Compliance Bulletin

California Supreme Court Affirms National Bank Act Preemption
June 28, 2012

In a case that was filed before the financial crisis and before the paring back of National Bank Act (“NBA”) preemption by the Dodd-Frank Act, the California Supreme Court in Parks v. MBNA unanimously held that the NBA preempts California’s convenience check disclosure law. More significantly, the high court reversed the court of appeal’s conclusion that, as a condition of asserting NBA preemption, a national bank must proffer evidence showing that the state law “significantly interferes” with the bank’s exercise of its powers.This decision supports the viability of the standard articulated in the 1996 U.S. Supreme Court’s Barnett Bank of Marion County, N.A. v. Nelson decision, which the Dodd-Frank Act specifically establishes as the statutory preemption standard for national banks and federal savings associations.

In Parks MBNA (later acquired by Bank of America) sent Parks, a credit card customer, preprinted drafts commonly referred to as “convenience checks” without complying with Civil Code § 1748.9. That statute requires, among other things, that a credit card issuer disclose that use of the draft constitutes a charge against the user’s credit account, states the APR, and indicates whether the finance charges are triggered immediately upon the use of the instrument. MBNA did not comply with the statute and Parks sued the bank on behalf of other similarly situated customers, alleging that the bank engaged in unfair competition in violation of Business and Professions Code § 17200 et seq. Following a decision favoring MBNA, the court of appeal reversed, holding that the NBA does not preempt § 1748.9 because it does not significantly impair the power of national banks. While the court acknowledged that § 1748.9 imposes some burden on national banks, it held that the statute does not on its face forbid or significantly impair national banks from exercising a power granted to it by Congress. The court of appeal’s position contradicted a federal Ninth Circuit decision on the same issue. The court also noted that the bank must make a factual showing that the disclosure requirement would cause such impairment.

The Supreme Court reversed, noting that the Dodd-Frank Act codified Barnett Bank’s significant impairment test in determining whether a state or local law is preempted by the NBA. Finding that the NBA broadly grants to national banks “all such incidental power as shall be necessary to carry on the business of banking . . . by [among other powers] loaning money on personal security” (12 U.S.C. § 24, par. Seventh), the Supreme Court concluded that the NBA preempts Civil Code § 1748.9.

The disclosure requirements in § 1748.9 impose a condition on NBA-granted authority. In essence, the law states that a creditor, including a national bank, may offer credit in the form of convenience checks as long as the checks contain specific disclosure and other requirements. These requirements exceed a national bank’s broad authority that includes “loaning money on personal security.”

The Supreme Court’s preemption analysis also considered the potential burden of similar requirements imposed potentially by all states in which a bank operates. If disclosure requirements such as those in § 1748.9 were allowed to stand, a national bank operating in multiple states would face the prospect of complying with a patchwork of conflicting restrictions, a circumstance that the NBA was designed to prevent.

The Court also reject the argument that § 1748.9 is not a generally applicable law similar to California’s law against unconscionable contracts. It is a law specifically directed at credit card issuers and at offers of credit to a cardholder through the use of a preprinted check or draft. And while the statute does not discriminate against national banks, its limit on a specific power granted a national bank is not lessened by the fact that it applies to all credit card issuers

Finally, the Supreme Court found the court of appeal to be in error when it held that national banks claiming preemption must make a factual showing of impairment. Such an evidentiary requirement could result in inconsistent preemption rulings that depend on the specific circumstances of each bank, and would make it very difficult to predict in advance whether a state law will apply.

It is significant that the Court made its ruling based on Barnett Bank and not the OCC’s regulation. As discussed above, Congress specifically identified the Barnett decision as the standard by which preemption decisions are measured, and the Court’s reading of Barnett in this decision bodes favorably for national banks and federal savings institutions. And to the extent that federal preemption is a viable barrier to the enactment of over-reaching state and local banking regulation, all banks benefit.

CBA’s amicus brief, which was joined by the American Bankers Association, was prepared by the law firm of Morrison & Foerster.

Leland Chan

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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