The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)¹ rolls back the clock on preemption for national banks to a time before broad preemption regulations were promulgated by the Office of the Comptroller of the Currency (OCC) in 2004. Dodd-Frank also subjects federal savings banks to the same preemption rules applicable to national banks. Beginning in July 2011, national banks and federal savings banks will have to adhere to more limited preemption of state laws in accordance with the 1996 Supreme Court holding in Barnett Bank v. Nelson.² With less than 10 months before the new preemption rules become effective, national banks and federal savings banks must immediately begin work implementing the new rules to ensure that their products, services and operations comply with state laws that have been preempted in the past. This Special Alert is provided to help national banks and federal savings implement the new preemption rules.

A.    Current Preemption Standard

There has been a vast expansion of the doctrine of federal preemption of state law in the consumer financial services sector in the last two decades. In its regulations and legal opinions, the Office of Thrift Supervision (OTS) has interpreted the Home Owners’ Loan Act (HOLA) as occupying the entire field of regulation for consumer financial products and services offered by federal savings banks and their operating subsidiaries, and the courts have for the most part agreed. Field preemption has allowed federal savings banks and their operating subsidiaries to offer products and services without regard to state laws purporting to regulate or otherwise affect such products and services, except in very limited circumstances.³ [Read more →]

Elizabeth Warren has been appointed Assistant to the President and Special Advisor to the Secretary of the Treasury for the Bureau of Consumer Financial Protection (“CFPB”).  In this role, Ms. Warren will be charged with establishing the CFPB, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) to regulate consumer financial products and services under the federal consumer financial laws.  Ms. Warren is a Harvard Law School professor and is widely credited with originally proposing the creation of a consumer protection agency.  Until the announcement of her appointment as special advisor, Ms. Warren chaired the Congressional Oversight Panel that oversees the Troubled Asset Relief Program.  [Read more →]

President Obama named Elizabeth Warren to serve as Assistant to the President and Special Advisor to the Secretary of the Treasury in connection with establishing the Bureau of Consumer Financial Protection. Ms. Warren has not been appointed director of the Bureau and her role does not require confirmation by the Senate. Click here for the related White House press release.

The Secretary of the Treasury designated July 21, 2011 as the date for the transfer of functions to the Bureau of Consumer Financial Protection. On this date, certain authorities will transfer from other federal agencies to the Bureau, and the Bureau will be able to exercise certain additional, new authorities under the Consumer Financial Protection Act of 2010 and other laws. Click here for the related Federal Register notice.

The FDIC issued proposed guidance on automated overdraft payment programs (the “Proposal”), which outlines additional expectations for the banks it supervises.  The Proposal would supplement the FRB’s overdraft rules under Regulation E, which are discussed in more detail in the June 1, 2010 and November 17, 2009 Consumer Financial Services Alerts.  Whereas the new Regulation E opt-in requirement addresses only paying overdrafts resulting from one-time debit card and ATM transactions, the Proposal provides that customers should have an opportunity to opt out of the payment of overdrafts resulting from non-electronic transactions (e.g., checks).  The Proposal also provides that banks should not process transactions in a manner designed to maximize the cost to customers.  In addition, the Proposal calls for banks to monitor accounts and take meaningful and effective action to limit customer use of overdraft coverage as a form of short-term, high-cost credit, including, for example, by giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage.  Moreover, the Proposal states that the FDIC expects banks to institute appropriate daily limits on overdraft fees.  The Proposal notes that overdraft payment programs will be reviewed at FDIC examinations.  Comments on the Proposal are due no later than September 27, 2010.

The FDIC Board of Directors approved the establishment of a new Office of Complex Financial Institutions (“CFI”) and a new Division of Depositor and Consumer Protection (“DCP”).  The FDIC organized the CFI and the DCP to help the FDIC meet its responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The CFI, said the FDIC, will conduct continuous reviews and oversight of bank holding companies with more than $100 billion in assets and will examine any nonbank financial companies designated as systemically important by the Financial Stability Oversight Council created by the Dodd-Frank Act.  The CFI is also the FDIC unit responsible for using the FDIC’s powers under the Dodd-Frank Act to implement orderly liquidations of bank holding companies and nonbank financial companies that fail.  The FDIC said that the establishment of the CFI is the first step in ending the presumption of “too big to fail.”

The FDIC Board of Directors adopted a final rule (discussed in FDIC Financial Institution Letter, FIL 49-2010) amending its deposit insurance and advertising of FDIC membership regulations to conform with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permanently increase the standard maximum deposit insurance amount, effective July 22, 2010, from $100,000 to $250,000.

