The Office of the Comptroller of the Currency received many comment letters strongly criticizing its May 26 preemption proposal. Unfortunately, the OCC largely ignored those criticisms and wrote final rules that blatantly violate the Dodd-Frank Act.
The law states unambiguously: “State consumer financial laws are preempted, only if” the OCC or a court determines, “in accordance with the legal standard for preemption” in the Supreme Court’s 1996 Barnett decision, that “the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers.” (This language appears in section 1044(b)(1)(B).) Thus, Congress specifically incorporated a phrase from Barnett — “prevents or significantly interferes” — as “the legal standard for preemption” for national banks.
The final rules refuse to accept “prevents or significantly interferes” as the governing preemption standard for such banks. The OCC’s reasons for flouting Congress’ mandate are fatally flawed.
First, the agency points to another section, 1044(c), which requires each OCC preemption determination to be supported by “substantial evidence.” The OCC observes that subsection (c) refers to “the legal standard of the [Barnett] decision” but that provision doesn’t repeat the “prevents or significantly interferes” part. However, subsection (c) requires each OCC preemption rule or order to be “prescribed under subsection (b)(1)(B).” Thus, subsection (c) affirms that each OCC preemption rule or order must satisfy the “prevents or significantly interferes” standard.
OCC also claims the Eleventh Circuit’s recent Baptista decision supports its refusal to accept “prevents or significantly interferes” as the governing preemption standard under Barnett. On the contrary, the court in Baptista (quoting Barnett) declared that the “controlling question” in preemption cases is “whether the state statute ‘forbid[s], or impair[s] significantly, the exercise of a power that Congress explicitly granted.’” Thus, Baptista relied on a phrase from Barnett synonymous with “prevents or significantly interferes.” Moreover, the phrase quoted by Baptista appears in Barnett in the sentence that immediately precedes the “prevents or significantly interferes” language.
The Supreme Court in Barnett articulated the “prevents or significantly interferes” preemption standard twice in consecutive sentences and in precisely parallel terms. Congress expressly incorporated the same standard in Dodd-Frank. The OCC has no authority to concoct another preemption standard that it likes better. Indeed, the regulator now admits it made a mistake in 2004 when it created its own “obstruct, impair, or condition” preemption test — a test that was far more preemptive than Barnett.
OCC’s final rules also violate Dodd-Frank by re-adopting three blanket preemption rules issued in 2004. Those rules proclaim nationwide preemptions of broad categories of state law — including state disclosure laws and other consumer protections — with respect to deposit-taking, real estate and other lending by national banks. The OCC originally justified its 2004 rules by using the “obstruct, impair, or condition” preemption test that it has now abandoned. The regulator claims that it has “re-reviewed” its 2004 rules, although it obviously did so without any opportunity for participation by state officials, the Consumer Financial Protection Bureau or the public. Based on its purported “re-review,” OCC asserts that its 2004 rules magically comply with a brand-new “standard for conflict preemption” allegedly based on Barnett. The OCC doesn’t explain what its newly-invented preemption test is, but it is certainly not “prevent or significantly interfere.”
OCC’s re-adoption of its 2004 rules flies in the face of Dodd-Frank. The law proclaims that, as of July 21, 2011, “State consumer financial laws are preempted, only if” the OCC or a court makes a preemption determination that satisfies all of Dodd-Frank’s requirements. Congress made two narrow exceptions to this “only if” command: OCC preemption rules remain valid for contracts signed by national banks before July 22, 2010; and the OCC may retain its preemption rulings for state usury laws. In all other areas, OCC preemption determinations must comply fully with Dodd-Frank.
The OCC’s 2004 rules, which preempt broad categories of state law in all 50 states, violate Dodd-Frank’s requirements in at least three ways. The OCC did not apply the “prevents or significantly interferes” preemption standard when it re-adopted the rules. Nor did the agency compile “substantial evidence” that would justify each of its many claims of preemption in the rules. The OCC also did not act on a “case-by-case” basis in determining why each type of state law is preempted, and it did not consult with the CFPB before deciding to preempt similar laws enacted by more than one state.
Glaring legal errors aside, the final rule suggests OCC preemption played little or no role in enabling the lending excesses that precipitated the crisis. That view, which the OCC has repeatedly voiced, has been refuted by the Senate committee report on Dodd-Frank, the Financial Crisis Inquiry Commission report, and numerous studies. Large institutions supervised by the OCC during the housing boom — including Bank of America, Citi, National City, Wachovia and Wells Fargo — have been criticized for reckless or abusive lending and foreclosure practices and received (directly or indirectly) massive federal assistance. It’s long past time for the OCC to accept reality (legal and factual) and to comply with Dodd-Frank.
Arthur E. Wilmarth, Jr. is a professor at George Washington University Law School in Washington. He is a consultant to the Conference of State Bank Supervisors, but the views expressed are his own.