The Single Most Common Compliance Question

If I had to tally up the categories I have been asked most frequently about over the years, I would say that the largest category of questions deals with state levies and restraints, but a very close second would be this: Is this new state law preempted? My answer to the second question has resulted in the most frustration since my most common response is “maybe” or “it depends.”

A recent decision by the Court of Appeals for the Fourth Circuit explains the framework that courts use to decide whether a state law is preempted. If you keep on reading, I can’t promise you that you will know whether you must comply with a new meddlesome state law as a federal credit union, but you will know what questions to ask as you determine how much time, effort and maybe even money you should invest into complying with the new mandate.

My purpose in describing this case is that preemption can rarely, if ever, be definitively opined on in the absence of clear legislative language. While Congress occasionally provides such language, state legislators and regulators rarely do as they are in the business of trying to maximize their authority.

In Guthrie v. PHH, the Fourth Circuit reversed a lower court ruling and held that the Bankruptcy Code did not preempt a North Carolina state law regulating debt collection practices. The plaintiff purchased a house with his soon-to-be ex-wife and ultimately filed for Chapter 13 bankruptcy. Both he and his wife moved out of the house. He faithfully complied with the restructuring plan, and in 2016 his bankruptcy was discharged, meaning he no longer had any obligation to pay the mortgage on the house he previously owned with his ex-wife. Nevertheless, over the next three years, Mr. Guthrie continued to receive mortgage statements from PHH for “informational purposes” only and was contacted by a third-party debt collector. PHH also neglected to update the plaintiff’s credit information to reflect that he was no longer delinquent on his mortgage loan.

The situation became so severe that the plaintiff, a Marine helicopter pilot, temporarily lost his security clearance and suffered from anxiety. He not only sued PHH for violating federal law but also sought to sue the defendant under North Carolina laws, including the North Carolina Debt Collection Act. PHH argued that his state law claims were preempted. Specifically, it reasoned that Guthrie’s claims were directly related to the protections afforded to him under the bankruptcy code and that under the code, his remedy was to argue for sanctions against PHH.

In reviewing this ruling, the Court of Appeals explained the framework courts used to determine whether statutes are preempted. You will see that it is a framework that does not lend itself to yes or no answers. Also, keep in mind that in answering these questions, the courts should start from the presumption that federal law does not preempt state law, particularly in the area of consumer protection.

Among the questions considered by the court were: Did Congress explicitly state an intention to preempt state laws in this area? This was an easy one for the court to answer. The provisions pertaining to Chapter 13 of the Bankruptcy Code do not contain language preempting state law. In contrast, some statutes and regulations do just that.

This is not always the case, a distinction particularly important to credit unions. For example, 12 USC §1757(5) gives the NCUA broad authority to regulate terms, rates and other conditions under which federal credit unions provide services to their members. The statute is further defined under 12 CFR §701.21 to explicitly preempt “any state law purporting to limit or affect rates of interest in finance charges, repayment terms or conditions related to the size of a loan or the eligibility of borrowers.” In fact, there is no shortage of preemption letters being issued by the NCUA preempting a range of state statutes conditioning the terms of accounts.

But Congress is typically not so helpful, as evidenced by this case. As a result, the court ultimately had to determine if it is possible for PHH, or in another context, your credit union, to comply with federal law and state law. Specifically, the court must determine whether the state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in enacting the bankruptcy code.”

I’m going to get in the weeds here a moment. For purpose of this case, the court had to determine whether PHH could both comply with the bankruptcy code and North Carolina law. If not, federal law preempts. It determined that the principle objective of the bankruptcy code –“to grant a fresh start to the unfortunate debtor”– is not frustrated by the heightened requirements of the state law if only because Guthrie is seeking compensation for conduct that took place after his bankruptcy was discharged.

For a good example of a statute being incompatible with federal law, you need look no further than the NCUA’s preemption of a law seeking to prevent credit unions from using the English language. Wisconsin passed two regulations prohibiting credit unions, among other institutions, from using the word “bank” or suggesting that they were engaged in the business of banking. The law created an irreconcilable conflict with the NCUA’s advertisement rule because it would prohibit credit unions from accurately describing the services they provide.

So how should you approach determining whether to comply with a state law? Depending on the cost and compliance burden, you may choose to take a deep dive into preemption issues, seek a ruling from the NCUA, or be prepared to defend yourself in court in the event you get sued for not complying with the statute. Conversely, not every statute is worthy of a detailed preemption analysis. There are times when compliance with state law is easy enough.

Most importantly, however, it does mean that whether you are a state or federal credit union, there are many laws in areas as significant as employment to powers of attorney that clearly do not conflict powers and privileges of federal credit unions.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.