United States: Unclear Whether Latest Preemption Developments Create Clear Path Or Muddy Waters For Federally Chartered Banks

Recent pronouncements from the courts and the Office of the Comptroller of the Currency ("OCC") have begun to shed some light on what preemption for national banks and federal savings associations will look like on and after July 21, 2011, the effective date of the preemption provisions of Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act").¹ In Baptista v. JP Morgan Chase Bank, N.A., the 11th Circuit upheld a pre-Dodd-Frank Act District Court determination that a Florida statute limiting check-cashing fees does not apply to national banks.² One day later, the Acting Comptroller of the Currency wrote a letter to a member of Congress to outline the agency's interpretation of particular aspects of the preemption provisions of the Dodd- Frank Act and the agency's plans to amend its regulations to reflect such interpretation (the "May 12th OCC Letter").³ These events were closely followed by a notice of proposed rulemaking by the OCC that sets those plans in motion (the "Preemption NPR").⁴ The comment deadline for the Preemption NPR closed on June 27, 2011.

Public comments submitted in response to the Preemption NPR reflect viewpoints from industry, government, trade and consumer groups that range from "you got it right" to "you got it all wrong," with respect to the OCC's position on preemption as reflected in the proposed rules.

In particular, the U.S. Department of the Treasury ("U.S. Treasury Department") submitted an unprecedented comment letter raising a number of significant concerns about the Preemption NPR.

Further, the recent nomination of Thomas J. Curry, a former Massachusetts banking commissioner, further muddies the waters for discerning federal policy in this important area. It remains to be seen whether the U.S. Treasury Department's letter and Curry's nomination indicates that the Obama Administration is looking for a Comptroller who takes a more favorable view of states' rights when it comes to banking regulation.

These latest developments are only the beginning of events that will continue to shape the preemption landscape for federally chartered banks. It remains to be seen how the preemption provisions of the Dodd-Frank Act may impact the interstate operations of federally chartered banks and what the OCC's implementing regulations for the preemption provisions of the Dodd-Frank Act will look like in final form.

Baptista v. JP Morgan Chase Bank, N.A.

In Baptista, the 11th Circuit considered an appeal from the U.S. District Court for the Middle District of Florida, which dismissed the plaintiff's two-count class action complaint against JP Morgan Chase Bank, N.A. ("Chase") for failure to state a claim upon which relief can been granted.⁵ The plaintiff, Vida Baptista, filed the case in early 2010, after she cashed a check for $262.48 written to her by one of Chase's account holders. Baptista was not an account holder at Chase, and when she brought the check in person to Chase to cash it, Chase charged her a $6.00 fee to provide cash immediately. Baptista sought damages from Chase on behalf of herself and those similarly situated on two counts: 1) that Chase's imposition of a check-cashing service fee violated Fla. Stat. § 655.85,⁶ and 2) Chase was unjustly enriched by the service fee.⁷ The District Court had determined that Fla. Stat. § 655.85 only bars check-cashing fees on bank-to-bank transactions, however "assuming that [Fla. Stat.] § 655.85 does apply to Plaintiff, it is preempted by the National Bank Act ("NBA"), 12 U.S.C. § 21 et seq., and its implementing regulations."⁸

In affirming the District Court decision dismissing plaintiff's class action suit, the 11th Circuit court looked to guidance from the 5th Circuit which, in 2003, interpreted a Texas "par value" statute with language that is similar to the Florida statute at issue.⁹ The Texas law, which prohibits all banks operating in Texas from charging non-account holders check-cashing fees, was determined by the 5th Circuit to be preempted under the NBA and in particular, the federal authority for national banks to charge non-interest charges and fees under section 7.4002 of the rules and regulations of the OCC.¹⁰ Citing to Barnett Bank of Marion County, N.A. v. Nelson,¹¹ the 5th Circuit court determined that the Texas par value statute was in "irreconcilable conflict" with the NBA because the NBA "expressly authorize[d] an activity which the state scheme disallows."¹² Specifically, the 5th Circuit reasoned "where a state statute interferes with a power which national banks are authorized to exercise, the state statute irreconcilably conflicts with the federal statute and is preempted by operation of the Supremacy Clause."¹³

