Comptroller of the Currency John C. Dugan, in an address before Women in Housing and Finance, criticized the Obama administration’s proposed legislation (the “CFPA Act”) currently being considered by Congress that would create the Consumer Financial Protection Agency (the “CFPA”). Comptroller Dugan’s speech focused on the provisions of the CFPA Act that would (a) eliminate certain aspects of state law preemption that have been traditionally enjoyed by national banks and federal savings associations, and (b) enable state regulators to enforce the provisions of the CFPA Act independently of federal regulators. Comptroller Dugan stated that in his view the elimination of state law preemption and the empowerment of state regulators to enforce the CFPA Act would (i) reverse nearly one hundred and fifty years of the United States’ proven success with the “dual banking system,” (ii) eliminate the efficiencies created by the current environment of consistent nationwide regulatory standards for national banks and state banks with interstate operations alike, (iii) generally be counterproductive to the CFPA Act’s goal of creating strong nationwide consumer protection standards, and (iv) potentially result in regulatory costs and inefficiencies that would be passed on to the consumer.
Traditionally, national banks and federal savings associations have not been subject to most state financial services laws under the doctrine of state law preemption. Examples of state laws that have not applied to national banks and federal savings associations include those that regulate loan terms, require state licenses for banking activities, or impose conditions on deposit or credit relationships. State laws that do not affect the manner or content of traditional national bank activities, such as those laws dealing with contracts, torts, taxation, or zoning, are generally applicable to national banks and savings associations. The CFPA Act seeks to eliminate state law preemption in the consumer financial services area by (A) explicitly granting state legislatures the right to enact legislation that would subject national banks and federal savings associations to more rigorous regulatory standards than those applicable under the substantive provisions of the CFPA Act, and (B) amending the National Bank Act and the Home Owners Loan Act to clarify that Congress does not seek preemption in the consumer financial services area so long as the relevant state laws are more rigorous than the CFPA Act and are not discriminatory with respect to national banks and federal savings associations. Further, the CFPA Act, as proposed, empowers state regulators to enforce the substantive provisions of the CFPA Act.
Comptroller Dugan emphasized that he supports much of the CFPA Act as proposed, most notably the creation of a set of nationwide consumer laws and regulations that would apply to banks and nonbank financial service providers uniformly. However, he argued that the elimination of state law preemption was unwise for a number of reasons. First, he believes that the creation of the CFPA is an opportunity to create consumer protections strong enough to eliminate the need for supplemental protections from state legislatures. Second, he noted that in an era where technology has enabled the market for consumer financial services to become national or at least interstate in scope, inconsistent regulatory standards for banks doing business on an interstate basis are particularly inappropriate. A “balkanized” approach, in Comptroller Dugan’s view, would create uncertainty about which regulations apply to a multistate business, including the regulations regarding which terms and disclosures are permissible for a particular product. A national bank doing business in multiple states might not only be burdened with multiple compliance regimes, but be genuinely unsure whether to apply the law of its home state, the law of the domicile of the consumer, or the law of the location where the financial service is provided. The bank may choose to apply the most stringent state law, which, in Comptroller Dugan’s view, would result in one state unfairly legislating for all states. Third, Comptroller Dugan believes that giving states the right to enforce the CFPA Act would add a further layer of confusion, as practical enforcement standards would invariably differ among the CFPA itself and the various state regulatory agencies that would have jurisdiction. In the long run, Comptroller Dugan believes that “these uncertainties have the real potential to confuse consumers, subject providers to major new liabilities, and increase the cost of doing business in ways that will be passed on to consumers.” Finally, Comptroller Dugan made the point that the elimination of state law preemption may affect not only federally chartered entities such as national banks, but also state chartered banks that operate in an interstate manner pursuant to the Riegle-Neal Act.
Comptroller Dugan also rejected the most common rationales for the elimination of state law preemption. Most notably, he rejected the premise that state law preemption deprived the states of the chance to enact tougher consumer protection rules that would have prevented predatory and unsafe mortgage loans. Comptroller Dugan argued that national banks have, in general, originated safer loans than state-regulated nonbank lenders. Furthermore, he rejected the argument that “more cops on the beat” was always better for the consumer. He suggested that the limited resources of state regulators were better directed at numerous nonbank financial institutions.