General Preemption Principles

We have drawn a number of general principles from the preemption determinations the Board has issued so far. Understanding these general principles may help you better understand the rationale for the determination the Board made for your state or, if the Board has not made a determination for your state, it may enable you to better predict what the preemption determination would be.

There are five general principles. The first is that state laws will survive unchanged and in their entirety to the extent that they apply to deposit accounts not subject to Regulation CC and to the extent that they apply to the deposit of “items” that are not “checks.”

In other words, if a state law applies to savings accounts or time deposits, none of the state law will be preempted in so far as it regulates these types of accounts. This is because the federal funds availability rules only apply to certain “transaction” accounts, and the Board has decided that the federal law does not prevent a state from regulating areas to which the federal rules do not apply. While a state law may or may not be preempted in whole or in part as it applies to transaction accounts subject to Regulation CC, it will not be preempted at all in its application to accounts that are not subject to Regulation CC.

Similarly, if a state law applies to deposits of “items” other than “checks,” as defined by the federal regulation, then the state law alone will continue to regulate the availability of those noncheck items. Many state laws regulate the availability of “items,” a term that includes checks but may also include certain instruments that are not checks. An example of an “item” that is not a “check” is a nonnegotiable instrument. The only “items” to which the federal rules apply are “checks” and, therefore, to the extent that a state law applies to items that are not checks, the state law is not preempted at all. [See the definition of “check” in Regulation CC, Section 229.2(k), 12 CFR 229.2(k).] Again, the rationale for this conclusion is that the federal rules should not prevent a state from regulating in areas to which the federal rules do not apply.

The second general preemption principle created by the Board is that state-law provisions that define categories of checks that are different from the categories defined in Regulation CC (local and nonlocal checks) will not be preempted if any checks in the state-law category are required to be available more quickly by the state law than they are by the federal rules. This is true even if other checks in the state-law category are required by Regulation CC to be available more quickly than the state law would require them to be.

An example will help clarify this principle. Suppose a state-law provision requires a check drawn on an in-state institution to be available on the fourth business day after the day of deposit. If the category “checks drawn on an in-state institution” describes any checks that are nonlocal checks under Regulation CC, then as to those checks the state law requires quicker availability than Regulation CC (since Regulation CC requires nonlocal checks to be available on the fifth business day after the day of deposit). The state-law category, therefore, supersedes Regulation CC as to those checks for which the state law requires quicker availability. To the extent that Regulation CC requires quicker availability for other checks in the state-law category—in our example, in-state checks that are local checks under Regulation CC—Regulation CC will preempt the state-law category. So, we are left with a combination rule: checks must be made available under either the state rule or the federal rule, whichever requires the quickest availability for that particular check.

Unfortunately, this approach can create a complicated set of rules for institutions to be aware of when structuring their funds availability policies. In some states, the total number of categories establishing maximum availability time limits almost equals the sum of all the categories in the state law plus those in the federal law. There was some hope that the Board would take the approach that a state-law category would be preempted entirely if any checks within the category would have to be made available more quickly under the federal rule than under the state rule. But, apparently the Board did not want the federal rules to have the effect of lengthening the availability time frame on any checks beyond what state law requires.

The third general preemption principle is that state-law safeguard exceptions will survive, but the exceptions will have limited applicability. (A safeguard exception is an exception to the normal availability time limits, intended as a safeguard to the institution.) An institution will be able to rely on a state-law safeguard exception only if the normal availability of the check in question would be determined by a state-law provision that had survived preemption. The additional delay allowed to the institution under the state-law exception will only last until normal availability is required under the applicable federal rule. An institution wanting to delay availability beyond the federal time frame will then have to rely on a federal exception to do so.

For example, suppose a state law had a provision requiring in-state checks to be available on the fourth business day after the day of deposit. Suppose also that the state law had an exception provision allowing an unlimited delay for checks of over $1,000. Last, suppose a customer deposits a $1,500 in-state check, and the check would be a nonlocal check under the federal rules. As we learned from the second general preemption principle, the state-law provision requiring fourth-day availability for in-state checks would survive preemption since it requires quicker availability on in-state checks that are nonlocal under Regulation CC than does Regulation CC. The third general preemption principle says that the state-law exception provision also survives preemption and allows the institution to delay availability of the check in our example past the fourth business day. However, the preemption principle says that the delay imposed under the state-law exception can only last until normal availability would be required under Regulation CC which, in this case, is the fifth business day after the day of deposit since the check is nonlocal. If the institution wanted to delay availability beyond the Regulation CC time frame, it would have to rely on one of the Regulation CC exceptions to do so.

Surviving state-exception provisions can only be applied when the normal availability of the check at issue is determined by a state-law availability provision that survived preemption itself. For example, if the check in our example above were a local check under the federal rules rather than a nonlocal check, the state-law exception for checks of over $1,000 would not be available to the institution. This is because the normal availability of the check would be determined by Regulation CC since the Regulation CC availability on local checks is the second business day after the day of deposit, a shorter time frame than the fourth business day availability of the state-law provision. Since the federal rules would determine the normal availability of such a check, only federal exceptions can extend the availability time frame.

The fourth general preemption principle is also related to safeguard exceptions. It says that in circumstances in which a state-law safeguard exception applies, an institution must comply with the notice requirements of Section 13(g) of Regulation CC [12 CFR 229.13(g)] in order to take advantage of the exception. This is true even if the state law itself had no notice requirement as a condition to its safeguard exceptions. Section 13(g) requires that institutions give notice to the customer of the fact that they are invoking a safeguard exception. Certain content and timing requirements exist, and you can look to our chapter dealing with ongoing responsibilities under Regulation CC for details. The important point here is that whether you are invoking a state-law exception or a Regulation CC exception, you must give notice according to Section 13(g) of Regulation CC.

The fifth general preemption principle is that state-law requirements concerning disclosures in the area of funds availability will be preempted in so far as they apply to transaction accounts subject to Regulation CC. State disclosure requirements will not be preempted to the extent they apply to accounts not subject to Regulation CC, such as savings accounts and time deposits. So, for example, if a state law requires that funds availability policy disclosures be mailed to account holders once per year, that requirement would be preempted with respect to transaction accounts and would survive with respect to any other non-Regulation CC accounts to which it applies. In other words, you would not have to meet the annual mailing requirement on transaction accounts subject to Regulation CC, but you would on other accounts to which the state law applies.

These are the general principles that have come out of the preemption determinations the Board has issued so far. Of course, individual state laws have their own peculiarities, and we recommend that you read on for the preemption analysis of your state. you may want to review the Preemption Determinations that have been made. These determinations are found in Appendix F to 12 CFR 229.