WASHINGTON — The Treasury Department and state regulators have insisted the enactment of Dodd-Frank effectively forces national banks to comply with more state consumer protection laws.
So far, however, courts are not supporting such claims.
A federal judge in Iowa ruled last week that the Dodd-Frank Act did not materially change the standard for federal preemption. It was the second such decision this year, following a ruling by a Florida appellate court in May.
The battle is far from over, but industry observers say the two cases have strengthened the Office of the Comptroller of the Currency's hand, which finalized a rule over the Treasury's objections in July that said preemption was mostly unaffected by Dodd-Frank.
"The court clearly said that the preemption standard applied to national banks was not materially changed by Dodd-Frank," said Ray Natter, a partner at Barnett Sivon & Natter and a former deputy chief counsel for the OCC. "I think this decision is entirely consistent with the OCC's position on the impact of Dodd-Frank."
In U.S. Bank v. Schipper, a district court judge ruled that national banks do not have to comply with an Iowa law imposing restrictions on ATM service providers.
Although state lawyers had argued the law should not be preempted because Dodd-Frank raised such standards, Judge James E. Gritzner disagreed. In a footnote in the ruling, Gritzner said that the regulatory reform law used the same preemption standard applied in the Watters V. Wachovia Bank case, which itself relied on the so-called Barnett standard established by the Supreme Court in 1996.
"That is, 'State consumer financial laws are preempted, only if … the state consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers,' " the judge wrote, quoting from the Watters decision. "Thus, the Dodd-Frank Act did not materially alter the standard for preemption the court must apply in this case."
In Baptista v. JPMorgan Chase Bank, a Florida judge reaffirmed a lower court's decision preempting a state law that prohibited banks from charging check-cashing service fees on non-account-holders.
Although the latest decision came from a different court in a different circuit — an Iowa district court, versus an appellate court in Florida — it helps build support for the principle that Dodd-Frank didn't change the preemption standard, Natter said. "Now that there are two courts reaching the same result, other courts in other circuits will be influenced by these two decisions," he said.
Robert Cook, a partner with Hudson Cook LLP, said that the decisions can give the OCC more ammunition for legal challenges, but that they also provide banks a better understanding of how the Barnett standard will be applied under the reform law.
"Until you really see the courts interpret the preemption standard post-Dodd-Frank, you don't know how significant the changes might be," Cook said. "So far we would say they're not significant at all, as far as how a court looks at preemption."
To be sure, while the OCC may have more ammo in court, it has stayed out of the fray to date.
"I would be very reluctant to have clients approach the OCC and expect them to wholeheartedly jump behind or to get them to issue some sort of preemption decision, because that could be the catalyst itself for litigation," said Jeffrey Taft, a partner with Mayer Brown LLP. "I do think that all the parties involved want to find the best facts to support their case, so that's why they're going to be very judicious in deciding what to go forward with at this point."
V. Gerard Comizio, a partner with the firm Paul, Hastings, Janofsky & Walker LLP, said that raises a strategic question for banks that may face legal challenges from states: Should a bank go to the OCC first and get an opinion from the agency, which then would be subject to new scrutiny standards under the Dodd-Frank Act, or should it go directly to the court, which can rely on case precedence? "If you look at the batting average so far, it seems like national banks have done just fine in court on their own without pulling the OCC into the action," Comizio said.
The OCC and industry lawyers have argued that the reform law did not substantively affect preemption, while state regulators and consumer advocates have argued the reform law made it harder to preempt local law. The agency did not comment for this article.
The law put a number of obstacles in front of the OCC, Cook said. For example, the comptroller can no longer issue broad preemptive regulations as it did in 2004, but must look at each state law case by case. It also must consult with the Consumer Financial Protection Bureau before making any preemption determinations, and those determinations must come from the comptroller himself rather than the general counsel's office.
But it appears the law "essentially left intact the standard a court uses when a case comes before the courts, and that is the Barnett standard," Cook said.
Although national bank advocates are cheering the latest decision as affirming the OCC's view on preemption, others say the decision would have been the same before Dodd-Frank.
Arthur Wilmarth, a professor at George Washington University Law School, said the court reached the same decision it likely would have reached pre-Dodd-Frank: that the Iowa law prevented U.S. Bank from engaging in the business of banking.
Where consumer advocates and national bank advocates have often disagreed was whether a state law "significantly interfered" with banking. Wilmarth and other critics have said the OCC's 2004 rule attempted to undercut that standard.
"I think the Iowa case and the Baptista case clearly are applying the 'prevent' standard, which no one would debate and which has always been a part of Barnett," Wilmarth said. "I think for the OCC to get any help, one of those courts would have to say, 'Oh, the interference does not have to be significant.' Neither of those courts said anything to suggest that; quite the contrary, I think."
Stacie McGinn, a banking lawyer with Simpson, Thacher & Bartlett, said she agrees, but drew a different conclusion.
"The courts are reaching the same results that they would have reached pre-Dodd-Frank … which does seem to be confirming the courts continue to think that, just as the statute says, the Barnett standard still applies," McGinn said.
Several banking lawyers say the Iowa case in particular would be great for the OCC's position if the state decided to appeal.
"If anything, the state law appears to harm consumers by limiting competition to an in-state company, while preemption has the effect of opening the market for this service to more providers," Natter said.
Still, he said, "I don't think the OCC is going to initiate any legal action with respect to this litigation."
While the two decisions are helpful, Taft said they will not stop states and consumer advocates from pursuing other cases. It will take two contrary opinions from two appellate courts before the Supreme Court would even consider taking up the case — an action that both sides say is inevitable.
That's a long way off, Taft said.
"If you're the industry, you could take some comfort from the decision, but there are a lot more salvos that are going to be fired in the preemption battle than just this case," he said. "Until the appellate courts weigh in, it's hard to draw any conclusions about who has won and who has lost."