Consumer Law & Policy Blog

Engel & Mccoy on Preemption After Dodd-Frank

Kathleen C. Engel of Suffolk Patricia A. McCoy of Connecticut have written Federal Preemption and Consumer Financial Protection: Past and Future, 3 Banking & Financial Services Policy Report 25 (2012).  Here is the abstract:

Many states and cities filled the void by passing anti-predatory lending laws of their own. Lenders, worried about potential liability, quickly organized a full-scale attack on the state and local initiatives. Their most potent strategy lay in challenging the laws and ordinances under federal preemption rules for national banks and federal savings associations that precluded states from enforcing their anti-predatory lending laws.

The Dodd-Frank Act curtailed the preemption rules by establishing that state consumer financial
laws can only be preempted if they discriminate against state-chartered depository institutions relative to, or prevent or significantly interfere with the powers of, national banks or federal savings associations.

Dodd-Frank's preemption standards became effective on July 21, 2011, at which point the U.S. Office of the Comptroller of the Currency (OCC) should have conformed its preemption rulings to the new law. Instead, on that date, the OCC issued a new rule that preempted broad swaths of existing state laws using its old preemption precedents, bypassing the Dodd-Frank procedures along the way. We contend that the OCC's actions are not consistent with Congress's intent and predict that there will be legal challenges to the substance of the OCC's new preemption rule and to the process the OCC employed when adopting the rule.

A Little Bit More on the Julie Williams Announcement

by Jeff Sovern

Deepak pointed out earlier this month that Julie Williams is stepping down from her position as Chief Counsel of the OCC.  Deepak observed that the news is seen as positive by consumer advocates; one graphic illustration of the feelings some have for her appeared in the movie Maxed Out when her image dissolved into a snake. Deepak also linked to a piece calling her the "Lex Luthor of bank regulators."  But you might get a completely different impression from the OCC's announcement, which states:

* * * Ms. Williams was an early advocate for the stronger bank privacy policies and more effective protections that are common today.  Her career at the OCC has included groundbreaking work ranging from bank interstate operations and bank powers to privacy rights to pioneering the theory, once thought radical, but now readily accepted and applied, that the Federal Trade Commission Act's ban on unfair and deceptive practices may be applied by the banking agencies to protect bank customers.  Nearly a decade ago, Ms. Williams pushed for taking a research-based approach to bank disclosures and using consumer testing to improve disclosures by asking in a speech why consumers got better disclosures on a bag of potato chips than when they engaged in what was likely most important financial transaction they would undertake—taking out a mortgage.

In other words, the announcement painted Ms. Williams as a consumer advocate.  Nor does it note the OCC's efforts to preempt state anti-predatory laws during her tenure, though Deepak pointed those efforts out (unless the mention in the announcement of her work on "bank powers" refers to preemption, though that's a pretty ambiguous reference).  And the announcement's attempt to highlight Ms. Williams's consumer protection accomplishments seems a bit unimpressive for a bank regulator of long duration. The last sentence is about a speech about mortgage disclosures, which would be more significant if the OCC created mortgage disclosures (at the time of the speech, mortgage disclosures were within the Fed's purview; they now are under the CFPB's jurisdiction).  While Ms. Williams has indeed expressed strong views about privacy protections, again, the GLB privacy protection rules were formulated by the Fed, not the OCC.

What are we to make of this?   A more honest appraisal of Ms. Williams work would have referred clearly to the preemption actions taken by the OCC during her tenure.  After all, preemption is the classic lawyer's issue.  Surely those actions are more central to Ms. Williams's work than speeches she gave about rules that her agency lacked the power to write. Is the OCC now embarrassed by its preemption position?  It is under new leadership.  Is Ms. Williams embarrassed by them?  That would be plausible after the financial crisis to which they may have contributed, except that the OCC continued to interpret its preemption powers very aggressively after the financial crisis, even interpreting Dodd-Frank Act so favorably to banks that the Treasury Department took issue with the OCC.  Is the explanation that preemption is too technical for most people to follow and so doesn't merit mention in this kind of announcement?  But wouldn't the people who know about the OCC, or that it has a Chief Counsel, or about bank interstate operations--which got a mention in the press release--be able to understand preemption?

Or is this just a cynical attempt to cast someone who helped banks at the expense of consumers as a consumer protecter?

 

Julie Williams Steps Down As OCC Chief Counsel

Julie Williams, the Office of the Comptroller of the Currency's notorious longtime Chief Counsel and sometime Acting Comptroller, is stepping down from her post effective September 30. According to a statement released by the agency, she will retire from the government at the end of this year; it's unclear whether that means that she won't do any lobbying for banks after leaving the agency. The Wall Street Journal has the story here.  The published reports do not indicate whether Williams was fired, but that's what I have heard from some reliable sources.

