On December 18, 2020, the OCC released a new interpretation of the statutory standards and requirements for federal preemption of state consumer financial laws that were enacted as part of the Dodd-Frank Act. Section 1044 of Dodd-Frank, codified at 12 U.S.C. § 25b, contains both substantive and procedural preemption provisions.  The OCC’s Interpretive Letter 1173 (“IL 1173”) focuses primarily on the procedural provisions; it explains the scope of these provisions based on a close reading of the text of section 25b.

Section 25b was enacted against a background of intense and vocal criticism by state attorneys general, consumer advocates, and some members of Congress about the expansive position the OCC took on national bank preemption, especially as it applied to state consumer financial laws. (The statute defines “state consumer financial law” to mean a state law that regulates the “manner, content, or terms and conditions” of a financial transaction or a related consumer account.)

In section 25b, Congress sought to clarify the bases for preemption by codifying three substantive legal grounds that could support the preemption of a state consumer financial law:

  • The law has a discriminatory effect on a national bank;
  • The law is preempted under the standards contained in the Supreme Court’s 1996 Barnett decision, which held generally that states may not prevent or significantly interfere with the exercise of national bank powers (the Barnett standard); and “preemption determinations” under the Barnett standard may be made by a court or by the OCC acting by regulation or order; or
  • The state law is preempted by a federal law other than the National Bank Act.

Congress also sought to require more transparency and accountability around the OCC’s preemption decisions. The statute therefore imposes certain procedural requirements that apply when the OCC decides that a state consumer financial law is preempted. These include a requirement that a “preemption determination” be made on a “case-by-case basis.” “Case-by-case basis” is statutorily defined to mean “a determination . . . concerning the impact of a particular State consumer financial law on any national bank that is subject to that law, or the law of any other State with substantively equivalent terms.” The statute provides further that if the OCC makes a determination that the law of another state with “substantively equivalent terms” is preempted, it must first consult with the CFPB.

In IL 1173, the OCC explains how these requirements apply. The OCC begins by noting that, in the statutory text articulating the three substantive preemption standards, the phrase “preemption determination” appears only in connection with the second statutory category — preemption under the Barnett standard. Then it construes the word “determination” to mean an “affirmative conclusion” that federal law preempts a state consumer law. From these predicates, the OCC concludes that:

  • An OCC decision that has only “indirect or incidental effects” on a state consumer financial law is not a “preemption determination,” presumably because that action does not state an “affirmative conclusion” that a state consumer financial law is preempted.
    • This likely means that an OCC opinion confirming that a national bank is authorized to exercise a particular power is not a “preemption determination,” although a consequence of that opinion may be that a state consumer financial law is preempted because, under the Barnett standard, it prevents or significantly interferes with a national bank’s exercise of the power. If, on the other hand, the OCC states expressly that a particular state law is preempted then, under the reasoning of IL 1173, that statement would be a “preemption determination.”
  • A “preemption determination” only occurs by application of the Barnett standard (not the other two statutory standards) to a state consumer financial law. Applications of the discrimination and “other federal law” standards therefore are not “preemption determinations.” Accordingly, the “case-by-case basis” and CFPB consultation requirements do not apply.
    • This means that the OCC could decide that an entire category of state consumer financial laws with discriminatory effects is preempted, rather than just a single law, and that the OCC could do so without prior consultation with the CFPB.
    • The same would hold true in cases where the OCC decides that state consumer financial laws are preempted by a federal law other than title 62 of the Revised Statutes. Title 62 comprises provisions, including the powers authorization clause in section 24(Seventh), that comprise the National Bank Act. It does not include provisions such as 12 U.S.C. § 371, which authorizes national banks to engage in real estate lending. Section 371 was originally enacted as part of the Federal Reserve Act and has never been codified in title 62 of the Revised Statutes. The OCC’s interpretation means that it could decide that an entire category of state consumer financial laws is preempted because that type of law prevents or significantly interferes with a national bank’s real estate lending powers, and that the OCC could do so without prior consultation with the CFPB.The OCC’s “indirect or incidental effects” interpretation is not amplified or explained in IL 1173.  If, however, the OCC’s opinions as to the scope of a national bank’s powers are not in themselves “preemption determinations,” that conclusion is consistent with the analysis in the Barnett decision, which considers first whether the power at issue is federally authorized for a national bank and, only if it is, considers whether the impact of the state statute on the exercise of that power triggers federal preemption.

