WASHINGTON — Financial legal experts say two Supreme Court rulings on preemption and agency deference this year could strengthen state consumer protection laws against national bank preemption, require courts to apply more thorough independent judicial review of state banking laws and add pressure on the Office of the Comptroller of the Currency to revise its rules governing when national banks can skirt state laws.
"If I'm a national bank, I'm going to rethink my reliance on those preemption rules, given what the Supreme Court has said," said Alexandra Barrage, a partner at Troutman Pepper and former FDIC executive. "It seems likely to me that the 2nd Circuit will not grant judicial deference to the [OCC's] preemption rules, because the Administrative Procedures Act and the holding in Loper Bright says courts have to exercise their independent judgment, courts have to look at [whether] the agency acted within its statutory authority. Courts may not defer to an agency interpretation simply because the statute is ambiguous or unclear."
Many in the banking industry anxiously awaited
In that case — known as Cantero v. Bank of America — the plaintiff and borrower Mr. Cantero contended that Bank of America should pay interest on a mortgage escrow account as mandated by New York law, which requires such accounts receive a minimum of 2% interest. However, BofA — a federally chartered bank — argued that the National Banking Act preempts such state requirements, asserting that federal law should supersede state law.
The lower courts differed in their interpretations of preemption. The 2nd Circuit applied a "control" test, suggesting state laws can't control national banks' activities, while the 9th Circuit used an 'interference' test, determining that only state laws significantly hindering a national bank's operations would be preempted. The Supreme Court found both standards flawed and remanded the cases back to the lower courts and demanded they apply a nuanced analysis based on historical precedents and the significant interference standard as referenced in the Dodd-Frank Act.
Preemption is grounded in the Supremacy Clause of the U.S. Constitution, which establishes that federal laws override conflicting state laws. The OCC has historically interpreted its preemption authority expansively, particularly with its 2004 rules which explicitly preempted state laws affecting national banks' real estate lending, non-real estate lending and deposit-taking powers.
Section 1044 of Dodd-Frank codified a standard for preemption that was established in the Supreme Court's
Barrage notes that taken together, the two decisions upend how banks approach state consumer financial protection laws as the OCC's broad preemption rules must now face independent judicial review.
"They're going to impact how state consumer financial laws and the OCC's preemption rules are going to be understood by national banks, I think also inform how states understand national bank preemption — so it kind of goes both ways," she said. "Loper Bright preserves what's called
Barrage argues in this particular case the court may agree with the OCC's current preemption rules that allow national banks to make real estate loans without regard to state limits concerning escrow accounts. However, the very act of applying the Barnett precedent is a more rigorous process that does not automatically defer to the OCC's interpretation.
"If you only look at the preemption rules, you would — if you're a national bank — say 'game over, we don't have to implement what New York is telling us to do,'" Barrage said. "But I think what Loper Bright instructs is that, no, it's actually not game over. I think the 2nd Circuit will still look at precedent and affirm its decision by this time correctly applying Barnett and applying that 'prevents or significantly interferes with' test."
Julie Williams, general counsel at WilmerHale and former chief counsel and first senior deputy comptroller at the Office of the Comptroller of the Currency said in a podcast episode Tuesday that the decision essentially turns back the clock on national bank preemption. Rather than establishing a bright line as to what laws are preempted, the ruling introduces significant uncertainty for the banking industry.
"The banking industry would have liked the 2nd Circuit's 'control' test because very few state laws would have survived under that test," she said. "Where we are, ironically, is back to the case law that preceded Dodd-Frank, which gave rise to all of this kerfuffle and the jurisprudence that has developed over literally 150 years in construing national bank preemption."
Financial regulation and banking law expert Art Wilmarth says the OCC will have to demonstrate a persuasive basis for all of its rulings to qualify for Skidmore deference.
"The OCC will have to make more significant changes to its rules, because it will have to deal with the combined impact of Cantero and Loper," said Wilmarth. "Taken together, Cantero and Loper will make it much more difficult for the OCC to defend rulings that seek to exempt national banks from complying with nondiscriminatory state consumer financial laws and other state laws. The result should be a much more level playing field between national banks and state-chartered banks.
Barrage agrees, adding that the OCC preemption standards are long overdue for a refresh.
"At a minimum — and this is actually required by Dodd-Frank — they ought to take a 'fresh look' at the preemption determinations every five years as a technical matter, they're required to do that under 1044 of Dodd-Frank," she said. "It's not clear to me that they've done that."
Acting Comptroller of the Currency Michael Hsu Wednesday said his agency is reviewing its preemption regulations in light of Cantero, and those revisions are aimed at providing certainty for banks about when and whether state laws do not apply to nationally chartered banks.
"Fortifying core preemption powers will provide certainty where it matters the most — i.e., with regard to safety and soundness and compliance with federal laws and regulations … is legally absolute and non-negotiable, and the OCC will act accordingly to defend that," Hsu said. "At the same time, we are reviewing the agency's 2020 interpretation of preemption under the Dodd-Frank Act to determine whether updates are needed in light of the recent Cantero decision."
Looking ahead, Barrage notes that wherever the 2nd Circuit lands on Cantero, the need to independently review state laws on a case-by-case basis upends status quo, which could potentially lead banks to price in the additional uncertainty in the form of premiums on services and products.
"What's impacted here is pricing," she noted. "The [banks] amicus briefs probably will take the position that the state law, even though it's a consumer law, directly impacts how national banks price their products and how they function and that will be something I think the 2nd Circuit will consider, as it refreshes its analysis, adopting Barnett."
Williams argues that with banking more widespread and online than ever, preemption will continue to be a persistent issue as national banks can reach consumers in every jurisdiction.
"As you think about how financial products and services are delivered, how the banking business is conducted, it is one that … does not operate according to state lines," she said. "The ability to do business in multiple jurisdictions under a single recognized source of powers and consistent oversight of those powers, for the most part by one federal bank regulatory agency … becomes even more important as the business of banking evolves with the use of technology."
