Source: http://www.pepperlaw.com/publications/the-more-things-change-the-more-they-stay-the-same-occ-issues-notice-of-proposed-rule-on-national-bank-act-preemption-and-claims-it-was-right-all-along-2011-06-20/
Timestamp: 2017-12-15 00:48:47
Document Index: 588103001

Matched Legal Cases: ['art 7', '§ 7', 'art 4', 'art 4', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§7', '§ 7', '§ 7']

The More Things Change the More They Stay the Same: OCC Issues Notice ...
The More Things Change the More They Stay the Same: OCC Issues Notice of Proposed Rule on National Bank Act Preemption and Claims It Was Right All Along
Authors: Richard P. Eckman, Stephen G. Harvey and Michael J. Callaghan
The global financial crisis that began in 2008 led to the passage in July 2010 of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (Dodd-Frank). During the debate before Dodd-Frank became law, the suggestion was made that Congress should do or say something in Dodd-Frank about the extent to which national banks, which operate under the National Bank Act (NBA) and are subject to the supervision of the Office of the Comptroller of the Currency (OCC), should be permitted to operate without giving effect to state law. What came out of the legislative process at the end of the day was Dodd-Frank Section 1044, which clarified that the standard for NBA preemption is whether the state law at issue “prevents or significantly interferes with the exercise by the national bank of its powers” in accordance with the Supreme Court’s decision in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) (Barnett Bank).1 This codification of the Barnett Bank “prevents or significantly interferes” standard was thought to be necessary because in 2004 the OCC issued preemption regulations that described the standard as whether the state law would “obstruct, condition, or impair” the exercise by a national bank of its powers. Some OCC critics contended that the 2004 regulation set a standard for NBA preemption that was different from and more preemptive of state law than the Barnett Bank standard.
The OCC recently rejoined the conversation on this issue when on May 26, 2011 it issued a notice of proposed rulemaking on a number of subjects, including federal preemption, to conform its regulations to Dodd-Frank. Comments on the proposed rule are due on or before June 27, 2011. This Alert summarizes the key aspects of the proposed rule as they relate to NBA preemption and related subjects.2 The main takeaway for the busy reader is that the OCC recognizes that, with the exception of the preemption standard for federal savings banks and the procedure for the OCC to make preemption determinations, Dodd-Frank changed very little about the law on these subjects. Also, the OCC takes the position that the “obstruct, condition, or impair” phrase used in its 2004 regulations is valid as just another formulation of the Barnett Bank standard, but it proposes to do away with this phrase in the regulations and replace it with the “prevents or significantly interferes” phrase simply to avoid ambiguity or misunderstanding on the subject.
NBA Preemption Standards
Perhaps the most important development to come out of the proposed rule is the OCC’s proposal regarding preemption of “state consumer financial laws.”3 The notice of proposed rule recognizes that under Dodd-Frank Section 1044 there are three ways federal law can preempt a state consumer financial law:
if “Application of such a law would have a ‘discriminatory effect’ on national banks compared with state-chartered banks in that state”
“[I]n accordance with the legal standard for preemption” in Barnett Bank, the state consumer financial law “prevents or significantly interferes with the exercise by the national bank of its powers,” or
the state consumer financial law is “preempted by a provision of Federal law other than Title LXII of the Revised Statutes.”
According to the OCC notice to the proposed rule, the legislative history of Dodd-Frank shows that the preemption language in Dodd-Frank was adopted to provide consistency and legal certainty by preserving the Barnett Bank standard. But the OCC also takes the position that the key phrase from Barnett Bank – “prevents or significantly interferes with” – is “one exemplary formulation of conflict preemption,” but not the only such formulation. The OCC defends the phrase used in its 2004 regulations – “obstruct, impair or condition” as yet another formulation of the same standard that was “drawn from an amalgam of prior precedents” relied upon by the Supreme Court in Barnett Bank. The OCC also noted, in support of its position that there are multiple formulations of the same Barnett Bank standard, that a recent federal appellate decision described “the proper preemption test” under Barnett Bank as “whether there is a significant conflict between the state and Federal statutes.”4
At the same time, the OCC noted that Dodd-Frank Section 1044 “could have been intended to clarify” the Barnett Bank standard “relative to how current OCC regulations have distilled principles” from Barnett Bank. It also acknowledged that the “obstruct, impair, or condition” formulation “has created ambiguities and misunderstandings regarding the preemption standard,” and therefore proposes to remove the language from its regulations. Nevertheless, according to the OCC, because the 2004 regulations “were premised in principles drawn from the Barnett case,” any existing precedent based on the 2004 regulations remain valid. The OCC even goes a step farther and states that the 2004 regulations are themselves “preserved.” In effect, the OCC is saying the 2004 regulations are consistent with Barnett Bank and therefore valid, but the phrasing of the preemption standard in the regulations is being changed simply for clarification.
