Insights

A new fight is brewing over the Office of the Comptroller of the Currency’s (“OCC”) proposed regulations to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (“Dodd-Frank”) new preemption standards. The OCC’s proposed regulations affirm that the OCC believed that Congress largely preserved existing preemption for national banks in Dodd-Frank. Now, dueling letters between Treasury and two Senators key to shaping the Dodd-Frank preemption language suggest that the position staked out in the proposed regulations will face strong scrutiny from the Obama Administration.

The OCC’s proposed regulations, among other things, address the new preemption standard applicable to “state consumer financial laws.” This portion of the proposal touches on several important ideas. First, the OCC states, in the Supplemental Information to the proposed rule, that Dodd-Frank clearly applies the new preemption standard only to laws that are “state consumer financial laws,” and, therefore, the new preemption standard does not apply to any law that falls outside of that definition. “State consumer financial laws” mean state laws that do not directly or indirectly discriminate against national banks and that directly and specifically regulate the manner, content, or terms and conditions of any financial transaction (as may be authorized for national banks to engage in), or any account related thereto, with respect to consumers.

In the proposed regulations, the OCC makes very clear that it believes that the Dodd-Frank preemption standard incorporates the U.S. Supreme Court decision in Barnett Bank of Marion County N.A. v. Nelson in its entirety – not any specific formulation of the court’s holding. Section 1044 of the Dodd-Frank Act provides that federal law preempts state consumer financial laws if, in accordance with Barnett, the state consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers. The OCC explained that the “prevent or significantly interfere” language is only one formulation of the conflict preemption standard set forth by Barnett, and that “the analysis may not simply stop and isolate those terms from the rest of the decision: it is necessary to take into account the whole of the conflict preemption analysis in the Supreme Court’s decision.”

Treasury responded quickly to the OCC’s proposed regulations, arguing that the OCC seeks to broaden the preemption language in Dodd-Frank. Treasury claimed that Congress – in enacting Dodd-Frank – required preemption only where the state consumer financial law “prevents or significantly interferes with the exercise by the national bank of its powers.” Instead of including this language in its proposed regulations, Treasury argued that the OCC read this language out of Dodd-Frank. Treasury also criticized the proposed regulations for validating all prior preemption determinations, including those based on the OCC’s prior distillation of the Barnett preemption standard that allowed preemption of all state laws that “obstruct, impair or condition” national bank powers. The OCC deleted that standard, promulgated in its 2004 preemption rulemaking, but noted that rulings based on those prior regulations using that language remain valid, as the OCC premised the 2004 preemption regulations on Barnett itself, not on that specific language. Treasury finally also took issue with the OCC’s proposed rule in that it did not expressly indicate that the OCC would make preemption determinations on a case-by-case basis as required by Dodd-Frank.

In response, Senators Tom Carper and Mark Warner – both key players in shaping Dodd-Frank’s preemption language – sent a letter to Treasury in July expressing “surprise and disappointment” with the Treasury letter and asking that Treasury withdraw it. The Senators noted that both the final language of Dodd-Frank and its legislative history “clearly demonstrate that the Barnett standard is maintained and the Treasury position …. was, in fact, rejected by Congress.” They further took Treasury to task for ignoring the “literal language” of Dodd-Frank that maintained the Barnett standard. The Senators stated that the “prevents or significantly interferes with” language in the Dodd-Frank preemption standard is not a limiting phrase, but simply identifies the touchstone of the Barnett case. The Senators cited to legislative history supporting their position, including a statement from Senator Dodd himself to Senator Carper that “(t)here should be no doubt that the legislation codifies the preemption standard stated by the U.S. Supreme Court in (Barnett).”

The Senators also rejected Treasury’s statement that the OCC must revisit all prior preemption determinations as unnecessary since the OCC based its 2004 preemption rules on the Barnett case itself, not from any specific phrase encapsulating that case. Expressing concern about the lack of certainty that would result, the Senators stated that adopting Treasury’s position would lead to years of litigation, as “(p)roducts and services offered nationally could literally be subject to hundreds of differing state and loan laws,” resulting in an increase in costs “at a time of economic difficulty when we can least afford it.”

Although Treasury has not withdrawn its letter in response to the Senators’ request, the OCC has received numerous comment letters from other industry participants and consumer advocates in what is shaping up to be a confrontation over what Congress did and what anti-preemption stalwarts want to believe Congress did, in enacting Dodd-Frank.

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at cbrennan@hudco.com.