WASHINGTON — The Treasury Department has unexpectedly allied with state regulators and consumer groups in their bid to force the Office of the Comptroller of the Currency to dial back its preemption standards.
The Obama administration
"Although Congress adopted a specific preemption standard in Dodd-Frank, the OCC's rule articulates a preemption standard that is broader than the language of the Dodd-Frank standard," Treasury General Counsel George Madison wrote to the OCC.
It is relatively unusual for federal agencies to weigh in on another regulators' proposal, but even more rare in this case. The OCC is nominally a bureau of Treasury, but the administration has only limited oversight of the agency.
At issue is language used by the OCC to preempt state consumer protection laws. The agency has said it can preempt laws that "obstruct, impair or condition" the business of banking.
But those words were not part of the 1996 Barnett Supreme Court decision, which Dodd-Frank said should be the preemption standard.
In a proposal issued May 26, the OCC dropped the controversial language, but still said its previous rulings stood intact.
In his letter, Treasury's Madison said that did not make sense.
"The proposed rule validates all prior preemption determinations, including those based on its deleted 'obstruct, impair or condition' standard," Madison wrote. "In our view, this position is contrary to Dodd-Frank."
Madison said the OCC was trying to ignore the law.
"The notion that the new standard does not have any effect runs afoul of basic canons of statutory construction; it is also contrary to the legislative history, which states that Congress sought to 'revise the standard the OCC will use to preempt state consumer protection law,'" he wrote.
Treasury said the OCC should rely on the Supreme Court ruling, which said the OCC could preempt state law that prevents or "significantly interferes" with the business of banking.
"The OCC rule, however, essentially reads the 'prevents or significantly interferes' language out of the statute," Madison wrote. "Specifically, the rule takes the position that Congress sought to codify the Barnett opinion, but not any particular formation in the opinion. This avoidance of the specific standard is inconsistent with the plain language of the statute and its legislative history."
An OCC spokesman said, "We appreciate the important points raised in the comments submitted by Treasury and other commenters, and we will be closely reviewing all the comments we've received as we finalize the regulation."
The administration largely agrees with state regulators, who said it was obvious Congress wanted to ease preemption standards.
"I think it's fairly clear they missed large chunks of what Congress was asking them to do," said Buz Gorman, general counsel for the Conference of State Bank Supervisors.
The impact of the letter is unclear, but it likely means that the White House will accelerate its plan to appoint a replacement for John Dugan, who left the agency in August of last year.
Since then, Acting Comptroller John Walsh has come under heavy fire for the agency's interpretation of preemption and comments in London last week suggesting that regulators were going overboard in their demand for the biggest banks to hold even higher capital.
The administration is widely expected to nominate former Massachusetts Banking Commissioner Tom Curry for the job, but it is unclear how Curry, a registered independent, views the preemption issue.
In their own comment letters, state advocates said the OCC's plan ignores the balance that Dodd-Frank struck between state and federal laws, and violates the plain language and intent of the law.
The National Association of Attorneys General said Congress rejected the OCC's 2004 preemption rule, which said that national banks do not have to comply with any state laws that "obstruct, impair or condition" the business of banking.
While the agency has said the new language was an attempt to "distill" the Barnett standard, the attorneys general said the OCC "is clearly attempting to maintain its current standard for preemption, in direct opposition to the requirements of the Dodd-Frank Act."
"Congress rejected the standard currently used by the OCC by specifically including the 'prevent or significantly interfere,'" the attorneys general wrote. "By stating that precedents based on the 'obstruct, interfere, or condition' language remain valid, the OCC is subverting the intention of Congress by essentially continuing to use the standard that was rejected by Dodd-Frank to preempt state consumer financial laws."
Gorman said Congress clearly articulated in statute and in congressional reports on their deliberations that the Barnett standard was "prevent or significantly interfere."
"To say that the previous standard of 'obstruct, impair or condition' is still valid is just completely contrary to what Congress has set forth in black-letter law and described in their deliberations," agreed Matt Lambert, a policy analyst for the supervisor group.
In addition, they said Dodd-Frank required the OCC to review state laws on a case-by-case basis, while the new proposal appears to maintain the OCC's posture in favor of broad preemption going forward.
Treasury's Madison also objected to that part of the plan.
"To the extent that the OCC seeks to preempt categories of state consumer financial laws going forward, rather than through a case-by-case approach (and after consulting with the CFPB in appropriate instances), that would not comply with Dodd-Frank," Madison wrote.
Bankers, meanwhile, have argued the OCC read the law correctly. "Bank of America strongly agrees that the 2004 regulations were a codification of the existing Supreme Court preemption principles and that the regulations are consistent with Barnett," wrote Kenneth L. Miller, deputy general counsel of the bank.
"Any contrary interpretation that a new, narrower standard was being created by the Dodd-Frank Act would be legally incorrect and would have significant negative consequences for the national banking system."
He was backed by Stephen M. Cutler, general counsel of JPMorgan Chase & Co.
"The proposed preemption rule faithfully implements this congressional mandate, and will thereby lower the cost of banking services for consumers and preserve the congressional mandate, and will thereby lower the cost of banking services for consumers," he wrote.
