BPInsights: Oct. 5, 2024

OCC Defends National Bank Preemption in Illinois Interchange Lawsuit

On Wednesday, the Office of the Comptroller of the Currency submitted an amicus brief supporting plaintiffs in the case Illinois Bankers Association et al. v. Raoul. The lawsuit, filed by the American Bankers Association, Illinois Bankers Association, America's Credit Unions, and the Illinois Credit Union League, challenges the Illinois Interchange Fee Prohibition Act (IFPA), a recently enacted state law that prevents banks from collecting interchange fees on the tax and tip portions of transactions. The OCC brief argues the IFPA is preempted by the National Bank Act. The brief is notable because it is the first amicus brief on preemption that the OCC has filed since the Supreme Court's recent ruling in Cantero v. Bank of America this past term.

Background. The IFPA was signed into law in June 2024, becoming first state law seeking to regulate the structure of the national credit card payment system. Specifically, the IFPA purports to (1) prohibit banks that issue credit and debit cards (among others), from receiving or charging an Illinois merchant any interchange fees on the gratuity and state and local tax portions of the transaction and (2) prohibit these same entities from using transaction data from purchases made with cards in Illinois for any purpose other than processing the transaction data or as "required by law." In August, a group of banking and credit union associations challenged the law in the U.S. District Court for the Northern District of Illinois, arguing that the law is preempted by several federal statutes, including the National Bank Act.

OCC brief. In its brief, the OCC agreess that the IFPA conflicts with the powers of federally chartered banks and is preempted by the National Bank Act. Specifically, the OCC argues: "interchange fees play a vital role in enabling banks to protect against fraud, cover the costs of transaction processing, and provide other valuable customer services." Moreover, "the IFPA's imprudent data usage limitation will likewise weaken national banks' and Federal savings associations' abilities to prevent fraud, manage risk, and provide critical services to customers." The OCC concludes the law is preempted because "the result would be an unmanageable patchwork of state laws that undermine the uniformity necessary for the smooth and effective functioning of the national payment system"

• Applying Cantero. The OCC brief notes that Cantero "reaffirmed the Barnett Bank standard." According to the OCC, Cantero-and the antecedent cases cited in Cantero-"demonstrate[] that a state law prevents or significantly interferes with a federal power, at a minimum, when it (1) interferes with critical flexibility granted to a national bank under federal law, (2) interferes with a national bank's efficient and effectiveness in exercising its federal power, or (3) qualifies a federal power in an unusual way." (emphasis added, internal footnotes omitted)
• Key quote. "[T]he IFPA prevents or significantly interferes with federally-authorized banking powers that are fundamental to safe and sound banking and disrupts core functionalities that drive the Nation's economy. In short, the IFPA constitutes both bad policy and an unlawful interference with federally granted powers."

BPI amicus brief. In August, BPI along with The Clearing House and Consumer Banker Association filed an Amicus brief in support of plaintiffs which argued the IFPA is preemption by both the National Bank Act and the Durbin Amendment. Furthermore, because the law is preempted as to national banks, it is also preempted for non-Illinois state chartered banks under Illinois state and federal law, which provides preemption parity for activities of state banks operating in a host state.

Next up. It is still to be seen whether the OCC will submit briefs in other important preemption cases that are pending. Litigation is ongoing in the Second Circuit in Cantero, as well as Flagstar Bank v. Kivett in the Ninth Circuit, which the Supreme Court also remanded following its decision in Cantero. Both cases, as well as a similar case, Conti v. Citizens Bank pending in the First Circuit, will consider if the NBA preempts state laws requiring banks to pay a specified interest rate to borrowers with mortgage escrow accounts.

Five Key Things

1. FDIC's Hill: Basel Redo 'Still Has Problems'

FDIC Vice Chair Travis Hill said this week that the revamped Basel proposal draft "still has problems," namely regarding capital requirements for market risk, according to Reuters. Hill's remarks at a Women in Housing & Finance event came after multiple media reports citing opposition from a majority of FDIC directors to the new Basel reproposal. Such disagreements, according to the reports, have delayed a vote on the reproposal despite Federal Reserve Vice Chair for Supervision Michael Barr's recent preview of an apparent agreement between the banking agencies.

• 'Uneconomical': The new draft has significant improvements, but "still has problems," according to Hill, who said it overstates risks posed by fluctuations in the market. Market risk is duplicated in the Global Market Shock in the Fed's stress tests, Hill said. This duplication "is going to effectively make a number of these activities uneconomical for banks to engage in," he said.
• Timing: Hill said he did not know when the reproposal would come up for a vote and said he does not control that timing.

2. Judge Tosses Suit Against Banks on Credit Line Disclosure, Agreeing with Banks and CFPB

This week, U.S. District Judge Edmond Chang granted a motion from Bank of Orrick and Kendall Bank to dismiss a Chicago plaintiff's lawsuit, which accused the banks of failing to provide necessary disclosures about a credit line in monthly billing statements. In a defense of banks, the CFPB argued in an amicus brief in July that its Regulation Z rule applies only to certain open-end credit lines, such as credit cards, and does not cover the type of credit in the plaintiff's suit. Judge Chang agreed with the CFPB and ruled that the banks were not required to provide such disclosures for personal credit lines, which are exempt from Regulation Z requirements.

