By Rehm, Barbara A.
American Banker , Vol. 175, No. 132
Byline: Barbara A. Rehm
Defenders of federal preemption publicly insist the Dodd-Frank Act left things pretty much the way they were. The "Barnett standard," they will tell you, is plenty strong enough to maintain a single set of rules for national banks to follow.
But privately? Those same people concede they are worried, and they should be.
First, preemption is losing its biggest institutional champion. It's a safe bet the next comptroller of the currency will not be like the last three. Gene Ludwig, Jerry Hawke and John Dugan all went to the mat to defend (or even expand) preemption, but President Obama is likely to appoint someone who thinks the states should get a bigger say in how best to protect consumers.
In fact the administration sent a clear signal of its intent by not naming Julie Williams as acting comptroller. As the agency's chief legal counsel (and its acting head on two previous occasions) Williams was a key architect of the 2004 rulemaking that extended preemption to national bank operating subsidiaries. The administration didn't want her calling any of the shots, even on an interim basis, so when Dugan's term ended this month it went against tradition and selected the agency's chief of staff, John Walsh, to run the agency until it can get a successor nominated and confirmed by the Senate.
And no matter who the next Comptroller is, one big change has already occurred: under Dodd-Frank preemption no longer covers operating subsidiaries, affiliates or agents of national banks.
That's huge for the large national banks; they run their mortgage businesses from operating subsidiaries, and they no longer are protected from state rules and laws.
These companies are now weighing the cost of pulling those units back into their banks versus registering with all the states where they operate, including obtaining licenses, paying fees and ensuring that the proper disclosures to consumers are made.
What most people think Dodd-Frank did to preemption is this: it reinstated the Barnett standard laid out in a 1996 Supreme Court ruling. That standard said only a state consumer protection law that "prevents or significantly interferes" with a national bank's operations may be preempted.
"Interferes" is not defined.
The law has something called the "designated transfer date," and that's the day when the Office of the Comptroller of the Currency and the Office of Thrift Supervision merge.
The way some experts are reading Dodd-Frank, national banks (and federal thrifts) will lose the protection provided by preemption entirely on the date. (The law gives Treasury Secretary Tim Geithner until Sept. 21 to set the date, which must be between January and December 2011.)
"People who try to tell you that this is not a big deal are either spinning or they are misunderstanding what happened here. This is a huge deal," said Jeremy T. Rosenblum, a partner with the law firm Ballard Spahrin Philadelphia. "Come the designated transfer date the Comptroller's and the OTS's preemption regs go away, at least as to state consumer financial laws."
Dodd-Frank does say that the OCC will have to make its preemption determinations on a case-by-case basis, and if you read the law the way Rosenblum does, that means national banks must comply with every law or rule in the states where they operate or risk being sued.
"This is a country that loves its litigation. It's not a question of waiting for a state to come knocking on the door"to say a rule is not preempted, he said. …