The Consumer Financial Protection Act of 2010 (the Act), signed into law on July 21, 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, brings sweeping changes to the regulation of consumer financial products and services.1 Issues related to the preemption of state consumer protection laws as applied to federal banks and thrifts and the authority of states to enforce consumer protection laws generally were among the most debated and controversial aspects of the Act. In several respects, the Act preserves current federal banking preemption laws and codifies Supreme Court precedents regarding those laws. In other respects, however, the Act fundamentally alters the current balance between state and federal regulation of consumer financial services by empowering state regulators with new tools for enforcing state and federal law and bringing about creative new ways for states to shape federal consumer financial regulatory policy. These developments could prove particularly burdensome for institutions that also are subject to the vast regulatory authority of the new federal Bureau of Consumer Financial Protection (the Bureau). This article describes federal bank preemption law prior to the Act, explains the changes and clarifications to this body of law in the Act, and identifies a number of outstanding questions and other implications of the Act for the consumer finance industry.
Background – Preemption Prior to the Act
The federal banking laws authorizing federally-chartered banks, i.e., the National Bank Act (NBA) for national banks and the Home Owners’ Loan Act (HOLA) for federal savings banks or thrifts, provide for some degree of preemption of state law with respect to lending and other activities of those institutions. Prior to the Act, these statutes had been interpreted by the federal banking regulators, as reflected in their regulations, to substantively preempt broad categories of state laws.2 For example, regulations promulgated by the Office of the Comptroller of the Currency (OCC) relating to mortgage lending purport to preempt any state laws addressing “licensing” and “registration,” “terms of credit,” “disclosure and advertising,” “disbursements and repayments,” and several other categories.3 The Office of Thrift Supervision (OTS) adopted similar broad regulations and went even further, stating that “OTS hereby occupies the entire field of lending regulation for federal savings associations.”4
The OCC and OTS regulations also extended preemption under the federal banking laws to the non-bank operating subsidiaries of national banks and thrifts.5 In 2007, the Supreme Court affirmed the OCC’s subsidiary-preemption regulation in Watters v. Wachovia Bank, N.A. after a Michigan state mortgage regulator barred a Wachovia operating subsidiary from lending in the state after it surrendered its state license.6
The OCC’s regulations also broadly interpreted the National Bank Act’s prohibition on the state exercise of “visitorial” powers by defining visitorial powers to include enforcing any applicable state or federal law against a national bank concerning activities authorized or permitted for national banks under federal law.7 In Cuomo v. The Clearing Housing Association, the Supreme Court held that the OCC exceeded its authority under the NBA in banning state attorneys general from enforcing nonpreempted state laws against national banks, although it affirmed the regulation’s proscription that states could not “supervise” or “examine” national banks.8 Despite early predictions, it does not seem that the Cuomo decision “opened the floodgates” to state lawsuits against national banks, although two high-profile actions have been filed by the Illinois Attorney General against major national banks that, arguably, would not have been possible prior to the Cuomo decision.
In addition to preemption under the federal banking laws, some substantive federal consumer financial protection statutes, such as the Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), and Real Estate Settlement Procedures Act (RESPA), have provisions explicitly preempting “inconsistent” state laws.9
Preemption After the Act
In many ways, the Act preserves and affirms federal banking preemption laws and precedents already in effect, and some of the earlier proposals to scale back preemption of state laws were defeated. However, as described below, in a number of very significant respects, the Act has altered the preemption landscape and allowed for greater state regulation of banks and other providers of consumer financial products and services.
Subsidiary preemption eliminated. Perhaps the most significant change to preemption law in the Act is to eliminate the extension of preemption under the NBA and HOLA to operating subsidiaries of national banks and thrifts.10 This change essentially negates some current OTS and OCC regulations and supersedes the decision in Watters, as discussed above. In light of this change, national banks and thrifts have been considering whether to bring their nonbank operating subsidiary lenders into the parent bank or thrift or whether to make other changes to these entities.
State visitorial and enforcement power expanded. The Act adopts the holding in Cuomo, which authorized state law enforcement authorities to bring lawsuits under state law against national banks, and enhances the authority of states by authorizing suits by state attorneys general against national banks and thrifts to enforce rules issued by the Bureau (but not the Act itself).11 With respect to nonbank covered institutions, state attorneys general can sue to enforce the Act and Bureau rules, and state banking regulators can bring administrative proceedings against institutions chartered, incorporated, or licensed in their states to enforce the Act and Bureau rules.12
With this broad grant of enforcement authority to states, institutions – including national banks and thrifts – will now be subject to varying and potentially conflicting interpretations of federal law by 50 state attorneys general and state regulators, as well as one or more federal authorities. This could result in significant uncertainty and increased compliance costs for institutions. Before a state attorney general or regulator initiates proceedings against any covered person, it must provide notice of the lawsuit to the Bureau.13 The Bureau can then intervene as of right, be heard in court, remove the action to federal court, and, to the same extent as other parties, appeal the judgment.14 In lawsuits by state authorities to enforce the Act or Bureau rules, it is likely that the Bureau’s decision whether to intervene or appeal will depend in large part on whether the approach taken by the state and the outcome promote consistent interpretation of federal law.
