American Conference Institute’s Prepaid Card Compliance Annual Forum

Preparing for the Changing Dynamics and Scope of Federal Preemption in the Prepaid ContextJune 24, 2010

Speakers

•Cheryl Slipski, EVP & General Counsel, TxVia, Inc., New York, NY

•Robert Rowe, Vice President & Senior Counsel, Center for Regulatory Compliance, American Bankers Association, Washington, DC

Preemption

•Based on the Supremacy Clause of the U. S. Constitution

•Permits uniform nationwide standards that facilitate an efficient banking system

•Did not cause unsound mortgage lending

Preemption Case Law

•As noted previously, there is a long history of Supreme Court cases relating to preemption and national banking.

•The original preemption decision was McCulloch v. Maryland in 1819.

•The most recent Supreme Court decision was Cuomo v. Clearing House Association, LLC in June of 2009.

• McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819)

▫ State of Maryland attempted to impose a tax on notes of banks not chartered in Maryland.

▫ Seminal case established two principles: The Constitution grants to Congress implied powers

for implementing the Constitution's express powers, in order to create a functional national government.

States may not impede valid constitutional exercises of power by the Federal government.

Early Cases

Early Cases• First Nat. Bank in St. Louis v. Missouri, 263 U.S.

640 (1924)

▫ The Supreme Court upheld the right of the Attorney General of Missouri to bring suit against a national bank to enforce a state anti-bank-branching law.

▫ National banks are subject to the laws of a state, unless such laws interfere with the purposes of their creation, impair or destroy their efficiency as federal agencies, or conflict with the paramount law of the United States.

Recent Cases• Barnett Bank of Marion Cty., N.A. v. Nelson, 517 U. S. 25

(1996)

▫ The Supreme Court held that federal law preempted a state insurance law prohibiting national banks from selling insurance.

Using principles of conflict preemption, Court found that the state insurance law significantly interfered with a national bank’s exercise of its powers.

The Court noted the history of “interpreting grants of both enumerated and incidental ‘powers’ to national banks as grants of authority not normally limited by, but rather ordinarily preempting, contrary state law.”

▫ The “Barnett Standard” - State law is preempted if it forbids or significantly impairs the exercise of a power granted by federal law or “stands as an obstacle to the accomplishment and execution of the full purposes and objectives” of the federal law.

Recent Cases• Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007)

▫ The Supreme Court held that the National Banking Act preempted the application of the state laws to the mortgage-lending activities of an operating subsidiary of a national bank.

▫ The Court stated that “Wachovia’s mortgage business, whether conducted by the bank itself or through the bank’s operating subsidiary, is subject to OCC’s superintendence, and not to the licensing, reporting, and visitorial regimes of the several States in which the subsidiary operates.”

Recent Cases• Cuomo v. Clearing House Ass’n, LLC, 129 S.Ct. 2710 (2009)

▫ NY AG sought information from national banks as part of efforts to enforce state fair-lending laws. OCC sued for relief claiming that this type of state law enforcement against national banks is prohibited.

▫ Lower courts agreed with OCC and enjoined the AG from enforcing state fair lending laws through demands for records or judicial proceedings.

▫ The Supreme Court affirmed as to demands for records, but reversed as to judicial proceedings:

The state is precluded from seeking to conduct examinations and requiring the production of records as part of sovereign supervisory powers over national banks, as this activity is part of federal government’s exclusive visitorial power.

But, the exclusive visitorial powers of the federal government do not preclude a state from bringing suit to enforce state law against a national bank

Prepaid Cases• SPGGC, LLC v. Ayotte, 488 F.3d 525 (1st Cir. 2007)

▫ Federal law preempted a NH law, which prohibited gift cards with a face value of less than $100 from having expiration dates or fees assessed, from being applied to prohibit agent’s sale of gift cards.

▫ First Circuit held that the NH law “regulates the activities of [the] national bank itself and creates a conflict between federal and state laws.”

In finding that the NH law regulated the activities of the bank itself, the court noted that U.S. Bank had “sole control” over setting terms and conditions.

▫ First Circuit also held that the NH law “indirectly prohibits a national thrift from exercising powers granted to it under HOLA and OTS regulations.”

Prepaid Cases• SPGGC, LLC v. Blumenthal, 505 F.3d 183 (2d Cir. 2007)

▫ Analysis required “discerning whether the state regulation at issue actually affects the exercise of any national bank powers or, rather, whether it simply limits the activities of a third party…”

▫ Court found that CT’s prohibition on expiration dates might affect BofA’s right to issue gift cards (issue was remanded for further factual findings). But, CT’s prohibition on fees affects only the agent’s conduct.

▫ Key factual findings: SPGGC paid costs of administering the program, physically collected all fees and charges, and established the original terms and conditions governing the cards.

OCC position: “we do not believe that the state restrictions on Simon charging a monthly service fee in connection with the gift cards would burden or interfere with national bank powers...”

Prepaid Cases• Mann v. TD Bank, N.A., No. 09-1062, 2009 U.S. Dist.

LEXIS 106015 (D.N.J. Nov. 12, 2009)

▫ The case was a consumer class action case against several national banks alleging unlawful conduct and deceptive and misleading advertising as it pertains to advertising “no fee” gift cards.

