Consumer Financial Protection Act: Preemption Questions

Consumer Financial Protection Act: Preemption Questions August 26, 2010 Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL 60654 312.832.4500 2 Today s Speakers Thomas I. Elkind Boston telkind@foley.com Martin J. Bishop Chicago mbishop@foley.com Michael C. Lueder Milwaukee mlueder@foley.com Christi Adams Orlando cadams@foley.com 1

3 Preemption and State Enforcement of Consumer Financial Laws Thomas I. Elkind 4 Preemption and State Enforcement of Consumer Financial Laws The Preemption Doctrine is grounded in the Supremacy Clause of the United States Constitution. That clause mandates that the laws of the United States are the supreme laws of the land. No state law or constitution can trump federal law. 2

5 Preemption and State Enforcement of Consumer Financial Laws States pass and enforce laws all the time. Most do not touch on matters of federal concern. Whenever a new federal law is passed, we lawyers must consider its impact on state law. 6 Three Types Of Preemption 1. Conflict Preemption Compliance with both state and federal law is impossible or compliance with State law would frustrate the federal scheme. 2. Field Preemption The regulatory scheme is so pervasive that Congress left no room for the states to supplement it. 3. Express Preemption Explicit statutory language preempts State law. See SPGGC, LLC, et al. v. Ayotte, 488 F.3d 525, 530-31 (lst Cir. 2007) (Collecting cases). 3

7 Subtitle D Preservation of State Law The Consumer Financial Protection Act expressly addresses preemption in Title X, Subtitle D. That title creates two standards - one for all covered persons and a second for national banks and federal thrifts. 8 The Consumer Financial Protection Act does not exempt any person from complying with state law except to the extent that state law is inconsistent with the CFPA and then only to the extent of the inconsistency. 1041(a)(1). 4

9 State law is not inconsistent with the CFPA if the protection afforded to consumers is greater than the protection provided under the CFPA. This is not unlike other federal consumer protection laws like TILA. 1041(a)(2). 10 The Consumer Financial Protection Bureau determines whether such protection itself is inconsistent with the CFPA either on its own initiative or in response to a request for review. 1041(a)(2). 5

11 The CFPA does not affect preemption standards which are included in other federal consumer laws. For example, the CFPA does not affect the preemption provisions of the FCRA, TILA, or ECOA. 1041(b). 12 The CFPA gives states the power to force federal action. The CFPB must engage in rulemaking whenever a majority of the states has requested the establishment or modification of a consumer financial protection regulation. 1041(c). 6

13 Before prescribing a final regulation based on a majority of states request, the Bureau must consider whether: a) the proposed regulation would afford greater protection to consumers than existing regulation; b) the intended benefits of the proposed regulation for consumers would outweigh any increased costs or inconvenience for consumers and would not discriminate unfairly against any category or class of consumer and; c) a federal banking agency has advised that the proposed regulation is likely to present an unacceptable safety and soundness risk to insured depository institutions. 1041(c)(2). 14 State Law Preemption Standards for National Banks and Subsidiaries Martin J. Bishop 7

15 National Bank Act Riegle-Neal Interstate Banking & Branching Efficiency Act (I and II) Home Owners Loan Act 16 Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) Conflict Preemption 8

17 OCC: Preemption Rule Expands Barnett Incidental powers Field preemption Visitorial Powers Rule 18 Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007). Cuomo v. Clearing House Ass n, LLC, 129 S. Ct. 2710 (2009) 9

19 Section 1044 State consumer financial laws are preempted only if: (1) Application of a state consumer financial law would have a discriminatory effect on national banks in comparison with the effect of the law on a state-chartered bank; (2) The state consumer financial law prevents or significantly interferes with the exercise of national bank powers; or (3) The state consumer financial law is preempted by another federal law. 20 State Consumer Financial Law 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. 10

21 Bottom Line Significant Interference/Conflict Preemption under Barnett prevails over OCC/OTS Field Preemption 22 OCC Preemption Determinations, Barnett Bank and Subsidiaries and Affiliates Michael C. Lueder 11

23 Federal thrifts are now subject to the same preemption standards that apply to national banks. 1046. 24 The OCC is stripped of its ability to make sweeping preemption announcements like the Preemption Rule of 2004. Now the OCC or a court must make preemption decisions on a case-by-case basis. 1044(b)(3). 12

25 Every five years, the OCC is required to conduct a review of each preemption determination through the notice and public comment process. 1044(d)(1). 26 The Comptroller must publish and update quarterly a list of preemption determinations then in effect that identifies the activities and practices covered by each determination and the requirements and constraints determined to be preempted. 13