The OCC also proposes to clarify provisions of its regulations regarding the types of state laws that would not be preempted (e.g., contracts, torts, criminal law, etc.). The OCC proposes to amend portions of its regulations describing the types of state laws that are not preempted by making specific reference to Barnett Bank as the proper standard.
Preemptions questions can be decided by a reviewing court or by the OCC itself. Dodd-Frank imposes procedures and consultation requirements for how the OCC can make preemption determinations after July 21, 2011. The OCC in its notice of the proposed rule recognizes these procedures and requirements: any preemption determination must be made under the Barnett Bank standard and then on a case-by-case and not a categorical basis; it must be supported by substantial evidence made on the record of the proceeding; the OCC must consult with the Consumer Financial Protection Bureau under certain circumstances; and the OCC must publish a list of preemption determinations every quarter and must conduct a periodic review of preemption determinations every five years. Note that the OCC in its notice to the proposed rule made no reference to and seemingly ignored the provision in Dodd-Frank Section 1044(a) that any preemption determination “shall be made by the Comptroller, and shall not be delegable to another officer or employee of the Comptroller of the Currency.” Note as well the OCC does not propose any new regulations to implement the process for making preemption determinations, possibly because it decided that the new requirements are so onerous that it is unlikely to make any preemption determinations.
Elimination of Preemption for National Bank Subsidiaries
Dodd-Frank eliminates preemption of state law for national bank subsidiaries, agents and affiliates. In accordance with Dodd-Frank, the OCC proposes to eliminate its regulation concerning the application of state laws to national bank subsidiaries. This proposal is directly in line with Dodd-Frank, which reverses the Supreme Court’s holding in Watters v. Wachovia, N.A., 550 U.S. 1 (2007). This will force national banks to either conduct the operations of subsidiaries, agents and affiliates at the bank level or have subsidiaries, agents and affiliates comply with applicable state law.
Preemption Standard Applicable to Thrifts
The proposed rule also addresses the issue of preemption with regard to federal savings associations. The OCC proposes amendments to its regulations to apply national bank standards on preemption and visitorial powers to Federal savings associations and their subsidiaries to the same extent and in the same manner as they apply to national banks and their subsidiaries. This complies with Dodd-Frank Section 1046, which provides that any preemption determinations made by a court or the OCC under the Home Owners’ Loan Act with respect to federal savings associations “shall be made in accordance with the laws and legal standards applicable to national banks regarding the preemption of State law.”
The proposed rule also discusses the OCC’s proposal to revise its regulation addressing visitorial powers with respect to national banks. Dodd-Frank specifically codifies the decision in Cuomo v. Clearing House Association, L.L.C., 129 S. Ct. 2710 (1999), in which the Supreme Court held that when a state attorney general files a lawsuit to enforce a state law against a national bank, such lawsuit is not an exercise of visitorial powers. The Supreme Court held that the OCC erred by extending the definition of visitorial powers to include “prosecuting enforcement actions” in state courts. Accordingly, the OCC proposes to modify its visitorial powers regulation to provide that an action by a state attorney general to enforce a non-preempted state law against a national bank and seek relief thereunder is not an exercise of visitorial powers.