▫ The Court held that Plaintiffs’ state law claims predicated on issuance of gift cards subject to federally authorized fees were preempted, but state law claims predicated on deceptive/misleading advertising were not preempted.

Prepaid Cases• Mwantembe v. TD Bank, N.A., No. 09-0135, 2009 US

Dist LEXIS 107140 (E.D.Pa. Nov. 17, 2009)

▫ Another consumer class action case against several national banks alleging unlawful conduct and deceptive and misleading advertising as it pertains to failure to disclose certain fees.

▫ The Court held that enforcing Pennsylvania’s consumer protection laws will not interfere with or unduly burden bank operations, and accordingly, there is no conflict with federal law and no basis for federal preemption.

Prepaid Cases• Parks v. MBNA America Bank, N.A., __ Cal.App.4th ___

(May 12, 2010)

▫ The state Court of Appeal held that federal law did not preempt plaintiffs’ CA unfair competition law claim based on a provision of CA law that requires certain disclosures to credit card holders who use preprinted "convenience checks.”

▫ Court held that (1) section 1748.9 "does not preclude national banks from exercising their authority to lend money on personal security under section 24 of Title 12 of the United States Code (Seventh)" and (2) "without a factual record," it could not conclude that section 1748.9 "significantly impairs national banks' authorized activities.”

Preemption and Regulatory Reform•Much of modern preemption is based on

elements in the National Bank Act of 1864•State laws that conflict with or

significantly interfere with national bank powers are preempted

•However, many state laws still apply•The question: who can better protect

consumers

The OCC

•In 2004, the Office of the Comptroller of the Currency issued two critical rules:▫The first stated that national banks and

their operating subsidiaries are not subject to state laws or regulations that “obstruct, impair or condition” the national bank’s federally authorized powers

▫The second provided the OCC has “exclusive visitorial powers” over national banks

Important Note• The OCC 2004 rule did not preempt all state

laws• The rule at 12 CFR 7.4008(e) specifically

provides that the following laws continue to apply to national banks (as long as they only incidentally affect national bank powers):▫Contracts▫Torts▫Criminal law▫Right to collect debts▫Acquisition and transfer of property▫Taxation▫Zoning

Preemption under the CFPA or CFPB•Recent Federal Legislation

▫The Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173 – passed by the House on December 11, 2009

▫The Restoring American Financial Stability Act of 2010, S. 3217 – passed by the Senate on May 20

•Conference to reconcile the differences

The House Version

•As initially proposed, it would have essentially eliminated preemption of any state consumer law that provided greater protection to consumers

The House Version

•As adopted, Title IV, Subtitle D – Preservation of State Law▫Allows states to provide enhanced

protection for consumers▫Requires the CFPA to issue an NPR when a

majority of states request modification of consumer laws

▫Authorizes state AGs to enforce the Act▫Preserves much of the Barnett standard

(preemption would have to be case-by-case)

The House Version•Provides that state laws that “prevent,

significantly interfere with, or materially impair the ability of national banks to engage in the business of banking may be preempted

•Incorporates the Barnett language/concept without actually referencing the decision

•OCC retains the ability to interpret the standard (Chevron deference)

The House Version

•Judicial interpretation is permitted•Interest rates can still be exported•Applies to state consumer protection laws

(non-consumer statutes still would be subject to the current pre-emption standard)

•Visitorial rights are not entirely clear•Where a majority of states have acted, the

CFPA must conduct rulemaking

The Senate Version

•Provides that any preemption of a state consumer law must follow the Barnett standard

•Eliminates the House requirement that federal law provide substantive standards before state law can be preempted

•Like the House bill, expands state AG authority

•Operating subsidiaries are not covered

The Senate Version•As amended by Senator T. Carper (D-DE),

the Senate version is closer to current law•Specifically references Barnett•Like the House bill, expands the visitorial

authorities of state attorneys general (goes beyond Cuomo) – but restricts their authority to enforcing rules promulgated by the CFPB

•Also restricts state AG’s to suits covering their own citizens and not a broader class or those in other states

Next Steps

•Conference on the House and Senate bills started Wednesday, June 9

•The goal is to complete the legislation by the July 4th recess (or sooner)

Some Thoughts on Preemption•Uniform standards:

▫ permit consistent terms for consumer products

▫permit efficiencies and lower costs▫facilitate consumer understanding of terms and

conditions▫Eliminate state protectionism:

Sales of annuities (Connecticut and Texas) Acting as fiduciary (Wisconsin and Missouri) Branches and ATMs (Massachusetts and Florida)

•Preemption creates a uniform regulatory climate

Interesting Quote• “The erosion of state power in itself need not

be problematic from a consumer protection perspective. In an era of interstate banking, uniform regulation of consumer credit products at the federal level may well be more efficient than a litany of consumer protection rules that vary from state to state. The problem is not in the federal preemption; it is in the failure of federal law to offer a suitable alternative to the preempted state law.”

• Making Credit Safer, 157 The University of Pennsylvania Law Review, p83, 2008, by Oren Bar-Gill and Elizabeth Warren

Thank You!Robert G. Rowe, IIIVice President & Senior CounselCenter for Regulatory ComplianceAmerican Bankers AssociationBuilding Success. Together.202-663-5029

Cheryl Slipski, Esq.Executive Vice President and General CounselTxVia, Inc.340 Madison AvenueNew York, NY 10173(212) 937-4163cslipski@txvia.com