In a March 15, 2010 letter to the staff of the SEC (the “FINRA Letter”), the FINRA staff agreed to create rules that would, in broad terms, allow its broker-dealer members to act as placement agents in soliciting government entities on behalf of investment advisers provided the placement agents observe prohibitions on “pay-to-play” activities conducted on their own behalf or on behalf of investment advisers employing them (“FINRA Pay to Play Rule”).  The FINRA Letter appears to be an indication that the SEC is considering limiting its proposed pay-to-play rule under the Investment Advisers Act of 1940 (the “Advisers Act”) which would prohibit an investment adviser from paying any third parties (e.g., solicitors, finders, placement agents or pension consultants) to solicit a state or local government entity as an advisory client (the “SEC Pay-to-Play Rule”).

The SEC Pay-to-Play Rule was part of proposed regulations published by the SEC during the summer of 2009, which are designed to address practices that may influence the selection of an investment adviser to manage money on behalf of state and local government entities (e.g., for public pension plans, retirement plans and 529 plans) (as discussed in the August 18, 2009 Alert.)  The FINRA Letter appears to be a response to a December 18, 2009 letter from the SEC staff asking FINRA to consider promulgating the FINRA Pay-to-Play Rule, with the apparent understanding that the final SEC Pay-to-Play Rule would contain an exemption permitting an adviser to retain FINRA members to act as placement agents in soliciting state and local government entities as advisory clients so long as they comply with FINRA Pay-to-Play Rule. [Read more →]

The FTC issued a final rule that requires certain advertisements for “free credit reports” to include prominent disclosures to prevent confusion with federally-mandated free annual credit reports. The rule also prohibits credit reporting agencies from advertising other products or services to consumers seeking free credit reports until a consumer receives the free credit report, and further prohibits other practices that may interfere with the free credit report process. The rule becomes effective April 1, 2010, except for certain disclosure requirements, which take effect September 1, 2010. Click here for a copy of the rule.

The FRB issued a proposed rule that would impose new obligations on credit card issuers concerning penalty fees and raising interest rates. Among other things, the proposal would place limitations on penalty fees that a credit card issuer may assess. Specifically, an issuer could only charge a penalty fee if the fee represents a “reasonable proportion” of the costs incurred due to that type of violation. The proposal would require issuers to re-evaluate such costs at least annually. Alternatively, an issuer could charge a penalty fee for a violation if the issuer has determined that the amount of the fee is “reasonably necessary” to deter that type of violation, using an “empirically derived, demonstrably and statistically sound model.” In addition, the proposal would (1) prohibit the penalty fee from exceeding the dollar amount associated with the violation, (2) prohibit imposing multiple fees based on a single transaction, (3) require issuers that use risk-based pricing to increase the annual APR on an account to periodically consider changes in factors and, if appropriate, reduce the APR within 30 days, and (4) require issuers to inform customers of the reasons for their rate increases. Comments on the proposal are due 30 days after publication in the Federal Register, which is expected soon. Click here for a copy of the proposal.

The U.S. House of Representatives (the “House”) passed the Wall Street Reform and Consumer Protection Act of 2009 (the “Act”) by a vote of 223-202.  The Act combines all of the financial markets regulatory reform efforts previously approved by various House committees.  For more on the bills that were included in the Act, please see the December 8, 2009 Alert.  If enacted, the Act would be the greatest change in the regulation of financial markets and products since the Great Depression.  Among other things, the Act provides for (a) the creation of a regulatory and resolution regime for systemically significant financial companies, (b) a new Consumer Financial Protection Agency (the “CFPA”), (c) broadened adviser registration requirements and related measures designed to facilitate SEC oversight of unregistered funds (such as hedge funds) and (d) the regulation of the over-the-counter derivatives market (see the next article in this issue).  The Act also contains restrictions on mortgage lending practices, limitations on executive pay, and additional investor protection requirements.  It would reform the regulation of credit rating agencies and permit the Government Accountability Office (the “GAO”) to audit the FRB.  Though over 240 amendments to the Act were proposed, only 36 were considered by the House. [Read more →]

The various regulatory reform bills passed by the House Financial Services Committee have been combined into a single 1,279 page omnibus regulatory reform bill, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) (the “Bill”).  The Bill is expected to be introduced to the floor of the House on December 9, 2009.  It is anticipated that the Bill will require three full days of debate, and many amendments to the Bill have already been proposed, including a 200 page manager’s amendment by House Financial Services Committee Chairman Barney Frank relating to mortgage lending reform.  The Bill combines the language of the following bills:

