The document summarizes changes to federal preemption rules for banks and thrifts under the Dodd-Frank Act. Key points: 1) The Act eliminates broad preemption for operating subsidiaries of banks and thrifts, subjecting them to state laws. 2) The standard for preemption is now determined on a case-by-case basis, considering if state laws prevent or significantly interfere with bank powers. 3) States have enhanced authority to enforce consumer protection laws against banks, including allowing state AGs to sue for violations.

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MEMORANDUM
To: Clients and Friends
Date: December 2, 2010
Subject: Preemption Rules Applicable to Banks and Thrift Institutions After the
Dodd-Frank Act
I. Introduction
As has been much publicized, the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Act”), which was signed into law on July 21, 2010, will have a major impact on the way that
consumer financial products and services are regulated. Issues related to the preemption of state
consumer protection laws as applied to national banks and federal thrift institutions, as well as the
authority of states to enforce consumer protection laws generally, are directly addressed by the Act.
These provisions were among the most controversial included in the Act. In certain important
respects, the Act preserves current federal banking preemption laws and codifies Supreme Court
precedents regarding those laws. However, the Act also changes in significant ways the balance
between state and federal regulation of consumer financial services.
This Memorandum briefly reviews federal bank and thrift institution preemption law prior to the
Act and explains the changes (and “clarifications”) to the law as set forth in the Act. In so doing, we
identify areas that banks and thrift institutions will need to address directly in order to deal with
some of the changes brought about by the Act.
Perhaps the most significant change to preemption law in the Act is the elimination of the broad
extension of preemption that has developed under the National Banking Act (“NBA”) and the
Home Owners’ Loan Act (“HOLA”), the primary two laws governing the activities of national
banks and federal thrift institutions, respectively, to operating subsidiaries of national banks and
thrift institutions. 1 This provision and the ramifications that may result therefrom are discussed in
more detail in Part III, Section F below.
II. Existing law
Federal preemption of state law in the banking sector has been greatly expanded over the prior
twenty years. For federal thrift institutions, courts have interpreted the HOLA and regulations
issued by the Office of Thrift Supervision (“OTS”) as extending “field preemption” 2 to federal thrift
1 Sections 1044 and 1046 of the Act.
2 Courts will infer an intention to preempt state law if the federal regulatory scheme is so pervasive as to
“occupy the field” in that area of the law. Gade v. National Solid Wastes Mgmt. Ass’n. 505 U.S. 88, 98 (1992). In 1982,
the Supreme Court ruled in Fidelity Federal Savings and Loan Assn. v. de la Cuesta, 458 US 141 (1982), that the OTS
and its predecessor agency, the Federal Home Loan Bank Board, had the authority to issue rules that preempt state laws
for federal thrift institutions. As a result, the OTS issued a rule in 1996 that “occupied the field” of federal thrift lending
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institutions. Lawsuits subsequently filed against federal thrift institutions have been dismissed on the
basis of preemption.
For national banks, there has been a gradual expansion of preemption from courts, Congress and by
interpretation by the Office of the Comptroller of the Currency (“OCC”) over this period.
Practitioners have considered such expansion as tantamount to de facto field preemption for
national banks. The recent trend began following the passage of the Riegle-Neal Interstate Banking
and Branching Efficiency Act in 1994, which allowed national banks to establish branches across
state lines. An OCC interpretive letter issued after its passage asserted that Riegle-Neal gave national
banks the power to “export” the interest rates of both the state where the bank was headquartered
and the state in which a branch was located. 3 This interpretation allowed banks to take advantage of
the most favorable interest rates, which has become known as the “most favored lender doctrine.”
The doctrine has become one of the hallmarks of federal preemption in the banking sector. As
discussed below, this important interpretation has been specifically preserved by the Act. 4
In 1996, the Supreme Court in the seminal case of Barnett Bank of Marion, N.A. v. Nelson, Florida
Insurance Commissioner, et. al. 5 invalidated a state insurance law that prohibited national banks
from selling insurance in small towns in Florida, holding it was preempted by a federal law
permitting national banks to sell insurance in towns with small populations. The Supreme Court
held that a state law that “prevents or significantly interferes” with a national bank’s exercise of its
powers is preempted. The Barnett Bank case set a new standard for preemption decisions. As a
consequence and relying on this decision, the OCC began a significant expansion of preemption law
for national banks.
