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Department's Response to the Proposed Rules of the Office of the Comptroller of the Currency Regarding Preemption of State Consumer Financial Protection Laws 

June 27, 2011

Acting Comptroller John Walsh
Office of the Comptroller of the Currency
250 E Street, S.W.
Washington, D.C. 20219

 

Re:       OTS Integration; Dodd-Frank Act Implementation
            OCC-2011-0006

Dear Comptroller Walsh:

I write to express serious concerns regarding the proposed rules of the Office of the Comptroller of the Currency (“OCC”) regarding preemption of state consumer financial protection laws (the “Proposed Rules”).  These rules would inappropriately narrow and hamper the application of state consumer protection laws.  The Proposed Rules, as discussed below, run afoul of the clear language and intent of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), whose purpose was to allow for more state protection of consumers, not less.  The OCC should abandon any attempt to issue rules that would roll back the clock to a pre-financial crisis era when the OCC repeatedly and reflexively blocked state attempts to protect consumers.  It is a critical priority for the State of New York to ensure that state consumer financial protection laws and rules are not inappropriately invalidated by illegal preemption rules from a bygone era.1

The New York Banking Department has been at the vanguard of state efforts to protect consumers from predatory lending, often in the face of inaction or hostility by the OCC.  We have been enforcing heightened origination standards for high cost loans since 2001 and for subprime loans since 2008.  We have originated or, with other states, participated in numerous investigations of predatory non-bank lenders, and the associated settlements have resulted in millions of dollars in restitution to New York consumers.  In 2008, we began to regulate mortgage loan servicers, and our conduct of business rules for servicers are both widely adopted by servicers and among the most progressive in the nation.  Yet there are national banks that claim that our standards are preempted by the OCC’s 2004 preemption rules.  In 2009, we had to amend New York’s foreclosure laws to require the filing of information about foreclosures with the Banking Department, because servicers affiliated with national banks told us the OCC had suggested that they not provide information about New York foreclosures to us.  We have attempted to develop a cooperative relationship with the OCC.  (For example, we have an information sharing agreement with the OCC under which we pass along consumer complaints about each other’s banks.)  Nevertheless, we believe it is in the best interest of consumers to make clear that we retain jurisdiction to enforce laws that would assist them.

It is understandable that national banks and federal thrifts wish to have the certainty of a single set of national standards to guide their operations, particularly when they operate across state borders.  However, we believe it is clear that Congress, in the Dodd-Frank Act, recognized the benefits of the dual banking system – i.e. having both federal and state regulatory regimes, as well as both federal and state regulators monitoring compliance – particularly in the context of consumer compliance.  We believe the Proposed Rules take the clear language of the Dodd-Frank Act (which clarifies that the preemption standard is different from the OCC’s current standard), and transforms it into the OCC’s pre-Dodd-Frank preemption policy. 

This letter will discuss our four major objections to the Proposed Rules: 

(1)  Legal Standard for Preemption of State Law.  The OCC’s explanation of the preemption standard that will apply after the effective date of Section 1044 of the Dodd-Frank Act changes the plain language of the preemption test in Section 1044 into a completely different test.  Section 1044 of the Dodd-Frank Act clearly states that the test is whether a state law “prevents or significantly interferes with a national bank’s exercise of its federally granted powers.”  The OCC’s explanation, on the other hand, characterizes the test as “the different formulations of conflict preemption” under the Barnett case, of which “prevents or significantly interferes” is but one exemplary formulation.  The OCC maintains that the analysis of preemption does not stop with “prevents or significantly interferes.”  This interpretation is inconsistent with the new statutory standard under the Dodd-Frank Act.

