The Treasury Department vs. Fair Access Laws (Pt. 2)
Acting Comptroller of the Currency Michael Hsu has also recently critiqued fair access laws, and possibly implied the OCC may seek to preempt them. Is this wise, or possible?
The Treasury Department is starting to push back on state “fair access” laws. These laws are intended to protect bank customers from being denied services based on being part of a legal but controversial industry or other contentious criteria. These laws are a response to efforts by banks, government officials, and others to use access to the banking system as a tool of de facto regulation.
Last week we talked about a letter from Treasury Undersecretary Brian Nelson expressing concerns that fair access laws might undermine banks’ ability to comply with their obligations under the Bank Secrecy Act and other laws. Here we will discuss the other recent public pushback, which came from Acting Comptroller of the Currency Michael Hsu.
In a speech before the Exchequer Club on July 17th Acting Comptroller Hsu criticized what he saw as a trend of banks being used as a tool of politics by the states in the service of “culture wars, identity politics, and weaponization of finance.” However, according to news reports of the speech it appeared the primary target of his ire was state fair access laws. The criticism was in the context of the OCC reevaluating its position on preemption of state laws for national banks, implying that the OCC may seek to preempt these laws.
Here it is important to note that information is limited. I was not invited to the speech and there is no video or transcript of the speech as delivered and subsequent q&a that I am aware of. I have asked the OCC if such existed via Twitter and received no response. The issue apparently came up during the q&a, so more detail and nuance may have been expressed in the room than is available in the prepared remarks. We will operate based on the prepared remarks but if anyone has additional information, please share it!
If concern about fracturing and distorting the banking system is the OCC’s real concern, it is bizarre that it would be the fair access laws that are seen as the problem. These laws didn’t arise in a vacuum, they arose in response to efforts (that have been going on for years) to get banks to cut off gun companies, political advocacy groups, fossil fuel providers, religious groups, and others that engage in completely legal conduct disfavored by powerful constituencies. It is the very legality of the businesses of the targeted customers that motivated the efforts to use banks as de facto regulators in the first place!
Direct regulation may have been impossible due to political or Constitutional limitations, so some looked for another way. An attractive option appeared to be the banking system because it is heavily regulated under a government granted “regime of privilege.” As the Supreme Court recently acknowledged, this allows the banking system to serve as a choke point to alter the behavior of the customers of banks.
In response, some states have passed laws prohibiting banks from discriminating against customers based on controversial industry or other politically salient factors. These laws do not require banks to serve any particular customer. Rather, they prohibit banks from basing the decision on the customer’s industry, politics, etc. In this regard they mirror anti-discrimination law, which does not compel a company to do business with a customer but prevents the company from refusing to do so because of a protected characteristic. As such, financial firms, including banks, are not obligated to make unprofitable or overly risky loans, or provide payments services to dodgy customers, but they must be able to justify that decision on non-political grounds.
How Valid is the Acting Comptroller’s Critique?
The Acting Comptroller attributed these laws to “culture wars, identity politics, and weaponization of finance.” As discussed above, a more accurate statement would add “a response to” at the beginning of the quotation. Still, how valid is the Acting Comptroller’s critique? Are these laws just political exercises interfering with the functioning of the national economy?
First, are these laws legitimate? Are they a legitimate expression of a state’s sovereignty for an appropriate purpose? Here we need to acknowledge that people will have different opinions of both what things are worthy of protection and what cost is worth paying to protect. For example, some view the ability of advocacy groups and individuals who hold controversial views to access financial services to be essential to the legitimacy of our system of government. To these people access to financial services is essential to the ability to advocate and convince voters, which is in turn essential to legitimate self-governance. Others view such controversial speakers as hateful threats to democracy who should be suppressed for the good of society.
Absent a Constitutional concern, elections are how a given polity resolves these questions. In the case of the states who have passed fair-access laws the voters, through their elected representatives, have chosen to protect certain industries and activities from being targeted for exclusion from the financial system because of their controversial status. Yes, this limits the autonomy of nominally private actors (the banks), but it seeks to protect other private actors and the ability to engage in conduct that is viewed as essential to vindicate the rights of citizens or protect the country’s economy and independence.
