condition standard” mentioned in a 2004 OCC rule, since that standard is derived from case law upon which Barnett is based.  Future preemption determinations could also be made using the broader standard.  In this regard, according to Treasury, “the rule seems to take the position that the Dodd-Frank standard has no effect:  the proposed rule expressly argues that the new Dodd-Frank standard would not change the outcome of any previous determination, and the same logic would apply to any future determination.”  CSBS adds that “the proposed rule turns a blind eye toward the sweeping changes Congress put in place [with Dodd-Frank to ensure the preservation of state banking laws].”      

2.  The procedural requirements governing preemption determination

Treasury claims the OCC rule does not guarantee preemptions will be reviewed on a case-by-case basis, as required in Dodd-Frank.  Both Treasury and CSBS acknowledge mention of the case-by-case requirement in the preamble to OCC’s proposal.  Absent a full discussion in the body, however, Treasury claims the rule could be read to mean OCC “can preempt whole categories of state consumer financial laws,” instead of preempting them one at a time.                                   

3.  The definition of visitorial powers

CSBS claims the OCC rule defines visitorial powers – the powers of a regulator to inspect or examine an entity – in manner that limits states’ ability address national bank infractions.   

In Cuomo v. Clearing House Association, L.L.C. (2009) the Supreme Court held that provisions restricting the exercise of visitorial powers did not apply to State Attorneys General bringing action against national banks for violation of an “applicable law.”  The Dodd-Frank Bill echoes this ruling, empowering State Attorneys General to enforce “applicable” state and federal banking laws.    

In its proposal, the OCC references Cuomo (and the related language in Dodd-Frank).  However, it trades “applicable law” for “non-preempted law.”  CSBS notes that “non-preempted law is not the same as applicable law,” and that “to limit State AGs to non-preempted law violates the explicit jurisdiction settled by Cuomo, Dodd-Frank, and the National Bank Act.”  Further, CSBS points out that Cuomo and related legislation clearly nullify OCC language stating “State officials may not exercise visitorial powers…such as…prosecuting enforcement actions [against national banks], except in limited circumstances authorized by federal law.”  Finally, according to CSBS, the OCC’s addition of “investigating” to the definition of visitorial powers should be disregarded in lieu of Cuomo.  In its letter, CSBS notes that “States routinely receive complaints about national banks, and to classify standard enforcement procedures as visitorial powers prevents a State from tracking problems and referring them to the attorney general for action.”           

To read the OCC’s proposed rule, click here.  Additional resources: