Federal banking law preemption in the post-Dodd Frank world: A review of significant developments

Federal preemption has long been a battleground in U.S. banking law. 

In the years leading to the financial crisis of 2008, federal and state bank regulators regularly sparred over preemption issues, particularly with regard to various interpretive letters and regulations in which the Office of the Comptroller of the Currency (the “OCC”) and the Office of Thrift Supervision (the “OTS”) asserted that federal law preempted state legal requirements.

The financial crisis led to criticisms of the broad preemption approach taken by the OCC and OTS and to changes in the statutes permitting federal banking law preemption via the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) of 2010.  The Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, pgs. xxiii, 111-113, 126 (January 2011); Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, sections 1041-1048 (2010).  (The OTS was merged into the OCC via Dodd Frank.)

The OCC implemented various of these Dodd Frank changes (e.g., prohibition on preemption for non-bank subsidiaries, affiliates or agents of national banks) in post-Dodd Frank rules, but the agency maintained that the basic standards and categories in its pre-Dodd Frank banking law preemption rules were generally consistent with the new Dodd Frank requirements.  76 Fed. Reg. 43549, 43565-43566 (July 21, 2011).

Now that Dodd Frank has been on the books for over eight years and its principles have been tested in court, the question is:  Has the practical impact of federal banking law preemption changed?

Overview of Dodd Frank preemption changes

Dodd Frank included the following among its major preemption provisions: 

• Requirement that preemption under the Home Owners Loan Act (“HOLA”) for federal savings associations (“FSAs”) is to be construed as equal to the preemption authority for national banks under the National Bank Act (the “NBA”) and is to be based on “conflict preemption” principles, rather than “field preemption.”  12 U.S.C. § 1465.
• As mentioned above, prohibition of the use of federal banking law preemption on behalf of non-bank subsidiaries, affiliates and agents of national banks and FSAs.  12 U.S.C. § 25b(b)(2), (e) and (h).
• Establishment of procedural restrictions for federal banking law preemption determinations regarding “state consumer financial laws.”  12 U.S.C. § 25b(b) and (c).
• Clarification of the rights of state attorneys general to bring actions and enforce applicable laws against national banks and FSAs.  12 U.S.C. § 25b(i).
• Clarification of the level of deference that courts should apply to OCC preemption rules and orders.  12 U.S.C. § 25b(b)(5).
• Clarification of the standards for preemption determinations regarding “state consumer financial laws.”  12 U.S.C. § 25b(b).

This last area – Dodd Frank’s standards for preemption – was not only a focus of debate in the OCC’s reformulated post-Dodd Frank preemption rules, but has also been the focus of certain post-Dodd Frank court decisions.  76 Fed. Reg. 30557 (May 26, 2011) (proposed rule) and 76 Fed. Reg. 43549 (July 21, 2011) (final rule).

Preemption standards:  Dodd Frank changes and OCC response

Dodd Frank language.  Under Dodd Frank, a “state consumer financial law” can be preempted if it “prevents or significantly interferes with” the exercise of banking powers authorized under federal law.  12 U.S.C. § 25b(b).  A “state consumer financial law” is defined by Dodd Frank as “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.”  12 U.S.C. § 25b(a)(2).   

This Dodd Frank standard is derived from the U.S. Supreme Court decision in Barnett Bank of Marion County v. Nelson, 517 U.S. 25 (1996) (“Barnett”), which is directly cited in the Dodd Frank preemption provisions.  (It is important to note that, in addition to this Dodd Frank provision on “state consumer financial laws,” the Barnett standard also applies to preemption issues under the NBA regarding certain types of state laws that are not “state consumer financial laws,” for example, state commercial lending laws.) 

OCC rule.  As compared to this Dodd Frank standard:

• the language of pre-Dodd Frank OCC preemption rules included broader language under which a state law that would “obstruct, impair or condition” the exercise of federal banking powers could be preempted (see 69 Fed. Reg. 1904 (Jan. 13, 2004)), and
• for its post-Dodd Frank rules, the OCC revised this language to reflect only the “prevents or significantly interferes with” standard, although the OCC maintained that its pre-Dodd Frank rule and related preemption opinions were generally consistent with the Barnett standard cited in Dodd Frank and that the wording change was only to “remove any ambiguity” and avoid misunderstandings (see 76 Fed. Reg. 43549, 43555-43557 (July 21, 2011)).

The OCC retained in its post-Dodd Frank rules, a series of categories of state laws that would and would not normally be preempted, despite Dodd Frank language requiring a “case-by-case basis” for OCC preemption determinations.  76 Fed. Reg. 43549, 43555-43557 (July 21, 2011); 12 U.S.C. § 25b(b) and (c).

Notable post-Dodd Frank cases

The following cases illustrate how certain courts in the post-Dodd Frank era have interpreted banking law preemption standards in a manner that may be more restrictive than many pre-Dodd Frank interpretations.

Lusnak – state law on escrow accounts.  In Lusnak v. Bank of America, 883 F.3d 1185 (9^th Cir. 2018), the federal Ninth Circuit held in March of 2018 that the NBA did not preempt a California statute requiring lenders to pay borrowers interest on mortgage loan escrow accounts.  The court held that the state law requirement did not “substantially interfere” with the defendant national bank’s powers under federal law.  Lusnak at 1194.  The opinion includes an in-depth discussion of the Dodd Frank preemption changes and held against preemption despite the fact that:

• under the post-Dodd Frank OCC rules “state law limitations concerning … escrow accounts” are categorized as laws normally preempted (see 12 C.F.R. 34.4(a)(6)), and
• in the pre-Dodd Frank era, the OTS had previously issued multiple opinions finding that similar state law requirements mandating interest payments on escrow accounts were preempted under HOLA.  Lusnak at 1189, 1191-1197.  (See OTS Letter P-2003-7 (Oct. 6, 2003); OTS Letter P-98-13 (Nov. 17, 1998); OTS Chief Counsel Opinion (Jan. 3, 1991).  Although these opinions were based on the theory of “field preemption,” rather than the more limited “conflict preemption” doctrine of Dodd Frank, the two more recent opinions cite a former OTS rule (12 C.F.R. 560.2) that provided for preemption over state laws imposing requirements regarding escrow accounts that was very similar to the current OCC rule at 12 C.F.R. 34.4(a)(6).)

The national bank petitioned the U.S. Supreme Court for a writ of certiorari to review the case, but the Supreme Court declined in November of 2018.  Bank of America v. Lusnak, 139 S.Ct. 567 (2018).

In re Checking Account – state law on checking accounts and overdraft fees.  In Re Checking Account Overdraft Litigation, 797 F.Supp.2d 1312 (S.D. Fla. 2011) was a federal court case involving a national bank re-ordering debits in deposit accounts with the effect of increasing overdraft fees.    In this case the court held that state contract and tort law addressing “bad faith” actions could apply to the re-ordering of debits and that such contract and tort law was not preempted because it was law of general applicability that only incidentally affected the exercise of national bank deposit-taking powers under federal law.  In re Checking Account at 1319-1322.  The court reached this holding despite the fact that:

• under the pre- and post-Dodd Frank OCC rules “state law limitations concerning … checking accounts” are categorized as laws normally preempted (see 69 Fed. Reg. 1904, 1916 (Jan. 13, 2004) and 12 C.F.R. 7.4007(b)(2));
• the OCC pre- and post-Dodd Frank rules also indicate that non-interest fees charged by national banks are protected from state law limitations pursuant to preemption principles under the U.S. Constitution and “judicial precedent” (see 66 Fed. Reg. 34784, 34791 (July 2, 2001) and 12 C.F.R. 7.4002); and
• in the pre-Dodd Frank era, the OCC had issued various opinions indicating that the NBA and OCC rules would preempt state laws purporting to restrict a national bank’s ordering of deposit account debits and assessment of related fees for overdrafts (see OCC Interpretive Letters No. 916 (May 22, 2001), No. 997 (April 15, 2002) and No. 1082 (May 17, 2007)).  

It should be noted that the holding in this case involved a broader exemption from NBA preemption than the much-publicized Gutierrez v. Wells Fargo Bank, 704 F.3d 712 (9^th Cir. 2012) case.  The appeals court in the Gutierrez case held that:

• The NBA preempted state laws based on “good faith” duties and “unfairness” restrictions that purported to limit a national bank’s ability to determine the posting order of deposit account debits or the method of calculating fees for overdrafts.  Gutierrez at 725.
• However, the NBA did not preempt state laws prohibiting fraudulent acts that could impact a national bank’s activities related to the posting order of debits and calculation of overdraft fees.  Id. at 726.

The In re Checking Account case was preceded by pre-Dodd Frank cases with similar holdings, such as White v. Wachovia Bank, 563 F.Supp.2d 1358 (N.D. Ga. 2008). 

Aguayo – state debt collection laws.  The federal Ninth Circuit held in Aguayo v. U.S. Bank, 653 F.3d 912 (9^th Cir. 2011) that a California law requiring a national bank to provide a defaulting borrower with certain notices before collecting a deficiency payment was not preempted under the NBA or OCC preemption rules (in this case the pre-Dodd Frank OCC rules were applicable).  The appeals court reversed the district court and held that the state notice requirements did not fall within the category under the OCC rule requiring preemption of state law concerning “disclosures … including laws requiring specific statements, information or other content to be included in [any] credit-related documents.”  Aguayo at 919, 925-928.  Instead, the court held that:

• The required notices were “notices” and not “disclosures.”  Aguayo at 925-926.
• The required notices were not “credit related documents,” but were instead documents related to “contracts” and the “right to collect debts,” which were (and continue to be) in categories under the OCC rule for state laws that are not normally preempted.  Aguayo at 926-928.  The court distinguished a bank’s lending operations from its collection of loan debts.  Id.
• The laws requiring these notices only “incidentally affected” national bank lending powers and, therefore, qualified for a category of state laws not subject to preemption under the OCC rule.  Aguayo at 925-928.

The court also distinguished its holding from Crespo v. WFS Financial, Inc., 580 F.Supp.2d 614 (N.D. Ohio 2008), in which a similar state law on post-repossession notices was held to be preempted under HOLA.  Aguayo at 921-923.  The Aguayo court noted that the Crespo case involved a FSA acting under the (then applicable) “field preemption” principles of HOLA, which were broader than the conflict preemption principles under the NBA.  Id.  The Aguayo court also noted that the applicable pre-Dodd Frank OTS rule did not include the OCC rule’s carve-out making state laws regarding the “right to collect debts” normally exempt from preemption.  Id.

Conclusion

The cases described above are only a few of the post-Dodd Frank cases that have addressed federal banking law preemption issues.  Other cases have taken approaches to federal banking law preemption issues that differ from the holdings in the cases described above.

In the months and years ahead, subsequent cases – particularly cases based on facts arising after the effectiveness of Dodd Frank and the post-Dodd Frank OCC preemption rules – will indicate whether the cases described above will become part of a general shift in case law limiting federal banking law preemption.