Preemption of State Law for National Banks and Their Subsidiaries by the Office of the Comptroller of the Currency

Publication Date: March 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

This report focuses on regulations issued by the Comptroller of the Currency preempting certain state laws. It contains a brief summary of those regulations; a review of the case law setting forth standards of preemption in the banking law area; summaries of various statutes that contain explicit statements as to their effect upon state law; summaries of recent agency interpretations and court decisions on newly enacted state laws; and a general analysis of the proposed regulations.

The question of whether or not a state law applies to a federally chartered banking institution depends upon whether or not the state law has been preempted by federal law. Unless there is an explicit federal statute specifically preempting the particular type of state law, indicating that such state laws are not to be applied to federally chartered banks, thrifts, or credit unions, the issue often turns on interpretation of the applicable federal laws. Generally, if the statutory authority is ambiguous and the courts determine that the statute at issue is one that the federal banking regulators are charged by Congress with administering, the courts will defer to a reasonable, well-reasoned interpretation by the regulator.

With this in mind, the Office of the Comptroller of the Currency (OCC), the regulator of national banks, has recently issued regulations that preempt various state laws that affect national bank real estate lending, other lending, and deposit-taking functions. There is also a regulation that sets a procedure for OCC to preempt other state laws affecting other activities or powers authorized by Congress for national banks. OCC premises these regulations on legal arguments flowing from principles of federal preemption derived from various judicial decisions and on practical argument, which in turn are based on the array of federal regulations addressing functions of national banks, including recent OCC guidance on real estate lending and predatory lending.

State regulators, consumer advocates, and certain Members of Congress have questioned whether OCC has the authority to issue such broad regulations. Some have criticized OCC as going beyond the standard articulated by the Supreme Court in Barnett Bank of Madison County v. Nelson, 517 U.S. 25, 31 (1996), when it decided that a state law that would prevent some national banks from exercising insurance powers authorized by federal law was preempted because it would "prevent or significantly interfere with the national bank's exercise of its powers." In recent years, criticism of increased bank fees and entry into new market areas have provoked state legislation aimed at protecting consumers in such areas as insurance sales, insurance licensing requirements, ATM fees, check cashing fees, and credit card warnings. National banks, sometimes supported by amicus briefs by the OCC, have challenged this type of legislation. Generally, the courts have been receptive to claims that such laws interfere with the federally authorized powers of national banks to such an extent that they are preempted by federal law.