The recent letter from the acting comptroller of the currency, John Walsh, to Sen. Carper had three significant concessions and two very serious errors. The concessions are welcome and overdue, but the errors are deeply troubling and must be corrected.
Walsh admitted that the Dodd-Frank Act requires the Office of the Comptroller of the Currency to rescind its existing preemptive rule for operating subsidiaries of national banks. Under Dodd-Frank, operating subsidiaries, affiliates and agents of national banks must comply with applicable state laws.
Walsh also acknowledged that the Supreme Court's 2009 decision in Cuomo v. Clearing House, which Dodd-Frank codifies, compels the OCC to modify its visitorial powers rule. In accordance with Cuomo, the OCC will finally recognize the right of state attorneys general to enforce non-preempted state laws against national banks through court proceedings. It is remarkable, however, that the OCC has taken two years to comply with a binding Supreme Court precedent.
Walsh further admitted that Dodd-Frank requires the OCC to remove the "obstruct, impair or condition" preemption standard from the OCC's 2004 preemption rules. Walsh recognized that the OCC's standard was untenable in view of Dodd-Frank's codification of the "prevent or significantly interfere" preemption standard that the Supreme Court adopted in its 1996 Barnett Bank decision.
Notwithstanding these helpful concessions, Walsh's letter was manifestly wrong on two points. First, he claimed that the "prevent or significantly interfere" preemption standard is only "the starting point" for analyzing preemption issues under the National Bank Act and "the analysis may not stop there." Walsh then asserted that the OCC may rely on "the whole of the conflict preemption analysis" in Barnett, although he did not explain how that analysis would be different from the Supreme Court's "prevent or significantly interfere" standard.
Walsh's claims regarding Barnett are squarely contradicted by Dodd-Frank's language. Dodd-Frank declares in the clearest possible terms that each preemption issue under the NBA must be determined "in accordance with the legal standard for preemption" in the Barnett decision, which is whether "the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers."
Thus, Dodd-Frank makes clear that there is only one "standard" to be applied under Barnett, and that standard is "prevent or significantly interfere." The OCC is not free to concoct some other approach, such as its now discredited "obstruct, impair or condition" formulation, which the OCC purported to "distill" from Barnett and other cases in 2004.
The Carper amendment to the Senate bill, which Walsh cited, does not support his claim. The Carper amendment referred generally to Barnett, but it omitted any reference to the "prevent or significantly interfere" standard.
In sharp contrast, the House-Senate conference committee inserted the "prevent or significantly interfere" language into the final version of Dodd-Frank as the governing standard under Barnett, and the conference report specifically affirmed that "prevent or significantly interfere" is indeed the controlling Barnett standard.
Second, Walsh claimed that the OCC may continue to apply its 2004 rules to future activities of national banks.
This claim is again foreclosed by Dodd-Frank's specific terms. Dodd-Frank allows the OCC to preempt state consumer financial laws only on a "case-by-case" basis and only after the OCC determines that "substantial evidence" supports the agency's application of the Barnett standard. The OCC's 2004 rules, which preempt broad categories of state law, represent the polar opposite of the "case-by-case" approach mandated by Dodd-Frank.
Walsh's claim is further undermined by two special carve-outs in Dodd-Frank. Section 1043 provides that the OCC's existing preemption rules and orders will remain in effect with regard to contracts made by national banks before Dodd-Frank's enactment date. Section 1044(f) stipulates that Dodd-Frank does not disturb the continued application of the OCC's existing rules and orders concerning the NBA's preemption of state usury laws.
Congress obviously would not have enacted those two carve-outs if it had intended to preserve the OCC's 2004 preemption rules with respect to all future operations of national banks.
With the exception of the two special carve-outs, Dodd-Frank declares that "State consumer financial laws are preempted, only if" the OCC complies with the new preemption rules set forth in Section 1044, including the "case-by-case" and "substantial evidence" requirements. The "only if" language in Section 1044 makes clear that the OCC's 2004 preemption rules will no longer be valid (except for matters covered by the carve-outs) after July 21, 2011.
