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SCOTUS National Bank Act Preemption Ruling

posted by Adam Levitin

The Supreme Court issued an important ruling about the National Bank Act's preemption standard today that precludes broad, categorical preemption of state consumer financial laws, but instead requires a fact-specific analysis.This decision opens the way to more expansive state consumer financial regulation that affects banks.

In the 2010 Dodd-Frank Act, Congress codified the standard for preemption under the National Bank Act, namely that a state consumer financial law is preempted only if it is (1) discriminatory against national banks relative to state banks, (2) preempted by a specific federal non-banking law provision, or (3) "prevents or significantly inters with" a national bank's exercise of its powers. In codifying that third preemption route, Congress provided that it was "in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank of Marion County, N. A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996)".  (The degree to which interest rate exportation is covered by this analysis is unclear; there is an opaquely drafted savings clause regarding the interest rate exportation provision.)
Bank of America challenged a NY law requiring banks to pay interest on mortgage escrow accounts. The 2nd Circuit took the view that a state consumer financial law was preempted based on an older line of cases that holds that federal law preempts any state law that "purports to exercise control over a federally granted banking power,” regardless of “the magnitude of its effects. The Supreme Court reversed and remanded, unanimously holding that under the Dodd-Frank Act (and before--see FN2) preemption analysis under Barnett Bank requires "a practical assessment of the nature and degree of the interference caused by a state law." The Supreme Court did not undertake this analysis itself, instead instructing the Second Circuit to do so on remand, but it identified six precedents (three going each way) for the "which of these things is more like the others" analysis. Given how de minimis mortgage escrow interest is relative to anything with Bank of America, it's hard to imagine that Bank of America will prevail on the remand under the Barnett Bank standard.The outcome in the case doesn't provide bright line rules for what is and isn't preempted. It's a standard, so questions will remain at the margin. But the decision very much clears the way for states to engage in more consumer financial regulation that affects national banks.

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