On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Law (the DFA). (Pub. L. 111-203, H.R. 4173).1
The DFA has been characterized as the most sweeping change to financial regulation in the U.S. since the Great Depression. The DFA includes 16 titles; Title X is the Consumer Financial Protection Act of 2010 (CFPA). Title X establishes a new regulatory body called the Bureau of Consumer Financial Protection (the Bureau) with broad power to make law by enforcing, interpreting, and administering the CFPA as well as 18 federal statutes that already govern consumer financial services, such as the Truth-in-Lending Act, Equal Credit Opportunity Act, Real Estate Settlement Practices Act, and many others statutes enumerated in the CFPA and referred to in the CFPA as the “Enumerated Consumer Laws.” This article summarizes the most important aspects of Subtitle D (Sections 1041-48) of Title X, relating to the preemption of consumer financial laws. The text of Subtitle D is set forth in the Appendix.
The DFA is a sweeping new federal statute that envisions the creation of much new law by a new agency with vast powers. What impact will the DFA and the Bureau have on existing state law? To answer that question one needs to look at three categories that the CFPA deals with relating to preemption: (1) conflicts between state law and the CFPA; (2) conflicts between state law and the Enumerated Consumer Laws; and (3) conflicts between state law and federally chartered national banks and federal savings associations.
Conflicts between the CFPA and State Law
The rule for the first type of conflict – between state law and the CFPA -- is in Section 1041(a)(1), which provides that the CFPA does not preempt state law “except to the extent that any such provision of [state] law is inconsistent with the provisions of [the CFPA], and then only to the extent of the inconsistency.” Section 1041(a)(2) provides that a state law that affords greater protection to consumers is not inconsistent with the provisions of the CFPA. These are fairly common "anti-preemption" provisions found in numerous federal statutes today, including most of the Enumerated Consumer Laws.
Conflicts between Enumerated Consumer Laws and State Law
The rule for the second type of conflict – between state law and an Enumerated Consumer Law – is in Section 1041(b), which provides that the CFPA does not affect the provisions in any of the Enumerated Consumer Laws that address the preemptive effect of those laws, with the exception of Section 1083 (relating to the Alternative Mortgage Transaction Parity Act of 1982.) In other words, the CFPA does not change the preemption analysis for any of the Enumerated Consumer Laws, except for that one statute (which basically says that states cannot prohibit alternative mortgage transactions).
The rule for the third type of conflict – between state law and the statutes that govern national banks and federal thrifts, i.e., the National Bank Act (NBA) and the Home Owners’ Loan Act (HOLA) – is set forth in Sections 1044 and 1046, respectively. Section 1044 applies only to national banks, which are regulated by the Office of the Comptroller of the Currency (OCC). Section 1044 provides that “state consumer financial laws”2 are preempted only in three circumstances: (1) the state law discriminates against a national bank in favor of a bank chartered in that state; (2) in accordance with the decision in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, 517 U.S. 25 (1996), the “state consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers”; or (3) the state law “is preempted by a provision of Federal law other than this title.” Existing preemption rules of the OCC outside of State Consumer Financial Laws are not affected by the CFPB including those relating to state licensing requirements and national trust operations.
Section 1046 establishes the very same rule for federal savings associations, which had historically been entitled to the broadest possible preemption, known as “field preemption,” for state laws that conflicted with the HOLA or regulations promulgated by the Office of Thrift Supervision (OTS). Section 1046 explicitly states that federal savings associations are subject to the same preemption standard as national banks (as set forth in Section 1044) and that they are not entitled to field preemption.
Changes in OCC Practices for Preemption Determinations
The CFPA makes sharp changes to existing OCC practices with respect to preemption determinations. Under prior law, the OCC made preemption determinations for national banks on a categorical basis under a standard promulgated by the OCC that preempted any state law that “obstructs, impairs, or conditions” the exercise of a national bank’s powers.3 OCC preemption decisions must now be made in accordance with the standard set forth in Section 1044 (discussed above). Moreover, under Section 1044, preemption determinations must be made on a case-by-case basis by the Comptroller herself, without delegation of the role to another officer or employee and she must first consult with the Bureau. Further, the Comptroller’s preemption determination are not entitled to Chevron deference when reviewed by a court.
