The federal pre-emption of state banking laws is a complex topic. Pre-emption can take many forms, including explicit pre-emption provided for by federal statute and pre-emption as a result of case law.
Also, there is the grayer area resulting from federal statutes that provide that state statutes are pre-empted to the extent they are "inconsistent" but that such statutes shall not be deemed "inconsistent" if they offer greater protection to consumers than federal law. And federal statutes will occasionally state that state law is pre-empted unless the state opts out of the regulatory scheme by a particular date. Further, pre-emption occurs through regulations and opinions promulgated by regulatory agencies under the authority of federal statutes, typically the Office of the Comptroller of the Currency, which regulates national banks, and the Office of Thrift Supervision, which regulates federal and state-chartered savings and loan associations and federal savings banks.
Finally there is "parity," a word used to describe a state's efforts to put its institutions on the same [or better] footing than federally-chartered institutions. Parity can lead to pre-emption because, if a federal institution has the power to pre-empt a state banking law, an argument can be made that a state institution with parity has the same power.
Constitutional Background
The federal claim to the right to regulate banking is based on Article I, §[8 of the U.S. Constitution, which gives Congress the right to borrow money, regulate commerce, coin money and punish counterfeiting. Pre-emption of state law is based on the Supremacy Clause, which states that federal law is the "supreme law of the land." The states' power to regulate banking is based on the concept that the states and the people have all powers not delegated to the federal government, as memorialized in the 10th Amendment.
Prior to the Civil War, there were no national banks or Federal Reserve notes, and money in the United States took the form of "bank notes" issued by individual banks, all of which were state-chartered. Indeed, early money circulated in Newark, New Jersey on exhibit at the Newark Museum and the infamous Confederate money issued during the Civil War are all bank notes issued by state-chartered banks.
When the OCC was chartered toward the end of the Civil War, it was thought at the time that all state banks would have to acquire national bank charters because they were no longer authorized to issue bank notes. Instead, state-chartered banks survived by issuing checks, which have served as an alternative to currency in this country ever since.
Besides the OCC and the OTS, the other federal bank regulators are the Federal Reserve System, the Federal Deposit Insurance Corporation and the National Credit Union Administration, all of which were founded in the 20th century and are therefore younger than the New Jersey Department of Banking and Insurance, which was founded in 1892.
Pre-emption by Federal Statute
A not uncommon development in this country has been the promulgation of consumer protection statutes at the federal level designed to address perceived abuses accompanied by explicit pre-emption of existing state statutes designed to address the same abuses, but doing so in a complicated quiltwork of 50 differently-worded state compliance requirements.
Typically, efforts to regulate a perceived abuse begin at the state level. As more and more states decide to regulate a particular activity, they create different solutions to the same nationwide problem, which in turn creates a compliance problem for the regulated industry. Thereafter, the industry typically works with federal legislators to draft a federal statute that protects consumers while recognizing the interests of the industry.
Such statutes often explicitly pre-empt state law, giving the industry the advantage of having only one regulatory system to comply with rather than 50 different state statutes.
Explicit pre-emption might also occur where state statutes are deemed to be counterproductive. For example, state usury statutes were designed to help consumers by keeping interest rates down, but sometimes set such a low ceiling that few loans were made.
The federal solution to this problem was the Depository Institutions Deregulation and Monitoring Control Act of 1980, 12 U.S.C. §[1735f-7a, which explicitly pre-empts state ceilings on first lien mortgage loans, not only on behalf of OCC and OTS-regulated depositories, but on behalf of state-chartered depositories and state-licensed lenders as well.
Pre-emption as a Result of Case Law
Even when a federal statute does not explicitly pre-empt state law, courts can find pre-emption to exist. Such a finding often is based on the court's reading of Congress' intention as found in federal statute, either expressly or impliedly.
For example, if Congress is found to have occupied the "field" with respect to a particular topic, courts have held that there is no role for the states to regulate a federally-chartered depository in that regard. See Fidelity Federal Savings & Loan Assn. v. de la Cuesta, 458 U.S. 141 [1982].
Likewise, if a state law is in "conflict" with federal law, courts have determined that it must yield. See, e.g. McCulloch v. Maryland, 4 Wheat. 316, 429, 436 [1818]. To make an analogy to the game of bridge, the federal cards are always "trump"; state law can only win if the bid is "no trump."
The most well-known banking cases pre-empting state law have to do with the "exportation" of interest rates from state to state designed to avoid state usury laws. In Marquette National Bank v. First of Omaha Service Corp., 439 U.S. 299 [1978], the U.S. Supreme Court stated that a national bank in one state [Nebraska] could lend money to a borrower in a second state [Minnesota] at an interest rate greater than would be permitted under the usury laws of the second state, relying on the fiction that the borrower traveled to the first state to borrow the money.
Not only interest rates but certain fees have been "exported" under this line of reasoning, with the result that consumers have been charged higher fees by out-of-state lenders than would be permitted by their state's law.
