The debate about the legality of Richard Cordray’s appointment to head the Consumer Financial Protection Bureau is just one of many brewing power battles.  Another, and the one I am writing about today, is the Office of the Comptroller of the Currency’s preemption ruling.

The OCC has absorbed the Office of Thrift Supervision and, thus, has dramatically increased the number of institutions subject to its enforcement, supervisory and rule-writing authority, which translates into more and louder voices crying for preemption of state lending laws.  The OCC already is a poster child for regulatory capture because of its 2004 blanket preemption rule shielding national banks from state laws that were aimed at curtailing costly, unaffordable loans, and deceptive lending practices. It was in response to the OCC preemption rule (and a similar one by OTS) that the Dodd-Frank Wall Street Reform and Consumer Protection Act included provisions aimed at limiting preemption.

Dodd-Frank restricts OCC preemption to situations in which a state consumer financial law: (1) discriminates against national banks in favor of banks chartered in the state; (2) “prevents or significantly interferes with the exercise by the national bank of its power;” or (3) conflicts with federal laws that expressly preempt state laws. Dodd-Frank also requires that any preemption determinations be made case-by-case, based on substantial evidence, and on the record. http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_public_laws&docid=f:publ203.111.

As many of you know, on July 21, 2011, the OCC revised its preemption provisions as required under Dodd-Frank. http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-97.html.  Many features of the new OCC rule were in accord with Dodd-Frank’s mandates, but the process that the OCC employed in issuing the rule did not follow the requirements set out in Dodd-Frank.  

The OCC did not look at individual state consumer financial laws to determine whether they were preempted on the grounds that they “prevent[ed] or significantly interfere[d]” with national banks’ exercise of their power. The OCC’s position is that the process for issuing preemption rulings is only for prospective rules and that the agency had no obligation to review existing rules.  As a result, the OCC kept intact a list of preempted state laws that it had assembled under its former and broader preemption standard.  The effect boils down to continued field preemption of state consumer financial laws.

So, why should we expect a battle ahead?  When the OCC issued its proposed rule, both the Department of the Treasury—of which the OCC is an arm—and the National Association of Attorneys General opposed the proposed rule.  The OCC did not yield.  Bets are that Obama’s nominee for Comptroller of the Currency, Thomas Curry, won’t yield either. 

Whether Treasury and the CFPB, with Cordray in the driver’s seat, will try to win Curry over is hard to say.  The CFPB has its own preemption battle to contend with as consumer advocates protest its interim rule on the Alternative Mortgage Transaction Parity Act, which preempts state laws that restrict nonbank lenders from making loans with balloon payments and other “nontraditional” features. http://www.nationalmortgagenews.com/nmn_features/criticize-cfpb-preemption-1028266-1.html.

The field of play will be the courts where state Attorneys General will likely try to enforce laws that are subject to earlier OCC preemption rules. It will take years for courts to determine the legality of the OCC’s process and its 2011 rule.  While the courts sort out these issues, neither lenders nor consumers will know exactly which laws matter.

Administrative Law, Financial Institutions, Masters: Dodd-Frank | Bookmark

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