Last week, I wrote about the populist and progressive tie that binds each side of the U.S. political spectrum, pointing in particular to how the left and right are each calling for an end to “financial censorship.” MAGA Republicans in Florida have taken the lead here for populists with new legislation barring banks from closing accounts based on pretty much anything but the fact that the account holder took out all the money and maybe not even then. As FedFin subsequently described, Members of the House Financial Services Committee called first on Secretary Yellen and then on Chair Powell to declare that federal law preempts the state statute, noting that the Florida law bars banks from closing accounts even when money laundering is feared, imperiling law enforcement and financial integrity. Secretary Yellen called for preemption, although it’s hers only to urge, not to grant. Mr. Powell was more circumspect, but he surely supports preemption. But, this is also not for the Fed to declare; the power of preemption indeed rests with only the Office of the Comptroller of the Currency. So far, it’s done nothing and the nothing it’s done points to the consequences of one of the quieter decisions in this year’s tumultuous Supreme Court term and the threat this poses to the national-bank charter.
As you well know, almost all the attention on the Supreme Court that isn’t glued to Donald Trump targeted two end-of-session decisions revoking Chevron and extending ad infinitum the statute of limitations for regulatory challenges. These are consequential enough, as our weekly summary made clear. But there’s another, lower-profile case to consider: Cantero v. Bank of America. I am no lawyer and FedFin emphatically does not provide legal advice, but I know a game-changer when I see it.
The nature of this Supreme Court and its other decisions combined with it stand here to strengthen the limitations on OCC preemption powers when it comes to state consumer law. Dodd-Frank curtailed OCC preemption by restricting its reach only to state laws that prevent or significantly interfere with a national bank’s exercise of its powers. This had been the standard well before Dodd-Frank’s preemption rollback following the 1996 Barnett decision, but the Supreme Court has now overturned a lower-court decision upholding OCC preemption not because it didn’t clearly interfere with national banking, but because it lacked the “nuance” necessary to ensure that all of the preemption criteria pertained. In short, the Supreme Court says that the OCC must make a carefully-reasoned decision about what undermines national banking when it preempts state consumer law and, if this is challenged, the courts have to like the agency’s reasoning. Combine this high bar to preemption with the end of deference to the OCC’s rulings on what it thinks warrants preemption, and you’ve got a much tougher challenge for preemption to prevail.
Lawyers know this far better than I. But the next steps here depend not only on what lawyers say, but also on what agency officials want. There is no question in my mind that the OCC wants to preempt problematic state laws – it’s historically done so even when there was a strong case to be made that a state law did not interfere with national banking. It’s precisely this predilection for preemption that led to Dodd-Frank’s provisions.
But a state law that limits a national bank’s ability to comply with federal law is very different than a state law that is different than a federal law in ways that do not force a national bank to violate federal law as it pursues state-specific consumer protections, environmental edicts, or similar standards.
Are the Florida and similar statutes the barrier to adherence to federal law as asserted at the hearings and confirmed by Secretary Yellen? This seems clear-cut, but of course nothing in law or politics ever is. For one thing, states also cannot order state-chartered banks to violate federal laws, especially those founded on established concerns for law enforcement and national security. Is that what this is about or is this the fuss over financial censorship the law’s adherents assert?
The Acting Comptroller is likely to heed Secretary Yellen’s call and issue a preemption determination. Mr. Hsu is, though, only an Acting Comptroller and the election could lead to his prompt replacement much as it did to his acting predecessor when President Biden took over from Donald Trump. Treasury may separately assert its right to enforce anti-money laundering laws in a manner meant to bind both national and state banks. The state could back down, at least a bit. We shall see, but one key benefit of national-bank charters – preemption – faces the fight of its life.