The applicable New Jersey line of cases dealing with this topic is illustrated by Sherman v. Citibank [S.D.], N.A., 143 N.J. 35 [1995], a New Jersey Supreme Court case effectively overruled by the U.S. Supreme Court in Smiley v. Citibank [South Dakota], N.A., 517 U.S. 735 [1996].
In Sherman, the New Jersey Supreme Court held that a late fee is not "interest" and, therefore, could not be exported from out of state to New Jersey, with the result that an out-of-state bank could not charge a late-payment fee in an amount prohibited under New Jersey law even if permitted under the law of the state where the bank was located.
Had this case not been overruled by Smiley, it would have opened up the possibility of a vast number of class action lawsuits against out-of-state banks lending here. But it was effectively overruled by the U.S. Supreme Court which, in deferring to the OCC, held in Smiley that late fees [and other fees so determined by OCC regulation] also came under the category of "interest" and could therefore be exported by a national bank into a state which forbade such fees or placed limitations on them.
Protecting Consumers
In recent decades, there has been a growing perception in Washington, D.C., that state consumer protection laws were being pre-empted to the advantage of depositories, but not to the advantage of consumers.
Concerned that pro-consumer state statutes were being set aside, Congress enacted federal laws that pre-empted state laws only if they were "inconsistent" with the federal law, and provided that a state law is not inconsistent with the federal law if it provides greater protection to consumers than the corresponding federal law.
The Truth in Lending Act, 15 U.S.C. 1601 et seq., for example, prevents inconsistent state disclosure requirements. Sec. 111[a], 15 U.S.C. 1601[a]. The Credit Repair Organization Act, 15 U.S.C. Ch. 41, does not pre-empt state law, except to the extent inconsistent. Sec. 412, 12 U.S.C. 1679.
Part V of the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., deals with privacy and in particular the need to protect nonpublic personal information of consumers. Consumers who do not want this information shared with third parties have a right to "opt out" of such sharing [except as permitted by law].
The regulation promulgated under the GLBA states that state laws not inconsistent with the GLBA are not pre-empted and states further that a state law is not inconsistent if greater protection is provided. See, 15 U.S.C. 6807 and 12 C.F.R. 216.17. This language has given rise to the possibility of state laws offering greater protection by requiring consumers to affirmatively "opt in " to the sharing of their nonpublic personal information before that would be permitted.
Other examples of such limited pre-emption can be found in the Equal Credit Opportunity Act, 15 U.S.C. 1691 et seq., the Fair Credit Billing Act, 15 U.S.C.
1666 et seq., and the Fair Debt Collections Practices Act, 15 U.S.C. 1692 et seq.
The Equal Credit Opportunity Act includes a unique limited pre-emption, that is, it contains language pre-empting state law "which prohibits the separate extension of consumer credit to each party to a marriage ... Provided, that in any case where such a state law is so pre-empted, each party to the marriage shall be solely responsible for the debt so contracted." 15 U.S.C. 1681d[c]. The act also states: "Consideration or application of state property laws directly or indirectly affecting credit worthiness shall not constitute discrimination." See 15 U.S.C. §[1691d. The act limits the choice of remedies under federal and state law to one, but not both.
State's Option to 'Opt Out'
Sometimes nationwide statutes are passed giving states the opportunity not to participate if they do not wish to. Three examples of this approach were: the Depository Institutions Deregulation and Monitoring Control Act of 1980; the Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. 3801 et seq.; and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, 12 U.S.C. 43, 12 U.S.C. 1835a and amendments to 12 U.S.C. 1811 et seq.
Under the Deregulation and Monitoring Control Act and the Alternative Mortgage Transaction Parity Act, states which did not want these federal laws to apply within their borders were given the opportunity to "opt out" during the three-year period immediately following enactment of the federal law. A few states chose to get out of one or the other [or both] of these two laws, but New Jersey did not. Similar to the Deregulation and Monitoring Control Act, the Alternative Mortgage Transaction Parity Act pre-empts state law not only with respect to depositories [federal and state-chartered], but also with respect to state-licensed lenders. The Parity Act also gives the OTS authority to promulgate regulations in that regard.
While Riegle-Neal provided for interstate banking and branching, states were given the opportunity to opt out of it either with respect to interstate bank acquisitions altogether or, with respect to interstate branching, by tailoring a local statute forbidding de novo branching into the state. 12 U.S.C. 1828[d].
New Jersey took advantage of this provision in Riegle-Neal by authorizing interstate banking and branching, but forbidding de novo entry. See the New Jersey Interstate Banking and Branching Act, as now incorporated in the Banking Act of 1948, as amended, N.J.S.A. 17:9A-1 et seq.
OCC and OTS Pre-emption
Both the OCC and the OTS have been active in holding that federal banking law and regulations pre-empt state law. The basic position of the OCC is that even when state law does apply to a national bank, such as state fiduciary laws, state law is to be enforced by the OCC, not by the states.