Conclusion – The More Things Change the More They Stay the Same
From the perspective of the OCC, nothing has really changed with regard to NBA preemption, except for new OCC procedural processes for preemption determinations and the elimination of “field preemption” for federal savings banks. The standard under which the OCC will make preemption determinations is and remains the Barnett Bank standard.
Please see below to review how the OCC preemption regulations would look if the proposed rule were finalized in its entirety. Text that would be deleted from the regulations is in brackets ( [ ] ) and text that would be added to the regulations is in bold. The proposed rule may not be finalized as proposed, so stay tuned to Pepper Client Alerts for developments as they arise.
Pepper Point: Certain consumer groups and Rep. Barney Frank (D- Mass) take the position that the "prevent or substantially interfere" standard of Barnett Bank is the sole standard for the courts to use and not the more than 150 years of judicial precedent on this issue. Who is correct in this interpretation will no doubt be answered by future court decisions.
Our attorneys have worked hard to stay ahead of these and other important developments that may affect your organization. We regularly advise clients on all aspects of banking and financial services laws, including regulatory counseling, litigation, class actions, and enforcement actions.
For more information, please contact any of the authors or the Pepper Hamilton attorney with whom you usually work.
1 For our report on and analysis of Section 1044 of Dodd-Frank, please see “How the Dodd-Frank Act Affects Preemption of State Consumer Financial Laws: A Primer on Subtitle D of Title X,” available at http://www.pepperlaw.com/publications_update.aspx?ArticleKey=1919.
2 Other subjects covered in the proposed rule that are not addressed in this Alert include the transfer of Office of Thrift Supervision to the OCC; implementation of the moratorium on the approval of a change in control of credit card banks, industrial banks and trust banks if the change of control would result in a commercial firm controlling such bank; and the transfer of authority to collect assessments for federal savings associations from the OTS to the OCC.
3 Under Dodd-Frank Section 1044, “[t]he term ‘State consumer financial law’ means a State law that does not directly or indirectly discriminate against national banks and that directly and specifically regulates the manner, content, or terms and conditions of any financial transaction (as may be authorized for national banks to engage in), or any account related thereto, with respect to a consumer.”
4 See Baptista v. JPMorgan Chase, N.A., No. 10-13105 (11th Cir. May 11, 2011).
Changes to 12 cfr Part 7 – (Bank Activities and Operations), Subpart D (Preemption)
§ 7.4000 Visitorial powers.
(a) General rule. (1) Under 12 U.S.C. 484, Only the OCC or an authorized representative of the OCC may exercise visitorial powers with respect to national banks. [, except as provided in paragraph (b) of this section.] State officials may not exercise visitorial powers with respect to national banks, such as conducting examinations, inspecting or requiring the production of books or records of national banks, or prosecuting enforcement actions, except in limited circumstances authorized by federal law. However, production of a bank’s records (other than non-public OCC information under 12 CFR part 4, subpart C) may be required under normal judicial procedures.
(ii) Inspection of a bank’s books and records;
(iv) Investigating or Enforcing compliance with any applicable federal or state laws concerning those activities.
(b) Exclusion. In accordance with the decision of the Supreme Court in Cuomo v. Clearing House Assn., L.L.C., 129 S. Ct. 2710 (2009), an action against a national bank in a court of appropriate jurisdiction brought by a state attorney general (or other chief law enforcement officer) to enforce a non-preempted state law against a national bank and to seek relief as authorized thereunder is not an exercise of visitorial powers under 12 U.S.C. 484.
(c) Exceptions to the general rule. Under 12 U.S.C. 484, the OCC’s exclusive visitorial powers are subject to the following exceptions:
(ii) Review, at reasonable times and upon reasonable notice to a bank, the bank’s records solely to ensure compliance with applicable state unclaimed property or escheat laws upon reasonable cause to believe that the bank has failed to comply with those laws (12 U.S.C. 484(b));
(vi) Functionally regulate certain activities, as provided under the Gramm-Leach-Bliley Act, Pub. L. 106–102, 113 Stat. 1338 (Nov. 12, 1999).
