Henry Meier, Esq., The Law Office of Henry Meier, Esq.
I’ve said before and I’ll say it again, the most difficult question that everyone wants an easy answer to is; is this law preempted?
The reality is that preemption determinations are never easy to make in the best of times but are particularly challenging in the present environment. There is so much uncertainty about the foundations of preemption analysis as applied to credit unions and banks that extrapolating any clear conclusions about its impact on a given state law is a fool’s errand. Here is a look at the present state of preemption. It is my hope that after reading this, you will cut your compliance person a bit more slack the next time you want to know if a bill is preempted.
The extent to which banks could ignore the state-level laws in which they operated has been hotly debated, virtually since the inception of the country. Remember that it was in McCulloch v. Maryland, a case involving the authority of Maryland to tax the first federally chartered bank in which Justice Marshall declared that the power to tax is the power to destroy.
Fast forward to the Civil War and all of a sudden, the Union has a pressing need for a strong currency. In the National Bank Act of 1863 and the subsequent Act of 1864, one of the primary aims of Secretary of the Treasury Chase, other than trying to position himself for a run at the Presidency, was to centralize the federal currency through the creation of a single federal charter. One of the ways he did this was to make sure that the National Bank Act had strong preemption language.
The tradeoff was a simple one; if you became a federal charter, you would adopt a single note regulated by the newly formed OCC, and in return, would be protected from a host of nettlesome state laws. It was a policy judgement almost as important as the creation of the Federal Reserve. When the Federal Credit Union Act of 1934 was passed by Congress, preemption was not a primary concern. But the tax-free status of credit unions in part reflected the age-old dictum of Marshall: Congress did not want states to be able to tax a not-for-profit financial institution to death.
What does this trip down memory lane have to do with the present day? Because even though 92 years have gone by since the Federal Credit Union Act, there has been very little legal analysis of credit union preemption. That is about to change.
First, the district court’s holding in Illinois Banker’s Association v. Raoul that federally chartered credit unions were subject to the interchange portion of the bill-has for the first time unequivocally stated that federally chartered credit unions enjoy little of the preemption protection afforded to their banking counterparts. In theory, everyone knew this to be the case, but in reality, credit unions often piggybacked onto bank preemption authority when it came to their own protection. After all, the credit union and banking industry jointly brought the lawsuit, challenging the application of the IFPA to federally chartered institutions.
The Court held that federally chartered banks were also required to comply with the interchange reimbursement requirements, but this was because the Court concluded that interchange fees were not set by the banks but by Visa and Mastercard so traditional bank preemption analysis doesn’t apply
By itself, this case would be an interesting development. But it is happening precisely as the Supreme Court has either intentionally or unintentionally muddied the preemption waters. In 2024, the Supreme Court decided Cantero v. Bank of America, in which it ruled on the applicability of approximately a dozen state laws mandating financial institutions make minimum interest payments on mortgage loans with escrows to federally chartered banks.
Banks had traditionally argued that these mandatory interest payments were preempted as applied to federal banks because banks had the power to provide mortgages under the National Bank Act. The Supreme Court held that the First, Second, and Ninth circuits should reconsider their earlier rulings by scrutinizing more closely, not only the court’s seminal ruling in Barnett Bank of Marion Cty. v. Nelson, but the decisions on which case is based.
In hindsight, it seems like a ruling destined to create even more confusion, and that is exactly what it has done. Recently, the Court of Appeals for the Second Circuit reconsidered the case under this framework, but it still came to the same conclusion: mortgage escrow laws were preempted as applied to National Banks. In contrast, the Court of Appeals for the First Circuit in Conti v. Citizen’s Bank reached the exact opposite conclusion, ostensibly applying the same framework articulated by the Court.
Here is where it gets really confusing for credit unions. Federally chartered credit unions have long assumed that they are also exempt from these escrow interest requirements since federal banks were exempt, or so they thought.
Let’s take a deep breath. So far, we know that the Federal Bank Act has strong preemption protection for federally chartered banks. We know that similar authority was not extended to federal credit unions, but federal credit unions often enjoyed expanded preemption based on the fact that they were also financial institutions. But recently, the Supreme Court has raised questions as to the scope of bank preemptions, while at the same time the IFPA directly raises the question of how much preemption protection federally chartered credit unions have in comparison to their banking counterparts.
Now let’s add one more twist to this confusing mix. Remember way back in 2024 when the Supreme Court made its landmark decision in Loper Bright Enterprises v. Raimondo? At the time, the court was troubled by the degree of deference the federal courts were giving federal agency interpretations of federal statutes under so-called Chevron Deference. In this case, the court ended this deference. It held that courts may, but are not required to, consider an agency’s interpretation of its own statutes. The key point was that it was courts and not the federal government that ultimately interpreted federal law. Congress could, if it wanted to, indicate that certain agencies were to be given greater rulemaking flexibility than others, but ultimately the interpretation of laws was the job of the courts.
Ironically, the same Court has subsequently adopted a muscular view of executive branch authority– i.e., the so-called Unitary Executive Theory– and many of the same players who welcomed the Loper Bright decision are now trying to re-assert agency authority. For instance, the OCC has promulgated separate regulations explaining that both the IFPA and escrow interest laws are preempted under federal law,
In the old days of the Chevron Deference, these regulations would have settled the issue. But now, they simply will confront the federal courts with the opportunity to examine just how strictly Loper Bright is going to be interpreted. This has a very important indirect impact on credit unions. For example, industry advocates have called on the NCUA to promulgate similar regulations to protect credit unions. But this assumes that NCUA has such authority in the first place.
So, let’s put all this together. Up until about three years ago, federal credit unions enjoyed much of the same preemption exercised by federal banks, even while acknowledging that they did not have the same extent of preemption protection. The full extent of preemption as applied to federally chartered institutions is once again being debated as a result of the Supreme Court’s Cantero decision. In addition, agencies like NCUA’s ability to independently interpret their own preemption authority is now being challenged because of the Court’s Loper Bright decision. Notwithstanding Loper Bright, banking agencies have rushed to promulgate regulations effectively overturning judicial rulings with which they disagree.
Where does this leave credit unions? At the very least, the extent of credit union preemption has never been more unclear. The most aggressive thing to say is that, in the coming months, we may see a series of rulings so narrow regarding credit union preemption that the industry will have to seek redress from Congress to correct this newly discovered structural imbalance.
Related Breaking News:
NCUA Confirms Federal Preemption Over Illinois Interchange Law