On July 17, Acting Comptroller of the Currency Michael Hsu delivered prepared remarks before the Exchequer Club entitled “Size, Complexity, and Polarization in Banking.”
These were his first public remarks about the Supreme Court’s recent opinion in Cantero v. Bank of America. In that case, the Court reversed a Second Circuit opinion which had held that because of preemption a national bank need not comply with a New York law which requires the payment of 2% interest on residential mortgage escrow accounts. The Court remanded the case to the Second Circuit for it to redetermine whether the New York law is preempted under the Dodd-Frank preemption standard, posing this question to the Second Circuit: “Does the New York State law prevent or significantly interfere with the exercise of the national bank’s powers?” That is the preemption standard articulated by the Court in the Barnett Bank case.
Shortly after the enactment of Dodd-Frank on July 21, 2010, the OCC launched a rulemaking which purported to implement the preemption standard set forth in Dodd-Frank. The result of that rulemaking was a final regulation that, like the prior set of regulations, preempted categories of state laws. That regulation was heavily criticized by the Treasury, lawmakers and others for not faithfully applying the Barnett Bank preemption standard of whether the various state laws prevent or significantly interfere with the exercise of national bank powers.
Acting Comptroller Hsu announced that, in response to the Cantero opinion, the OCC will be taking a fresh look at its preemption regulations and will conduct the nuanced analysis mandated by the Court: He stated as follows:
“…[W]e are reviewing the agency’s 2020 interpretation of preemption [OCC Interpretive Letter No. 1173] under the Dodd-Frank Act to determine whether updates are needed in light of the recent Cantero decision. We need to develop a more nuanced and balanced approach to Barnett. Updating that interpretation could be a helpful step toward that.
The combination of vigorously defending core preemption, while being more precise in defining and applying the Barnett standard, will sharpen the OCC’s preemption powers. Doing so will allow us to meet the challenges of increasing polarization consistent with our rich history and deep roots.”
The mention of “increasing polarization” is a reference to the proliferation of state laws that prohibit banks from denying services to a person or company based on certain factors. This is often colloquially referred to as “debanking” a person or company. We recently blogged about one such law, a Florida law that, under the guise of identifying “unsafe and unsound” practices, prohibits federal and out-of-state financial institutions from “denying or canceling financial services to a person, or otherwise discriminating against a person in making available such services or in the terms or conditions of such services,” on the basis of a person’s:
- Political opinions, speech, or affiliations;
- Religious beliefs, religious exercise, or religious affiliations;
- Any factor if it is not a quantitative, impartial, and risk-based standard, including any such factor related to the person’s business sector ….
The Acting Comptroller castigated states for enacting these types of laws:
This trend seems to reflect the rise of polarization writ large. To varying degrees the culture wars, identity politics, and weaponization of finance are pushing toward greater and greater fragmentation of the U.S. financial system. Increasingly, banks are being asked by states to pick a side in service of performative politics rather than deliberative policy.
The OCC is a bulwark against this. Just as the advent of national banking was able to unify a fragmented banking system in the late 1800s, it can help ensure that parochial overreach today does not splinter our banking system.
We welcome the OCC’s decision to weigh in on what the First, Second and Ninth Circuits should do with respect to their mandate from the Supreme Court to determine whether state laws mandating the payment of interest on residential mortgage escrow accounts are preempted. Hopefully, the OCC will issue a new interpretive letter that will debunk the notion that the preemption determination needs to be made on a bank-by-bank basis or that a preemption determination for a particular bank could change in the future. We also hope that the OCC expands the scope of the interpretive letter to cover all the categories of state laws that are addressed in the OCC’s existing preemption regulations, While the immediate need is for OCC guidance with respect to the New York, California and Rhode Island laws requiring the payment of interest on residential mortgage escrow accounts, the need is for much broader guidance with respect to whether many other state laws are preempted. We also hope that the OCC converts its new interpretive letter into a full-blown regulation established after notice and comment rulemaking pursuant to the Administrative Procedure Act.
While under Dodd-Frank and the Supreme Court Court’s recent opinion in Loper Bright Enterprises, neither the OCC’s new interpretive letter or regulations will be entitled to Chevron deference, a well-reasoned, thorough and practical OCC preemption determination may be given some strong consideration by the courts.
Given the Cantero decision and the demise of the Chevron standard, national banks are moving closer to parity with state chartered banks when it comes to the preemption analysis of state laws. State banks have long been required to comply with many state laws that national banks have been able to eschew, but as a result of these recent decisions, national banks are beginning to conduct analyses similar to the reviews of state banks.
Finally, we want to address another important topic that was not mentioned by the Acting Comptroller in his remarks. By and large, national banks over the years have reasonably relied on the presumed validity of the OCC’s categorical preemption of certain state laws. To protect banks from being exposed to any liability to any government agency or individual for relying on those regulations, even if there is a subsequent determination by the OCC or any court that there is no preemption, we recommend that the Acting Comptroller support, and that Congress enact, a further amendment to the National Bank Act to protect those reliance interests. That amendment could be patterned after similar protective statutes that are part of many federal consumer financial services statutes. For example, Section 130 (f) of the Truth-in-Lending Act states:
“Good faith compliance with rule, regulation, or interpretation of Bureau or with interpretation or approval of duly authorized official or employee of Federal Reserve System. No provision of this section, section 1607(b) of this title, section 1607(c) of this title, section 1607(e) of this title, or section 1611 of this title imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule, regulation, or interpretation thereof by the Bureau or in conformity with any interpretation or approval by an official or employee of the Federal Reserve System duly authorized by the Bureau to issue such interpretations or approvals under such procedures as the Bureau may prescribe therefor, notwithstanding that after such act or omission has occurred, such rule, regulation, interpretation, or approval is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.”
The Equal Credit Opportunity Act (ECOA) —Section 706(e), 15 U.S.C. 1691e(e)., the Electronic Funds Transfer Act (EFTA) — Section 916(d), 15 U.S.C. 1693m(d), the Fair Debt Collection Practices Act (FDCPA) – Section 813(e), 15 U.S.C. 1692k(e) and the Real Estate Settlement Procedures Act (RESPA) – Section 19(b), 12 U.S.C. 2617(b) contain similar provisions.
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