Supreme Court Ruling Favors States over Banks

Clears Path for States to Enforce Actions Against National Banks
Supreme Court Ruling Favors States over Banks
The U.S. Supreme Court has issued a ruling on the closely-watched case of Cuomo v. ClearingHouse, which addresses the issue of federal pre-emption governing consumer protection in the banking industry. The ruling clears the way for individual states to enforce fair-lending laws and other consumer protection measures against the biggest banks -- and strikes down a rule that limited those powers to federal banking regulators.

New York Attorney General Andrew Cuomo filed the case on behalf of the other 49 state Attorneys General, challenging how the federal government regulates state-chartered banks. Their Supreme Court brief argues, "The recent (and continuing) fallout from the subprime lending debacle demonstrates the need for more oversight and consumer protection enforcement in the area of mortgage lending."

The court ruled 5-4 and determined whether the Office of the Comptroller of the Currency's (OCC) authority to investigate national banks for racial discrimination in lending preempts State law. Justice Antonin Scalia wrote the majority opinion against the banks' position. Justice Clarence Thomas penned the dissent. According to the court, rules issued by federal banking regulators under the National Bank Act, passed back in 1864, couldn't block or preempt efforts by the states to enforce their laws.

The Washington, D.C. law firm Morrison & Foerster filed an amicus brief in the case on behalf of all former Comptrollers of the Currency dating back to 1973.


The ClearingHouse suit was originally brought against New York State by a coalition of banks and the U.S. Comptroller of the Currency. The case began in 2005, when then New York attorney general Eliot Spitzer sent letters to several national banks including Citigroup, Wells Fargo and JPMorgan Chase questioning their minority lending practices. The letters requested lending information "in lieu of subpoena," but hinted that subpoenas would follow if the information wasn't provided.

The OCC and a banking association brought a suit to block Spitzer's request and said the National Bank Act and rules issued by the Bush administration in 2004 gave enforcement authority to the OCC and stopped states from enforcing them. A federal district court ruled against the states, and the United States Court of Appeals for the Second Circuit affirmed the lower court's decision.

Writing for a 5-to-4 majority, Justice Antonin Scalia states the attorney general had not been engaged in the broad "visitorial powers" reserved by the federal government, in which the government acts like a supervisor with free access to bank records on demand. Scalia says the court has always understood that visitorial powers are quite separate from the power to enforce the law, and the attorney general was acting in the role of "sovereign-as-law-enforcer" in seeking the information.

A decision concurring in part and dissenting in part was written by Justice Clarence Thomas. Thomas, Chief Justice John Roberts Jr. and Justices Anthony Kennedy and Samuel Alito were on the dissenting side.


The OCC was quick to issue a response, with Comptroller of the Currency John C. Dugan saying "While the OCC naturally is disappointed that the Court disagreed with the OCC's interpretation of the scope of visitorial powers under the National Bank Act, everyone benefits from clarification of the law. We will continue to look for ways to improve collaboration and cooperation between the OCC and the states."

"This is a very important decision," says Venable LLP partner John Cooney, a former Assistant Solicitor General and Deputy General Counsel at the Office of Management and Budget. "Implicitly, the decision will allow the State Attorneys General to enforce other state consumer protection statutes against national banks."

The decision, Cooney notes, means that national banks will be subject to a greater risk of investigations and enforcement actions by State Attorneys General, unless they can persuade Congress to overturn the decision and grant the OCC express authority to preempt the states from applying their own fair lending and consumer protection statutes to national banks.

Cooney, with 30 years of experience in regulatory policy-making and litigation, served as Assistant to the Solicitor General in the Department of Justice and as Deputy General Counsel for Litigation and Regulatory Affairs in the Office of Management and Budget in the Reagan Administration.

"New York persuaded the Supreme Court to allow its Attorney General to enforce against national banks a state law that is identical to the federal law," notes Cooney. "One of the most important pillars of New York's argument was that the OCC rarely takes public enforcement action against national banks for violation of the federal anti-discrimination law, so there is no reliable proof that the federal government actually enforces these laws," he says. The OCC handles these issues in private, through the bank examination process and informal enforcement actions, and believes that it has an enviable record of enforcement of fair lending and consumer protection laws, Cooney states. "At the oral argument, several Justices suggested that under these circumstances the public interest would be served by permitting by permitting parallel enforcement efforts by the State Attorneys General."

Cooney notes this decision is a rare defeat for the OCC, which has a long history of successfully defending and expanding its turf in the courts. "Until now, the OCC had an excellent track record of success in persuading the Supreme Court to adopt a broad interpretation of its powers. The OCC understood that it was running a risk of reversal in issuing a rule that purported to preempt the States from enforcing their laws to protect consumers from national banks. That regulation ran against the tide of history. In recent years, a conservative Supreme Court has been much more respectful of the role of the States and that State action in parallel with federal action can make a substantial contribution to the public interest."

Related Podcast: Supreme Court Has Created More Chaos than Clarity" - Gregory Taylor of the ABA on Cuomo v. ClearingHouse"

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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