3. Hill: FDIC Merger Measure Adds Uncertainty

FDIC Vice Chairman Travis Hill expressed concern about the agency's updated merger guidance in comments at the same Women in Housing and Finance event mentioned above. "The notion that the FDIC can look at any product or consumer segments, I think adds a lot of unpredictability," Hill said this week. "The FDIC can look at any product market and segment it by any group of consumers, and you may get very different answers, depending on how you choose to segment it." The FDIC's updated guidance departs from more objective metrics like the Herfindahl-Hirschman Index (the metric traditionally used by economists to measure market shares of deposits in a specific geographic region) to measure competitiveness in merger reviews. Instead, it would take into account a broader range of more subjective factors, an approach that would make the process more uncertain. He also said the FDIC's guidance should reflect an up-to-date view of banking competition, where consumers have many options available for financial services. "For consumers who are looking for banking or financial products, generally, oftentimes, there are many, readily substitutable products that are available from across the country using the internet, which was not the case decades ago," he said. "We should focus on addressing the underlying causes of consolidation … rather than trying to put these artificial constraints on banks merging."

4. OCC Flags Credit Risk Transfers in Supervision Plan

The OCC this week released its Bank Supervision Operating Plan for 2025, which outlines the agency's supervision priorities and objectives for the upcoming fiscal year. Among other items, the 2025 plan says that "examiners should continue to monitor capital optimization activities, including any new plans by banks to engage in credit risk transfer transactions" to "determine whether banks have effective risk management systems to identify, measure, monitor, and control risks posed by these transactions, including proper governance" as well as "effective risk management systems to maintain adequate capital for these risks."

• SRTs demystified: BPI recently published an SRT explainer describing what these arrangements are, how they work and why concerns about them are largely misplaced. The explainer also gives important context about how the capital regulatory framework creates incentives for SRTs.

5. Crypto, Oversight and Housing: Rep. Huizenga on the Legislative and Regulatory Outlook

In a recent Banking with Interest podcast interview, Rep. Bill Huizenga (R-MI), chair of the House Financial Services Subcommittee on Oversight and Investigations, discussed a range of legislative and regulatory issues. Huizenga is one of a few senior members vying to lead the Republicans on the Committee after the retirement of Chair Patrick McHenry (R-NC). He flagged crypto regulation, artificial intelligence and housing as key priorities. One key theme was supporting innovation as new technologies emerge: "AI is here to stay," Huizenga said. "It's not a fad, it's not going away, it's a reality." Huizenga alluded to the legal issues surrounding the CFPB's structure. "The only court case I think in the financial services space that this administration has really won has been with CFPB funding, and even that seemed a little tenuous," he said.

In Case You Missed It

The Law is Clear: The Fed Decides Who Gets Access to the U.S. Payments System

Federal Reserve Banks have the right to decide who gets - or doesn't get - a master account in the Federal Reserve system, BPI and The Clearing House wrote in a motion supporting the Fed in its legal case against Custodia Bank over master account access. Custodia is a crypto-focused firm based in Wyoming that has sued the Federal Reserve over its denial of a master account, which would grant access to the nation's payment rails. "Both as a matter of law and sound public policy, reserve banks have discretion to grant or deny a master account. This discretion is no accident," wrote BPI and TCH. "It reflects Congress's recognition that master account holders receive several important privileges and … can serve as a risk transmission channel to the Reserve Banks and other participants in the payment system."

• Context: Custodia is now challenging a lower court's ruling in the Fed's favor in the U.S. Court of Appeals for the 10^th Circuit.
• Why it matters: Access to Fed master accounts in the hands of "novel charter" institutions, such as fintech and crypto firms, poses risks to the financial system. This court case sets important precedent in defining how the Fed controls access for such participants.

The Crypto Ledger

Here's what's new in crypto.

• Judge sides with SEC: A U.S. district judge granted the SEC's motion for summary judgment in a case against mobile crypto wallet Rivetz, which the SEC accused of selling unregistered securities.
• Binance GC's road ahead: Eleanor Hughes, Binance's general counsel since July 2023, faced "probably one of the most stressful situations a lawyer can face" when she took the job as the crypto firm was settling with U.S. authorities for billions of dollars over charges of sanctions evasion and Bank Secrecy Act violations. Law360 sheds light on Hughes' tough road ahead after the settlement, and her efforts to build a legal team, here.

Charles Schwab Names Wurster as Next CEO

Charles Schwab this week announced current President Rick Wurster as its next CEO. Wurster will take the helm on Jan. 1, succeeding Walt Bettinger, who is retiring and will remain on the company's board as executive co-chairman.