Finally, in 2004, the OCC issued two expansive rules: (i) a preemption regulation providing that
national banks and their operating subsidiaries were not subject to state laws that “obstruct, impair
or condition” a bank’s exercise of its federally authorized powers to make loans or take deposits, 6
and (ii) a “visitorial powers” regulation that restricted the authority of states to examine and
supervise national banks, making such examination and supervision the exclusive province of the
OCC. 7
III. Changes to Existing Law
A. Overview
From the standpoint of analyzing federal preemption as a result of the Act, the Act divides state
laws essentially into “state consumer financial laws”--as defined, and state laws that are not “state
consumer financial laws.” By the specific language in the Act, it is intended to “clarify” the
preemption standard for “state consumer finance laws.” As discussed below, the current legal
regulation. As a result, federal thrifts were not required to comply with any state laws that regulated lending, except with
respect to subjects identified in the OTS rule and other federal laws.
3 PL 103-328, 108 Stat. 2338 (1994). OCC Interpretive Letter No. 686, September 11, 1995.
4 See III G. “Aspects of Preemption and State Law that Remain Unchanged,” below.
5 517 U.S. 25 (1996).
6 12 CFR § 7.400, 69 Federal Register 1904 (January 13, 2004).
7 12 CFR § 7.407, § 7.409, § 34.4, 69 Federal Register 1904 (January 13, 2004).
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standard has not been changed that dramatically. The Act preserves and essentially affirms federal
banking preemption laws and precedents already in effect. Significantly, however, the Act does not
modify preemption standards for state laws that are not “state consumer finance laws.” Thus, after
the preemption provisions of the Act go into effect, 8 every preemption analysis under the NBA and
HOLA will focus on whether the provision in question involves a “state consumer financial law.”
B. Definition of “State Consumer Financial Law”
The Act adds a provision to the NBA which defines a state consumer financial law as “a 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. 9 ” The Act also incorporates this
definition and the related preemption provisions into HOLA. 10 Thus, the state law in question may
not discriminate against national banks, and also must meet several requirements to be a state
consumer financial law under the NBA or HOLA: (i) it must regulate the manner, content, or terms
and conditions of a financial transaction or account; (ii) it must do so “directly and specifically;” and
(iii) the financial transaction or account that the law regulates must be “with respect to a
consumer.” 11
C. How Future Preemption Determinations Are to be Made
In a change from current law, the Act provides that courts and the OCC must make preemption
determinations on a case-by-case basis with respect to particular state laws, and can no longer rely
on blanket preemption determinations like the OCC’s 2004 regulations or the OTS’ broad field
preemption. In addition, the standard for judicial review of regulatory determinations will change
under the Act. Previously, courts accorded a high level of deference to regulatory determinations.
Courts generally deferred to an agency’s permissible construction of statutes administered by that
agency. 12 Under the Act, courts must now assess the thoroughness of the OCC’s consideration, the
validity of the OCC’s reasoning, the consistency with other determinations made by the OCC, and
any other factors that the court finds persuasive and relevant to its decision. 13
8 The preemption amendments go into effect on the “designated transfer date,” which is also the date that
many of the consumer protection enforcement powers of the existing federal agencies are consolidated in the new
Bureau of Consumer Financial Protection (“Bureau”). The Treasury Secretary is required to fix the designated transfer
date within 60 days of the Act becoming law. The date cannot be sooner than six months after the Act becomes law,
and (unless the Treasury Secretary submits a report to Congress explaining reasons for a delay) not later than one year
after the Act becomes law. Sections 1048 and 1062 of the Act.
9 Section 1044 (a) of the Act.
10 The Act amends HOLA to provide, in essence, that HOLA preempts state laws for federal thrifts to the
same extent that the NBA preempts state laws for national banks. Section 1046 of the Act.
11 Section IIIG. “Aspects of Preemption Law that Remain Unchanged,” below, addresses areas of consumer
law that do not fall within this definition and are therefore outside of the Act’s parameters.
12 Chevron, U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984).
13 Section 1044 (b)(5) of the Act, which uses standards set out by the Supreme Court in Skidmore v. Swift &
Co., 323 U.S. 134 (1944).
