On July 15, 2010, the Senate approved the conference report for H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"). The House had approved the conference report on June 30. It is anticipated that President Obama will sign the Act into law the week of July 19. The Act includes a number of important provisions of interest, which we will address in a series of Alerts to our banking clients. This Alert discusses those provisions of the Act that significantly reduce the ability of federally chartered financial institutions to rely on federal preemption of state consumer finance laws. These entities will need to carefully consider whether they may now be required to comply with various state consumer finance laws.
Scope of Preemption
As an initial matter, the preemption provisions under the Act apply only to "state consumer financial laws." Accordingly, it appears that existing preemption standards under federal law will continue to apply to state laws that do not fit within the definition of "state consumer financial laws."
The Act defines a "state consumer financial law" as a law that does not directly or indirectly discriminate against national banks or federal thrifts and that directly and specifically regulates the manner, content or terms and conditions of any financial transaction, or related account, with respect to a consumer. This definition is very broad and somewhat ambiguous, and it will certainly take some time for the OCC (which will take over regulation and supervision of federal thrifts from the Office of Thrift Supervision) and courts to sort out which laws or types of laws are subject to preemption. For example, many states in the past have attempted to impose licensing rules on national banks and thrifts prior to engaging in certain types of transactions. If such state laws do not regulate the "manner, content or terms and conditions" of such transactions, then they arguably would not constitute a "state consumer financial law" and existing preemption standards would continue to apply. It is clear that the Act's heightened standards of preemption will likely not apply to a number of state laws intended to protect consumers.
A "state consumer financial law" will be preempted only:
Since state law typically is not discriminatory against national banks and thrifts and express preemption is rare, the focus of bankers should fall squarely on the second bullet point above. Barnett stands for the principle that state or local law applies to national banks in circumstances that do not alter, condition or interfere with a national bank's ability to exercise a power granted by federal law. However, some courts have interpreted Barnett in a relatively favorable manner for national banks. It will remain to be seen how the OCC and federal courts apply the principles of Barnett going forward.
In addition to the restrictions on preemption of state law above, the Act substantially curtails the ability of the OCC to strike down "state consumer financial laws."
As set forth above, the Act requires the OCC to make preemption determinations on a "case-by-case basis," defined as a determination by the OCC concerning the impact of a particular "state consumer financial law" on any national bank that is subject to the law, or the law of any other state with substantively equivalent terms. Accordingly, the OCC may not make a determination that multiple state laws are preempted unless it has determined that each of such laws has "substantively equivalent terms" to other state laws that have already been preempted.
Before making a determination that a state law is "substantively equivalent" to another state law that has been preempted, the OCC is required to consult with the newly created Bureau of Consumer Financial Protection and take its views into account.
Any court reviewing the OCC's determination will be able to assess the validity of such determination by considering the "thoroughness evident in the consideration of the [OCC], the consistency with other valid determinations made by the [OCC], and any other factors which the court finds persuasive and relevant." It is evident from the breadth of such language that Congress intends to subject any preemption determination by the OCC to close court scrutiny.
Other restrictions on the OCC's determinations regarding preemption include the following:
The Act reverses existing case law to eliminate preemption of state law with respect to operating subsidiaries and affiliates of federally chartered institutions. Accordingly, all state laws, including "state consumer financial laws," will apply to operating subsidiaries to the same extent as any other entity. National banks and thrifts should immediately consider whether existing operating subsidiaries now exposed to such laws should consolidate with the parent bank.
Although the Act is mostly full of bad news for national banks, one item of good news is that the Act appears to preserve the right of national banks to "export" interest rates under 12 U.S.C. 85. The definition of "interest" would appear to encompass many fees, including late fees, NSF fees, overlimit fees, annual fees and cash advance fees.
The provisions of the Act related to preemption will become effective on the "designated transfer date," which can be no earlier than six months and no later than 18 months after enactment of the Act.
On January 11 and 12, Joy Harmon Sperling will be co-chairing the American Conference Institute’s 22nd National Forum on Residential Mortgage Litigation & Regulatory Enforcement.
Joy Harmon Sperling and Rachel Packer wrote an article, "No Such Thing As A Free House? NJ Court Says Otherwise," for Law360. The article examines a recent unpublished opinion rendered by the Superior Court of New Jersey, Bergen County in Anim Investment Co. v. Shaloub, No. F-30508-15, 2015 N.J. Super. Unpub. LEXIS 3042 (Ch. Div. June 30, 2016).
On June 30-July 1 Warren Whitaker spoke at STEP Global Congress 2016: Advising Families Across Generations in Amsterdam on "Is America the new Switzerland?"
Day Pitney Alert
On June 4, Robert Taylor spoke on a panel at Connecticut Community Bankers Association Annual Meeting. In a session for bankers and bank directors called "Charter and Regulator Choice," Taylor and other panelists discussed the option banks have of being regulated by the state or federal government.
Day Pitney Press Release
Eliza Fromberg was quoted in an article, "FINRA's Capital Acquisition Broker Rules Face Tough Sell," in Law360.
Eliza Fromberg was quoted in an article, "Introduction of Regulation Crowdfunding" in Financier Worldwide Magazine.
Michael Rave was quoted in an article, "Banks Have Another Reason to Sell with SBLF Dividend Hike," in American Banker. In the article, Rave discusses how banks that hold Small Business Lending Fund (SBLF) capital are likely to be acquired. "They aren't in a position to repay the money or refinance it. They don't have a lot of choices," explains Rave.
Hartford, Conn, November 10, 2015 – Day Pitney is advising SBT Bancorp, Inc. (OTCQX: SBTB), the holding company for The Simsbury Bank & Trust Company, Inc. today in pricing a $8.4 million offering of 400,000 shares of its common stock at a public offering price of $21.00 per share.