UPDATE 2-Big U.S. banks face more exposure to state laws

Wed May 25, 2011 10:26pm BST

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* Changes required by Dodd-Frank law

* OCC has faced criticism for pre-empting state laws (Adds comments from law professor and background)

By Dave Clarke

WASHINGTON, May 25 (Reuters) - 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 on 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 pre-emption 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.

Bank of America (BAC.N), JPMorgan Chase (JPM.N) and Wells Fargo (WFC.N) are among the banks the OCC regulates.

The OCC proposal released on Wednesday lays out the additional hurdles the agency must pass before being allowed to pre-empt a state consumer protection law.

The OCC would have to review each state law case-by-case and would have to consult the new Consumer Financial Protection Bureau when seeking to pre-empt a state law.

The Dodd-Frank law also requires the OCC to meet a stricter standard on pre-emption by showing that a state law "prevents or significantly interferes" with a national bank's ability to conduct business.

The agency's rule refers to this standard as a "starting point," which has led some critics to charge that the OCC is seeking to maintain broader pre-emption powers than the law intends.

"They're trying to preserve wiggle room," Arthur Wilmarth, a law professor at The George Washington University, said in an interview. Wilmarth also works as a consultant to the Conference of State Bank Supervisors.

Even before Dodd-Frank, the OCC's pre-emption powers were threatened, namely through the 2009 Supreme Court decision in Cuomo v. Clearing House Association LLC.

The case involved whether the OCC could block states from pursuing law enforcement actions against banks by arguing they did not have "visatorial" powers over the banks, which are supposed to be defined under federal law and can include such things as bank exams and administrative penalties.

The court ruled that this OCC interpretation was too broad and the agency could not prevent the state of New York from 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 OCC said the proposal on Wednesday reflects the court's ruling.

The OCC proposal is out for comment for 30 days. (Reporting by Dave Clarke; Editing by Dave Zimmerman, Tim Dobbyn and Carol Bishopric)

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