(2) Validity of OCC’s 2004 Preemption Rules.  The OCC’s conclusion that the sweeping 2004 preemption rules for deposit-taking, non-real estate lending and real estate lending, 12 CFR §§ 7.4007 and 7.4008 and 12 CFR 34.4 will be consistent with the Dodd-Frank Act after the July 21, 2011 effective date of Title X ignores the plain language of Section 1044 of the Dodd-Frank Act.  Section 1044 requires a case-by-case determination of whether to preempt state consumer protection laws, where the term “case-by-case basis” refers to a determination concerning the impact of a particular State consumer financial law on any national banks.   In the Proposed Rules, the OCC seeks to uphold the validity of its existing preemption rules, without making any case-by-case determinations.   

(3)  Enforcement by State AGs.  Sections 1042 and 1047 of the Dodd-Frank Act clearly authorize State Attorneys General not only to enforce state consumer protection laws but also to seek remedies under provisions of “other law,” or “applicable law,” which includes Federal law.  However, Section 7.4000(b) of the Proposed Rule changes the plain language of this standard to limit a state attorney general’s jurisdiction to enforcing “a non-preempted state law” against a national bank.   In addition, Cuomo v. Clearing House Association, L.L.C., 129 S. Ct. 2710 (2009)(“Cuomo v. Clearing House”) clearly holds that enforcement activities are not visitorial.  Nevertheless, paragraph (a)(2)(iv) of proposed Section 7.4000 defines visitorial powers to include “investigating or enforcing compliance” with any applicable Federal or state laws, and the exclusion in paragraph (b) applies only to an action against a national bank to enforce a non-preempted state law, although an investigation accomplished outside the premises of the national bank by interviewing bank customers and reviewing transaction documents clearly is not visitorial under Cuomo v. Clearing House.

(4)  Comment Period.  The 30-day comment period is far too short a time to expect comments from the most interested parties – the State regulators and attorneys general, and the consumer groups who are this country’s traditional guardians of consumer protection. 
 

The Proposed Rules Change the Plain Language of the Preemption Standard in the Dodd-Frank Act

Under Section 1044 of the Dodd-Frank Act, a state consumer protection law is preempted only if one of three circumstances exists:  (1) the State consumer financial law has a discriminatory effect on national banks, (2) the State law is preempted by a provision of Federal law other than the National Bank Act, or (3) the State consumer financial law “prevents or significantly interferes with the exercise by the national bank of its powers.” 

With respect to this last standard, Section 1044 states:

“in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996), the State consumer financial laws prevents or significantly interferes with the exercise by the national bank of its powers”.

The plain meaning of this sentence is that the standard is whether the state law prevents or significantly interferes with the exercise by the national bank of its powers – nothing more and nothing less.  The fact that the sentence characterizes this latter standard as being “in accordance with the legal standard for preemption” in Barnett is irrelevant to the interpretation of the standard. 

The OCC, however, transforms this simple standard into a very different standard.  It states:

“The legal standard for preemption in Barnett is conflict preemption and the decision references different formulations of conflict to illustrate and explain the nature and level of interference with national bank powers that triggers preemption.  The phrase “prevent or significantly interfere” is one exemplary formulation of conflict preemption used in the decision.  It is not the only formulation; it is not set apart from the others; and it is not presented as a test different from the others; rather it is part of the whole of the Court’s reasoning in its decision.  Thus, in the Barnett preemption provision, the phrase may serve as a touchstone or starting point in the analysis, but it takes meaning from the whole of the Supreme Court’s decision.  Since the phrase must be “in accordance with the legal standard for preemption” in the decision of the Court, the analysis may not simply stop and isolate those terms from the rest of the decision. . . .”

See 76 Fed. Reg. 300557, 30552 (May 26, 2011).

If Congress had wanted the “prevents or significantly interferes” test to be only a starting point, it would have said so. 

The legislative history of the Dodd-Frank Act takes pains to point out that the OCC’s interpretation of the entirety of the Barnett case went significantly beyond the proper test.  For example, the Senate report on the Dodd-Frank Act states:

“The standard for preempting State consumer financial law would return to what it had been for decades, those recognized by the Supreme Court in Barnett Bank v. Nelson, 517 U.S. 25 (1996)(Barnett), undoing broader standards adopted by rules, orders, and interpretations issued by the OCC in 2004.” 