(2) Exception for courts of justice. National banks are subject to such visitorial powers as are vested in the courts of justice. This exception pertains to the powers inherent in the judiciary. [and does not grant state or other governmental authorities any right to inspect, superintend, direct, regulate or compel compliance by a national bank with respect to any law, regarding the content or conduct of activities authorized for national banks under Federal law.]
(d) Report of examination. The report of examination made by an OCC examiner is designated solely for use in the supervision of the bank. The bank’s copy of the report is the property of the OCC and is loaned to the bank and any holding company thereof solely for its confidential use. The bank’s directors, in keeping with their responsibilities both to depositors and to shareholders, should thoroughly review the report. The report may be made available to other persons only in accordance with the rules on disclosure in 12 CFR part 4.
§ 7.4001 Charging interest at rates permitted competing institutions; charging interest to corporate borrowers.
(a) Definition. The term “interest” as used in 12 U.S.C. 85 includes any payment compensating a creditor or prospective creditor for an extension of credit, making available of a line of credit, or any default or breach by a borrower of a condition upon which credit was extended. It includes, among other things, the following fees connected with credit extension or availability: numerical periodic rates, late fees, creditor-imposed not sufficient funds (NSF) fees charged when a borrower tenders payment on a debt with a check drawn on insufficient funds, overlimit fees, annual fees, cash advance fees, and membership fees. It does not ordinarily include appraisal fees, premiums and commissions attributable to insurance guaranteeing repayment of any extension of credit, finders’ fees, fees for document preparation or notarization, or fees incurred to obtain credit reports.
(iii) The enhancement of the competitive position of the bank in accordance with the bank’s business plan and marketing strategy; and
§ 7.4003 Establishment and operation of a remote service unit by a national bank.
A remote service unit (RSU) is an automated facility, operated by a customer of a bank, that conducts banking functions, such as receiving deposits, paying withdrawals, or lending money. A national bank may establish and operate an RSU pursuant to 12 U.S.C. 24(Seventh). An RSU includes an automated teller machine, automated loan machine, and automated device for receiving deposits. An RSU may be equipped with a telephone or televideo device that allows contact with bank personnel. An RSU is not a “branch” within the meaning of 12 U.S.C. 36(j), and is not subject to state geographic or operational restrictions or licensing laws.
§ 7.4004 Establishment and operation of a deposit production office by a national bank.
§ 7.4005 Combination of loan production office, deposit production office, and remote service unit.
[§ 7.4006 Applicability of State law to national bank operating subsidiaries.
Unless otherwise provided by Federal law or OCC regulation, State laws apply to national bank operating subsidiaries to the same extent that those laws apply to the parent national bank.]
§ 7.4006 [Removed and Reserved]
§ 7.4007 Deposit-taking.
(b) Applicability of state law. [(1) Except where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its Federally authorized deposit-taking powers are not applicable to national banks.]
[(2)] A national bank may exercise its deposit-taking powers without regard to state law limitations concerning:
[(i)] (1) Abandoned and dormant accounts;3
3 This does not apply to state laws of the type upheld by the United States Supreme Court in Anderson Nat’l Bank v. Luckett, 321 U.S. 233 (1944), which obligate a national bank to “pay [deposits] to the persons entitled to demand payment according to the law of the state where it does business.” Id. at 248–249.
[(ii)] (2) Checking accounts;
[(iii)] (3) Disclosure requirements;
[(iv)] (4) Funds availability;
[(v)] (5) Savings account orders of withdrawal;
[(vi)] (6) State licensing or registration requirements (except for purposes of service of process); and
[(vii)] (7) Special purpose savings services;4
4 State laws purporting to regulate national bank fees and charges are addressed in 12 CFR 7.4002.
(c) State laws that are not preempted. State laws on the following subjects are not inconsistent with the deposit-taking powers of national banks and apply to national banks to the extent consistent with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996): [that they only incidentally affect the exercise of national banks’ deposit-taking powers:]
(3) Criminal law;[5]3
[5]3 But see the distinction drawn by the Supreme Court in Easton v. Iowa, 188 U.S. 220, 238 (1903) where the Court stated that [between “crimes defined and punishable at common law or by the general statutes of a state and crimes and offences cognizable under the authority of the United States.” The Court stated that] “[u]ndoubtedly a state has the legitimate power to define and punish crimes by general laws applicable to all persons within its jurisdiction * * *. But it is without lawful power to make such special laws applicable to banks organized and operating under the laws of the United States.” Id. at 239 (holding that Federal law governing the operations of national banks preempted a state criminal law prohibiting insolvent banks from accepting deposits).