To be sure, there can also be a more parochial interest at play. It is no surprise that the states who seek to protect fossil fuel extraction tend to be fossil fuel producers. It is possible that the protection of fossil fuel is motivated less by high-minded ideals than by a desire to protect an important and politically powerful industry, as well as the jobs and tax revenue that are attached to that industry. That said, even if we grant that there are cases where these laws serve at least in part as industrial policy, that is hardly outside the norm for state legislatures.
Trying to protect citizens’ ability to meaningfully exercise their rights is part of what governments are expected to do. One can disagree with the choices made by these states, but the relevant question is not whether these choices are wise, but whether they are the type of choices that state legislatures are allowed to make and bind national banks with. Which gets to the next big question, could the OCC preempt these laws?
Is Preemption Possible?
In our Constitutional system the federal government is supreme, but only if certain conditions are met. The mere whims of a federal official, without a basis in a legitimate federal law or prerogative, do not bind the states. National banks are creatures of the federal government, and do enjoy significant preemption from certain state laws, but that preemption is neither unlimited nor arbitrary. To preempt state fair-access laws the OCC will need to be able to argue that such laws are preempted by federal law, which may prove challenging.
Perhaps ironically, it has long been a project of progressives to limit the amount of preemption of state law national banks enjoy. In the Dodd-Frank Act a progressive Congress limited national bank preemption of state consumer finance law. Relevant for our purposes Dodd-Frank limits preemption to cases that meet the criteria identified in the Supreme Court case of Barnett Bank of Marion County v. Nelson.
The Barnett Bank standard requires that a state law “prevents or significantly interferes with the exercise by the national bank of its powers.” As the Court recently noted in Cantero v. Bank of America Congress has foreclosed field preemption as a consideration. It is not enough that a federal law exists on the same general topic as a state law. Rather, the OCC must show that a specific state law serves as a bar or significant impediment to a national bank being able to exercise its powers.
Do these fair-access laws do that? It seems hard to see how. These laws allow banks to refuse to do business with customers but limit the criteria that banks can use to make that decision to objective, economic criteria. As such, banks can still make profit-maximizing and (legitimate) risk-minimizing choices as to which customers they serve but cannot consider certain non-economic criteria in making that decision.
For example, if oil is in fact a declining business or if a bank legitimately believes its money could be invested more profitably with a green energy company banks are free to do so, but they are not allowed to have per se bans on fossil fuel companies. This allows banks to do what we want them to do, which is allocate capital to its highest and best use, without being able to categorically discriminate.
To the extent National Banks are empowered to do things like lend or provide payments services, it is for the purpose of facilitating a national economy, not the de facto regulation of legal conduct to fit the preferences of bank management or some influential constituency. (See especially pages 119-128 of the linked article.) It is hard to argue then that these laws substantially interfere with national banks exercising their legitimate power, provided they do not prevent banks from making choices driven by legitimate economic or compliance concerns. (There is more to be said about whether they may be potential for evasion here, but that can wait for another post.)
The mechanism used by the state fair-access laws in question mirror how anti-discrimination law usually works. There is no obligation to serve, but there are criteria not directly related to the economic viability of the transaction that are off limits.
The OCC has long taken the position that state anti-discrimination laws generally are not preempted. This is the case even though anti-discrimination law may cause banks to alienate the customers who want to harm the class of people protected by the law. One of the advantages of such laws, however, is it allows banks to tell these frustrated customers that no bank can serve their desire to harm other potential customers, protecting any one bank from being targeted for reprisal.
This isn’t to say that state anti-discrimination laws could never be preempted, but the burden will be on the OCC to show why preemption is allowed for these laws but not laws with similar mechanisms that protect other groups.
Further, Dodd-Frank explicitly raises the bar for preemption of state consumer financial laws, so it is hard for the OCC to argue that there is some sort of general policy against such laws. Such an argument will be even harder for the OCC with the demise of Chevron deference.
All this to say that while it is theoretically possible that the OCC could successfully argue that these state fair-access laws qualify for preemption, it would likely be an uphill battle, and one that would be fought tooth-and-nail by the states who passed the laws.
This all makes the OCC singling out these laws for condemnation surprising. Why spend precious political capital on this fight versus others?
Hopefully we will get more information as to the OCC’s thinking and justification. If nothing else, Acting Comptroller Hsu is more than welcome to come on the FinRegRant to discuss!