For eight months after the enactment of the Dodd-Frank Act, it has been conventional wisdom that federal preemption of state banking laws was rolled back at least somewhat, dealing the Office of the Comptroller of the Currency and national banks a significant blow.
But a growing number of preemption experts are arguing that is dead wrong, saying the regulatory reform law left preemption largely untouched despite the addition of ambiguous language that consumer advocates and others see as weakening it.
"The substance of the federal preemption analysis hasn't changed at all," said Robert Cook, a partner at Hudson Cook.
He is hardly alone. Howard Cayne, a partner at Arnold & Porter, has given speeches to fellow lawyers entitled "Reports of the Death of National Bank Preemption Have Been Greatly Exaggerated."
Rodgin Cohen, a partner at Sullivan and Cromwell LLP, delivered a speech last month to the Clearing House Association emphasizing that preemption was fully intact after Dodd-Frank.
Although the Office of the Comptroller of the Currency has been silent on the law's impact since it was enacted last year, officials behind the scenes strongly agree with Cohen and Cayne.
At issue is how much Dodd-Frank really changed preemption. The law explicitly mentions the 1996 Barnett Supreme Court case, which said the OCC could preempt state laws on a case-by-case basis. But it also said the OCC could preempt "any state consumer financial law that prevents or significantly interferes with the exercise by the national bank."
The problem is that both state advocates and preemption supporters interpret Barnett differently. For some, the OCC and national banks won in Dodd-Frank merely because it refers to Barnett.
"By referencing Barnett, Barnett is the most relevant, pertinent, applicable statement of preemption," Cayne said. "As a result of it embracing the Barnett case, Congress made no change to preemption as it applies to national banks because Barnett is the guiding force."
But state advocates and consumer groups disagree, arguing the additional language — that a law must "significantly interfere" with the business of banking — makes it harder for the OCC or banks to preempt state laws.
"The Congress has clarified that Barnett means exactly what it says, which is 'significantly interferes,' which is not an easy standard to meet," said Art Wilmarth, a professor at George Washington University Law school.
The OCC "fought tremendously hard to keep the words 'significantly interferes' out," Wilmarth said. "My view is since this is the law related to consumer protection powers, general laws are subject to a more demanding standard."
Cayne, however, said the language merely refers back to Barnett and doesn't change anything.
"States say by those words, it limited Barnett," he said. "By our view it did no such thing. Those are just some ways to describe Barnett, but the statute in its entirety adopts Barnett."
To be sure, both sides agree Dodd-Frank did make some changes. For example, the regulatory reform law essentially reversed the Supreme Court case Watters v Wachovia, which said operating subsidiaries enjoy the same preemption rights as their parent companies.
Cook also contends that the law, while it does not fundamentally change the ability of national banks to preempt local statutes, adds a few more steps in the process.
"What's changed is the hurdles you have to go through to claim preemption," he said. "I don't think it changes the landscape. … The test whether a state law is preempted is essentially the same as pre-Dodd-Frank. What's clearly changed is the way you have to go about showing preemption whether you are the OCC or a bank making its case before a court."
The key test is likely to come after July when the Dodd-Frank provisions go into effect. Both sides expect a court challenge of some kind shortly afterward and are already gearing up. The Clearing House Association, for example, has formed a group devoted to preemption issues.
But it has already become clear what the battle lines will look like. The OCC and its supporters will argue on several fronts, including that Dodd-Frank only covered consumer laws, not banking ones dealing with mortgage licensing, and applies a case-by-case standard only for future rulings. Since it does not directly amend the National Bank Act's preemption provision, and the OCC has relied on Barnett in previous rulemakings on the issue, the agency's supporters said preemption is as strong as ever.
But state regulators and consumer groups said it is clear Congress intended to weaken preemption, and the new wording does so.
