Damming Watters: Channeling the Power of Federal Preemption of State Consumer Banking Laws

54 Pages Posted: 10 Nov 2007 Last revised: 14 Oct 2008

See all articles by Elizabeth Rose Schiltz

Elizabeth Rose Schiltz

University of St. Thomas School of Law (Minnesota)


In Watters v. Wachovia, 127 S. Ct. 1559 (2007), the Supreme Court reversed two presumptions about federal preemption of state law that historically have guided the delicate balance between state and federal authority over consumer protection in banking services - the presumption that issues involving consumer protection are quintessentially matters of state rather than federal prerogative and the presumption that national banks are subject to nondiscriminatory laws of the states where they are located, except where federal law expressly preempts such law.

This article analyzes the dramatic impact of Watters' reversal on two different areas - consumer protection in banking services and the continued vitality of the uniquely American dual banking system. The first part of the article traces the evolution of consumer protection law in the banking industry through three stages. The first was the gradual expansion of the preemptive effect of a particular federal usury statute for national banks through a combination of action by federal banking agencies and case law. The second stage was the assertion by federal banking regulators of a broad theoretical framework for federal preemption of state banking law based not on any particular federal statute, but rather on a theory of congressional intent to permit national banks to provide consistent banking services nationwide. The third stage was the validation of that broad conflict preemption theory by the Supreme Court in Watters. The article demonstrates how the reversal of the historic presumption has recently played itself out in the preemption of state laws governing bank-issued gift cards, culminating in the first citation of Watters in SPGGC, LLC v. Ayotte, 488 F.3d 525 (2nd Cir. 2007).

While challenging the proposition reflected in most recent scholarship in this area that federalization of consumer protection law necessarily entails deregulation, in this article I nevertheless conclude that Watters will have a significant adverse effect on the continued vitality of the dual banking system. Arguments for preserving the "dual banking system" arise out of our nation's fundamentally federalist sensibilities. From that perspective, a recent shift in the tenor of arguments for the preserving the dual banking system from the benefits of competition (states as laboratories of reform) to arguments based on the principle of subsidiarity (states as more responsive units of government where democratic ideals are more fully realized) can be observed. I argue that the subsidiarity arguments are likely to be more persuasive in convincing Congress to intervene to address the imbalance between the state and national banking system exacerbated by the Watters decision. I conclude by proposing that Congress partially reverse Watters by validating a recent proposal by the primary federal regulator of state banks to extend preemption authority to state banks, thus preserving to states the authority to offer a meaningful alternative to the national banking system on the level of consumer protection.

Keywords: banking law, consumer protection, state banking law, federal preemption, financial services, financial regulation, subsidiarity

Suggested Citation

Schiltz, Elizabeth Rose, Damming Watters: Channeling the Power of Federal Preemption of State Consumer Banking Laws. Florida State University Law Review, Vol. 35, p. 893,2008; U of St. Thomas Legal Studies Research Paper No. 07-40. Available at SSRN: https://ssrn.com/abstract=1028886

Elizabeth Rose Schiltz (Contact Author)

University of St. Thomas School of Law (Minnesota) ( email )

MSL 400, 1000 La Salle Avenue
Minneapolis, MN Minnesota 55403-2005
United States
651-962-4922 (Phone)
651-962-4971 (Fax)

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