See S. Rep No. 111-176 (2010) at p. 175.  The Proposed Rules, on the other hand, undo the existing standard only with respect to subsidiaries and affiliates, and not with respect to national banks and thrifts, as Dodd-Frank demands.

The OCC, in the explanation of the Proposed Rules, finds it significant that both Senators Carper and Johnson, in colloquies about the Conference Committee Report, spoke favorably about the Barnett standard.  Those colloquies, however, support the plain meaning of the statute –i.e. that Congress was adopting the “prevents or significantly interferes” standard.

The colloquy between Senator Carper and Senator Dodd is as follows:

“Mr. Carper.  One change made by the conference committee was to restate the preemption standard in a slightly different way, but my reading of the language indicates that the conference report still maintains the Barnett standard for determining when a State law is preempted.

Mr. Dodd.  The Senator is correct.  That is why the conference report specifically cites the [Barnett case].  There should be no doubt that the legislation codifies the preemption standard stated by the U.S. Supreme Court in that case.

Mr. Carper.  I again thank the Senator.  This will provide certainty to everyone – those who offer consumers financial products and to consumer[s] themselves.”

In a similar colloquy, Mr. Johnson said:

“One change made by the conference committee was to restate the preemption standard in a slightly different way, but it is clear that this legislation is codifying the preemption standard expressed by the U.S. Supreme Court in [Barnett].  This will provide certainty to consumers and those that offer consumers financial products.”

Neither of these colloquies indicates that the preemption test was to be something other than “prevents or significantly interferes.”  In fact, if the test were to be whatever principles could be gleaned from the Barnett decision, then the certainty extolled by both Sens. Carpers and Johnson would have been illusory. 

Indeed, the Conference Committee report shows unequivocally the intent to choose the “prevent or significantly impair” language, not the OCC’s alternative formulations of the test:

“The conference report also revises the standard the OCC will use to preempt state consumer protection laws.  It codifies the standard in the 1996 Supreme Court case Barnett Bank of Marion County, N.A. v. Nelson to allow for the preemption of State consumer financial laws that prevent or significantly interfere with national banks’ exercise of their powers.” (emphasis added)

See Joint Explanatory Statement of the Committee of Conference, House Conference Report, No. 111-517, reprinted in 2010 U.S.C.C.A.N. 722, 731 (hereinafter “Conference Committee Statement”).  When a case law standard has been codified, there is no need to go back to the original source. 

The OCC previously interpreted Barnett to preempt any state consumer laws that “obstruct, impair, or condition a national bank’s ability to fully exercise its powers.”  However, the codification of the “prevent or significantly interfere” test demonstrates that Congress rejected the OCC’s easier-to-satisfy “obstruct, impair or condition” test , and recognized that a state consumer law may “condition” or “impair” a national bank’s ability to fully exercise its powers, without “prevent[ing] or significantly interfer[ing]” with such powers.  Consequently, consumer protection laws, such as laws requiring disclosures, may override the business judgments of bank directors in establishing account terms, as long as the consumer protection law does not significantly interfere with the ability of the bank to exercise its powers.

Straining logic, the OCC insists that, although its prior “obstruct, impair, or condition” language may have been “ambiguous,” and should be removed from the OCC’s preemption rules, it was still correct.  Furthermore, because it was “drawn from an amalgam of prior precedents relied upon in the Supreme Court’s decision in Barnett,” any existing precedent which cites those terms in the OCC’s regulations remains valid, since the regulations were premised on “principles drawn from the Barnett case.”  This contradicts the plain language of the Dodd-Frank Act.  In Section 1043 of the Dodd-Frank Act, Congress made clear that the Dodd-Frank Act should not be construed to alter or affect the applicability of any “regulation, order, guidance, or interpretation” prescribed by the OCC regarding the applicability of State law to any contract entered into on or before the date of enactment of the Dodd-Frank Act.  If the prior precedent remained valid, there would have been no need for Congress to preserve contracts whose validity depended on State consumer protection law being inapplicable.2

