A dual system of banking in the United States has existed since President Lincoln signed the National Bank Act in 1863. The act provides express powers to federally chartered banks including banking-specific powers. National banks are subject to federal oversight by the Office of the Comptroller of the Currency. By contrast, many banks are state-chartered banks and are subject to regulation by the state that issues their charter.
From time to time the regulatory interest of the state invades enumerated powers of national banks. This raises the question of whether a state law is preempted, or not applicable, because of federal law. This dual system offers advantages and disadvantages that inform how banks formulate compliance and market strategies. This article examines a recent development in this area and seeks to understand the opportunities for bankers, while also exploring the threats and risks.
In May, the U.S. Supreme Court examined the legal analysis applicable to preemption under the National Bank Act. The case, Cantero v. Bank of America, involved a putative class action challenging whether a New York law which requires payment of interest on escrow accounts was preempted by the National Bank Act. While the details of the case are interesting, they are beyond the scope of this article, which seeks solely to inform bankers of the decision and how it may impact their business.
The approach to National Bank Act preemption changed, as did so much, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank precludes what is called “field preemption.” In essence, there is no valid legal argument that an entire field is preempted under the National Bank Act.
Dodd-Frank provides that the National Bank Act is only preempted if the state law discriminates against national banks or prevents or significantly interferes with a national bank’s exercise of its powers and ties this analysis to a prior Supreme Court decision, Barnett Bank of Marion County, NA v. Nelson, Florida Insurance Commissioner. That ruling held that an effort by the state of Florida to prevent banks from selling insurance products was preempted because the law significantly interfered with a national bank’s exercise of its powers — in that case to sell insurance.
However, the Barnett Bank court went further and stated its ruling did not deprive states of the power to regulate national banks, where doing so does not prevent or significantly interfere with the national bank’s exercise of its powers. Importantly, the Barnett Bank court found that a state law can be preempted, even if it is possible to comply with both state and federal law — as such, the ability to comply with both state and federal law does not preclude preemption. The question, under Barnett Bank and, by adoption, Dodd-Frank, is whether the state law prevents or significantly interferes with a national bank’s exercise of powers — not whether a bank has the ability to comply with both state and federal law.
Supreme Court Justice Brett Kavanaugh, writing for the unanimous Cantero court, reversed an order of the Second Circuit, which had previously held that the New York law was preempted because it would “exert control over” a national bank’s power related to escrow accounts. The Supreme Court’s reversal was not a transformational event — merely a reset of how courts should view National Bank Act preemption.
Going forward, courts reviewing National Bank Act preemption must “make a practical assessment of the nature and degree of the interference caused by a state law. If the state law prevents or significantly interferes with the national bank’s exercise of powers, the law is preempted. If the state law does not prevent or significantly interfere with the national bank’s exercise of powers, the law is not preempted.” Ultimately, the court did not answer the question of whether the New York law requiring escrow interest is preempted — it remanded the case so that a complete analysis, based upon the nuanced requirements of its decision, could be had. As such, I fully anticipate additional guidance regarding National Bank Act preemption from this case. However, we can glean some insight based upon the Supreme Court’s analysis.
What does this all mean for bankers and how do banks determine whether compliance with a state law is necessary?
What cases have been found to be preempted?
Unfortunately, there remains no bright line rule for when a state law is preempted. As noted above, a more nuanced analysis is required. There are cases which have found preemption, which the Cantero court finds persuasive. I will not attempt a deep dive into each case, but the broad categories provide insight worthy of examination.
We have already discussed the Barnett Bank case in which the court found a Florida law seeking to preclude banks from selling insurance to be preempted. In doing so, that court reasoned that Congress had afforded banks a broad, rather than a limited, grant of authority and had not qualified that grant (at least as it pertains to insurance). The court found no indication that Congress sought to restrict national banks in this regard.
Two other instances, Franklin National Bank of Franklin Square v. New York and Fidelity Federal Savings and Loan Association v. De la Cuesta, both found that attempts to limit federally authorized power are preempted. In Franklin, the Court found that the state of New York’s law prohibiting banks from using the word “saving” in advertising was preempted, despite no prohibition of receiving or advertising savings deposits because the New York law interfered with a national bank’s ability to use a commonly understood description.
What cases have been found not to be preempted?
The Cantero court pointed to one primary example of the type of state law that is not preempted. A Kentucky law required banks to comply with its abandoned property law. The Supreme Court found that the Kentucky law did not interfere with a national bank’s power to collect deposits, because that power included the obligation to pay those deposits to those entitled to demand payment, in that case the Commonwealth of Kentucky. Anderson National Bank v. Luckett. However, as noted above, the analysis is nuanced. Another, exceptionally similar case, First National Bank of San Jose v. California, found that a California law was preempted because the California law did not require proof of abandonment. That court reasoned that the law could cause a customer to hesitate before depositing funds at the bank and interfere with the efficiency of a national bank receiving deposits.
Based upon these cases, the test for significant impact likely favors preemption in most instances. However, I fully anticipate that banks will need to conduct an analysis and determine if their current stance preempted state law remains valid and sound.
Implications of the case
The nuanced analysis of National Bank Act preemption, as outlined in Cantero, impacts how banks — national or state chartered — must react to their market and their competitive advantages. Community banks will have their own unique challenges.
Banks, whether state or federally chartered, have much to consider in light of Cantero. The initial questions all banks should consider are:
- How does this nuanced preemption analysis impact my current stance on compliance with state and federal law?
- What changes do I need to make to my compliance with state and federal law based upon this analysis?
- What regulatory challenges will this bring?
- What risks do I face in compliance and in dealing with my customers?
- Does my state impose stricter regulations than federal law and what risks, or opportunities, exist?
While the Cantero case may not be a fundamental shift in application, it is a fundamental shift in understanding. And the decision presents all banks with risks and opportunities. The key to understanding Cantero is understanding the opportunities it creates.
Jared M. Tully is the vice chair of the Business Litigation Practice Group and serves as the team leader for the Community Bank and Financial Institutions Team at national law firm Frost Brown Todd LLP.