No Preemption for Operating Subsidiaries of National Banks
The CFPA overturns the decision of the Supreme Court in Watters v. Wachovia, 550 U.S. 1 (2007), which held that operating subsidiaries of national banks are entitled to the same preemption from state law as their national bank parents. Sections 1044 and 1045 provide that operating subsidiaries are subject to the same laws as any other entity subject to state law.
Supreme Court Visitorial Powers Decision Affirmed
Section 1047 adopts the holding of the Supreme Court in Cuomo v. Clearing House Ass’n, 129 S.Ct. 2710 (2009). In Cuomo, the Court held that the power to exercise supervisory authority over federally chartered institutions, such as the routine examination of the books and records of the institution, is held by the primary banking regulator and not by the states. The Court also held that this exclusive visitorial power does not displace the traditional law enforcement authority of state attorneys general to enforce compliance with non-preempted laws. The ability to conduct such law enforcement activities, however, is limited to civil litigation and may not be accomplished through state administrative enforcement actions.
Interest Rate Exportation Preserved
In Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978), the Supreme Court held that, under Section 85 of the NBA, a national bank may charge out-of-state credit card customers the interest rate permitted by its home state, without regard to the usury limitations of the customer’s state of residence. Section 1044 expressly preserves this power to “export” interest rates for national banks. This has been touted as one of the few things in Title X that is advantageous to the financial services industry.
Consumer Protection Regulations in Response to State Action
Section 1041(c) provides that the Bureau “must engage in rulemaking whenever a majority of the States has enacted a resolution in support of the establishment or modification of a consumer protection regulation by the Bureau.”
Enforcement of CFPA By States
Section 1042(a)(1) authorizes states attorneys general to bring civil actions in state or federal court “to enforce provisions of this tile or regulations issued under this title....” Also under this section, a “state regulator may bring a civil action or other appropriate proceeding to enforce the provisions of this tile or regulations promulgated under this title with respect to any entity that is State chartered, incorporated, licensed, or otherwise authorized to do business under State law....”
Under Section 1042(a)(2), only an attorney general may bring a civil action against a national bank or federal savings association “to enforce a regulation prescribed by the Bureau under a provision of this title and to secure remedies under provisions of this title or remedies otherwise provided under other laws.”
Under Section 1042(a)(3), “before initiating any action in a court or other administrative or regulatory proceeding against any covered person as authorized by subsection (a) to enforce any provision of this title, including any regulation prescribed by the Bureau under this title, a State attorney general or State regulator shall timely provide a copy of the complete complaint to be filed and written notice describing such action or proceeding to the Bureau and the prudential regulator, if any, or the designee thereof.” There is no requirement of consent, only notice. In any action brought by a state attorney general or regulator after giving notice to the Bureau, the Bureau may intervene, remove to federal court, and be heard on all matters arising in the action.
Preservation of Existing Contracts
Section 1043 preserves interpretations issued by the OCC and the OTS regulations regarding the applicability of state law to any contract entered into on or before the effective date of the CFPA by national banks, federal savings associations, or their subsidiaries.
Section 1048 provides that the effective date for Subtitle D of Title X is “the designated transfer date.” The Secretary of the Treasury has designated July 21, 2011, as the designated transfer date.
1 According to the preamble, the law is intended “[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” The scant legislative history is contained in the Joint Explanatory Statement of the Committee of Conference in the Conference Report (111-517) to accompany H.R. 4173.
2 Section 1044(a) provides that “[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.”
3 12 C.F.R. § 7.4009(b).
Stephen G. Harvey and Richard P. Eckman
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