The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) became law on July 21, 2010. The Dodd-Frank Act, which arose out of the recent financial crisis, is one of the most significant and sweeping pieces of financial services legislation enacted since the Great Depression. The provisions of the Dodd-Frank Act include, but are not limited to, the creation of a Financial Stability Oversight Council to identify and respond to any emerging risks in the financial system (attempting to end "too big to fail" bailouts) and the reformation of the Federal Reserve system.

One of the most important of the 16 Titles of the Dodd-Frank Act is the Consumer Financial Protection Act of 2010 (CFPA), codified in Title X of the Dodd-Frank Act. The CFPA contains many provisions that alter existing laws, and it establishes the Bureau of Consumer Financial Protection (the Bureau) as an independent "watchdog" organization with broad power and authority to write, interpret, examine, and enforce rules that provide consumers protection from financial institutions. One area in which the CFPA changes the law significantly is the federal preemption of state laws.

Preemption Before Dodd-Frank

Prior to the enactment of the Dodd-Frank Act, state financial laws were generally preempted by federal laws. For nearly 200 years, federal law has been held to be "supreme over state law with respect to national banking."1 In 1996, the Supreme Court in Barnett Bank v. Nelson held that a federal law permitting national banks to sell insurance in small towns preempted a state law prohibiting the sale by national banks of most types of insurance.2 The Court affirmed that states lacked the power to regulate national banks where doing so would "prevent or significantly interfere with the national bank's exercise of its powers."3

The National Bank Act and the Home Owners' Loan Act have been interpreted by federal banking regulations to preempt state laws to a significant degree. In 2004, the Office of the Comptroller of the Currency (OCC), interpreting the Supreme Court's decision in Barnett Bank, codified regulations providing for preemption of state laws that "obstruct, impair, or condition a national bank's" exercise of its federally granted powers.4 The OCC even provided a list of broad categories of state laws, including, but not limited to, laws regarding licensing, registration, and the terms of credit, that the OCC contended were preempted.5

Similarly, the Office of Thrift Supervision (OTS) adopted and promulgated its own regulations with respect to preemption in the field of federal savings associations.6 The OTS described as preempted broad categories of state laws almost identical to the OCC's list. The OTS even went as far as to declare that it "occupies the entire field of lending regulation for federal associations."7 In 2007, the Supreme Court's decision in Watters v. Wachovia Bank extended preemption of state laws as applied to subsidiaries of national banks.8

Beyond national banks and federal savings associations, federal consumer protection statutes, including the Truth in Lending Act (TILA), the Equal Credit Opportunity Act (ECOA), and the Real Estate Settlement Procedures Act (RESPA), contain specific preemption provisions.

Dodd-Frank's Preemption Provisions

The Dodd-Frank Act substantially redirects this decadeslong trend in favor of federal preemption of state law by focusing more on "conflict" preemption than notions of "field" preemption. Subtitle D of the CFPA, which addresses the issue of federal preemption of state consumer protection laws, alters the relationship that existed between federal and state laws relating to national banking. Entities covered by the CFPA are affirmatively subject to state laws unless the laws are "inconsistent" with the Dodd-Frank Act's provisions.9 A state law is not inconsistent with the Dodd-Frank Act if that state law affords to consumers greater protection than provided by the Dodd-Frank Act.10 In other words, the Dodd-Frank Act appears to set the "floor" for consumer financial protection while giving each state the freedom to provide greater protection to consumers within its jurisdiction. The Bureau is authorized to determine whether state law is inconsistent with the Dodd-Frank Act "on its own motion or in response to a nonfrivolous petition initiated by any interested person."11 In addition, the Dodd-Frank Act apparently provides the Bureau with authority to determine that state laws that do not provide a sufficient level of protection for consumers should be superseded, as the Bureau has the power, after considering certain factors, to "issue a notice of proposed rulemaking whenever a majority of the States has enacted a resolution in support of the establishment or modification of a consumer protection regulation by the Bureau."12

The Dodd-Frank Act also codifies a separate preemption standard for national banks and federal savings associations with respect to "state consumer financial laws." A "state consumer financial law" is defined as any state law "that does not directly or indirectly discriminate against national banks and that directly and specifically regulates the manner, content, or terms and conditions of any financial transaction . . . or any account related thereto, with respect to a consumer."13 With respect to national banks, Subtitle D of the CFPA provides for the preemption of a "state consumer financial law" only if one of the following occurs:

  • The state consumer financial law has a discriminatory effect on federal banks as compared to the state banks.
  • "In accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank . . . , the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers" as determined by a court or the Comptroller of Currency (Comptroller) on a case-bycase basis.
  • The state consumer financial law is preempted by another federal law.14