Williams has long been a target of criticism by consumer advocates; in a post earlier today, Naked Capitalism calls her "the Lex Luther of bank regulators."  The main reason for the criticism is Williams' role as the principal architect and chief defender of the OCC's expansive preemption regime, which wiped out state anti-predatory lending laws at the very time they were most needed. Even after Congress took specific action to roll back OCC preemption through the Dodd-Frank Act, Williams persisted, spearheading new rules last summer that attempt to circumvent the Act.  More generally, Williams was known for her tendency to prioritize banks' interests over consumer protection and for her hostility to the CFPB and the Dodd-Frank Act.

Although she held the position during previous vacancies, Williams was passed over for Acting Comptroller by the Obama Administration and there has been much speculation about whether she would be fired outright by the new comptroller, Tom Curry.  Curry had a very different, and more balanced position on preemption when he ran the state banking agency in Massachusetts, but has been circumspect on the topic since taking over the OCC.  

Times Article on Whether the OCC Will Change

by Jeff Sovern

The Office of the Comptroller of the Currency has long been the poster-child for an agency captured by the entities it regulates--in this case, national banks.  Thus, when states enacted anti-predatory lending statutes, the OCC declared them pre-empted as to national banks. Similarly, the OCC went to court against New York to protect national banks from state enforcement of fair lending laws.  But now the OCC has a new leader. Will things be different?  The Times has a report here. An excerpt:

Previously, O.C.C. regulators have emphasized that they want our banking system to be “safe and sound.” To that, Mr. Curry has added the word “fair.” A banking system needs to serve people and businesses, so that we don’t simply have, as he says, “a safe and sound national bank system just for sake of the system itself.”

“I’m committed to improving the agency’s reputation,” Mr. Curry told me.

The question is whether the host will reject the transplant.

Cato Institute Paper on the Fair Credit Reporting Act and Preemption

Jim Harper

 of The Cato Institute has written Reputation Under Regulation: The Fair Credit Reporting Act at 40 and Lessons for the Internet Privacy Debate.  Here's the abstract

More than 40 years ago, Sen. William Proxmire (D-WI) guided the Fair Credit Reporting Act (FCRA) through Congress, seeking to improve the operations of the credit reporting industry. The complexities and tensions in a reputation system like credit reporting are formidable, however, and the FCRA has not satisfied consumer group demands for accurate, responsive, fair, and confidential credit reporting. In fact, new problems have emerged, such as credit repair fraud and identity fraud.

Credit reporting today is anything but the confidential service Proxmire hoped for. Passed in tandem with a financial surveillance law called the Bank Secrecy Act, the FCRA has been turned toward government and corporate surveillance, providing little or no privacy or control for consumers.

As economic theory predicts, the credit reporting industry appears to have benefited from the ossifying effects of regulation. Though the information and technology environments have changed dramatically over the last four decades, the credit reporting and reputation marketplace has seen little change or innovation. A potential related market for identity services is also stagnant thanks in part to government policies.

When Congress chose to preempt common law remedies for wrongs done by credit bureaus, it withdrew a tool that could have guided credit reporting toward better service to consumers and a more innovative and vibrant marketplace. With uniform national regulations, we cannot know how credit reporting might have evolved for the better.

Florida Supreme Court Hears Post-Concepcion Challenge to Class-Action Ban in Payday Contract

The Florida Supreme Court heard oral arguments on Wednesday in Betts v. McKenzie Check Advance of Florida, a challenge to a class-action ban in a payday loan contract. 

Public Justice attorney and CL&P co-blogger Paul Bland argued on behalf of plaintiff Wendy Betts, defending a lower-court decision holding that the class-action ban violated public policy by preventing consumers from obtaining competent counsel. The attorney for the lender, McKenzie Check Advance, contended that Bland's argument was foreclosed by AT&T v. Concepcion:

"At this point it's not an issue of whether arbitration's good or bad, but it's an issue of the supremacy clause," said Jamie Bianchi, a lawyer for McKenzie.

Justice Barbara Pariente acknowledged Bianchi had a strong argument.

"It would seem - and maybe this is sort of a friendly question for you - that Concepcion really takes the certified question and really obviates it," Pariente said. "Right or wrong, we're bound to follow the U.S. Supreme Court."

"We agree with that, your honor," Bianchi replied.

Pariente later added, "So much for state's rights, huh?"

F. Paul Bland, a lawyer representing Wendy Betts and other McKenzie customers, argued the Concepcion ruling does not prevent the state justices from affirming the 4th District's ruling.

Bland said the decision did not invalidate prior U.S. Supreme Court rulings saying consumers must be able to effectively vindicate their rights.

"A procedure that ends up gutting the rights effectively is enough to render the clause unenforceable," Bland said.

Pariente, though, asked how he could argue "with a straight face" that the U.S. Supreme Court would void the class action ban simply on the basis of testimony from three consumer advocate lawyers who said they wouldn't take the McKenzie cases.

Bland argued they included a legal aid lawyer who offered broader evidence of being unable to find lawyers willing to take a large number of cases, some involving military members.

