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OCC Issues Important Letter Interpreting Dodd-Frank Act Preemption Provisions

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In a May 12, 2011 letter (“OCC Preemption Letter”), the Office of the Comptroller of the Currency (“OCC”) provided its interpretation of certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) regarding National Bank Act preemption. Importantly, the OCC also provided long-awaited insight into the changes the agency plans to propose to the preemption regulations adopted by the OCC in 2004 (“OCC Preemption Regulations”).

As described more fully below, the OCC determined that the preemption standard the agency applied when issuing the OCC Preemption Regulations is consistent with the preemption standard under Section 1044 of the Dodd-Frank Act and thus the OCC Preemption Regulations are preserved under the Dodd-Frank Act. The OCC also indicated it will follow the new procedures for preemption determinations as adopted by the Dodd-Frank Act (e.g. case-by-case determinations supported by substantial evidence in the record) for specified preemption determinations after July 21, 2011.

These developments regarding the Dodd-Frank Act and the OCC Preemption Regulations are relevant to federal savings banks as well as national banks because the Dodd-Frank Act establishes the same general preemption framework for both types of institutions.

This memorandum describes (1) the relevant preemption regulations from the OCC and the Office of Thrift Supervision (“OTS”); (2) the relevant preemption provisions from the Dodd-Frank Act; (3) recent letters from members of Congress to the OCC on the preemption issues; and (4) the OCC Preemption Letter.

I. OCC and OTS Preemption Regulations

In 2004, the OCC substantially revised its regulations regarding National Bank Act (“NBA”) preemption of state laws that purport to regulate national bank operations. After extensive examination of relevant judicial precedent on when state laws are preempted because they “conflict” with the NBA, the OCC concluded that the NBA preempts state laws that “obstruct, impair or condition” a national bank’s ability to fully exercise it federally authorized powers.

The OCC Preemption Regulations identify several types of laws that the OCC determined do not apply to national banks under this general standard. For example, these regulations provide that state laws concerning licensing or registration, the terms of credit and disclosure requirements do not apply to loans made by national banks. On the other hand, the OCC Preemption Regulations provide that certain state laws that establish the general legal infrastructure that makes practicable the conduct of business (e.g. state laws regarding contracts, torts, and taxation) apply to national banks to the extent that the state laws only incidentally affect the bank’s exercise of powers granted by the NBA.

The types of laws that are preempted under the OCC Preemption Regulations are substantially similar to the types of laws that, under regulations adopted in 1996, the Office of Thrift Supervision (“OTS”) concluded are preempted by the Home Owners Loan Act (“HOLA”) for federal savings banks. However, the underlying basis of preemption under HOLA and the OTS regulations is that federal law “occupies the field” (i.e. “field preemption”) rather than the general “conflicts” preemption underlying the OCC Preemption Regulations.

II. Preemption Provisions in Dodd-Frank Act

Section 1044 of the Dodd-Frank Act expressly limits the extent to which the NBA preempts “State consumer financial laws.” That terms is defined as 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 or related account with respect to a consumer.

Section 1044 provides that, subject to an exception for preemption related to interest rates, State consumer financial laws are preempted only if one of three preemption tests applies:

1. application of the law would have a discriminatory effect on national banks in comparison with the effect of the law on a bank chartered by that state;
2. in accordance with the legal standard for preemption in the U.S. Supreme Court decision in the Barnett Bank case, the state law prevents or significantly interferes with the exercise by the national bank of its powers (and any preemption determination under this subparagraph may be made by a court, or by regulation or order of the OCC on a case-by-case basis in accordance with applicable law); or
3. the state law is preempted by a provision of Federal law other than the NBA.

Section 1044 further provides that no regulation or order of the OCC prescribed under the subsection containing the Barnett Bank standard shall preempt a State consumer financial law unless substantial evidence, made on the record of the proceeding, supports the specific finding regarding the preemption of such provision in accordance with the legal standard of the decision of the U.S. Supreme Court in the Barnett Bank case.

The Dodd-Frank Act made two additional important preemption changes. First, the statute provides that state laws generally apply to federal savings banks to the same extent as they apply to national banks, and thus eliminated the “field preemption” previously enjoyed by federal savings banks. Second, the Dodd-Frank Act reverses provisions in the preemption regulations of both the OCC and the OTS that non-bank operating subsidiaries of national banks and federal savings banks enjoy the same preemption as the parent institution.