Case-by-case Determination and the Validity of the 2004 Preemption Rules

Section 1044 not only provides that the legal standard for preemption is that the State consumer financial law “prevents or significantly interferes” with the exercise by a national bank of its powers, it also requires that any preemption determination under subparagraph (b)(1)(B) of Section 5136C of the National Bank Act be “on a case-by-case basis.”   Clause (b)(2) goes on to define “case-by-case basis:”

“As used in this section the term ‘case-by-case basis’ refers to a determination pursuant to this section made by the Comptroller concerning 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.” (emphasis supplied)

In addition, the section makes clear that, while a single determination may apply to laws in other states with “substantively equivalent terms,” the OCC must consult with the Consumer Financial Protection Bureau (“CFPB”) and must take the CFPB’s views into account in making the determination of substantial equivalence.

Finally, the OCC’s determination must be based on substantial evidence supporting the finding that the state law “prevents or significantly interferes” with a national bank’s exercise of its powers, made on the record of the proceeding. 

Once again, however, the OCC makes these three requirements – case-by-case, CFPB consultation, and substantial evidence – disappear with respect to any product or service covered by the OCC’s prior preemption rules.  This legerdemain is patently inconsistent with the Dodd-Frank Act standards. 

We believe the Dodd-Frank Act requires the OCC to rescind its existing broad preemption rules regarding deposit-taking and non-mortgage lending, i.e. 12 CFR 7.4007 and 7.4008, effective July 21, 2011, and to replace them going forward with the case-by-case analysis required by the Dodd-Frank Act.  These regulations preempt broad categories of state law without containing any individualized analysis that any applicable state laws prevent or significantly interfere with the exercise of national banks’ powers under Section 5136C(b)(1)(B) of the National Bank Act or are specifically preempted under other law within the meaning of Section 5136(b)(1)(C). 

We also believe that the OCC must rescind the preemption provisions of its broad real estate lending rule, 12 CFR 34.4.  Those provisions were adopted using “principles of preemption developed by the U.S. Supreme Court, if they obstruct, impair, or condition a national bank’s exercise of its lending, deposit-taking, or other powers granted to it under Federal law.”  69 Fed. Reg. 1904 (January 13, 2004).  While certain aspects of state mortgage lending laws may be preempted by Federal law, within the meaning of new Section 5136C(b)(1)(C) of the National Bank Act, or in accordance with the “prevents or significantly interferes” standard under new Section 5136C(b)(1)(B), the OCC has not demonstrated compliance with either section for post-July 21, 2011 periods.

It is not sufficient to remove the “obstruct, impair or condition” language from 12 CFR 7.4007, 7.4008 and 34.4 and to argue that the broad preemption of state law continues to stand.  As noted above, in Section 1043 of the Dodd-Frank Act, Congress made clear that the Dodd-Frank Act should not be construed to alter or affect the applicability of any “regulation, order, guidance, or interpretation” prescribed by the OCC regarding the applicability of State law to any contract entered into on or before the date of enactment of the Dodd-Frank Act.  If the rules themselves remained valid, there would have been no need for Congress to preserve contracts whose validity depended on State consumer protection law being inapplicable.

Enforcement Authority of State Attorneys General

The OCC also flouts the Dodd-Frank Act’s safe harbor for the enforcement authority of State attorneys general.  Based on the holding in Cuomo v. Clearing House, the OCC’s Proposed Rule on visitorial powers excludes “an action against a national bank . . . to enforce a non-preempted state law . . . and to seek relief as authorized thereunder.”  This, however, is not the standard in the Dodd-Frank Act.  Section 1042(a)(2)(B) allows a State attorney general to bring a civil action against a national bank or Federal savings association to enforce any regulation prescribed by the CFPB under the Dodd-Frank Act and to secure remedies under provisions of Dodd-Frank “or remedies otherwise provided under other law,” which could include either state or federal law.  Similarly, Section 1047(a) of the Dodd-Frank Act enacts section 5136C(i) of the National Bank Act, which states that the National Bank Act does not limit or restrict the authority of any State attorney general to bring an action against a national bank “to enforce an applicablestrong> law and to seek relief as authorized by such law.”   (emphasis added)  See also Senate Report at 176-77 (Section 1047 clarifies that a State attorney general may bring a judicial action against a national bank or Federal savings association to enforce Federal law, as permitted by such  law, or non-preempted State law.)

