Chairman & Managing Director
Lenders Compliance Group
The Dodd-Frank
Wall Street Reform and Consumer Protection Act retained much of the existing
framework regarding federal preemption of state laws. But included a number of
significant changes that opened the door to a larger role for state involvement
in the activities of federally chartered institutions.
For example, the
Dodd-Frank Act clarified that states generally may, if they so choose, provide
greater protection to consumers than Title X of Dodd-Frank (its Consumer
Financial Protection Act) provides.
Specifically, Dodd-Frank
§ 1041 specifies that “a statute, regulation, order, or interpretation in
effect in any state is not inconsistent with the provisions of this title if
the protection that such statute, regulation, order, or interpretation affords
to consumers is greater than the protection provided under this title.”
Recently, a Chief Compliance
Officer at a large financial services institution, a national bank, told me
that he had received a call from a borrower who lives in California. The
borrower contended that this financial institution should be paying him
interest on his mortgage escrow account. The compliance officer was concerned
about how this request should be met under Dodd-Frank.
After getting some facts
regarding the institution’s regulatory framework, I offered the following
guidance.
Based on my call
with him, it sounded as though the bank had made the decision to comply with
state interest-on-escrow laws, even though the Office of the Comptroller of the
Currency (OCC) and others have questioned whether a national bank is required
to comply. A decision of the U.S. Court of Appeals for the 9th Circuit suggests
that compliance with state interest-on-escrow laws is a good idea, certainly
for institutions located within the jurisdiction of the 9th Circuit (viz., Alaska,
Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam,
and the Northern Mariana Islands).
Suffice it to
note that national banks and federal savings associations interested in
avoiding litigation of the matter would be well-advised to comply with state
interest-on-escrow laws.
Dodd-Frank § 1044
amended the National Bank Act to clarify the preemption standards for national
banks and § 1046 amended the Home Owners’ Loan Act to set the same preemption
standards for federal savings associations. Dodd-Frank provides that state
consumer financial laws are preempted only if:
• Application
of a state consumer financial law would have a discriminatory effect on
national banks (or federal savings associations), in comparison with the effect
of the law on a bank (or savings association) chartered by that state;
• In
accordance with the legal standard for preemption in the decision of the
Supreme Court of the United States in Barnett Bank v. Nelson, 517 U.S. 25
(1996), the state consumer financial law
prevents or significantly interferes with the exercise by the national bank (or
federal savings association) of its powers; and any preemption determination
may be made by a court, or by regulation or order of the Comptroller of the
Currency (OCC), on a case-by-case basis in accordance with applicable law; or
• The
state consumer financial law is preempted by a provision of federal law other
than Title X of the Dodd-Frank Act.
On July 20, 2011,
the OCC amended its regulations to reflect its understanding of the Dodd-Frank
preemption standards as applied to national banks and federal savings
associations (which Dodd-Frank moved from OTS to OCC control). Since 2011,
several court decisions have considered how much change Dodd-Frank wrought.