(8) Any other law that the OCC determines to be applicable to national banks in accordance with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v Nelson, Florida Insurance Commissioner, et al. 517 U.S. 25 (1996), or that is made applicable by Federal law. [the effect of which the OCC determines to be incidental to the deposit-taking operations of national banks or otherwise consistent with the powers set out in paragraph (a) of this section.]
§ 7.4008 Lending.
(b) Standards for loans. A national bank shall not make a consumer loan subject to this §7.4008 based predominantly on the bank’s realization of the foreclosure or liquidation value of the borrower’s collateral, without regard to the borrower’s ability to repay the loan according to its terms. A bank may use any reasonable method to determine a borrower’s ability to repay, including, for example, the borrower’s current and expected income, current and expected cash flows, net worth, other relevant financial resources, current financial obligations, employment status, credit history, or other relevant factors.
(d) Applicability of state law. [(1) Except where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its Federally authorized non-real estate lending powers are not applicable to national banks.]
[(2)] A national bank may make non-real estate loans without regard to state law limitations concerning:
[(i)] (1) Licensing, registration (except for purposes of service of process), filings, or reports by creditors;
[(ii)] (2) The ability of a creditor to require or obtain insurance for collateral or other credit enhancements or risk mitigants, in furtherance of safe and sound banking practices;
[(iii)] (3) Loan-to-value ratios;
[(iv)] (4) The terms of credit, including the schedule for repayment of principal and interest, amortization of loans, balance, payments due, minimum payments, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan;
[(v)] (5) Escrow accounts, impound accounts, and similar accounts;
[(vi)] (6) Security property, including leaseholds;
[(vii)] (7) Access to, and use of, credit reports;
[(viii)] (8) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents;
[(ix)] (9) Disbursements and repayments; and
[(x)] (10) Rates of interest on loans.6
6 The limitations on charges that comprise rates of interest on loans by national banks are determined under Federal law. See 12 U.S.C. 85; 12 CFR 7.4001. State laws purporting to regulate national bank fees and charges that do not constitute interest are addressed in 12 CFR 7.4002.
(e) State laws that are not preempted. State laws on the following subjects are not inconsistent with the non-real estate lending powers of national banks and apply to national banks to the extent consistent with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996): [that they only incidentally affect the exercise of national banks’ non-real estate lending powers:]
7 See supra note 5 regarding the distinction drawn by the Supreme Court in Easton v. Iowa, 188 U.S. 220, 238 (1903) between “crimes defined and punishable at common law or by the general statutes of a state and crimes and offences cognizable under the authority of the United States.”
(8) Any other law that the OCC determines to be applicable to national banks in accordance with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996) or that is made applicable by Federal law. [the effect of which the OCC determines to be incidental to the non-real estate lending operations of national banks or otherwise consistent with the powers set out in paragraph (a) of this section.]
[§ 7.4009 Applicability of state law to national bank operations.
(b) Applicability of state law. Except where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its powers to conduct activities authorized under Federal law do not apply to national banks.
(c) Applicability of state law to particular national bank activities. (1) The provisions of this section govern with respect to any national bank power or aspect of a national bank’s operations that is not covered by another OCC regulation specifically addressing the applicability of state law.
(iii) Criminal law8
8 8 Id.
(viii) Any other law the effect of which the OCC determines to be incidental to the exercise of national bank powers or otherwise consistent with the powers set out in paragraph (a) of this section.]
§ 7.4009 [Removed and Reserved]
(a) In accordance with section 1046 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 25b), state laws apply to Federal savings associations and their subsidiaries to the same extent and in the same manner that those laws apply to national banks and their subsidiaries.
Richard P. Eckman, Stephen G. Harvey and Michael J. Callaghan