Federal Preemption and Consumer Financial Protection: Past and Future

Abstract

Starting in 1995 and throughout the subprime boom during the next decade, Congress failed to take action to curb predatory mortgage lending. 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.