Supreme Court Ruling Lets States Take National Banks to Court Over Lending

New York Attorney General Andrew M. Cuomo
New York Attorney General Andrew M. Cuomo (Andrew Harrer - Bloomberg News)
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By Neil Irwin
Washington Post Staff Writer
Tuesday, June 30, 2009

For years, state governments have had little power to enforce consumer-protection and lending rules at the country's biggest banks. No more.

Yesterday, in a decision that marked a major victory for consumer advocates, the Supreme Court held that states can challenge the practices of national banks in court.

Major banks have long argued that only federal bank regulators can compel them to comply with rules meant to protect consumers from potentially unfair lending practices or pursue cases of potential discrimination against minorities.

The Supreme Court, in a 5-4 decision, disagreed, concluding that state attorneys general can go after national banks on such matters. The court found, however, that states cannot unilaterally require banks to turn over information or change their behavior, the way a regulator can. Rather, they must take the banks to court.

"States were precluded from going forward to enforce consumer-protection laws against banks," said John Cooney, a partner in the law firm Venable and a specialist in regulatory law. "Now they have the green light to move forward in consumer protection and a lot of other areas."

During the lending boom earlier this decade, many state officials sought to clamp down on what they viewed as abusive or discriminatory practices by banks, but were rebuffed by long-standing legal principles that only federal authorities can regulate nationally chartered banks. The decision yesterday redraws those lines of authority.

"I believe the majority was writing this opinion with some appreciation for what's happened the last few years, against the background of the current financial crisis," said Arthur Wilmarth, a law professor at George Washington University who wrote a brief in the case on behalf of state regulators. There is evidence that the Office of the Comptroller of the Currency and other federal banking regulators "did not act with sufficient vigor to protect consumers. . . . States that tried to change that were repeatedly barred from acting."

The case, Cuomo vs. Clearing House Association, came about when then-New York Attorney General Eliot L. Spitzer and his successor, Andrew M. Cuomo, demanded that banks in the state disclose information about their lending patterns as part of an investigation into whether minorities were being steered into bad mortgages. The banks argued that only their federal regulator, the OCC, had authority to demand that information -- a position that the OCC argued as well.

Writing for the majority, Justice Antonin Scalia said such arguments effectively leave states without the ability to enforce their own laws. "The bark remains," he wrote, "but the bite does not."

Scalia argued that state authorities must have the power to pursue cases against companies operating within their borders so long as there is no federal law explicitly prohibiting them from doing so and so long as they pursue claims through the court system.

Scalia, a vocal conservative, was joined by the court's four liberals -- a coalition that reflected the unique alignment of conservative and liberal arguments behind giving the states leeway. The decision affirms states' rights relative to those of the federal government, but does so in a way that exposes banks to more intensive government oversight.

Banking groups argued that the decision will create a difficult situation in which national banks must deal with officials in 50 states.

National banks "will face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions," Edward L. Yingling, president and chief executive of the American Bankers Association, said in a statement. "This will make it difficult to serve consumers in today's hi-tech, mobile society where people and bank services move constantly across state lines."

John C. Dugan, the comptroller of the currency, said in a statement that he was disappointed by the decision, but that "the OCC and the states share a common goal of ensuring fair access to financial services and fair treatment of consumers and businesses by all financial firms."

Some of the industry's allies said yesterday's decision is hardly disastrous for banks, given that state officials will not have the power to demand documents or compel executives to submit to questioning without a court order.

"Obviously there's going to be some additional burden on the big banks," said Seth Galanter, of counsel at the law firm of Morrison & Foerster, who filed a brief on behalf of former comptrollers of the currency. "But civil litigation has always been available to private parties. This just adds state attorneys general to the list of groups that can sue."

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