Today's Trends in Credit Regulation

Cautious Optimism: The OCC’s Preemption Proposal
By Meghan S. Musselman

Late last month, the Office of the Comptroller of the Currency (“OCC”), published proposed regulations to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (“Dodd-Frank”) new preemption standards. The OCC’s proposal – the latest in a series of developments, including a letter from the Acting Comptroller to Congress and an Eleventh Circuit Court of Appeals decision [see June article here] –provides a glimpse into the future of federal preemption. Although uncertainty still remains, at least until courts begin to interpret these new standards, the OCC clearly believes that Congress largely preserved existing preemption for national banks in Dodd-Frank.

The OCC proposes several things. First, it rescinds the OCC’s regulation that afforded national bank operating subsidiaries the same preemption authority as their parent national banks. In accordance with Dodd-Frank, national bank operating subsidiaries no longer enjoy that preemption authority.

The OCC’s proposal also implements Dodd-Frank’s visitorial powers provisions. Dodd-Frank codified the U.S. Supreme Court’s decision in Cuomo v. Clearing House Association, LLC, which allows a state attorney general to file a lawsuit against a national bank under a non-preempted state law. Thus, the OCC proposes to revise its rules to provide that an action by a state attorney general to enforce a non-preempted state law is not an exercise of visitorial powers.

Further, the OCC’s proposal implements Dodd-Frank‘s provisions concerning federal savings banks. Dodd-Frank requires preemption standards for federal savings associations to conform to those for national banks. To that end, the proposal applies national bank preemption standards and visitorial powers rules to federal savings banks, and indicates that it will repeal the Office of Thrift Supervision’s preemption rules. This change is significant for federal savings associations, which, until Dodd-Frank, had enjoyed broader preemption authority than national banks. Based on the preemption language in the Home Owners Loan Act, courts applied the HOLA to give federal thrifts blanket field preemption of state law. The OCC’s proposal implements the idea from Dodd-Frank that, as of the designated transfer date, federal savings associations will have only the conflict preemption that national banks have.

Finally, and probably of utmost importance to banks wanting to understand the scope of Dodd-Frank’s new preemption provisions, the OCC’s proposal addresses 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.

The OCC makes clear that it interprets the Dodd-Frank preemption standard as incorporating the entirety of the U.S. Supreme Court’s decision in Barnett Bank of Marion County, N.A. v. Nelson, rather than any specific formulation of the Court’s holding. Section 1044 of Dodd-Frank states 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 explains 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.”

At the same time, the OCC recognized that Section 1044 of Dodd-Frank seems to take issue with the OCC’s distillation of the Barnett standard to “obstruct, impair or condition,” and that this formulation of Barnett “has created ambiguities and misunderstandings regarding the preemption standard that it was intended to convey.” As a result, the OCC proposed to eliminate the “obstruct, impair or condition” language from its regulations and to refer instead to the Barnett decision. Interestingly, because the OCC believes that the “instruct, impair or condition” standard distilled the Barnett standard, the OCC takes the position that OCC rules and existing precedents (including judicial decisions and interpretations) remain valid. In essence, the OCC’s proposal appears to largely preserve the status quo, with respect to how preemption determinations are made and how courts will review these determinations.

In addition to addressing the substance of the preemption standard, Dodd-Frank made significant changes to how preemption determinations are made and the standard by which courts are to review such determinations. Dodd-Frank requires the OCC must make preemption determinations on a “case-by-case” basis, defined as a determination by the Comptroller as to the impact of a particular state consumer financial law on any national bank that is subject to that law or the law of any other state with substantively equivalent terms. The OCC simply restates this requirement in the Supplementary Information to its proposal, but does not explain how this requirement will play out practically, nor does the OCC propose any regulations in this regard. Dodd-Frank further specifies that the Comptroller must make any such determinations and cannot delegate this duty to any other officer or employee of the OCC. This represents a departure from years past, where the General Counsel or other staff members would issue preemption determinations or interpretive letters.

Dodd-Frank establishes a judicial standard of review for any preemption determination by the OCC, requiring courts to “assess the validity of such determinations, depending upon the thoroughness evident in the consideration of the agency, the validity of the reasoning of the agency, the consistency with other valid determinations made by the agency, and other factors which the court finds persuasive and relevant to its decision.” This standard of review essentially precludes a court from affording deference to an OCC determination, as courts had done with regularity prior to Dodd-Frank. Instead, OCC determinations will be subject to de novo review.

In sum, although procedural changes surrounding case-by-case preemption determinations and the new standard of judicial review will continue to create some uncertainty surrounding preemption, the OCC seems to clearly favor preemption as it exists today.

Meghan S. Musselman is a partner in the Maryland office of Hudson Cook, LLP. Meghan can be reached at 410-865-5403 or by email at

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