Upon establishing the OCC's authority to promulgate the regulation, and that the OCC's interpretation of the term "customer" to include any person presenting a check for payment was reasonable, the 5th Circuit concluded that "a bar on a [national] bank's ability to charge fees to persons presenting checks for payment would clearly and irreconcilably conflict with the OCC's allowance of the charging of such fees."¹⁴ The Baptista II court adopted the conflict preemption rationale of the 5th Circuit and held that Fla. Stat. § 655.85 is preempted by section 7.4002 of the OCC's regulations promulgated pursuant to the NBA, which authorizes national banks to establish non-interest charges and fees in connection with their services. Specifically, the court concluded that "the state's prohibition on charging fees to nonaccount- holders, which reduces the bank's fee options by 50%, is in substantial conflict with federal authorization to charge such fees."¹⁵ Accordingly, the 11th Circuit viewed that such conflict with federal law satisfied the preemption standard under Barnett.

The OCC Interprets the Barnett Standard Under Title X of the Dodd-Frank Act

A) Title X of the Dodd-Frank Act

Pursuant to Title X of the Dodd-Frank Act, effective July 21, 2011, preemption of a "state consumer financial law"¹⁶ is permissible only if:

1. application of the state law would have a discriminatory effect on national banks as compared to state banks;
2. "in accordance with the legal standard for preemption in [Barnett], the [s]tate consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers," with such preemption determination being made either by a court or the OCC (by regulation or order), in either case on a "case-by-case" basis; or
3. the state law is preempted by another provision of federal law other than Title X of the Dodd- Frank Act.¹⁷

For further discussion on the background of the federal preemption doctrine and the impact of the Dodd-Frank Act on the availability of federal preemption for national banks and federal thrifts, see V. Gerard Comizio & Helen Y. Lee, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Impact on Federal Preemption for National Banks and Federal Thrifts.¹⁸

B) The OCC Preemption NPR

On May 12, 2011, Acting Comptroller of the Currency John Walsh sent a letter to Senator Thomas R. Carper (D-Del) to, among other things, address the agency's interpretation of the second prong of the preemption test specifically requiring application of the Barnett standard. In the letter, Acting Comptroller Walsh noted:

On May 25, 2011, the OCC issued the Preemption NPR, which largely echoed and expanded upon the May 12th OCC Letter regarding the OCC's interpretation of the preemption provisions of the Dodd- Frank Act and their impact on existing OCC regulations.²⁰

In determining the impact of the preemption provisions of the Dodd-Frank Act on existing OCC regulations, the OCC proposed in the Preemption NPR to:

• amend 12 C.F.R. § 7.4000 to incorporate the Dodd-Frank Act's codification of Cuomo v. Clearing House Association, L.L.C.,²¹ by clarifying that "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," however adding that non-judicial investigations generally do constitute an exercise of visitorial powers;²²
• rescind current 12 C.F.R. § 7.4006 which is applicable to operating subsidiaries, in light of the Dodd-Frank Act's overruling of the Supreme Court's decision in Watters v. Wachovia Bank, N.A.²³ and elimination of preemption of state law for national bank subsidiaries, agents and affiliates;
• add new 12 C.F.R. §§ 7.4010 and 34.6, which pegs the preemption standards and visitorial powers provisions applicable to federal savings associations and their subsidiaries to those applicable to national banks and their subsidiaries;
• amend the deposit-taking and general lending regulations at 12 C.F.R. §§ 7.4007 and 7.4008, and the real estate lending regulation at 12 C.F.R. § 34.4, to remove the portions of such regulations which provide that state laws that "obstruct, impair, or condition" a national bank's powers are not applicable to national banks, and to clarify that a state law is not preempted to the extent consistent with the Barnett decision; and
• remove 12 C.F.R. § 7.4009 in its entirety, which has historically been used as a catch-all regulation that applies the "obstruct, impair or condition" standard as the general regulatory preemption standard for state laws not governed by the OCC's deposit-taking and lending regulations, to "remove any ambiguity that the conflict preemption principles of the Supreme Court's Barnett decision are the governing standard for national bank preemption."²⁴

Interestingly, the Preemption NPR does not propose to amend 12 C.F.R. § 7.4002, which provides national banks with express authority to impose non-interest charges and fees in connection with their services. This express authority for national banks to charge fees for their services served as the basis for the Baptista court's determination that the Florida law at issue was in "clear conflict" with federal law, as "the OCC specifically authorizes banks to charge fees to non-account-holders presenting checks for payment."²⁵

