Financial institutions are subject to a multitude of laws and regulations that vary by jurisdiction. Understanding which state and federal regulations apply and how to operate in compliance with these requirements can be a costly and often difficult compliance management process.
The U.S. Constitution’s Supremacy Clause provides that the Constitution, federal laws made pursuant to it, and treaties made under its authority constitute the “supreme law of the land.” This language is the foundation of federal preemption, which allows federal law to supersede state law when conflicting terms exist. Under the National Bank Act, the Office of the Comptroller of the Currency (OCC) serves as the primary regulator for all national banks and federal savings associations, ensuring they operate in a safe and sound manner and in compliance with applicable laws and regulations.
Federal preemption permits national banks and federal savings associations, many of which operate across state lines, to operate under a uniform set of rules to support nationwide banking. State law will prevail in the absence of federal law, or when state law provides more protection than what is available under existing federal law. But determining whether federal law can override state law in each case is often a key point of contention among regulators, financial institutions, and other stakeholders.
The evolving federal preemption landscape
The Dodd-Frank Act changed the federal preemption landscape in several ways. Before the Dodd-Frank Act went into effect in 2010, the OCC relied on broad preemption determinations, which often caused a significant debate between federal and state regulators as to what law prevailed. Some have even gone so far as to assert that the federal preemption of state anti-predatory lending laws played a role in the 2008 financial crisis by hampering the states’ ability to legislate against disreputable lending practices.1
Over the last decade, the Dodd-Frank Act has muddied the waters of federal preemption by establishing that state consumer financial laws can only be preempted if they prevent or significantly interfere with the powers of national banks or federal savings associations. As a result, the OCC and courts must now make preemption decisions on a case-by-case basis. The Dodd-Frank Act has also led to increased regulatory scrutiny of national banks and thrifts and led to a growing number of enforcement actions by state agencies. Many banks are concerned that with the OCC’s loss of broad preemption authority, they will be subject to myriad state regulations that increase the costs and risks of doing business.
Manage compliance for multiple jurisdictions
National banks with a presence in multiple states are subject to thousands of state and federal regulatory obligations, which develop continuously and vary by jurisdiction. Historically, it has been an enormous challenge for financial institutions to keep pace with such a massive volume, breadth, and scope of regulatory change while understanding the ongoing impact. Beyond operating in compliance with state and federal requirements, financial institutions must also provide proof of compliance across the board to internal stakeholders and regulatory authorities.
For financial institutions, the ability to identify what federal and state regulations apply to their institution is the biggest challenge. Often, financial institutions have to manually search for, interpret, and apply a vast amount of regulatory data. Given that regulatory requirements, complexity, approaches, and terminology can vary widely by jurisdiction, it requires a massive resource commitment to maintain your compliance obligations on a national scale. Additionally, it can involve many content sources often delivered and managed in a spreadsheet format that is not easily searchable or manageable.
An AI-based solution like OneSumX ProViso® that uses machine learning, natural language processing, and human augmented intelligence from legal and regulatory experts, can help financial institutions develop, maintain, and prove compliance with their legal obligations to U.S. federal and state regulators.
AI-based tagging allows financial institutions to:
- Easily find the regulatory updates that apply to the business
- Find commonality in laws that span across multiple jurisdictions
- Access comparative state-to-state and federal-to-state analysis written by compliance experts
- Integrate applicable regulations into day-to-day processes using workflow tools
- Prove that policies and processes align with all relevant regulatory requirements
Looking ahead, it doesn’t appear that the pace of regulatory change will slow down anytime soon. Finding a solution that allows you to manage the overwhelming complexity and volume of state and federal regulatory obligations while minimizing manual effort and risk will prevent you from missing a critical regulatory update that could harm your business or your customers.