The federal regulator of the largest U.S. banks will have less power to shield these national banks from state consumer financial laws, under a proposal released Wednesday.
The changes to the Office of the Comptroller of the Currency rules are required by last year's Dodd-Frank financial oversight law.
Critics of the OCC charge that in the run-up to the 2007-2009 financial crisis, the agency was too aggressive in preventing states from enforcing their consumer protection laws on national banks, and took an expansive view of its ability to do so under the National Bank Act.
The OCC has said it uses its preemption authority to protect national banks from a patchwork of state laws — such as those that apply to credit cards and mortgages — that can be contradictory and difficult to comply with.
The OCC proposal released Wednesday lays out details of the process it would undertake when it does decide to preempt a state.
Under the proposal, the OCC would have to make determinations on a case-by-case basis and must provide substantial evidence of the reason for preempting a state law.
The OCC will also consult with the new Consumer Financial Protection Bureau when making such decisions.
The Dodd-Frank law seeks to curtail OCC's preemption powers in several ways.
It allows state consumer financial laws to apply to subsidiaries and affiliates of national banks.
The law also seeks to limit the definition of when the OCC can preempt a state law. The law states the OCC should only step in if a state law "prevents or significantly interferes" with a national bank's ability to conduct business.
In its proposed rule, the OCC would strike from its regulations a looser standard for preemption based on whether state laws "obstruct, impair, or condition" a national bank's powers.
The Dodd-Frank law also codifies the 2009 Supreme Court decision in Cuomo v. Clearing House Association LLC. The court ruled that the OCC could not prevent the state of New York from investigating or enforcing its fair lending laws in a case that involved the New York attorney general's office investigating possible racial discrimination in mortgage lending.
The Dodd-Frank law references this ruling in an effort to prevent the OCC from blocking states from pursuing such cases.
The OCC said it is proposing to revise its rule to reflect the court's ruling.
The OCC rule is out for comment for 30 days.
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