With respect to any existing precedent relying on the "obstruct, impair, or condition" regulatory standard, which the OCC stated "has created ambiguities and misunderstandings regarding the preemption standard that it was intended to convey," the Preemption NPR asserts that the "precedent remains valid, since the regulations were premised on principles drawn from the Barnett case. Going forward, however, that formulation would be removed as a regulatory preemption standard."²⁶ Therefore, as reflected in the May 12th OCC Letter and the Preemption NPR, the OCC appears to have concluded that past and existing OCC practice has been consistent with the Barnett legal standard for preemption all along – specifically by applying the principles of conflict preemption rather than any particular formulation. As explained by the OCC, the proposed elimination of the "obstruct, impair, or condition" language was simply intended to clarify and "remove any ambiguity" that the conflict preemption principles of the Barnett decision serve as the governing standard for future preemption determinations of the OCC.

The OCC's position on the implication of removal of the "obstruct, impair, or condition" language was criticized by opponents submitting public comments. Notably, the General Counsel of the U.S. Treasury Department submitted an unprecedented comment letter which challenged, among other things, the OCC's position that "the new Dodd-Frank standard would not change the outcome of any previous determination, and the same logic would apply to any future determination."²⁷

The U.S. Treasury Department cited the following three "principal concerns" with respect to the Preemption NPR: (1) "it is not centered on the key language" of the Dodd-Frank Act's preemption standard, and instead seeks to broaden the standard; (2) even though the proposed rule deletes the OCC's current "obstruct, impair, or condition" standard, the rule asserts that preemption determinations based on that eliminated standard would continue to be valid; and (3) the rule could be read to preempt categories of state laws in the future, even though Dodd-Frank requires that preemption determinations be made on a "case-by-case" basis, and after consultation with the Consumer Financial Protection Bureau where appropriate.²⁸

With respect to the OCC's position that its removal of the "obstruct, impair, or condition" language would not affect the precedent relying on such language, the U.S. Treasury Department noted:

It remains to be seen whether the OCC's implementing regulations for the preemption provisions of the Dodd-Frank Act will be finalized in the near future given the foregoing, and unclear as to what its final scope will be. The real question is whether the U.S. Treasury Department's letter is a shot across the bow of the OCC that portends infighting within the Obama Administration on its policies on preemption and state consumer financial laws.

Additional Guidance on "Prevent or Significantly Interfere" Standard and "Other Formulations" of Barnett Conflict Preemption Principles to Come

Notwithstanding the view of the OCC and its supporters that the Dodd-Frank Act did not change much in terms of the applicable preemption analysis, we anticipate that as the Barnett preemption standard for state consumer financial laws is further developed through application by the courts and the OCC after the effective date of the provisions, increasing emphasis will likely be placed on the literal requirement that a state law must either "prevent" or "significantly interfere" with a national bank's authorized powers, before it may be preempted. We anticipate this shift towards a literal reading and parsing out of the standard in light of the mandate in the Dodd-Frank Act for OCC preemption determinations (by regulation or order) based on the Barnett standard to be supported in the record by "substantial evidence" that preemption is consistent with that standard. The requirement for substantial evidence would obligate the OCC to demonstrate, by means of substantial evidence, that a particular state law either outright prevents a national bank (or federal savings association, as of July 21, 2011) from engaging in its federally authorized activities or, if the state law simply poses a burden on a national bank (or federal thrift), the OCC must show, by means of substantial evidence, that the burden amounts to significant interference with the bank's federally authorized activities.

In regard to what amounts to "significant" interference, some courts citing to Barnett have commented on the fact-specific inquiry that would need to be made for a state law that – if not outright preventing but merely imposing a burden on a national bank or federal thrift seeking to exercise its federally authorized powers – the burden amounts to significant interference with the bank's or thrift's activities as a matter of law.³⁰ For example, in Parks v. MBNA America Bank, N.A., a preemption case currently pending review at the California Supreme Court (and therefore cannot be cited as precedent pursuant to California law due to the fact that the case is under review) involving state law disclosures on convenience checks, the lower court in Parks distinguished between some burden (which a requirement for compliance with a state law will invariably impose), and a burden that amounts to "significant impairment" of a national bank's federally authorized power as a matter of law:

Accordingly, we expect to see additional guidance from the courts and the OCC in regard to what types of burdens imposed by a state law meet – and consequently, do not meet – the "prevent or significantly interfere" standard under Barnett.

