Preemption May Not Be as Weak as You Heard
Hopkins, Cheyenne, American Banker
Byline: Cheyenne Hopkins
WASHINGTON - 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 in New York last month emphasizing that preemption was mostly 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. …