The scope of national bank preemption is currently before the U.S. Supreme Court in Cantero v. Bank of America, N.A.  A New York statute requires the payment of interest on mortgage escrow accounts and the question before the Supreme Court is whether the National Bank Act (NBA) preempts application of the New York statute to national banks.  Reversing the district court, the Second Circuit ruled that the New York statute is preempted by the NBA.

In its amicus brief filed with the Supreme Court, the Justice Department argues that the Court should vacate the Second Circuit’s judgment and remand the case to allow the Second Circuit to undertake the correct preemption inquiry in the first instance.  OCC regulations provide that certain types of state laws are categorically preempted by the NBA, including state laws addressing “[e]scrow accounts, impound accounts, and similar accounts.”  In ruling that the New York law is preempted by the NBA, the Second Circuit did not rely on OCC preemption regulations.  Instead the Second Circuit concluded that in determining the NBA’s preemptive scope, the relevant “question is not how much a state law impacts a national bank, but rather whether it purport to ‘control’ the exercise of its powers.”

As it did in its amicus brief filed at the invitation of the Supreme Court at the petition stage of Cantero, the Justice Department, in its merits stage amicus brief, takes issue with the OCC’s “different and broader view of NBA preemption.”  The Justice Department states that the interpretation of the NBA set forth in its amicus brief “better reflects the text, structure, and history of the statute and this Court’s cases applying the NBA.”  In its brief, the Justice Department points to the language in 12 U.S.C. Sec. 25b (Dodd-Frank Section 1044) which provides that a state consumer financial law is preempted if it “prevents or significantly interferes with the exercise by the national bank of its powers.”  According to the Justice Department, this language requires a court to make a practical, case-by-case assessment of the degree to which a state law will impede the exercise of those powers.  The Second Circuit’s conclusion that a state law is preempted if it attempts to “control” a national bank’s exercise of its powers “runs counter to  the ordinary meaning of the term “significantly interferes with”; it is inconsistent with Congress’s  evident expectation that preemption determinations will rest on practical degree-of-interference assessments; and it does not account for this Court’s many decisions holding that the NBA did not preempt various state laws regulating national banks’ banking activities.”  The Justice Department also argues that the Second Circuit’s analysis was “particularly flawed” because it “logically implies that substantially all ‘State consumer financial laws’ will be preempted in contravention of Section 25b’s text, structure, and history.”

The OCC’s approach to preemption was recently criticized by a group of seven Democratic Senators in a letter sent to Michael Hsu, the Acting Comptroller of the Currency.  In the letter, the Senators ask Mr. Hsu “to address [the OCC’s] longstanding expansion of its preemption authority to undermine state consumer protections.”  More specifically, the Senators listed the following ways in which the OCC “has not operated consistent with Congress’s carefully calibrated regime in the years since Dodd-Frank”:

• The OCC has “improperly sidestepped” Section 1044 of Dodd Frank (12 U.S.C. Sec. 25b) “to justify preempting broad categories of state consumer protection laws.”  Section 1044 states that a state consumer protection law is preempted only if one of three conditions is met: (1) application of the state law would have a discriminatory effect on national banks, in comparison with the effect of the law on a bank chartered by that state; (2) in accordance with the legal standard for preemption in Barnett Bank, the state law prevents or significantly interferes with the exercise by the national bank of its powers; or (3) the state law is preempted by a provision of federal law other than Dodd-Frank.  In 2020, the OCC issued an interpretive letter in which it asserted that an OCC action with “indirect…effects on a state consumer financial law” is not a preemption determination and therefore not subject to Section 1044.  “Indirect” preemption is not one of three conditions in which state consumer protection laws regulating national banks may be preempted.
• The OCC’s preemption rules published in 2011 cannot be reconciled with the text and Congressional intent of Section 1044.
• The OCC has not reviewed its preemption determinations every five years as required by Dodd-Frank.
• The OCC has “unduly interfered” with states’ ability to gather information about credible violations of non-preempted state consumer protection laws.  Although states may not exercise visitorial powers over national banks, state attorneys general have “unquestioned” authority to enforce non-preempted state laws under governing Supreme Court precedent which is codified in Section 1047 of Dodd-Frank.  (The Senators reference a letter recently sent to CFPB Director Chopra by 21 state attorneys general requesting that the CFPB take appropriate action to make clear to national banks, federal savings associations and other federally-chartered institutions that it creates a material risk that may give rise to unfair or abusive acts or practices for a bank to refuse to cooperate with state AG information requests that see to further enforcement of applicable state laws, including enforcement of generally applicable state consumer laws.)

