The Dodd-Frank Wall Street Reform and Consumer Protection Act (CFPA) directly addresses its own preemptive effect on State law and amends the National Bank Act to clarify the standards that apply to national banks. The CFPA greatly increases the powers of states to make and enforce laws designed to protect consumers in financial transactions. The default preemption standard for all covered persons is conflict preemption.

Conflict preemption occurs when a federal law is in “irreconcilable conflict” with State law. It arises when it is impossible to comply with both federal and State law or when State law stands as an obstacle to achieving some federal law objective.

No covered person is exempt from complying with State law unless that State law is inconsistent with the CFPA and then only to the extent of the inconsistency. The CFPA specifically provides that a State law is not inconsistent if the protection given to consumers is greater than the protection provided in the statute.

The Consumer Financial Protection Bureau (“Bureau”) has the power to determine what State laws are preempted, and we expect Courts to defer to the Bureau’s determinations as they would those of any administrative agency specifically empowered to interpret the law.

Preemption Standards Applicable to National Banks and Federal Thrifts

The CFPA’s preemption standards have an additional layer of complexity when applied to national banks and federal thrifts. The CFPA amends both the National Bank Act and the Home Owners’ Loan Act to “clarify” existing preemption standards. “Clarify” is the word Congress used. Modify might be more accurate.

Because preemption standards are now identical for national banks and federal thrifts, this article refers only to national banks but intends to include federal thrifts. The National Bank Act has been amended to provide that State consumer financial laws are preempted only if:

A.  The application of the State consumer financial law would have a discriminatory effect on national banks when compared with the effect of the law on State‑chartered banks;

B.  The State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers; or

C.  The State consumer financial law is preempted by an express provision of federal law.

We expect future case law and regulatory guidance to center on paragraph B, because State consumer financial laws usually do not discriminate against national banks and few federal consumer laws specifically preempt State law.

Congress adopted the language of the Supreme Court in Barnett Bank of Marion County NA v. Nelson, 517 U.S. 25 (1996) to establish the “prevents or significantly interferes” with standard. While cases construing Barnett will be helpful in determining whether a State law is preempted, they are less than clear. More than 200 court decisions have been issued construing Barnett. The Barnett analysis begins with an examination of national bank powers under the National Bank Act. One then must analyze whether the particular state law “prevents or significantly interferes with” one or more of the enumerated powers . Research reveals cases which support many interpretations.

What is a State Consumer Financial Law?

The Barnett standard applies only to the preemption of State consumer financial law. A “State consumer financial law” is one that “directly and specifically regulates the manner, content or terms and conditions of any financial transaction, or related account, with respect to a consumer.” Existing, pre-CFPA preemption standards will likely apply to those State laws which are not consumer financial laws. An example might be state licensing, unfair and deceptive practice and advertising laws.

The OCC Loses Power

The CFPA also substantially reduced the OCC’s authority to make preemption determinations. In 2004, the OCC issued its Preemption Rule which aggressively identified types of State laws which the OCC viewed as preempted. In an apparent effort to keep the OCC in check, the new Act requires that all preemption determination be made on a case-by-case basis and to be reviewed every five years to determine that the basis for preemption still applies. Significantly, the Controller must make the decision himself. He cannot delegate.

Moreover, Chevron deference no longer applies to OCC preemption determinations. In the Chevron case, the United States Supreme Court ruled that courts are required to defer to agencies with expertise construing the statutes within their enforcement power. However, the new standard requires that courts assess the validity of any preemption determination by considering the thoroughness of the OCC’s consideration, the consistency of its determination with other valid determinations made by the OCC and any other factors which the court finds persuasive and relevant.

Bank Subsidiaries and Affiliates Now Covered

The CFPA also reverses the United State Supreme Court’s Watters v. Wachovia decision in which the Court determined that subsidiaries and affiliates of federally chartered institutions were entitled to the application of the same preemption standards to which their national bank parents were entitled. Such subsidiaries and affiliates are now subject to the same standards as any other state chartered institution.

The CFPA’s elimination of NBA preemption for subsidiaries and affiliates leaves some questions unanswered. For example, it is not clear whether NBA preemption has been eliminated for only State consumer financial laws or all State law as applied to national bank subsidiaries and affiliates.

The Effective Date

The statute takes effect on the “transfer date.” This is the date in which consumer protection employees of the various safety and soundness regulators are transferred to the Bureau. This date will be no earlier than six months from and no more than 18 months after President Obama signed the law. Regardless of the effective date, the preemption standards will not apply to any contract entered into prior to the law’s enactment.