Dodd-Frank, the OCC, and Federal Preemption

While the Dodd Frank Wall Street Reform and Consumer Protection Act expands the jurisdiction of the Office of the Comptroller of the Currency by abolishing the Office of Thrift Supervision and transferring many of its functions to the OCC, the Act also restricts the OCC's preemption power over state law.  A good summary of the changes in federal preemption for federally chartered institutions can be found at Arnold & Porter's website.  One of the contacts listed is Jerry Hawke, who was an Under Secretary of Treasury for Domestic Finance in the Clinton Administration and the Comptroller under the Clinton and George W. Bush Administrations.

One of the effects of the Act is to change the law with respect to operating subsidiaries of national banks.  In 2007, the Supreme Court held in Watters v. Wachovia Bank that the operating subsidiary of a national bank benefited from the same preemption applicable to its parent.  Consequently, the Michigan Office of Insurance and Financial Services could not subject Wachovia Mortgage Corporation to its regulatory requirements.  (The Court divided 5 to 3 on this issue.  Justice Ginsburg wrote the opinion of the Court, and Justice Stevens wrote the dissent.  Chief Justice Roberts and Justice Scalia joined Stevens' dissent.  Justice Thomas did not participate in the case.)

The Watters case was very important to the OCC in 2007, and there was relief and happiness when the decision came down.  It vindicated the OCC in its reading of the law and its policy position with regard to preemption.  It is now turns out that the Watters victory was short-lived.

Also, in the area of consumer protection requirements, the Dodd-Frank Act limits the OCC's ability to preempt state law.  In general, in order to preempt state consumer protection laws, the Comptroller needs to find on a case-by-case basis that state law is "inconsistent" with federal law.  Tougher state requirements are not deemed to be inconsistent with federal law. [This is incorrect.  See correction below.]

While federal courts have generally upheld the OCC's assertion of preemption, which has been controversial, the Congress has as a matter of policy now limited federal preemption for federally chartered institutions.  The advantages of a national charter over a state charter have consequently been reduced, which may affect the decisions of banks going forward on what type of charter to have.  The OCC will now have to adjust to this change.

Correction (6/30/11):  The discussion above concerning what the OCC must determine on a case-by-case in order to preempt state consumer financial laws with respect to national banks is incorrect.  What the Dodd-Frank Act does in this area is currently a matter of contention, with the Treasury Department publicly disagreeing with the OCC, which is nominally a bureau of the Treasury, on what the statute does.  The Arnold & Porter paper referenced in this post summarizes the provision relating to the OCC and preemption of state consumer financial laws as follows:


"With respect to national banks and federal savings banks 
themselves, the NBA and HOLA (and their respective 
implementing regulations) will be deemed to preempt 
a state consumer financial law only if: (i) the state law 
would have a discriminatory effect on a national bank 
or federal savings bank in comparison with the effect 
of the law on a bank chartered by that state; (ii) under 
the legal standard for preemption articulated in Barnett 
Bank v. Nelson, 517 U.S. 25 (1996), the application of the 
state law would “prevent or significantly interfere with” 
a national bank’s or federal savings bank’s exercise 
of a federally granted power; or (iii) the state law is 
preempted by another federal law."    


The current controversy concerns with whether the words "prevents or significantly interferes with" narrows the OCC's preemption authority and whether earlier preemption prior to the effective date of the Act need to be reviewed on a case-by-case basis.  The OCC Notice of Proposed Rulemaking, which prompted the Treasury comment letter can be found here.  The OCC does agree that preemption does not extend to the subsidiaries of national banks.