Dodd-Frank Act and National Bank Preemption: Much Ado About Nothing
Virgina Law and Business Review, Vol. 7, No. 2, pp. 303, Fall 2012
64 Pages Posted: 26 Apr 2012 Last revised: 17 Feb 2013
Date Written: April 25, 2012
Federal preemption of state law has been a contentious issue since 1819, when the Supreme Court upheld the right of the Federal Government to charter a national bank and preempted a state attempt to tax that institution. In 1863, the National Bank Act (NBA) established the national bank system, with the goal of having federally chartered institutions eventually supersede state banks. Efforts by the states to prevent this result and to enforce state laws on national banks led to a continuing debate over the preemptive effect of the National Bank Act over the next 150 years.
More recently, those opposed to preemption charged that the preemption policies of national bank’s federal regulator, the U.S. Office of the Comptroller of the Currency (OCC), contributed significantly to the risky mortgage lending practices that led to the financial crisis. This article finds that this hypothesis is without foundation. National banks were effectively prevented from engaging in predatory lending practices by federal regulatory actions. Further, the argument against preemption conflates predatory lending with subprime lending. The state anti-predatory lending laws were not aimed at 'responsible' subprime lending, which was encouraged by both the states and Federal Government as a means of increasing home ownership. Unfortunately, once housing prices began to collapse, these 'responsible subprime loans' began to massively default. Even with respect to subprime lending, the overwhelming majority of these loans were originated by state regulated entities, not subject to OCC preemption. In fact, financial holding companies that had national bank subsidiaries often used state regulated companies to originate subprime loans, thereby avoiding the more stringent underwriting standards imposed by the OCC.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the NBA with respect to preemption. Some commentators argue that the Dodd-Frank Act changed the standard used to determine if a state law is preempted. They argue that state law is only preempted if the law 'actually prevents or significantly interferes' with a national bank power. This article reviews the statutory language and legislative history of the Dodd-Frank Act, and concludes that the legislation did not make any material change in the traditional and long-standing conflict preemption standard applicable to national banks as described by the Supreme Court in the case of Barnett Bank v. Nelson.
The other changes made by the Dodd-Frank Act relating to national bank preemption are relatively minor. The Act provides that preemption does not apply to bank subsidiaries, but a national bank can merge the subsidiary into the bank and continue to engage in the activity under a uniform national standard. The Act states that a reviewing court shall apply a 'substantial evidence' test, rather than the 'arbitrary and capricious' test when reviewing OCC preemption determinations. But most courts would not view this as a meaningful difference. The courts are directed not to apply Chevron deference to OCC preemption determinations, but the OCC will continue to receive Chevron deference for opinions regarding the permissibility of national bank activities under the NBA. In addition, the OCC must act on a case-by-case basis when making preemption determinations, but this will not affect the precedential value of any OCC determination when a bank or a court is looking at an analogous state law.
The article also discusses the OCC amendment to its 2004 preemption regulation. In 2011, the OCC removed the phrase 'impairs, obstructs or conditions' as a touchstone for preemption. However, the OCC left in place the categories of state laws described in the regulation as presumptively preempted. The deletion of the phrase 'impairs, obstructs or conditions' will require national banks to be careful about relying on past OCC precedents that solely relied on those deleted words, but in light of the fact that the categories of preempted state law remain in the regulation, the deletion of the phrase should have limited impact on national bank activities.
In short, the Dodd-Frank Act preemption amendments effect relatively minor changes in the preemption area, and the concerns that the Act made significant changes to the preemption standard are, in reality, 'much ado about nothing.'
Keywords: preemption, national bank, national bank act, dodd-frank act, mortgages, mortgage loans, financial crisis, comptroller of the currency, predatory lending, subprime lending
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