III. Recent Congressional Letters to OCC

In recent months, the OCC received two significant letters from members of Congress on the Dodd-Frank Act preemption provisions. First, in a letter to Acting Comptroller Walsh, dated March 8, 2011, Representative Barney Frank (D-Mass.) stated that Congress had grave concerns about the OCC Preemption Regulations and believed that the agency had included an overly broad interpretation of the preemption standard from the Barnett Bank case. He also indicated Congress expressly articulated the “prevents or significantly impairs” standard in the Dodd-Frank Act because it rejected the “obstruct, impair or condition” standard the OCC had included in the OCC Preemption Regulations, and concluded that “the OCC’s preemption regulation no longer comports with federal law and therefore must be reversed or substantially overhauled.” Representative Frank also indicated that the OCC Preemption Regulations did not meet the new requirement in the Dodd-Frank Act that any preemption determination be made on a “case-by-case” basis.

More recently, Senators Tom Carper (D-Del.) and Mark Warner (D-Va.) also sent a letter to Acting Comptroller Walsh, dated April 4, 2011, for the stated purpose of ensuring that the OCC’s interpretation of the of Dodd-Frank Act preemption provision is consistent with the intent of the amendment on the Barnett Bank standard that they authored and the full Senate adopted. The Senators indicated their view that Section 1044 codified the preemption standard in the Barnett Bank case and that the reference to “prevent or significantly impair” was merely a shorthand reference to the traditional “conflict” preemption standard discussed in that decision. They also indicated that the requirement for the OCC to act on a case-by-case basis in making preemption determinations was not intended to apply retroactively to repeal the OCC Preemption Regulations.

IV. OCC Preemption Letter

In the OCC Preemption Letter, addressed to Senator Carper, Acting Comptroller Walsh provided interpretations of Section 1044 and described the changes to the OCC Preemption Regulations that the OCC plans to propose.

To start, the OCC indicated that the conflict preemption standard under the Barnett Bank provision of Section 1044 is not limited to a state law that “prevents or significantly interferes with exercise by a national bank of its powers” (the phrase expressly included in the statutory language). Instead, the OCC interprets Section 1044 as requiring consideration of the whole conflict preemption analysis in the Barnett Bank decision.

The OCC also indicated that its effort to distill the preemption principles from the Barnett Bank case (and the cases cited in Barnett Bank) into an abbreviated regulatory preemption standard (i.e. the “obstruct, impair or condition” standard) may have caused uncertainty. As a result, the letter provides that the OCC plans to propose to remove the “obstruct, impair or condition” formulation from its preemption regulations. However, the agency concluded that the OCC Preemption Regulations are preserved under the Dodd-Frank Act standard because they are consistent with the preemption principles in the Barnett Bank case.

The OCC Preemption Letter further provides that the OCC will follow the new procedures and consultations with respect to preemption determinations going forward, after July 21, 2011. The OCC indicates that these requirements include the requirement for the OCC to make determinations under the Barnett Bank standard on a case-by case basis, to consult with the Consumer Financial Protection Bureau on certain preemption determinations, and to have substantial evidence on the record to support a preemption order or regulation under the Barnett Bank standard.

The OCC indicated that it also plans to propose rescission of its regulations on application of state laws to national bank operating subsidiaries. Further, because of the changes to the preemption standards under the HOLA, the OCC Preemption Letter states that the OCC plans to propose amendments to its regulations to make clear that federal savings banks and their subsidiaries are subject to the same preemption standards as apply to national banks and their subsidiaries, respectively. Finally, the OCC stated that it planned to propose changes to its visitorial powers regulation, to reflect the codification of the Supreme Court’s Cuomo decision in Section 1047 of the Dodd-Frank Act.

If you have any questions regarding this update, please contact the Sidley lawyer with whom you usually work.

The Financial Institutions Regulatory Practice of Sidley Austin LLP

The Financial Institutions Regulatory Practice group offers counseling, transaction and litigation services to depository and nondepository financial institutions and their holding companies. Our lawyers assist domestic and non-U.S. financial institutions and their holding companies, and electronic payment systems, as well as securities, insurance, finance, mortgage and other diversified financial services companies. We represent financial services clients before the U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and state bank regulatory agencies. In addition, we represent clients before the United States Supreme Court, the federal courts of appeal, federal district courts and state courts.

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This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.

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