The OTS has been even more aggressive than the OCC, pre-empting virtually any state statute purporting to protect consumers if deemed contrary to powers granted to federal thrifts. The OTS has opined that state laws which it has determined are pre-empted with respect to an OTS-chartered institution are pre-empted even with respect to a subsidiary of an OTS-chartered institution, which has a separate state-incorporated identity.
Recent examples of OTS pre-emption of state law are an OTS guidance issued on Jan. 30, 2003, www.ots.treas.gov/doc/77304.html, concluding that New York's predatory lending law does not apply to federal thrifts and their operating subsidiaries. [This law, entitled the New York Fair Lending Act, N.Y. Banking Law, 56-1, N.Y. Gen. Bus. Law 771-a, and N.Y. Real Prop. Act, Law 1302, takes effect in April, 2003.]
The guidance cites an OTS legal opinion, P-2003-2, also issued on Jan. 30, 2003. This pre-emption followed similar pre-emption pronouncements issued the week before by the OTS [OTS Op. Chief Counsel, Jan. 21, 2003] with respect to Georgia's predatory lending law [The Georgia Fair Lending Act, H.B. 1361, April 23, 2002].
At the time the Riegle-Neal Act was enacted, Congress was concerned that pre-emption by staff members at federal agencies such as the OCC and the OTS might not be in the best interests of consumers. While pre-emption is still permitted, under §[114 of Riegle-Neal, 12 U.S.C. 43, the agencies must now follow certain procedures before pre-empting state laws.
If pre-emption opinions apply to certain types of state laws such as in the area of consumer protection, the OCC must provide a public notice through the publication of the proposed pre-emption rule in the Federal Register, which notice must provide for a comment period of not less than 30 days. The OCC must also report annually to Congress on its pre-emption opinions.
Both agencies published pre-emption opinions on their Web site and provide their opinions directly to parties who originally request them. At this time, neither agency is required to notify the state in advance when contemplating a pre-emption opinion.
While state officials have access to the Federal Register and the Web sites, it would obviously be more convenient for them to be notified directly of pre-emption decisions applying to their state, giving them an opportunity to react. See, United States General Accounting Office letter to Chairman Leach dated Feb. 7, 2000, B-284372.
Parity
Some states, not wishing to put their state-chartered institutions at a competitive disadvantage vis-**-vis their federally-charted counterparts, have enacted so-called "parity" statutes and regulations. The New Jersey parity statutes applicable to banks and thrifts were recently amended by P.L. 2000, c. 69, §[3 and are found at N.J.S.A. 17:9A-24b.1 and N.J.S.A. 17:12B. The state's proposed parity regulation can be found at 34 N.J.R. 1491 [April 15, 2002].
The existence of parity statutes and regulations can result in rather confusing arguments in the pre-emption area.
New Jersey, for example, has an ambiguous statute relating to prepayment penalties. N.J.S.A. 17:3B-22. Federally chartered thrifts are specifically authorized to charge prepayment penalties and do so, pre-empting state law.
If the state-chartered thrifts and banks have parity with federally-chartered thrifts, does this mean that they can charge prepayment penalties as well? If so, that would give state institutions the right to themselves "pre-empt" state law through parity where federal depositories have that right.
If the state law is held to apply only to state-chartered institutions, that would put them at a competitive disadvantage; and if the power is important enough, the competitive disadvantage could encourage a charter flip to a national bank or federal thrift.
If on the other hand parity pre-emption is available, such an argument could eliminate the applicability of state banking law to state-chartered institutions altogether -- at least state banking law inconsistent with corresponding federal law or regulation.
A variation of the parity statute is a state statute which in effect states that compliance with a specified federal banking law is deemed to constitute compliance with the corresponding state statute. An example is N.J.S.A. 17:3B-1, which provides that where certain state laws are inconsistent with TILA and the regulations promulgated thereunder, compliance with federal law shall be deemed compliance with state law.
The tension between the federal and state governments in the banking arena is great. Nonetheless, that tension can ultimately be of benefit to consumers.
Where there is a perceived problem, the states can serve as incubators, offering a variety of solutions. Where more and more states adopt a similar approach to a problem, their statutes and regulations can serve as a model for a federal approach.
Once a federal solution is decided upon, pre-emption of inconsistent state provisions probably does make sense, permitting larger depositories to operate interstate with one set of compliance requirements. The states must proceed with caution when that occurs, for if more burdensome state laws are held to apply to state-chartered depositories, but not federal ones, the state-chartered depositories would be at a competitive disadvantage and might be encouraged to flip their charters.
A regulatory or judicial decision to pre-empt should be deliberate, with the interests of consumers, not the regulated industries, foremost in mind. And where federal regulation does not enter the arena, state law should continue to prevail.
Indeed, with rare exceptions like the Depository Institutions Deregulation and Monitoring Act, the Alternative Mortgage Transaction Parity Act, and licensed lenders which are subsidiaries of OTS thrifts, state law does continue to prevail, not only with respect to state-chartered depositories in the absence of a parity-pre-emption argument, but also with respect to the thousands of licensed lenders.