27 OCC determinations on federal preemption are not entitled to Chevron deference. Instead, reviewing courts must assess the validity of the determination. They will examine the thoroughness of the OCC s consideration, the validity of its reasoning, its consistency with other determinations and any other factor the court finds persuasive and relevant. Chevron deference still applies to the OCC s interpretations of the National Bank Act that are unrelated to consumer financial laws. 1044(b)(5). 28 No OCC regulation or order shall be interpreted or applied as to invalidate or otherwise declare inapplicable to a national bank a state consumer financial law unless substantial evidence made on the record of the proceedings supports the specific finding regarding the preemption of such provision in accordance with the legal standards of Barnett. 1044(c). 14

29 The requirement that preemption determinations be made on a case-by-case basis will be used to argue that the Preemption Rule has no authoritative value as applied to State consumer financial law. The erosion of the OCC s preemption authority undermines the reliability of existing OCC preemption pronouncements and all case law which is rooted in those pronouncements. 30 The CFPA does not occupy the field in any area of state law. 1044(b)(4). 15

31 Recent cases which relied heavily on the Preemption Rule: State law cannot limit amount garnishee bank can charge for processing a garnishment. Monroe Retail, Inc. v. RBS Citizens, N.A., 589 F.3d 274 (6th Cir. 2009). Unlawful practice of the law statute cannot limit a mortgage lenders practice of charging document preparation fees. Fuchs v. Wachovia Mortgage Corp., 838 N.Y.S. 2d 148 (N.Y. App. Div. 2007). California cannot mandate check disclosures for national banks. Rose v. Chase Bank USA, N.A., 513 F.3d 1032 (9th Cir. 2008). 32 All is not lost. Case law construing Barnett Bank from 1996 to 2004 should still provide good guidance as to what future courts will do to address preemption issues. 16

33 Municipal ordinances prohibiting banks from charging ATM fees to non-depositors preempted. Bank of America v. City & County of San Francisco, 309 F.3d 551 (9th Cir. 2002). Iowa law barring advertisements on ATMS preempted. Bank One v. Guttau, 190 F.3d 844 (8th Cir. 1999). California minimum payment periodic statement disclosure law preempted. American Bankers Ass n v. Lockyer, 239 F. Supp. 2d 1000 (E.D. Cal. 2002), appeal dismissed, No. 03-15160 (9th Cir. 2004). 34 Subsidiaries, Affiliates & Agents The CFPA s provisions related to the preemption of State law as applied to subsidiaries, affiliates and agents. 17

35 (4) Subsidiary The term subsidiary (A) Means any company which is owned or controlled directly or indirectly by another company; and (B) Includes any service corporation owned in whole or in part by an insured depository institution or any subsidiary of such a service corporation. 12 U.S.C. 1813(w). 36 (k) Affiliate -- For purposes of this Act the term affiliate means any company that controls, is controlled by, or is under common control with another company. 12 U.S.C. 1841(k) 18

37 5136C. State Law Preemption Standards for National Banks and Subsidiaries Clarified (b) Preemption Standards. (1) In General (2) Savings Clause This title and section 24 of the Federal Reserve Act (12 U.S.C. 371) do not preempt, annual or affect the applicability of any State law to any subsidiary or affiliate of a national bank (other than a subsidiary or affiliate that is chartered as a national bank). 1044(a)(Emphasis added). 38 5136C. State Law Preemption Standards for National Banks and Subsidiaries Clarified. (e) Application of State Consumer Financial Law to Subsidiaries and Affiliates. Notwithstanding any provisions of this title or section 24 of the Federal Reserve Act (12 U.S.C. 371) a State consumer financial law shall apply to a subsidiary or affiliate of a national bank (other than a subsidiary or affiliate that is chartered as a national bank) to the same extent that the State consumer financial law applies to any person, corporation, or other entity subject to such State law. 1044 (Emphasis added.) 19

39 (b) RELATION TO OTHER PROVISIONS OF ENUMERATED CONSUMER LAWS THAT RELATE TO STATE LAW No provisions of this title, except as provided in section 1083, shall be construed as modifying, limiting, or superseding the operation of any provision of an enumerated consumer law that relates to the application of a law in effect in any State with respect to such Federal law. 1041. 40 Clarification of Law Applicable to Non-Depository Institution Subsidiaries of National Banks Section 5136C of the Revised Statutes of the United States (as added by this subtitle) is amended by adding at the end the following: (h) Clarification of Law Applicable to Non-Depository Institution Subsidiaries and Affiliate of National Banks. (2) Rules of Construction - No provision of this title or 24 of the Federal Reserve Act... shall be construed as preempting, annulling, or affecting the applicability of State law to any subsidiary, affiliate, or agent of a national bank... 1045 (Emphasis added.) 20