• Financial Stability Improvement Act of 2009 (H.R. 3996), (for more on H.R. 3996 please see the November 3, 2009 Alert and the November 24, 2009 Alert);
• Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269);
• Over-the-Counter Derivatives Markets Act of 2009 (H.R. 3795), (for more on H.R. 3795 please see the November 3, 2009 Alert);
• Consumer Financial Protection Agency Act of 2009 (H.R. 3126), (for more on H.R. 3126 please see the October 20, 2009 Alert and the October 27, 2009 Alert);
• Private Fund Investment Advisers Registration Act of 2009 (H.R. 3818), (for more on H.R. 3818 please see the October 20, 2009 Alert);
• Accountability and Transparency in Rating Agencies Act of 2009 (H.R. 3890);
• Investor Protection Act of 2009 (H.R. 3817); and
• Federal Insurance Office Act of 2009 (H.R. 2609).

[Read more →]

The House Financial Services Committee approved by a 39-29 vote the Consumer Financial Protection Agency Act of 2009 (the “CFPA Act”), which consolidates federal consumer protection for financial matters in a new federal agency, the Consumer Financial Protection Agency (“CFPA”). For our previous coverage of the CFPA Act, please see the October 20, 2009 Alert and the August 4, 2009 Alert.

The House Financial Services Committee approved several amendments before voting on the entire bill. These included a significant amendment offered by Reps. Mel Watt and Dennis Moore (the “Watt-Moore Amendment”) that would make national banks and federally chartered savings associations subject to a broad range of state consumer protection and financial services laws. The Watt-Moore Amendment would, in all but a few cases, make “state consumer financial laws” applicable to national banks and thrifts, as well as their subsidiaries and affiliates. The Watt-Moore Amendment codifies the standard in Barnett Bank v. Nelson, 517 U.S. 25 (1996). This standard permits a federal banking agency to preempt state consumer financial protection laws only after a written finding that the state law “prevents or significantly interferes” with a federally chartered bank or thrift’s exercise of a power “explicitly” granted by Congress. The finding must be done by regulation or order on a case-by-case basis. The federal banking agencies would also be required to consult with CFPA to determine that consumers will still be protected under federal law if the state law is preempted. The Watt-Moore Amendment would allow judges reviewing preemption decisions to defer to the OCC on its interpretation of the National Bank Act or other federal laws. However, judges could not defer to the OCC on a specific claim by the OCC that a particular state law is preempted.

The final version of the CFPA Act passed by the House Financial Services Committee also grants far more expansive powers to the Director of the CFPA than contained in the original draft of the bill. For example, the Director of the CFPA would have the power to exempt any entity regulated by the CFPA and any financial product or service from a consumer law or regulation.

The Obama Administration announced an initiative to encourage small business lending by providing capital support to community banks.  Under the plan, community banks with less than $1 billion in assets will be given access to lower-cost capital, provided that they submit a plan explaining how the capital will allow them to increase lending to small businesses.  Participants would also be required to submit quarterly reports detailing their small business lending activities.  Banks will be eligible to receive capital totaling up to 2% of risk weighted assets.  The capital would be available at an initial dividend rate of 3%, compared to the Capital Purchase Program’s (the “CPP”) 5%, with the dividend rate increasing to 9% after five years to encourage timely repayment.  A bank’s participation will be subject to approval by its primary federal banking regulator.  Final details on the terms of the program — including the amount of capital available and how current CPP participants could replace existing capital with investments under this program — will be developed in the coming weeks by the Treasury in consultation with community banks and small businesses.

As part of its financial regulatory reform program, the Obama Administration, through the Treasury, submitted to Congress proposed legislation that would establish a new consumer regulatory agency, the Consumer Financial Protection Agency (the “CFPA”), which would consolidate and expand the existing regulatory regime for consumer financial products.  Rep. Barney Frank, Chairman of the House Financial Services Committee, introduced the proposed legislation to that committee as H.R. 3126, the Consumer Financial Protection Act of 2009 (the “CFPA Act”).  For a further discussion of the initial draft of the CFPA Act, please see the August 4, 2009 Alert.

Discussion Draft.  The initial draft of the CFPA Act has been amended several times since its introduction by Chairman Frank and other members of the House Financial Services Committee.  A discussion draft circulated by Chairman Frank eliminated two controversial provisions of the CFPA Act: the provisions relating to “plain vanilla” products that would have been required to be offered alongside other financial products and the “reasonableness” standard for communications with consumers. [Read more →]