Applying the reasoning of IL 1173, neither the OCC’s recent valid-when-made rule nor its true lender rule is a “preemption determination.” Both rules construe the scope of the authority of a national bank (or a federal savings association) under federal usury statutes to charge interest consistent with the law of the state of the bank’s location. The valid-when-made rule provides that interest that was permissible under those statutes when a loan was made continues to be permissible if the loan is sold or otherwise transferred. The true lender rule provides that a national bank (or federal savings association) “makes a loan” if it either is named as the lender in the loan documents or actually funds the loan. Under the interpretive positions described in IL 1173, neither rule is a “preemption determination” requiring application of the “case-by-case basis” or CFPB consultation requirements. This position is consistent with the positions the OCC already has taken in responding to commenters in both rulemakings.

In addition to construing the “case-by-case basis” and the CFPB consultation requirements, IL 1173 interprets the additional procedural requirements in section 25b. These include requirements that legal preemption conclusions be supported by substantial evidence and that the deference standard applicable to those conclusions is the Supreme Court’s Skidmore deference standard. A separate savings clause preserves Chevron deference for interpretations of the National Bank Act.   In addition, section 25b expressly excludes the national bank usury statute, 12 U.S.C. § 85, from the scope of coverage of both its substantive and procedural preemption provisions. Finally, section 25b requires the OCC to review its preemption conclusions every five years using a notice-and-comment process; issue a report to Congress with respect to that review; and publish quarterly a list of “preemption determinations.”

In IL 1173, the OCC construes the scope of section 25b’s procedural requirements as follows. The OCC’s conclusions in IL 1173 appear in italics; the statutory text is summarized immediately following.

  • The “substantial evidence requirement” applies only to preemption determinations under the Barnett standard. The statutory text of the substantial evidence requirement expressly references the provision describing preemption under the Barnett standard
  • The requirement for Skidmore deference applies to the OCC’s conclusion that any type of state law, not just a state consumer protection law, is preempted by either the National Bank Act or the provision at 12 U.S.C. § 371 that authorizes national banks to make real estate loans. The text of section 25b addressing Skidmore deference says that it applies with respect to “any determination . . . regarding preemption of a State law” under the National Bank Act or the real estate lending authorization.
  • Chevron deference applies to any interpretation by the OCC that a national bank power is authorized by the National Bank Act or the real estate lending authorization in § 371. The statutory text contains a “savings clause” providing that nothing in section 25b “shall affect” the deference that a court accords to the OCC in interpreting the National Bank Act or “other Federal laws.”
  • The authority of national banks under 12 U.S.C. § 85 to charge the interest permissible under the law of the state of their location is not subject to or affected by section 25b. The statutory text says that no provision of title 62 of the Revised Statutes, which contains the National Bank Act “shall be construed as altering or affecting the authority conferred by” section 85.
  • The review and reporting provisions apply with respect to any conclusion made by the OCC that a state consumer financial law is preempted, i.e., these provisions are not limited to determinations made under the Barnett standards. The statutory text refers to a determination that “a provision of Federal law” preempts a state consumer financial law.
  • The requirement that the OCC publish a list of preemption determinations applies only with respect to determinations made under the Barnett standard. The phrase “preemption determination” is used in only two places in section 25b — the first is in the provision identifying the Barnett standard as one of the three ways in which a state consumer financial law may be preempted; the second is in this requirement for publication of a list. The OCC’s construction is based on its reading of “preemption determination” to apply only to a decision that applies the Barnett standard.

Section 25b does not modify the pre-existing requirement, codified at 12 U.S.C. § 43, for the OCC to provide notice and an opportunity for public comment on any interpretation in which it concludes that a consumer protection, community reinvestment, fair lending, or interstate branching-related law is preempted.