Understanding the Federal Preemption Debate and a Potential Uniformity Solution

• Author: V. Gerard Comizio - Helen Y. Lee
• Position: Chair of the Paul Hastings Global Banking Practice, resident in the Washington, D.C. office - Associate in the Paul Hastings Global Banking Practice, resident in the Washington, D.C. office
• Pages: 51-62

B u s i n e s s L a w B r i e f | S p r i n g / S u m m e r 2 0 1 0 5 1

I. INTRODUCTION

Legendary baseball player and American philosopher Yogi

Berra once provided directions to his house by stating that

“when you come to a fork in the road, take it.”

1

As the U.S.

Congress continues to consider banking reform legislation in the

wake of the 2008 financial crisis, Yogi’s unique directions may be

a guide to resolving a current policy debate over a controversial

issue in bank regulation: the federal preemption doctrine. As dis-

cussed in this article, recent judicial and legislative actions poten-

tially roll back a long standing legal doctrine that has allowed

federally chartered banking institutions − national banks and

federal savings associations − to answer solely to federal banking

regulators.

Proponents of preemption argue that preemption is a long-

standing feature of the dual banking system and a legal advantage

of having a federal bank charter. They also argue that a single

uniform system of federal banking rules promotes operating and

business efficiencies that can be passed on to consumers and

minimizes undue regulatory burdens within the U.S. for larger

banks operating in a competitive international financial environ-

ment. Some proponents also accuse state regulators of opposing

preemption in pursuit of a parochial agenda, designed to stem

the tide of state banks converting to national bank charters in

recent years as they grow and operate across state lines under

relaxed interstate branching rules − basically an alleged case of

bureaucratic turf protection.

But in recent years preemption has come under attack

from state regulators, state attorneys general, and consumer

advocates.

2

Most opponents have focused their fire on national

banks − nearly three times the size of the thrift industry, and thus

a bigger target − arguing that national banks, with a willing part-

ner in recent years in their primary federal regulator, the Office of

the Comptroller of the Currency (OCC), have invoked preemp-

tion to escape a wide range of state consumer protection laws,

exposing consumers to abusive and predatory lending practices,

while failing to provide aggressive consumer protection at the

federal level.

3

They also charge that during the boom preceding

the financial crisis, the OCC and other federal regulators failed

to police mortgage and credit card lending abuses, even when

state regulators offered specific warnings.

4

Moreover, many state

attorneys general and consumer groups argue that the states have

been more aggressive than the federal government in adopting

and enforcing pro-consumer lending laws.

5

Understanding the preemption doctrine, the parties to this

debate and their respective positions would shed some light on

the root problem underlying the issue – and in a real sense the

shared grievance of both parties to the debate – a lack of uniform

state and federal banking laws, and a potential solution: a need

for uniformity among state banking laws, as well as between state

and federal banking laws.

6

This article addresses: 1) the development of the national

bank preemption doctrine; 2) federal thrift preemption; 3) recent

judicial and legislative developments;

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and 4) a possible solution

to the debate through uniformity in state and federal banking

laws.

II. BACKGROUND

A. Development of the National Bank Preemption Doctrine

With respect to national banks, preemption is the legal

theory that enables them to operate nationwide, under uniform

national standards, subject to the federal regulatory oversight of

the OCC.

8

Preemption has been a key feature of the dual bank-

ing system that has developed in the U.S. since national banks

were created in 1863 under the National Currency Act, which

was later amended and became the National Bank Act (NBA)

9

– a bank regulatory structure composed of a federal system

based on a national bank charter, and a state system, composed

of banks chartered and supervised by state bank regulators. The

dual banking system has resulted in many benefits to all banks

and their customers, but preemption has become a flashpoint in

the dual banking system in recent years. As noted by two banking

legal commentators:

Understanding the Federal Preemption Debate

and a Potential Uniformity Solution

By: V. Gerard Comizio†, Helen Y. Lee††

The root problem underlying the issue…[is]

a lack of uniform state and federal banking

laws, and a potential solution: a need for

uniformity

among

state banking laws, as well

as

between

state and federal banking laws.