"From our view the congressional intent to rebalance or recalibrate the state federal balance is pretty clear in terms of the preemption language and what Congress wanted to do," said Margaret Liu, senior vice president and deputy general counsel for the Conference of State Bank Supervisors.
Alan Kaplinsky, a partner at Ballard Spahr LLP, said a sea change in preemption did happen by the mere mention of the phrase "significantly interferes."
"It's pretty clear to me that Dodd-Frank does not uphold the validity of those OCC-OTS regulations but rather it says the test that will apply is the Supreme Court Barnett test, which requires 'significant' impairment," Kaplinksy said. "Dodd-Frank eliminates the ability of the OCC to issue regulations, broadly sweeping aside state law. Rather, it's got to look at state law on a case-by-case basis to see if there is significant impairment and Dodd-Frank eliminates the deference which courts have given to the comptroller. When all is said and done this is an enormous shift in the way national banks have been operating."
He also said it would be ill advised for national banks to follow the OCC's interpretation that not much has changed.
"Banks would not be going through that kind of trouble if they believe it's business as usual, and a bank that thinks it's business as usual will be sadly mistaken when state attorneys general or class-action lawsuits get filed for them not following state law," Kaplinsky said.
The preemption advocates also argue that the law's requirement for an OCC case-by-case determination of preemption refers only to future determinations, and previous agency rulings still stand.
Privately, OCC officials say their controversial 2004 preemption guidance still stands. The rule, which broadly asserted the OCC's right to preempt state consumer protection law, essentially means that case-by-case determinations were no longer necessary.
CSBS officials claim, however, that Dodd-Frank clearly upturned the 2004 guidance.
"That in and of itself is a significant change," Liu said. "The fact that you are going back to Barnett and a case-by-case analysis is a significant change in the preemption landscape, and it's pretty clear that's what Congress wanted to do: to go back to pre-2004."
Michael Barr, the former Treasury assistant secretary for financial institutions, who helped negotiate the Dodd-Frank Act, agreed.
"On the OCC side there's a set of explicit references to doing case-by-case analysis rather than field preemption, which you can interpret the OCC as having done before," he said. "The standard that they used in the 2004 order departed somewhat from what was articulated in the Barnett Bank case, and this brings it back to that."
Richard Neiman, the New York banking superintendent, agreed that the OCC must return to a case-by-case analysis.
"It is clear they have scaled back the ability of the OCC to broadly utilize field preemption, and they do have to take this on a case-by-case" basis, Neiman said.
The preemption lawyers also argue that the states' assertion that Dodd-Frank changed preemption lies with early interpretations of the bill, not the final draft.
House Democrats attempted to eliminate preemption for consumer protection laws, but in conference committee last summer lawmakers revised the language markedly.
"The states continue to focus on what they were hoping for rather than what they got," Cayne said. "They are living in the past; i.e., they were happy with some of the initial legislative proposals and initiatives, and what they choose to believe is that is the new law but there are vast changes from the time legislation was introduced in the two chambers and what came out."
As a result, some observers are calling for the OCC to publicly clarify where it stands on the Dodd-Frank preemption language.
"At this point, we have four months to go before the July 21 date. I find it surprising that the OCC has not put out a notice of proposed rules saying here's what we think the Dodd-Frank standards do and what we need to revise in our rules," Wilmarth said. "As the responsible regulator, I think the OCC has an obligation to get this process started through rulemaking rather than let the courts sort it out, but if it doesn't get sorted out I'm sure it will go to litigation."
Neiman agreed clarity is needed soon. "Banks should be very careful to not pretend that nothing changed under Dodd-Frank under preemption, and they should take a hard look and consult with counsel," he said. "I urge the OCC to provide any guidance necessary to interpret preemption under Dodd-Frank, and the banks are going to request that. ... The sooner this is interpreted at the court level there will be further confusion around these issues."
But most observers agree the only way to resolve the fight is in court.
"We can look forward to some really interesting litigation," Cook said. "It's going to be absolutely fascinating."