Read more here: http://www.miamiherald.com/2012/05/09/2791094/fla-supreme-court-hears-class.html#storylink=cpy

[Miami Herald]

Former OCC Counsel Pens Defense of OCC's New Preemption Rule

The Office of the Comptroller of the Currency's new preemption rule -- which leaves in place the very same controversial preemption regime that Congress sought to overturn in the Dodd-Frank Act -- has rightly been the subject of lots of criticism. Indeed, the General Counsel of the Treasury Department, of which the OCC is a part, took the unprecedented step of submitting an official comment in the rulemaking docket sharply criticizing the rule as contrary to Dodd-Frank. The leading academic expert on OCC preemption, Art Wilmarth of GW Law, has been even harsher in his criticism. The rule is a blatant power grab that barely tries to conceal the OCC's contempt for Congress. I have little doubt that when the federal courts are done with it, the rule will be Swiss cheese.

Enter former OCC deputy chief counsel and current bank lobbyist Ray Natter, who takes the position that the rule is legally defensible. I had a chance to publicly debate Ray on this issue twice over the past month as part of the Annual Consumer Financial Services Institute in New York and Chicago and, sadly, I don't think either of us succeeded in convincing each other.  But Ray was kind enough to send me a link to his new article on the subject, The Dodd-Frank Act and National Bank Preemption: Much Ado About Nothing, which will be published soon in the Virginia Law & Business Review. I thought I'd share it with interested readers so they can evaluate the arguments and judge for themselves.

My view is that the OCC's sophistic attempt to preserve blanket preemption in the face of Dodd-Frank is not only doomed, but bad for the very bank masters that OCC is trying to serve. What happens to the banks when aspects of the preemption regime are toppled?  Banks are compliance oriented and crave few things as much as regulatory certainty; the OCC's bad legal product guarantees that they will experience the opposite.  Several in-house bank lawyers that I've talked to are less than thrilled by this state of affairs.

No Preemption for U.S. Bank

On August 1 the Ninth Circuit Court of Appeals held that a consumer's California law claims against a national bank for improper repossession were not preempted by the National Bank Act and OCC regulations.  In a case argued for the consumers by fellow blogger Paul Bland, U.S. Bank's innovative proposal to be bound only by the uniform provisions of the state's Uniform Commercial Code was soundly rejected.  The Court of Appeals relied on the savings clause of the OCC preemption rule, which exempts state laws regarding the "right to collect debts," a category in which it had no trouble placing California's Rees-Levering repossession notice law. The Fourth Circuit will be hearing arguments later this year in the Epps v. JPMorgan Chase case, which raises similar issues.

Grand Theft Auto, or Preemption Run Amok

In a case now before the 4^th Circuit Court of Appeals, Chase Bank asserts that it may repossess an auto loan borrower’s car without complying with consumer protections in state commercial law.   The Maryland District Court found for Chase Bank, concluding that 1) the National Bank Act preempts state repossession notice law and 2) Chase was not bound by the mandatory loan contract term specifically incorporating Maryland repossession law, because as an assignee of the contract, Chase had not voluntarily agreed (!) to the choice of law provision. 

The opening brief of the appellants is here and the lower court opinion is here.  The logic of the lower court opinion is remarkable.  It seems to suggest that even the repossession rules of Article 9 of the Uniform Commercial Code could be preempted by the National Bank Act and OCC regulations.  What is truly extraordinary, however, is the idea that a national bank could on the one hand invoke the privilege, created by the UCC and other state law, to repossess collateral without judicial process, while on the other hand disregarding the restrictions and consumer protections that accompany that privilege.  If the entirety of state commercial and debt collection law conflicts with the National Bank Act, then there was no state law basis for Chase to seize Ms. Epps' car, and the purported repossession was nothing more than grand theft.

States and Consumer Protection

by Jeff Sovern

In the continuing battle over the role of states in consumer protection, two developments this week merit attention here.  David Arkush called my attention to an article by 

Amy Widman

 of Northern Illinois and

Prentiss Cox

 of Minnesota, State Attorneys General Use of Concurrent Public Enforcement Authority In Federal Consumer Protection Laws, forthcoming in Cardozo Law Review.  Here's the abstract:

Recent scholarly and legislative interest in state enforcement of federal law has led to the need for an empirical understanding of how and when these enforcement powers are used. This article reports on an examination of the use by state attorneys general of sixteen federal consumer protection laws that expressly allow for state enforcement. The data are sorted and analyzed by both single state actions and multistate actions over time, and by the involvement of federal agencies in the state cases. The data reveal a measured use of such powers by state attorneys general and robust state and federal cooperation in the enforcement of the statutes. This study should be useful for future legislative and scholarly examinations of federalism, enforcement powers, and consumer protection.

 So maybe states should be given more authority to enforce consumer protection laws?  Not so, says the OCC, which wants to preempt as much state law as it can, and perhaps a bit more, as Ed Mierzwinski reports.