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D. The Standard for Future Preemption Challenges
For both national banks and federal thrift institutions, the standard for determining whether state
consumer financial laws will be preempted rests on a determination of whether such law: (i)
discriminates against national banks; (ii) “prevents or significantly interferes with the exercise by the
national bank of its powers,” as stated in the Barnett Bank case; or (iii) is preempted by another
federal law. 14
State laws rarely discriminate against national banks. Accordingly, the relevant inquiry will generally
be whether state laws prevent or significantly interferes with a national bank’s powers or whether an
existing federal law covers the subject. Since the Barnett Bank decision was issued, courts have
interpreted the standard set forth therein to preempt the majority of state laws aimed at regulating
national banks’ activities. The Act codifies the Barnett Bank standard and national banks will
continue to rely on this favorable precedent. 15 Courts and the OCC will continue to analyze
preemption questions in light of the Barnett Bank case and subsequent court decisions. However,
because the OCC and courts are required by the Act to make preemption decisions on a case-by-
case basis, 16 it is likely that significant litigation will ensue, with the focus on whether particular state
consumer financial laws prevent or significantly interfere with a bank’s powers.
E. Enhanced State Scrutiny and Initiative
While parties may debate whether and to what extent the Act modifies the current law and
regulation with respect to federal preemption, at a minimum the Act will produce increased scrutiny
of national banks and federal thrift institutions by states and local authorities. State attorneys general
will now be authorized to enforce the Act as well as regulations issued by the Bureau. The Act
makes clear that state laws that provide greater consumer protection than federal law are not
necessarily preempted. 17 Also, the Act also upholds a recent Supreme Court decision that allows
states to sue national banks and federal thrift institutions to enforce non-preempted state laws. 18
Therefore, both state attorneys general and state agencies may be more active in enforcement
actions.
The Act also 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 states “enact” a “resolution” in support of
the establishment or modification of a consumer protection regulation. 19 The Act does not state
what type of state action is required to trigger this obligation. The Bureau is not required to adopt
any proposal endorsed by the states, but if it chooses not to adopt a rule based on the state
resolutions, it must explain its decision. 20
14 Section 1044 (b)(1) of the Act.
15 Section 1044 (b)(1)(B) of the Act.
16 Section 1044 (b)(3) of the Act. The OCC is required to consult with the Bureau and take its views into
account in rendering a decision.
17 Section 1041 (a)(2).
18 Cuomo v. Clearing House Association, LLC, 129 S. Ct. 2710 (2009).
19 Section 1041 (c)(1) of the Act.
20 Section 1041 (c)(2),(3) of the Act.
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F. No Continued Applicability of Preemption to Operating Subsidiaries
The Act explicitly overrules a substantial body of case law, including a recent Supreme Court
decision, 21 in providing that operating subsidiaries and affiliates of national banks and federal thrift
institutions will now be subject to state law. 22
National banks and federal thrift institutions have basically two options for their operating
subsidiaries. One is to merge the operating subsidiaries into the parent. The other option is to bring
the operating subsidiaries into compliance with state law, which could include obtaining a number of
state licenses, depending on the specific activities in which the operating subsidiaries engage.
Because many states do not provide exemptions from licensing requirements and other laws
regulating financial transactions for subsidiaries or affiliates of depository institutions, the repeal of
preemption for operating subsidiaries could significantly impact their ability to rely on any
exemptions granted to them by state law.
For example, the repeal of preemption for operating subsidiaries does not change the exemption in
the S.A.F.E. Mortgage Licensing Act (the “SAFE Act”) for loan originators employed by bank
subsidiaries. 23 Significantly, however, states may go beyond the exemption provided in this law and
impose a licensing requirement on these loan originators. The SAFE Act, which became law in
2008, essentially requires every “loan originator” to be licensed under state law (subject to certain
exceptions), unless the loan originator is an employee of: (i) a depository institution; (ii) a subsidiary
of a depository institution that is (i) owned and controlled by a depository institution; and (ii)
regulated by a federal banking agency; or (iii) an institution regulated by the Farm Credit
Administration. 24
Because the SAFE Act does not expressly preempt state laws that require loan originators employed
by such subsidiaries to obtain state licenses, the repeal of preemption for operating subsidiaries will
permit states to require employees of operating subsidiaries to obtain state licenses should they so
choose. The model state law to implement the SAFE Act proposed by the Conference of State
Bank Supervisors and the American Association of Residential Mortgage Regulators incorporated
the exemption in the SAFE Act for employees of bank subsidiaries that are registered with the
Nationwide Mortgage Licensing System and Registry to be established by the federal banking
agencies. Most states adopted this model law without changing this exemption. We will need to
monitor state activity in this area. Although it would be contrary to federal law, in view of the scale
back of federal preemption that has occurred, some states may attempt to remove this exemption in
an attempt to license loan originators of bank subsidiaries.
