Passage by the US Senate last week of the Restoring American Financial Stability Act of 2010 containing new standards for consumer protection sets the stage for a significant change in the standards for federal preemption of state law governing the offering of financial services to consumers. With limited exceptions for “inconsistent” state laws, the new federal consumer protection requirements would not preempt state law.
But at least as importantly for national banks and federal savings bank and their respective subsidiaries, both the House and Senate versions of this legislation would alter existing preemption standards by specifically outlining new “clarifying” standards for preemption of state law by the National Bank Act, and the Home Owners’ Loan Act. As is detailed in this advisory, these new standards would narrow the circumstances under which the NBA and HOLA could be deemed to preempt state law as applied to national banks, federal savings banks, and operating subsidiaries of those federally chartered banking institutions, thereby altering the regulatory and litigation landscape under which these institutions operate. If these new standards are included in the final legislation − which they almost certainly will − the circumstances under which national banks and federal savings banks may offer consumer products and services on a uniform, nationwide platform will be more limited and the costs of providing such services likely will increase.
For national banks, the new standards will codify existing precedent (i.e., the standards that were articulated by Barnett Bank v. Nelson, 517 U.S. 25 (1996)), but significantly limit the possible interpretation and application of that precedent. For federal savings banks, the standards will be new to them, as federal savings banks have always operated pursuant to a broad federal mandate under HOLA and its implementing regulations “occupying the field” of regulation with respect to deposit-taking and lending activities. To adapt to these changes, federal savings banks as well as national banks will likely need to undertake a probing review of their policies and procedures in relation to state laws in the consumer area. In any event, regulatory and compliance costs will increase.
On the litigation front, all financial institutions subject to the legislation’s new consumer protection provisions, including but not limited to national banks and federal savings banks, likely will see an increase in plaintiffs’ activities and the advent of broader actions by state Attorneys General. Defending against these actions on grounds of federal preemption will be a new challenge and will require both a solid understanding of preexisting precedent and the analytical skill to demonstrate that the new tests for preemption can be met under these standards.