Action Plan to Implement the New Dodd-Frank Preemption Rules

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)1 rolls back the clock on preemption for national banks to a time before broad preemption regulations were promulgated by the Office of the Comptroller of the Currency (OCC) in 2004. Dodd-Frank also subjects federal savings banks to the same preemption rules applicable to national banks. Beginning in July 2011, national banks and federal savings banks will have to adhere to more limited preemption of state laws in accordance with the 1996 Supreme Court holding in Barnett Bank v. Nelson.2 With less than 10 months before the new preemption rules become effective, national banks and federal savings banks must immediately begin work implementing the new rules to ensure that their products, services and operations comply with state laws that have been preempted in the past. This Special Alert is provided to help national banks and federal savings implement the new preemption rules.

A. CURRENT PREEMPTION STANDARD

There has been a vast expansion of the doctrine of federal preemption of state law in the consumer financial services sector in the last two decades. In its regulations and legal opinions, the Office of Thrift Supervision (OTS) has interpreted the Home Owners' Loan Act (HOLA) as occupying the entire field of regulation for consumer financial products and services offered by federal savings banks and their operating subsidiaries, and the courts have for the most part agreed. Field preemption has allowed federal savings banks and their operating subsidiaries to offer products and services without regard to state laws purporting to regulate or otherwise affect such products and services, except in very limited circumstances.3

Over the same period, national banks have benefited from a significant expansion of preemption supported both by the OCC and courts. This trend picked up in 1996 when the U.S. Supreme Court in Barnett held that Section 92 of the National Bank Act (NBA), authorizing insurance agent activities for national banks in small towns, preempted Florida insurance laws that would otherwise prohibit a national bank from selling insurance in a small town.4 In Barnett, the Court set an important standard for determining preemption for national banks: A state law that "prevents or significantly interferes" with a national bank's exercise of its powers is preempted.5

Barnett provided the OCC with the basis for a broader interpretation of state law preemption under the NBA. In 2004, the OCC issued a preemption regulation providing that national banks and their operating subsidiaries were not subject to state laws that "obstruct, impair or condition" their exercise of federally-authorized powers, including making loans and taking deposits.6 The OCC regulations provide illustrative lists of the types of state laws that are preempted, which are virtually identical to those in OTS regulations.7

The OCC's 2004 preemption regulation has led to a six-year run in which national banks and their operating subsidiaries have enjoyed what many consider de facto field preemption.

B. NEW PREEMPTION RULES

The new preemption standard goes into effect on July 21, 2011 and will apply to both national banks and federal savings banks. The new standard is essentially the old preemption standard from Barnett with a number of new, important considerations. Before turning to a discussion of the new standard, the scope of its coverage is first explored.

1. Definition of State Consumer...