G. Aspects of Preemption and State Law that Remains Unchanged
The Act explicitly preserves preemption and other provisions in other federal laws (such as the
Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures
21 Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007).
22 Sections 1044 and 1046 of the Act.
23 12 U.S.C. § 5103 (3)(A)(i)
24 12 U.S.C. § 5103 (3)(A)(i)-(iii)
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Act) that specifically address the application of state law in relation to that federal law. 25 Except for
the Act’s provisions which relate specifically to preemption for national banks and federal thrift
institutions, the Act itself cannot be construed to affect the application of any state law, except to
the extent that a state law is “inconsistent” with the Act, 26 and a state law that provides greater
protection than the Act is not deemed “inconsistent” with the Act. 27
Finally, the Act preserves the provisions of the NBA that have been interpreted to provide for the
“exportation” of interest rates from the bank’s home state. Specifically, the Act expressly provides
that banks will maintain their ability to charge interest at the rate allowed by the laws of the state in
which they are located. 28 Under the definition of “interest” in the applicable OCC and OTS
regulations, this provision would include not only interest on loans, but other types of fees
connected with the extension of credit, such as late fees, insufficient fund fees, over limit fees,
annual fees, cash advance fees, and membership fees.
It is also arguable that there are a number of state consumer laws that are not impacted by the Act
because of the way that “state consumer finance law” is defined, including laws that impose licensing
requirements, 29 laws that regulate unfair or deceptive practices 30 and laws that regulate advertising. 31
H. No Retroactive Application to Existing Contracts
The new preemption standards will not apply to any contract entered into by national banks or
federal thrift institutions prior to enactment. The Act and rules to be promulgated by the Bureau do
not alter the applicability of OCC or OTS preemption regulations, orders, guidance or
interpretations with respect to any “contracts” entered into by OCC- or OTS-regulated entities and
their subsidiaries on or prior to the enactment of the Act. 32 This provision should prevent the
applicability of state laws to contracts entered with consumers prior to the Act’s enactment, such as
credit and ATM card agreements, deposit accounts, and similar contracts. However, how the Act
will apply to new extensions of credit made after the enactment of the Act under existing lines of
credit or credit card accounts is not addressed in the Act.
# # # #
25 Section 1041 (b) of the Act.
26 Section 1041 (a)(1) of the Act.
27 Section 1041 (a)(2)
28 Section 1044 (f) of the Act.
29 A requirement that a company obtain a license before engaging in a financial transaction arguably does not
regulate the manner, content or terms and conditions of the transaction.
30 Laws that prohibit unfair and deceptive business practices (“UDAP laws”) are frequently used by state
attorneys general and plaintiffs’ attorneys to impose rules on lenders, servicers, and other providers of financial services
to consumers. To the extent that UDAP laws do not “specifically and directly” regulate financial transactions or
accounts, they would not be considered “state consumer financial laws.”
31 Rules on advertising arguably do not regulate the manner of a financial transaction, nor do they regulate the
content or terms of a financial transaction. Rather, advertising rules regulate the manner by which a financial institution
may communicate its products and services to the public.
32 Section 1043 of the Act.
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This Memorandum is provided by Patton Boggs LLC for educational and informational
purposes only and is not intended and should not be construed as legal advice. This
Memorandum is considered advertising under applicable state laws.
Please do not hesitate to contact us if you have general questions or if we can be of any
particular assistance to you.
Norman B. Antin Jeffrey D. Haas
nantin@pattonboggs.com jhaas@pattonboggs.com
(202) 457-6514 (202) 457-5675
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