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  State Law’s Longer Reach Dodd-Frank Changes Rules on Federal Pre-Emption
State Law’s Longer Reach Dodd-Frank Changes Rules on Federal Pre-Emption

By Cliff Weber

Financial-institution compliance officers in New York state should prepare for a new level of vigilance to protect their organizations against consumer-protection lawsuits. Two recent decisions by the New York Court of Appeals may be harbingers of a more expansive approach to consumer litigation by New York regulators.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 recalibrates the balance of power between federal and state regulators over financial products and services. The determination that federal law does not necessarily pre-empt state law creates more avenues by which state regulators and law enforcers can assert their jurisdiction over financial wrongdoing and redress perceived harm to consumers.

Appraisals
In People v. First American Corporation, the New York Attorney General sued First American Corporation, a residential real estate appraisal company. The AG’s complaint, based on the New York General Business Law and New York common law, sought an injunction and money damages arising from First American’s appraisal practices. Specifically, the AG alleged that First American, at the behest of Washington Mutual (WaMu), engaged in a pattern of fraudulent and deceptive conduct against consumers. The AG alleged that WaMu prodded First American to inflate the appraised values of homes on which Wamu made mortgage loans and that First American yielded to this coercion because WaMu was its largest client, accounting for almost 30 percent of its business.
First American moved to dismiss the complaint based on federal pre-emption. It contended that the Home Owners’ Loan Act (HOLA) and sections of FIRREA (the Financial Institutions Reform, Recovery, and Enforcement Act of 1989) pre-empt state law either because federal law occupies the field through a comprehensive statutory/regulatory scheme or because New York law conflicts with federal law. Both are recognized bases for pre-emption.
The Court of Appeals denied First American’s dismissal motion and allowed the case to continue. The court traced the federal involvement in appraisal practices to FIRREA, one purpose of which was to “thwart real estate appraisal abuses…[by] establish[ing] a system of national uniform appraisal standards.” The court found further that FIRREA’s legislative history “envisaged a robust partnership with the states,” evidenced by the recognition that states are best positioned to certify and monitor appraisal practices and OTS’s relegation of appraisal complaints to state authorities. Against this background, the Court of Appeals concluded that OTS’s pre-emption regulation, which purported to occupy the entire field of lending for federal savings associations, does not apply to the AG’s complaint. Finding that the state law grounding the AG’s action would only incidentally affect federal lending operations, the court held that:
“…FIRREA governs the regulation of appraisal management companies and explicitly envisioned a cooperative effort between federal and state authorities to ensure that real estate appraisal reports comport with USPAP [Uniform Standards of Professional Appraisal Practice]. We perceive no basis to conclude that HOLA itself or federal regulations promulgated under HOLA preempt the Attorney General from asserting both common law and statutory state law …”
What it means: The AG will fight federal pre-emption to preserve New York’s power to enforce state consumer protection laws.

Securities and Investments
Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc. involved Section 349 of the General Business Law, the Martin Act, also known as New York’s “blue sky” law. This law grants broad remedial investigative and enforcement powers to the AG to combat securities fraud. The Martin Act is the same state law that was involved in the First American case. The issue in this second case was whether the Martin Act pre-empted the plaintiff’s common law causes of action for breach of fiduciary duty and gross negligence.
Assured Guaranty, a financial guarantor that paid its client for investment losses incurred in an investment portfolio managed by J.P. Morgan, sued J.P. Morgan for breach of fiduciary duty and gross negligence, based upon J.P. Morgan’s alleged mismanagement of Assured’s client’s portfolio. J.P. Morgan moved to dismiss the complaint, asserting that the Martin Act pre-empted the plaintiff’s common law claims and that their prosecution by the plaintiff “would be inconsistent with the attorney general’s exclusive enforcement powers under the [Martin] Act.” Significantly, in an amicus brief, the AG opposed J.P. Morgan’s motion, arguing that “neither the language nor the history of the Martin Act requires pre-emption” and that public policy favors permitting the plaintiff’s common law claims to continue alongside the AG’s Martin Act claims.
The Court of Appeals examined the history of the Martin Act. Noting that “a clear and specific legislative intent is required to override the common law” (that is, judge-made law, as opposed to statutes enacted by the Legislature), the court found that the text of the Martin Act “does not expressly mention or otherwise contemplate the elimination of common law claims…”
As to policy concerns, the court sided with the AG and the plaintiffs, concluding that public policy is better served by allowing private litigants to pursue common law claims in tandem with the AG’s Martin Act claims against the same defendant.
What it means: The AG will fight to preserve a broad array of remedies to combat consumer and business fraud, and the limits on pre-emption give the AG more tools with which to do so.

Thoughts
Neither of the defendants in these two cases are banks. But the meaning of the cases’ outcome for financial institutions is obvious, and perhaps ominous: emboldened by Dodd Frank, state regulators will not hesitate to investigate or litigate re: perceived consumer abuse. Note, for example the New York Department of Financial Services’ pending investigation into banks’ forced placed insurance practices, a product that is now the subject of several class actions.
The consumer protection universe is a complicated and expanding alphabet soup – TILA, RESPA, TISA, EFTA, CRA, etc. And full time compliance staffs are costly for community banks. But on balance, if they protect a bank from time- and money-consuming enforcement litigation, they’ve earned their keep. ■


Posted on Friday, July 06, 2012 (Archive on Thursday, October 04, 2012)
Posted by Scott  Contributed by Scott
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