41 Operating Subsidiary State laws requiring an operating subsidiary to pay licensing fees, file annual statements and submit to state supervision preempted. Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007). Maryland law which restricted the amount of prepayment fees a mortgage lending subsidiary could impose on borrowers preempted. National City Bank of Indiana v. Turnbaugh, 463 F.3d 325 (4th Cir. 2006). Connecticut bank regulators cannot impose state licensing requirements on a mortgage subsidiary of a national bank. Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005). 42 Agents and Service Providers HOLA preempts state mortgage broker licensing requirements as applied to in State Farm agents. State Farm Bank, F.S.B. v. Reardon, 539 F.3d 336 (6th Cir. 2008). State law restrictions on gift card charges and expiration dates could not be imposed on agents and service providers to national banks. SPGGC, L.L.C. v. Ayotte, 488 F.3d 525 (lst Cir. 2007). A State law regulating refund anticipation loans issued by tax preparers preempted when they were acting on behalf of a national bank. Pacific Capital Bank N.A. v. Connecticut, 542 F.3d 341 (2d Cir. 2008). 21

43 Preservation of State Powers Christi Adams 44 Preservation of Enforcement Powers of States The attorney general of any state may bring a civil action in the name of the state to enforce provisions of the CFPA or the regulations issued there under and to secure remedies under the provisions of the CFPA or remedies otherwise provided under other law. 1042(a)(1). 22

45 A state bank regulator may also bring a civil action or other appropriate proceeding to enforce the provisions of the CFPA or regulations issued under it with respect to any entity that is state-chartered, incorporated, licensed or authorized to do business in the state and to secure remedies under the CFPA or remedies otherwise provided under other provisions of law with respect to that entity. 1042(a)(1). 46 Actions Against National Banks or Thrifts A state attorney general may not bring a civil action in the name of the state against a national bank or federal thrift to enforce the CFPA. 1042(a)(2)(A). 23

47 However, a state attorney general may bring a civil action in the name of the state against a national bank or thrift to enforce a regulation prescribed by the Bureau under a provision of CFPA and to secure remedies under provisions of the CFPA or remedies otherwise provided under other law. 1042(a)(2)(B). 48 The CFPA does not alter, limit or affect the authority of a state to enforce state law. The Supreme Court s decision in Cuomo v. Clearing House Ass n, LLC, 129 S. Ct. 2710 (2009) is codified. 1042(d)(1). 24

49 Going Back in Time In Anderson National Bank v. Luckett, the Supreme Court ruled a state law requiring national banks to escheat to the state inactive and unclaimed deposits was not preempted. The court ruled It has never been suggested that non-discriminatory laws of this type are so burdensome as to be inapplicable to the accounts of depositors in national banks. 321 U.S. 233, 236 (1944) 50 Back to the Future: Visitorial Standards for Banks and Thrifts No provision of the title which relates to visitorial powers or otherwise limits or restricts the visitatorial authority to which any national bank is subject shall be construed as limiting or restricting the authority of any state attorney general to bring an action against a national bank in court of appropriate jurisdiction to enforce an applicable law and to seek relief as authorized by such law. 1047(a)(1). 25

51 There is no provision permitting state attorneys general to bring class action type cases against any covered entity on behalf of state citizens. But, compare the parens patriae language of the amendments to the Omnibus Appropriations Act in sec. 1097. 52 Preservation of Powers Related to Charging Interest No provision of the CFPA shall be construed as altering or otherwise affecting the authority of a national bank to charge interest at the rate allowed by laws of the state, territory or district where the bank is located. 26

53 In Smiley v. Citibank (South Dakota), the Supreme Court held the OCC could define interest for rate exportation purposes under Section 85 of the National Bank Act. 54 Consultation Required Before initiating any action against any covered person to enforce the CFPA or a Bureau, a state attorney general or state regulator must provide a copy of a complete complaint to be filed and a written notice describing the action to the Bureau and the prudential regulator, if any. 1042(b)(1)(A). 27

55 Preservation of Existing Contracts The CFPA and the Bureau s regulations, orders, guidance and interpretations, do not alter or affect the applicability of any OCC or OTS regulations, orders, guidance or interpretation regarding the applicability of state law to any contract entered into on or before the date of the enactment of the act. 1043. 56 As noted, there is a savings clause which provides that contracts existing prior to the passage of the Act are subject to the preemption standards of the day. However, this does not provide great comfort as these contracted arrangements arguably change every time a new cardholder or deposit agreement is mailed to a consumer. 28

57 Effective Date This subtitle is effective on the transfer date. 1048. 58 Thank You for Participating in Today s Program To keep up with the latest developments in the Consumer Financial Protection Act and its impact, visit the Foley & Lardner blog CFSLBulletin.com regularly. 29