The Senators urge the OCC to (1) conduct its statutorily mandated review of its preemption determinations, (2) rescind any regulations, orders, interpretive letters, or other guidance that contravene Section 1044, including the OCC’s 2011 preemption regulations and 2020 interpretive letter, (3) issue supervisory guidance directing all national banks to comply with state requests for information regarding credible allegations involving non-preempted state consumer protection laws.  (The state attorneys general who sent the letter to Director Chopra referenced above also sent a letter to Acting Comptroller Hsu urging the OCC to issue such supervisory guidance.)

The outcome of Cantero will finally bring to a head an unresolved issue which has been percolating ever since the OCC proposed its preemption regulations in 2011.  At that time, as the Justice Department noted in its amicus brief, even the Treasury Department submitted a comment letter to the OCC in which it disagreed with the OCC’s proposed broad preemption approach.  Since the OCC finalized its preemption regulations, most national banks have relied on them to not comply with many state consumer protection law laws.  A ruling by the Supreme Court in Cantero that the NBA does not preempt the New York law will implicitly call into the question the validity of the OCC’s preemption regulations and mean that national banks will have to take a fresh look at whether they must now comply with certain state consumer protection laws and regulations which they have been ignoring–a task that will not be easy and could require each national bank to seek preemption determinations from the OCC with respect to each state law or regulation in question.  In connection with that review,  a bank may need to look at the costs associated with complying with such state laws and regulations and the impact on the bank’s profitability.  Given how costly and time-consuming that process could be, it might be easier for national banks to comply with previously ignored state laws and regulations. 

An even more difficult issue is whether an adverse ruling by the Supreme Court in Cantero would apply retroactively to the enactment date of Dodd-Frank, i.e. to July 21, 2010.  We would not be surprised to see an adverse ruling in Cantero trigger a new wave of state AG enforcement actions and private litigation against national banks based on violations of state consumer protection laws and regulations.  While banks might seek to argue that Cantero does not apply retroactively and they were entitled to rely on the OCC preemption regulations because under the Chevron deference framework they represented a reasonable interpretation of the NBA by the OCC, an adverse ruling in Cantero would call into question the reasonableness of the OCC’s interpretation.  In addition, the Supreme Court is scheduled to hear oral argument in two cases on January 17,  2024 in which the question before the Court is whether it should overrule its Chevron decision.  If the Court does overrule Chevron, banks might be unable to rely on Chevron to defend the validity of the OCC regulations.

The Justice Department’s amicus brief supporting vacatur of the Second Circuit’s decision is in sharp contrast to the amicus brief filed by the OCC in Cantero when it was before the Second Circuit.  In the OCC’s amicus brief filed in the Second Circuit, the OCC argued that the New York law mandating the payment of interest on mortgage escrow accounts is preempted based in large part on the OCC’s preemption regulations which provide that state laws addressing mortgage escrow accounts are categorically preempted.  Unfortunately, because the OCC has no independent right to litigate in the Supreme Court, it cannot file its own amicus brief in the Supreme Court as of right.  While the OCC might seek permission from the Justice Department to file its own amicus brief in the Supreme Court in support of Bank of America, it seems very unlikely that the Justice Department would grant such permission.  As a result, it will be the Justice Department that expresses the views of the United States rather than the agency charged by Congress with the role of interpreting the NBA. 

It should be noted that Cantero and the controversy over the scope of NBA preemption of state consumer financial protection laws does not implicate Section 85 of the NBA, which deals with the interest rate authority of national banks.

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