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An Anti-Consumer Loophole in Financial Overhaul Law?

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The Dodd-Frank financial reform act, passed last year by Congress, did a lot of things consumer advocates like. It created a Consumer Financial Protection Bureau charged with weeding out deceptive practices in the financial services industry and improving disclosures to consumers on things like mortgages and credit cards. It took power away from the Office of Thrift Supervision, widely seen as having been in the back pocket of failed savings and loans like Washington Mutual, and barred banks from paying kickbacks to loan officers in exchange for ratcheting up the interest rate on mortgages.

But last week we glimpsed a little-known part of the massive law that consumer advocates may not appreciate.  A federal judge in Florida ruled on March 11 that Dodd-Frank can be used to strike down tougher banking laws passed by the states. The case involves Vida Baptista, who went to Chase Bank to cash a check. Baptista does not have any accounts with Chase, so the bank charged her a $6 fee.

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That fee allegedly violates a Florida law banning banks from charging non-bank customers check cashing fees. Baptista filed a class-action lawsuit against Chase on behalf of all the other non-Chase customers who have been charged the fee.

Chase asked the federal court in Florida to dismiss the lawsuit on the basis of federal preemption, arguing that the Dodd-Frank act overrules any state laws about banks or bank fees. Chase won that case, and Baptista appealed.

In his decision, Joel Dubina, chief judge of the 11th Circuit Court of Appeals, wrote that Florida’s law banning banks from charging fees to non-customers “is in substantial conflict” with Dodd-Frank. And in that case, federal law wins.

The decision may not settle the preemption argument, as cases in other states raise similar challenges to bank fees, and allege that the fees violate state laws.

“It’s probably the first word, but not the last word on the subject,” Laurence Hutt, a partner at Arnold & Porter, told American Banker.

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