A significant determinant on how far the "prevent or significantly interfere" standard – and jurisprudence surrounding such standard – will be developed is the extent to which the OCC is successful with its position announced thus far. It was clear in the May 12th OCC Letter and Preemption NPR that OCC does not intend to be bound by any strict requirement to apply the "prevent or significantly interfere" formulation articulated in Barnett, but instead the OCC seeks to reserve for itself the ability to apply other judicial "formulations" of the conflict preemption legal standard articulated in Barnett.

Accordingly, if the OCC's position ultimately prevails, other "formulations" of the "conflict preemption legal standard" articulated in Barnett (which, as the OCC points out, includes the cases cited in Barnett) that could be articulated in future OCC preemption determinations include:

• whether the state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress;"³²
• whether compliance with both statutes may be a "physical impossibility;"³³
• whether the state law "unlawfully encroaches" on the rights and privileges of national banks;³⁴
• whether the state law would "destroy or hamper" national banks' functions;³⁵ and
• whether the state law "interferes with, or impairs national banks' efficiency" in performing the functions by which they are designed to serve the federal government.³⁶

The U.S. Treasury Department and other critics of the Preemption NPR assert, however, that the OCC's position that the "prevent or significantly interfere" language and other "formulations" of the conflict preemption standard articulated in Barnett are equally applicable for preemption determinations with respect to state consumer financial laws "essentially reads the "prevents or significantly interferes" language out of the statute" and that "[t]he avoidance of the specific standard is inconsistent with the plain language of the statute and its legislative history."³⁷ In this regard, the U.S. Treasury Department notes "[w]hile it is proper to look to the Barnett opinion to interpret the "prevents or significantly interferes" standard, we believe that Congress intended "prevents or significantly interferes" (as used in Barnett) to be the relevant test, not some broader test encompassing the entirety of the Barnett opinion."³⁸

Conclusion

While recent court decisions and OCC issuances present favorable guidance for federally chartered depository institutions with respect to how the preemption provisions of the Dodd-Frank Act are likely to impact their interstate operations, there is much more to be shaped in the preemption landscape, particularly as the preemption provisions of Title X of the Dodd-Frank Act become effective later this month. In particular, the OCC has been met with intense criticism (as well as strong support) with respect to its interpretation of particular aspects of the statutory standards for making preemption determinations under the Dodd-Frank Act and the agency's current plans to amend its regulations to reflect such interpretation. Therefore, it remains to be seen what the proposed implementing regulations of the OCC will look like in final form.

Finally, the recent nomination of Thomas Curry, a former Massachusetts Commissioner of Banks and current board member of the Federal Deposit Insurance Corporation, to the OCC further muddies the waters on preemption as the banking industry seeks to understand whether the nomination by the Obama Administration of a former state banking commissioner from a pro-consumer state is intended to convey any signals on federal policies in this important area.

The continued uncertainty in the preemption area will cause federally chartered banks to chart a cautious preemption course for the near term in addressing state consumer financial laws.

Action Plan

We recommend that national banks and federal thrifts apply a proactive approach in identifying the state laws that may potentially apply to your operations, in order to gauge and be prepared for the potential business impact that a new and more narrow preemption standard under the Dodd-Frank Act may have. A comprehensive review of state laws in the form of a 50-state survey should include the full scope of laws potentially applicable to your operations, including in the areas of lending, deposit-taking, trust and fiduciary laws, UDAPs, data privacy and e-commerce laws.

Footnotes

1 Public Law 111–203, 124 Stat. 1376 (2010).

2 Baptista v. JP Morgan Chase Bank, N.A., 640 F.3d 1194 (11th Cir. 2011) (hereinafter "Baptista II").

3 Letter dated May 12, 2011 from Acting Comptroller of the Currency John Walsh to Senator Thomas R. Carper, available at http://op.bna.com/bar.nsf/id/cbre-8gtg38/$File/occletter.pdf.

4 76 Fed. Reg. 30557 (May 26, 2011).