Therefore, aside from those cases where the state consumer financial law has a discriminatory effect or where the state consumer financial law is preempted by another federal law, the possible preemption of a state consumer financial law must be analyzed and determined on a "case-by-case basis."15 This case-by-case analysis requires a determination by the Comptroller regarding "the impact of a particular State consumer financial law on any national bank that is subject to that law, or the law of any other State with substantively equivalent terms."16 The Comptroller's determination with respect to preemption in accordance with the Barnett Bank standard must be supported by "substantial evidence, made on the record of the proceeding."17 Moreover, when making this determination, the Comptroller "shall first consult with the Bureau . . . and shall take the views of the Bureau into account."18 A court reviewing such determinations of the Comptroller "shall assess the validity of such determinations, depending upon the thoroughness evident in the consideration of the agency, the validity of the reasoning of the agency, the consistency with other valid determinations made by the agency, and other factors which the court finds persuasive and relevant to its decision."19

The Dodd-Frank Act provides the same preemption standards for federal savings associations as for national banks, even specifying that the Home Owners' Loan Act "does not occupy the field in any area of State law."20

Finally, one significant provision of the Dodd-Frank Act explicitly eliminates the extension of preemption under the National Bank Act and the Home Owners' Loan Act to operating subsidiaries and agents of national banks and thrifts.21 The explicit elimination of preemption as applied to subsidiaries and agents effectively overrules the Supreme Court's decision in Watters, as well as declarations from the OCC and the OTS.

The Potential Litigation Impact of Dodd-Frank's Preemption Provisions

The Dodd-Frank Act's preemption provisions could lead to litigation in several different areas. A critical threshold issue for any preemption determination is whether a particular state law constitutes a state consumer financial law. The Dodd- Frank Act will not affect preemption of state laws that do not fall within the Dodd-Frank Act's definition of "state consumer financial law." Thus, such analysis could be critical.

For example, it is possible that "Little FTC" acts, consumer fraud and deceptive trade practice statutes, advertising and marketing laws, and general antidiscrimination statutes not specifically directed to financial transactions are not subject to the same preemption standard under the Dodd-Frank Act as "state consumer financial laws." The plaintiffs' bar and states' attorneys general have been active in filing consumer fraud litigation against companies in several different industries. Such claims are attractive to plaintiffs' lawyers because (a) under some judicial interpretations, a defendant's act may be deceptive even it merely has a "tendency to deceive" without regard to proof of actual deception or reliance by a consumer; and (b) the statutes provide for potentially significant penalties of $5,000 to $10,000 per act.

Further, not only will the requirement for case-by-case determinations of the Comptroller concerning the preemption of a state consumer financial law create significant uncertainty, but those case-by-case determinations could also result in litigation. As previously stated, a court reviewing the Comptroller's decision on preemption must assess the validity of the Comptroller's determination by weighing various factors.22 Litigation will likely be necessary to clarify how these factors will be applied.

Additionally, there could be litigation relating to the role that the states might play in initiating changes in federal law. The Dodd-Frank Act creates a mechanism for states to impact federal law directly by requiring the Bureau to issue a notice of proposed rulemaking when a majority of the states enact a resolution in support of or modifying a consumer protection regulation. However, ambiguity still exists regarding the kind of state action that might trigger this obligation.

These, as well as other unresolved issues regarding the Dodd-Frank Act's preemption provisions, are likely to be litigated in the next few years and could be the difference between liability under, and protection from, state law.

Footnotes

1 Watters v. Wachovia Bank, N.A., 550 U.S. 1, 10 (2007) (citing McCulloch v. Maryland, 17 U.S. 319 (1819)).

2 Barnett Bank of Marion County, N.A. v. Nelson, Florida Ins. Comm'r, et al., 517 U.S. 25 (1996).

3 Id. at 33.

4 See 12 C.F.R. § 34.4(a).

5 Id.

6 Id. § 560.2.

7 Id.

8 Watters, 550 U.S.1 at 7.

9 The Dodd-Frank Act § 1041(a)(1). The Dodd-Frank Act § 1041 is codified in 12 U.S.C.S. § 5551.

10 Id. § 1041(a)(2).

11 Id.

12 Id. § 1041(c)(1)-(2). The Bureau must consider whether (1) the proposed regulation would provide greater consumer protection; (2) the intended benefits of the proposed regulation would outweigh any increased costs; and (3) a federal banking agency has advised if the regulation would present a risk to insured depository institutions. One question left open by the Dodd- Frank Act is whether such determinations are subject to judicial review and, if so, the scope of such review.

13 Id. § 1044. The Dodd-Frank Act § 1044 is codified in 12 U.S.C.S. § 25b.

14 Id.

15 Id.

16 Id.

17 Id.

18 Id.

19 Id.

20 Id. § 1046. The Dodd-Frank Act § 1046 is codified in 12 U.S.C.S. § 1465.

21 Id. § 1045. The Dodd-Frank Act § 1045 is codified in 12 U.S.C.S. § 25b(h).

22 Id. § 1044.

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