State of Preemption Post Dodd-Frank: Up for Debate

A special message from Mary Martha Fortney, President and CEO,
November 2011

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, signed into law in July 2010, recognized that the states can often act more quickly for its consumers than the federal government, and made clear that if the state law granted greater protection, it would not be preempted. The law also established a conflict preemption standard, widely thought to be a rollback of the blanket preemption standards used by the Office of the Comptroller of the Currency (OCC) since 2004.

The Dodd Frank Act in Section 1044 states that the OCC can preempt only if on a case-by-case basis "any state consumer financial law prevents or significantly interferes with the exercise by the national bank," codifying the language of the Barnett Bank v. Marion County Supreme Court case. The Supreme Court in Barnett invalidated a state insurance law that prohibited national banks from selling insurance in small towns with less than 5,000 people. The court determined that the state insurance law prevented and significantly interfered with the business of banking and therefore the state law was preempted.

When Dodd-Frank was signed into law, state advocates generally applauded the changes. In addition to codifying the Barnett standard, it also protected the states' right to enact stronger consumer protection laws and it also provided broad enforcement authority for states' Attorney Generals.  However, several developments since Dodd-Frank have brought this into question. First, many think that the OCC's final rule adopting the "prevent and significantly interfere" language will not materially affect preemption decisions. Also, there have been two recent court cases favoring federal banks.

In Iowa, a district court ruled in August 2011 in U.S. Bank v. Schipper that the bank did not have to comply with the Iowa Electronic Transfer of Funds Act restrictions on Automated Teller Machine (ATM) access. In the ruling, the judge stated that Dodd-Frank uses the same preemption standard as Watters v. Wachovia, which includes the "significantly interferes" test of Barnett thereby substantiating the ruling.

In May 2011, an appellate court in Florida ruled in favor of Chase Bank over check cashing fees. A Florida woman sued Chase (Baptista v. JPMorgan Chase Bank, N.A.) claiming that she had been wrongly charged a check cashing fee on an account holder's check based on a state law prohibiting such fees. The court determined the state's prohibition of charging fees is in conflict with the federal authorization to charge fees and therefore the state law is preempted.

So where does this leave us? The courts now have two more cases favoring banks to consider in other cases. However, the real impact of the Dodd-Frank Act preemption language will not be known unless a challenge arises that reaches the Supreme Court. In the meantime, the state of preemption post Dodd-Frank remains up for debate. NASCUS will continue to defend against preemption of state authority in its advocacy efforts for the state system, as it has since 1965.