Federal Oversight of Banks Risks Abuse, States Argue
Thursday, November 30, 2006
All 50 states and the District of Columbia yesterday urged the Supreme Court to overturn lower court rulings that they said would give federal authorities the ability to block states from prosecuting financial institutions for predatory lending practices.
In oral arguments, the justices posed tough questions about the implications of a mortgage-lending case that could affect the way state-chartered subsidiaries of national banks are regulated. Chief Justice John G. Roberts Jr. expressed concern about the banks' apparent effort to seek immunity from state regulations, but other justices suggested that banks are stumbling under excessive regulation by being required to report to both state and federal officials.
The case, Watters v. Wachovia Bank, is the latest in a series of legal skirmishes between state officials and the banking industry. Although the case centers on the lending practices of banks, legal experts said that it has broader implications for other industries that are also regulated on both the state and federal levels, in such areas as transportation safety, civil rights and environmental protection.
At issue is whether state-chartered subsidiaries of national banks should be subject to the regulations of state governments or be solely under the purview of the federal Office of the Comptroller of the Currency.
For 35 years, states have regulated the mortgage-lending practices of state-chartered subsidiaries of national banks. The parent national banks are regulated by the OCC. In 2001, the OCC ruled that those lenders should be overseen by the federal government under the National Banking Act of 1864, not by state regulators. And in 2003, officials at North Carolina-based Wachovia decided that their state-chartered subsidiaries, which are mortgage lenders but are not themselves banks, would no longer abide by the regulations of local jurisdictions and would answer only to the OCC. Michigan protested, so Wachovia sued for release from state oversight. The bank won on the lower court levels, and Michigan appealed to the Supreme Court.
Critics of the OCC have long said the federal agency falls short in consumer protection and that it bases its regulatory decisions on maintaining the banks' safety and soundness.
In oral arguments, E. John Blanchard, who represented Michigan and whose case is supported by the 49 other states, argued that "preemption" of local authority by the OCC would prevent states from protecting their residents. "Michigan and the states want to be able to help their citizens with abusive and predatory lending complaints," he said.
A lawyer for the banking industry countered that courts have long acknowledged the primacy of federal regulators over local authorities when evaluating large banks and that this instance was no different. Bankers have also complained of the burden of excessive regulation on the local and federal levels.
"The court has recognized for a century that in that area, when national banks have powers, including incidental powers recognized by the comptroller, they generally preempt any state law," said Robert A. Long Jr., who represents Wachovia, but whose case is supported by the entire banking industry.
Roberts said it seemed that banks wanted to be viewed as federally governed on regulation issues but state-based to shelter themselves from liability issues. "You are really trying to have your cake and eat it too," he said.
Justice John Paul Stevens questioned whether the OCC had the manpower to handle the increased responsibility it took when it preempted state law in 2001. He asked specifically how many additional investigators the OCC had hired when it took over this responsibility.
"Well, I don't have an empirical answer to that question," said Sri Srinivasan, assistant to the solicitor general of the Justice Department.
Justice David H. Souter, however, noted that banks could be forced to go through two separate rounds of inspection -- state and federal. "Regulation costs the regulated entity something," he said. "It is a burden on them."