Insights

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”) alters the landscape for national banks and federal thrifts with regard to the state laws they can preempt. This new preemption landscape will have a significant impact on the ability of a national bank or a federal thrift to offer a debt cancellation contract (“DCC”) in connection with an extension of credit.

The Act provides that federal law will continue to preempt any state laws that discriminate against a national bank or federal savings bank, vis-à-vis a local state bank. So, national banks and federal thrifts can preempt any state law that says, for example, federally chartered depository institutions cannot engage in an activity in which a state-chartered bank engages. The Act also preserves any preemption that arises from a provision of federal law other than the National Bank Act; so, if a separate federal law preempts state law, the national bank and federal thrift can look to that law to preempt a conflicting state law. However, any other state consumer financial laws will apply to the operations of national banks and federal thrifts unless a court or the Comptroller of the Currency finds that the state law is preempted under the preemption standard in the Act. Under this third prong of the preemption standard, the Act codifies the standard announced by the United States Supreme Court in Barnett Bank v. Nelson.

In Barnett, the Supreme Court did not provide a single clear statement of the appropriate preemption standard, but it noted that in “this case we must ask whether or not the Federal and State Statutes are in ‘irreconcilable conflict’.” Also, in summarizing prior U.S. Supreme Court case law on preemption of state law, the Barnett court noted “these cases take the view that normally Congress would not want States to forbid or to impair significantly, the exercise of a power that Congress explicitly granted.” The Barnett standard is often described as preemption of any state law that “significantly impairs” the power Congress provided to banks. Thus, the laws of the state where the borrower is located will apply to a federal depository institution’s operations unless the new federal preemption standard in the Act preempts these laws. These state rules may include, for example, limits on DCCs.

Under current law, a national bank and a consumer can contract for a DCC in connection with the extension of credit to ensure that the creditor will cancel debt or defer payments upon the occurrence of a specified event, such as death or disability of the consumer. As early as 1963, the OCC concluded that national banks may offer debt cancellation agreements under the incidental powers clause of the National Bank Act. In other words, the authority of national banks to offer a debt cancellation agreement is incidental to their authority to make loans. The OCC has issued regulations that regulate how national banks may offer DCCs. The regulations, which were issued prior to the passage of the Act, provide that federal law and regulations govern such agreements, not state law. Under the new preemption standards, however, it is clear that federally chartered depository institutions will have to comply with some state laws that regulate – or perhaps forbid – DCCs unless banks can rely on the new preemption standards in the Act.

The question of whether a state can forbid, as opposed to regulate, the offering of DCCs by a national bank seems to go to the heart of the Barnett standard of preemption. If the offering of DCCs remains a valid banking power of a national bank (and the Act did not affect the ability of the OCC to interpret what constitutes an incidental power under the National Bank Act), then a state may have the power to impose requirements on the offering of DCCs, but it would not seem to have the power to prohibit their offering by national banks. Any such attempt by a state to prohibit the exercise of a valid national bank power would seem to fall under the Barnett standard – such a state law would “significantly impair” a power Congress has granted to national banks. The real issue will be the extent to which a state can regulate the offering of DCCs by national banks without imposing state burdens that would create a “irreconcilable conflict” or “significantly impair” the right of a national bank to offer DCCs.

Some state law banking parity provisions authorize in-state chartered banks to engage in the same or similar activities as federally chartered depository institutions. These provisions intend to provide a level playing field for in-state chartered banks and ensure that they are not at a competitive disadvantage to federally chartered depository institutions. A state that has adopted a parity or wild card provision in its banking statutes might permit a state-chartered bank to offer a debt cancellation agreement because the OCC regulations permit a national bank to do so. For example, the Minnesota Banking Chapter includes a wild card provision that allows the Commissioner of the Minnesota Department of Commerce (the “Department”) to authorize state-chartered banks to engage in any banking activity in which banks subject to the jurisdiction of the federal government may be authorized to engage by federal legislation, ruling, or regulation and those activities authorized [to federally chartered depository institutions].” Pursuant to the wild card provision, the Department has determined that a state-chartered bank may apply to the Department to engage in the sale of a DCC. Minnesota-chartered banks offering DCCs must comply with all the disclosure, consumer protection and safety and soundness requirements set forth in the OCC regulations regarding debt cancellation agreements described above. Arguably, however, a Minnesota-chartered bank would not have to provide other disclosures or to abide by other restrictions in Minnesota law related to DCCs – and thus, a national bank could ignore these provisions as well because a state may not discriminate against a national bank in favor of a state-chartered institution.

In other words, states with wild card or parity statutes may present the best-case scenario for federally chartered depository institutions, because if state law tells state-chartered banks to look to what a national bank can do, a national bank can operate uninhibited by any state law (assuming the state has no other law that regulates DCCs. If a state had a separate DCC law that required certain disclosures, a national bank and a federal thrift would likely have to comply with such law. However, state wild card statutes present something of a chicken and the egg conundrum. Do you first look at the wild card statute to see what a national bank can do regardless of state law? Or, do you first look at what a national bank can do as limited by the new preemption standard – and then look at the wild card statute and permit the state bank to do only what the national bank can do – which is to offer the DCC subject to any state law restrictions or requirements not preempted under the Barnett standard. The solution may be to look at the precise wording of the statute. In the example of the Minnesota statute given above, the state wild card statute points to national bank powers as authorized by federal regulations. That may be enough to suggest that under this wild card statute, at least, you can first look to what is permitted under the federal regulations – without checking to see if there are other state limitations the national bank would have to follow. However, the language of each wild card statute – and how it is interpreted by the local banking regulator – will be key to understanding how this conundrum plays out.

Robert A. Cook is a partner in the Maryland office of Hudson Cook, LLP. Robert can be reached at 410-865-5401 or by email at rcook@hudco.com.

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.