Bank and thrift preemption standards and procedures clarified. The Act provides for preemption of a “state consumer finance law” only if:
- the law discriminates against federal banks as compared to state banks;
- the law “prevents or significantly interferes with the exercise by the national bank of its powers,” “in accordance with” the standard articulated in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, 517 U.S. 25 (1996), as determined by the Comptroller of the Currency on a case-by-case basis or by a court; or
- the law is preempted by another federal law.15
Case-by-case determinations by the Comptroller shall address “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 Comptroller’s determination – which cannot be delegated to other OCC officials or employees – must be supported by “substantial evidence” made on the record supporting the specific findings under the Barnett Bank standard. A reviewing court shall consider such determinations based on the thoroughness evident in the agency’s consideration, validity of the reasoning, consistency with other agency determinations, and any other relevant factors. The OCC is required to periodically review its preemption determinations and report the results of such reviews to Congress.16
The Act provides that “conflict” preemption, rather than broad “occupy the field” preemption, applies to national banks and thrifts, which countermands a current OTS preemption regulation purporting to “occupy the field” of lending regulation.17 Also, the Act explicitly harmonizes the preemption standard and procedure for national banks and thrifts, consistent with the merger of OTS into the OCC as per Sections 313 and 314 of the Dodd-Frank Act.18
While the Act’s substantive preemption standard under the banking laws is consistent with Supreme Court precedent applicable to national banks, its mandate for case-by-case preemption by the Comptroller essentially nullifies the approach taken in current OCC and OTS regulations, which purport to identify broad categories of state laws that are preempted. The requirement that preemption decisions be made on a case-by-case basis – rather than by categorical regulations – could lead to significant uncertainty regarding which state laws the OCC will chose to preempt.
One significant feature of the clarified preemption standard is that it applies only to “state consumer finance laws,” defined as any state law that “directly and specifically regulates . . . any financial transaction [or] account.”19 Arguably, this could mean that state statutes such as “Little FTC” acts, consumer fraud statutes, advertising and marketing laws, general antidiscrimination statutes and other statutes that are not directed specifically at financial transactions are not subject to the same preemption standard as state consumer finance laws. Although the Act is unclear, it may be held that preemption of state laws that are not state consumer finance laws continues to be governed by pre-Act preemption standards and that case-by-case preemption determination by the Comptroller is not required. As noted above, current OCC and OTS regulations set forth broad categories of state laws that are preempted.
State initiatives for changing federal law. The Act creates a mechanism for states to impact federal law directly by requiring the Bureau to issue a notice of proposed rulemaking when a majority of states “enact” a “resolution” in support of the establishment or modification of a consumer protection regulation.20 There is some ambiguity as to what type of state action (e.g., legislation, a pronouncement by the state’s governor or attorney general, etc.) is required to trigger this obligation, which may be resolved by later rulemaking. The Bureau is not required to adopt any proposal endorsed by the states, but if it chooses not to adopt a rule based on the state resolutions, it must explain its decision.21
Some aspects of preemption and state law unchanged. Some aspects of federal law relating to preemption (or non-preemption) of state law remain unchanged under the Act. The Act explicitly preserves preemption and other provisions in other federal laws (such as ECOA, TILA and RESPA, as noted above) that specifically address the application of state law in relation to that federal law.22 Similarly, except for the provisions relating to preemption for national banks and thrifts, the Act itself cannot be construed to affect the application of any state law, except to the extent that a state law is “inconsistent” with the Act – and a state law that provides greater protection than the Act is not deemed “inconsistent” with the Act.23 Likewise, the Act preserves the provisions of the National Bank Act that have been interpreted to provide for the “exportation” of interest rates from the bank’s home state.24
No retroactive application to contracts; effective date. The provisions in the Act relating to preemption and the applicability of state law do not take effect until the designated “transfer date” – when the powers of certain federal regulators will be transferred to the Bureau – which must occur six-12 months after enactment, with a possible extension of up to 18 months after enactment.25 Also, the Act provides that the Act and Bureau rules do not alter the applicability of OCC or OTS preemption regulations, orders or guidance to any “contracts” entered into by OCC- or OTS-regulated entities and their subsidiaries on the day of or prior to the enactment of the Act.26 There are several unanswered questions regarding the applicability of this section, such as how the law would apply to new extensions of credit made after the enactment of the Act under existing lines of credit or credit card accounts.
Given the ambiguities in the law, and the fact that a number of new consumer protection regulations will be promulgated by the Bureau, it will likely be some time before the full implications of the preemption provisions in the Act are known. It is already clear, however, that the Act empowers states with new enforcement authorities which, when coupled with the broad responsibilities and powers of the Bureau, will result in a double punch for many financial institutions on a broad range of regulatory and consumer enforcement protection issues.
1 Pub L. No. 111-203, Title X, 124 Stat. 1376 (2010).
2 See, e.g., 12 C.F.R. part 7, subpart D; 12 C.F.R. § 34.4; and 12 C.F.R. § 560.2.
3 12 C.F.R. § 34.4(a).
4 12 C.F.R. § 560.2.
5 12 C.F.R. § 7.4006; 12 C.F.R. § 559.3(n)(1).
6 550 U.S. 1.
7 12 C.F.R. § 7.4000. The National Bank Act provides that “[n]o national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof or by any committee of Congress or of either House duly authorized.” 12 U.S.C. § 484(a).
8 129 S. Ct. 2710 (2009).
9 15 U.S.C. § 1691d(f).
10 The Act, §§ 1044-46.
11 The Act, § 1042(a)(2).
12 The Act, § 1042(a)(1).
13 The Act, § 1042(b)(1). Note that in an “emergency” proceeding, the state can give notice to the Bureau immediately after – rather than before – initiating the proceeding. Id.
14 The Act, § 1042(b)(2).
15 The Act, § 1044.
17 The Act, § 1044.
18 The Act, §§ 1046, 1047.
19 The Act, § 1044.
20 The Act, § 1041(c)(1).
21 The Act, § 1041(c)(2), (3).
22 The Act, § 1041(b). Note, however, that the Act amends provisions relating to state law in the Alternative Mortgage Transaction Parity Act. The Act, §§ 1041(b), 1083.
23 The Act, § 1041(a).
24 The Act, § 1044.
25 The Act, §§ 1048, 1061, 1062.
26 The Act, § 1043.
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