The preemption provisions in the Dodd-Frank Act have been a source of confusion and uncertainty. To some, the act created a new standard for determining when the National Bank Act preempts state law. To others, it simply codified the existing preemption standard.
If the act did, in fact, create a new legal standard for preemption, there is no way to determine with any certainty what state laws would be applicable to national bank activities, and what state laws remain preempted.
This uncertainty created the potential for significant liability if a national bank failed to comply with a law that had previously been preempted under an OCC determination or court decision, but was now "revived" through the creation of a new and subjective preemption test.
In light of this uncertainty, and the huge risks of reaching an incorrect conclusion as to the meaning of the Dodd-Frank preemption provisions, Sens. Carper and Warner wrote to the Office of the Comptroller of the Currency asking for that agency to provide authoritative guidance. On May 12, John Walsh, the acting comptroller of the currency, responded to this request.
In his response, Walsh noted that while Dodd-Frank made significant changes to the procedures concerning preemption, and clearly required national bank subsidiaries and agents to comply with all applicable state law, it does not change the traditional standard for preemption that had been developed by the Supreme Court in almost 200 years of jurisprudence, and which the Supreme Court summarized in its 1996 decision in Barnett Bank v. Nelson.
Walsh's letter went on to explain that since the OCC had been applying this standard in its prior preemption determinations, including regulations that had been issued in 2004, national banks could continue to rely on those prior OCC determinations and court precedents.
The letter acknowledged that the OCC would be required to act on a case-by-case basis when making new preemption determinations and to consult with the Consumer Financial Protection Bureau with respect to certain state-law issues.
However, the letter explained that these procedural changes did not retroactively repeal prior OCC and judicial actions. This is consistent with the usual presumption against applying changes in the law retroactively, unless Congress clearly intends that result. The OCC then issued a proposed regulation on May 25 that essentially codified the letter through changes in its official rule book.
The OCC's reasoning is sound. Dodd-Frank's preemption provisions say the National Bank Act preempts state law when, "in accordance with the legal standard for preemption" in the Barnett Bank case, the state law "prevents or significantly interferes" with the exercise of a national bank of its powers."
The preemption standard used in the Barnett Bank case is so-called conflict preemption. In the Barnett Bank case, the court said that a state law that conflicts with federal law is preempted. The court explained that such a conflict exists when the state law "hampers" or interferes with the purposes of the federal law, or when it "stands as an obstacle to the accomplishment" of the purpose of the federal law.
The court indicated that these are the types of conflicts that "prevent or significantly interfere" with federal powers. In light of the specific reference to the Barnett case in Dodd-Frank, the OCC determined that the phrase "prevent or significantly interfere" should be given the same meaning as the Supreme Court gave to it in the Barnett decision.
The conclusion the OCC reached is directly supported by Dodd-Frank's legislative history. Sen. Dodd, at the time the chairman of the Senate Banking Committee, and Sen. Carper, the author of the act's preemption provisions, entered into a colloquy during Senate floor consideration of the legislation, and they agreed that the language was intended to provide legal certainty by preserving the preemption standard of the Barnett Bank decision. Sen. Johnson, the current Senate Banking chairman, agreed with this view.
The only court that has interpreted this language, the U.S. Court of Appeals for the 11th Circuit, reached the same conclusion in Baptista v. JPMorgan Chase, a case decided on May 11. The court of appeals quoted the preemption language used in Dodd-Frank, then proceeded to analyze the facts using the traditional conflict preemption tests discussed in the Barnett Bank case. Notably, the court did not interpret the act as establishing a new preemption standard.
In short, the OCC has eliminated the uncertainty surrounding the preemption provisions in Dodd-Frank.
Moreover, the agency's actions are supported both by public policy and legal reasoning. It simply is not good public policy to retroactively revive state laws that had previously been determined to be preempted and expose financial institutions to unknown potential liability. Also, the OCC's letter to the senators and recent proposed rule are clearly consistent with the statutory language in Dodd-Frank and its legislative history.