5 Baptista II, 640 F.3d at 1196, citing Baptista v. JP Morgan Chase Bank, N.A., No. 6:10-cv-139-Orl-22DAB, 2010 WL 2342436 (M.D.Fla. June 4, 2010) (hereinafter "Baptista I").

6 Fla. Stat. § 655.85 provides "... an institution may not settle any check drawn on it otherwise than at par."

7 Baptista II, 640 F.3d at 1196.

8 Baptista I, 2010 WL 2342436 *2-3.

9 Wells Fargo Bank of Texas N.A. v. James, 321 F.3d 488 (5th Cir. 2003) (hereinafter "Wells Fargo").

10 Id. at 491.

11 Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) (hereinafter "Barnett").

12 Wells Fargo, 321 F.3d at 491.

13 Id. at 491-492, citing to U.S. Const., Art. VI, cl. 2 and Barnett, 517 U.S. at 31.

14 Baptista II, 640 F.3d at 1198, citing to Wells Fargo, 321 F.3d at 495.

15 Id.

16 A "state consumer financial law" is 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." Dodd-Frank Act, § 1044, codified in relevant part at 12 U.S.C. § 25b(a)(2) (eff. July 21, 2011).

17 Dodd-Frank Act, § 1044, codified in relevant part at 12 U.S.C. § 25b(b) (eff. July 21, 2011).

18 Available at http://www.paulhastings.com/assets/publications/1668.pdf?wt.mc_ID=1668.pdf. See also V. Gerard Comizio & Helen Y. Lee, Understanding the Federal Preemption Debate and a Potential Uniformity Solution, Business Law Brief, Spring/Summer 2010 (advocating the development and adoption of a Uniform Banking and Consumer Protection Act to achieve uniform state banking regulation and conformity with federal banking law).

19 May 12th OCC Letter, p. 2.

20 Available at http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-62.html. The Preemption NPR was published in the Federal Register on May 26, 2011, at 76 Fed. Reg. 30557 (May 26, 2011).

21 129 S. Ct. 2710 (2009).

22 76 Fed. Reg. at 30564, citing to Cuomo v. Clearing House Assn., L.L.C., 129 S. Ct. 2710 (2009).

23 550 U.S. 1 (2007).

24 76 Fed. Reg. at 30563.

25 Baptista II, 640 F.3d at 1198.

26 76 Fed. Reg. at 30563.

27 U.S. Department of the Treasury Comment Letter to OCC-2011-0006, p. 2-3 (June 27, 2011) (hereinafter "Treasury Comment Letter").

28 Treasury Comment Letter, p. 1.

29 Id. at 2.

30 See, e.g., Am. Bankers Ass'n v. Lockyer, 239 F.Supp. 2d 1000, 1014-17 (E.D. Ca. 2002) (noting that "[t]here is, however, no authority that provides a yardstick for measuring when a state law "significantly interferes with," "impairs the efficiency of," "encroaches on," or "hampers" the exercise of national banks' powers" and concluding that "the [disclosure requirement] is preempted because the required disclosures are both significant in length and intrude on the highly valued space on the front page of the [credit card] statement, and additionally, the phone bank requirements are costly and burdensome...."); see also Parks v. MBNA Am. Bank, N.A., 109 Cal. Rptr. 3d 248, 256-57 (Cal. App. 4th Dist. 2010) (requiring a factual showing of significant impairment because "according to the United States Supreme Court, the preemption test is not whether the law causes "any" impairment of the exercise of banking powers; the test is whether such impairment is "significant"" and noting that "some disclosure laws are simply not significant enough to be preempted.") review granted, 115 Cal. Rptr. 3d 535; 2010 Cal. LEXIS 8628 (Cal., 2010) (hereinafter "Parks"). We note that the Parks case cannot be cited as precedent, as the holding has been superseded by a grant of review.

31 Parks, 109 Cal. Rptr. 3d at 255-56. We note that the Parks case cannot be cited as precedent, as the holding has been superseded by a grant of review.

32 Barnett, 517 U.S. at 31 (internal citations omitted).

33 Id. (internal citations omitted).

34 Id. at 33 (internal citations omitted).

35 Id. (internal citations omitted).

36 Id. at 34 (internal citations omitted).

37 Treasury Comment Letter, p. 2.

38 Id.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.