ABA Banking Journal - August 2010 - (Page 50)
legal issues | by james sivon
Preemption’s new status
The Dodd-Frank bill preserves preemption for national banks and federal thrifts, despite efforts by the Administration and some members of Congress to prevent preemption of state consumer financial laws. At the same time, the bill makes some changes in the application of preemption, and this will impact existing OCC and OTS preemption regulations. Barnett standard codified. The Dodd-Frank bill codifies a preemption standard from the 1996 decision of the U.S. Supreme Court in Barnett Bank v. Nelson. In that case, the Supreme Court identified many of the reasons why a state law would not apply to a national bank. For example, the court noted that a state law could not “hamper” a national bank’s functions or “impair the efficiency” of a national bank. The Court also noted a state law would not be preempted if it does not “prevent or significantly interfere” with the exercise of a national bank’s powers. The Dodd-Frank bill adopts the phrase “prevent or significantly interfere” as the standard for preemption. The bill provides that this standard is to be applied “in accordance with the legal standard for preemption” in the Barnett Bank case. Also, in a statement on the Senate floor, Senator Dodd noted that the bill codifies the preemption standard expressed by the Supreme Court in that case. As with any new federal law, it will be up to the federal regulators (the OCC in this case) and federal courts to interpret this standard. OCC preemption now case by case. The Dodd-Frank bill imposes some limitations on the application of preemption. For example, the bill provides that OCC preemption determinations must be made on a “case-bycase” basis. That is, a determination must relate to a particular state consumer financial law. This suggests that all or part of the existing OCC and OTS preemption regulations, which address broad areas of state law, will have to be revised. Additionally, the bill eliminates the application of preemption to operating subsidiaries of national banks and federal thrifts. As a result, subsidiary operations will have to be rolled-up into a parent bank or thrift in order for preemption to apply. Timing issues. The preemption provisions go into effect when the newly created Bureau of Consumer Financial Protection becomes operational. At that time, some or all of the existing OCC and OTS preemption regulations may cease to be effective, and national banks and federal thrifts will need to determine if a particular state law that was preempted under those general regulations would continue to be preempted under the statutory preemption
50 | ABA BANKING JOURNAL | august 2010
standard in the Dodd-Frank bill. Since the existing OCC regulations were based largely on the Barnett Bank case, it seems fair to assume that most state consumer financial laws will continue to be preempted. However, guidance from the OCC on the scope and application of the standard would be useful. Additionally, it should be noted that contracts entered into prior to the effective date of Dodd-Frank will continue to be shielded from state law under prior OCC and OTS preemption regulations. n
James C. Sivon is a partner with the Washington, D.C., law firm Barnett Sivon & Natter PC.
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