Case Tests Federal Supremacy Over Banks

Other businesses say the issue affects them, too. "The power of Congress (either directly or through administrative agencies) to preempt state and local law is vitally important to business and to the national economy," the U.S. Chamber of Commerce wrote in its brief. "Accordingly, the Chamber and its members have a substantial interest in ensuring that this Court properly resolves the issues raised in this case."

Another brief in Wachovia's support, co-written by libertarian law professor Richard A. Epstein, asserts that tighter rules on mortgage lending can make loans more expensive and less available, as lenders leave markets or adjust rates to reflect higher costs.

The preemption issue has attracted the attention of many prominent jurists and legal scholars. At an American Enterprise Institute conference in April attended by former special prosecutor Kenneth W. Starr and appellate court judges Douglas H. Ginsburg and Stephen F. Williams, Epstein and other scholars proposed that other industries could also eek federal preemption from state and local laws.

Many states set their own rules on such issues as auto emissions and safety, workplace standards and product safety.

Michigan's side also has many supporters. Michelle Aronowitz, deputy solicitor general in the office of New York State Attorney General Eliot L. Spitzer, wrote the brief that was co-sponsored by the 49 other states, the District and Puerto Rico. It is rare for so many states to support a particular legal position, but they were eager to do so, said Dan Schweitzer, Supreme Court counsel of the National Association of Attorneys General.

"One of the roles of state AGs is protecting their consumers, and what the OCC has been trying to do is prevent state AGs from doing that with respect to a very important [group] -- state-chartered mortgage lenders that happen to be owned by banks," Schweitzer said.

The OCC "has a long history of siding with the industry," said John Ryan, executive vice president of the Conference of State Bank Supervisors, which supports Michigan. Sharing that view are a dozen consumer advocacy groups, which wrote in their brief that the banks are seeking to shelter themselves under the OCC, which they say "has shown little interest in ensuring fairness to consumers." Lenders say the OCC handles consumer complaints quietly, without prosecution, often solving the problems more quickly.

The case comes to a head in a changed political landscape. Last year, a three-judge panel of the U.S. Court of Appeals for the 6th Circuit ruled in Wachovia's favor. Judge Boyce F. Martin Jr. wrote for the unanimous panel that federal law gave the OCC power to regulate banks, but he noted that "Congress has not spoken precisely to the issue."

The Democratic victories in the midterm elections, however, may bring the issue to the fore in Congress. Rep. Barney Frank (D-Mass.), who is expected to become chairman of the House Financial Services Committee, which oversees banks, has sponsored legislation that would limit the OCC's reach over state consumer protections.