In addition, the proposed definition of “visitorial” powers in paragraph (a)(2)(iv) of Section 7.4000 contradicts the Supreme Court’s clear guidance in Cuomo v. Clearing House.  Paragraph (a)(2)(iv) defines visitorial powers to include “investigating or enforcing compliance” with any applicable Federal or state laws concerning activities authorized or permitted pursuant to federal banking law, and the exclusion in paragraph (b) applies only to an action against a national bank to enforce a non-preempted state law, thus implying that any inquiry or investigation of a potential law violation is visitorial.  To the extent a State regulator or State Attorney General office may receive complaints from a national bank’s customers and may interview those customers and review their complaints and documents, such activity is not visitorial under the National Bank Act.  Consequently, we believe the OCC should amend Section 7.4000 to remove the offending language cited above.

The 30-Day Comment Period is Wholly Inadequate

It has taken the OCC ten months from the July 21, 2010 passage of the Dodd-Frank Act to publish the Proposed Rules.  Yet the OCC has provided only a 30-day comment period.  This is particularly troubling because many of the groups that should comment on the rule – consumer advocates and state regulators and attorneys general – generally have far fewer resources and therefore need more time to produce comments.  We understand that the OCC may wish to promulgate a final rule before the “Transfer Date” under the Dodd-Frank Act.  However, we believe that, even if the OCC feels it necessary to publish “interim” final rules before the Transfer Date, the comment period should be kept open for at least 60 days.

 
*     *     *

We hope you will take the following actions with respect to the Proposed Rules.  First, the OCC should amend the Rule proposal to make clear that the only relevant test for preemption under Barnett is “prevents or significantly impairs.”  Second, the preemption rules on deposit-taking and lending should be withdrawn, in favor of a case-by-case determination of the extent to which state consumer protection laws “prevent or significantly impair” the exercise of a national bank’s powers.  Third, the visitation rule should be clarified.  Finally, the OCC should extend the comment period for an additional 30 days, even if this means that the Proposed Rules would not become effective until after the Transfer Date under the Dodd-Frank Act.  If the OCC wishes to make the Proposed Rules effective by the Transfer Date, then they should be finalized on an interim basis. 

I appreciate this opportunity to share our views with you. 

Very truly yours,

 

Benjamin M. Lawsky
Superintendent of Financial Services and
Acting Superintendent of Banks                   

Cc:       Hon. Spencer Bachus
            Hon. Barney Frank
            Hon. Tim Johnson
            Hon. Richard C. Shelby
            Hon. Charles E. Schumer
            Hon. Kirsten Gillibrand
            Hon. Timothy Geithner

 

 

1 The New York State Banking Department is currently the regulator for all New York State-chartered banking organizations, including banks, trust companies, savings banks and savings and loan associations.  On October 3, 2011, the Banking Department will be consolidated into the Department of Financial Services, which will come into being on that date, with the same and additional responsibilities. I currently serve as the Superintendent of Financial Services and Acting Superintendent of Banks of New York State. 

 

2 The OCC’s reinterpretations of the Dodd-Frank Act mandates are not entitled to deference.  Pre-Dodd-Frank Act, the OCC’s interpretations were often upheld because of the doctrine of Chevron deference.  However, the Dodd-Frank Act has changed the deference standard.  Under Section 5136C(b)(5)(A) of the National Bank Act, a court reviewing OCC preemption determinations must “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.”  In our opinion, the Proposed Rules cannot stand under this less deferential standard.